Good morning, everyone, and welcome to the Natural Gas Services Group First Quarter 2020 Earnings Call. Your call leaders for today are Alicia Dada, IR Coordinator, and Stephen Taylor, Chairman, President and CEO. I will now turn the call over to your host, Alicia. You may begin.

Thank you, Ross. And good morning listeners, please allow me a moment to read the following forward-looking statement prior to commencing our earnings call. Except for the historical information contained herein, the statements in this morning's conference call are forward-looking and are made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, as you may know, involve known and unknown risks and uncertainties which may cause Natural Gas Services Group's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies and new governmental safety, health or environmental regulations which could require Natural Gas Services Group to make significant capital expenditures. The forward-looking statements included in this conference call are made as of the date of this call and Natural Gas Services undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include but are not limited to factors described in our recent press release and also under the caption Risk Factors in the company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Having all that stated, I will turn the call over to Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Stephen?

Thank you, Alicia, and Ross. Good morning everyone and welcome to the Natural Gas Services Group's first quarter 2020 Earnings review. Thank you for tuning into our call. The COVID-19 pandemic has had an impact on our industry and business activity, but we continue to provide quality service to our customers and we have seen no material impact on our supply chain or critical vendors. We have adopted remote and staggered work processes in our Midland headquarters and have adapted our field and fabrication work to meet the new realities stemming from the COVID virus. We have implemented guidelines and tended to keep our employees, our customers and suppliers as safe as possible. We have managed to do so without any significant cost to our operation. So, we continue to be vigilant to find ways to remain as efficient as possible in this environment of new operating challenges. The impact of COVID-19 and the resulting demand destruction continues to cloud our visibility for short-term business prospects. In April, as expected we experienced more unit returns and shut-in notices from customers, and we anticipate and are prepared for additional volatility in our business over the course of the next several months. Nevertheless, like many other oilfield service companies, NGS has the balance sheet to withstand this environment. With $13.1 million in cash on hand, minimal debt with a $13 million credit line and an expected $15 million cash tax refund, we have adequate liquidity and are well positioned to withstand when a more normal industry and economic environment returns. We anticipate impact to our business going forward from equipment being returned, the associated lower utilization rates, and revenue and margin pressure. Our larger horsepower installations are faring relatively well, but the medium horsepower equipment will be impacted the most. Interestingly, our smaller horsepower units, which are generally oriented towards the production of natural gas, now a relatively valuable commodity, may get by relatively unscathed. It's not a promise; there are no promises anymore, but we're seeing some isolated instances where that might be the case. We've implemented various cost-cutting measures with respect to operating and capital expenses, including reductions in our headcount from layoffs and attrition, wage freezes, and centralization of certain processes for better cost control among our suppliers and our cost-cutting efforts. We continue to review additional opportunities to become more efficient including combining and reorganizing field operations to reduce the number of operating locations. Our rationalization of cost is a multifaceted process that has started and is continuously being implemented and it will not go away for the foreseeable future. I also want to remind everyone of the flexibility and resilience of the NGS business model. Being on the production side of the energy business as opposed to the drilling side provides an inherited advantage. We are the last vestige of an operator to make money when they start drilling. Wells that require compression never cease to require compression, and while all the wells can be shut in, some production has to be maintained to keep even a minimal amount of revenue rolling in. Our business model insulates us from this downturn, absolutely not, but it does give us a preferred position in the oilfield services structure hierarchy. That's our macro advantage. We also have a number of company-specific advantages. As you know, if you have followed NGS for a short time, our model is demonstrably different from our competitors. We have operated for years through all kinds of cycles essentially without debt and we have maintained an appreciable amount of cash on the balance sheet. We retain the ability to generate cash through our rental business and have always been one of the first to cut capital expenses to an extremely low level and in an accelerated manner. Our playbook is the same this time, but it is being implemented in an even quicker manner due to the extreme downward slope in the industry. In spite of the pressures on the industry and our business, I feel certain we will emerge from this with preferred position both financially and as a superior provider of equipment and services to our customers. So with all that said, I'll discuss the financial results as well as pertinent operating and market comments. Given the challenges in our industry in the overall economy, we are pleased with our operational performance in the first quarter of 2020. Our rental revenue increased 5% sequentially and 20% when compared to the first quarter of 2019. It was driven by increased rentals of our large horsepower units. Our unit and horsepower utilization remained solid and we generated adjusted EBITDA of $5.8 million, an increase of 11% over the fourth quarter of 2019. Our operating cash flow for the quarter was $8.3 million. Looking further at revenues, NGS reported total revenue of $17.9 million for the first quarter of 2020, a $100,000 decrease from the same quarter in 2019. We experienced an increase in rental revenues at 20%, but a decrease in both sales and service maintenance revenue streams. Sequentially, total revenue decreased by 9%. More importantly, rental revenues increased 5% sequentially; not unexpectedly, sales revenues decreased due to a drop in compressor sales in a capital constrained environment. We would expect sales revenues to remain soft in the coming months as the company has significantly reduced capital spending. Total adjusted gross margin for the three months ended March 31, 2020, increased by 3% to $8.1 million from $7.9 million for the same period ended March 31, 2019. Adjusted gross margin, which does not include depreciation as a percentage of revenue for the three months ended March 31, was 45%, an increase from 44% year-over-year. Sequentially, adjusted gross margin for the first quarter of 2020 also increased by 3% to $8.1 million from $7.9 million from the prior quarter. Adjusted gross margin as a percentage of revenue increased to 45% in this quarter compared to 40% in the prior quarter. Selling, general, and administrative expenses were $2.2 million, a year-over-year decrease of approximately $330,000 and a decrease of approximately $580,000 sequentially. The main reason for the year-over-year decrease is due to a credit of $350,000 related to the company's reduced deferred compensation liability. Without this, the first quarter 2020 SG&A would have been relatively flat compared to the first quarter of 2019. Sequentially, the $580,000 decrease is also related to the lower deferred compensation liability and lower stock compensation expense. Our adjusted SG&A expenses generally run at 13% to 14% of total revenue and continue to do so. Operating income for the first quarter of 2020 was a loss of $273,000 compared to a loss of $145,000 in the first quarter of 2019. The adjusted operating loss this quarter was due to lower sales, lower rental margins, and higher depreciation expenses related to lower horsepower equipment. Sequentially, operating income increased $608,000 from an adjusted operating loss of $881,000 in the fourth quarter of 2019. This increase was primarily driven by higher rental revenue, lower SG&A, and higher rental margins. Our adjusted net loss after tax for this quarter was $808,000. This compares to a net income of $98,000 in last year's first quarter and a $1.4 million adjusted net loss in the fourth quarter of 2019. Quantifying the loss for this quarter, our net loss before tax was $461,000, so almost $350,000 of the bottom line net loss this quarter was attributable to deferred taxes, with another $300,000 related to a loss in our fabrication facilities. As far as reported net income, our net income will be a positive $4.1 million. Fortunately, due to our recent change in tax laws, we're able to claim net operating loss carrybacks and recoup some past cash income taxes. This will result in a total of $15 million in actual cash tax refunds, of which $4.9 million is the income tax benefit recorded this quarter. NGS reported earnings per diluted share of $0.30 for the first quarter. EBITDA is earnings before interest, taxes, depreciation, and amortization, and our adjusted EBITDA also excludes any increases in inventory allowance. Adjusted EBITDA for the three months ended March 31, 2020, was $5.8 million, a slight increase from $5.7 million for the same period in 2019. Adjusted EBITDA increased to approximately $580,000 sequentially from $5.2 million, primarily due to higher rental revenues and lower SG&A. Total sales revenues, which include compressors, flares, and product sales decreased 65% or $2.7 million on a year-over-year basis. Sequential sales revenue decreased to $1.5 million from $3.9 million. Approximately 70% to 80% of these declines, depending on the quarter, were driven by lower compressor sales. The first quarter of 2020 total sales gross margin was a loss of $289,000. This is the result of unabsorbed costs in our fabrication facilities, primarily due to lower plant throughput and our retention of incremental personnel, compared to positive gross margins of $426,000 in the first quarter of 2019 and $358,000 in the fourth quarter of 2019. First quarter 2020 compressor-only sales decreased from $2.7 million in the first quarter of 2019 and $3 million in the prior quarter to $852,000 this quarter. Again, due to unabsorbed costs, compressor-only sales margin posted a loss of $435,000 for the three months ended March 31, 2020 compared to a loss of $30,000 for the same period a year ago and a profit of $76,000 last quarter. Our sales backlog as of March 31, 2020, was approximately $1.4 million compared to approximately $2.2 million in the fourth quarter of 2019. Our rental revenue continued to grow in the year-over-year sequential quarters. Rental revenue in the first quarter of 2020 was $16.1 million compared to $13.4 million in the first quarter of last year and $15.3 million last quarter. This is a rental revenue increase of 20% and 5% respectively. Compared to the fourth quarter of 2019, our average rental rates on a per unit basis increased 7% and were up 4% on average per horsepower basis. Rental rates increased by an average of 18% per unit in the year-over-year quarters mainly due to our continued penetration into the larger horsepower market. This is a large per unit rental rate increase over the past year. I am going to brag about it, but remember that almost all of the rental fleet equipment added last year was large horsepower and carries much higher rates per unit in our average unit. Reported rental gross margins this quarter were 51%, an increase from the fourth quarter of 2019 rental gross margin of 47% and a decrease from last year's first quarter of 54%. Fourth quarter rental margins were negatively impacted by the previously mentioned $620,000 bad debt charge. Without the bad debt charge, gross margin sequentially would have been flat at 51%. Fleet size at the end of March 2020 totaled 2,316 compressors or 437,750 horsepower, including the addition of 12 units or 8,100 horsepower during this first quarter. As of March 31, 2020, 37% of our utilized horsepower classifies as large. Over the past 12 months, we've added 86 new fleet units totaling just above 32,000 horsepower, with 94% of those units classified in the large horsepower category. The 37% of our utilized horsepower being classified as large is important. Large horsepower, as compared to small and medium horsepower, tends to fare better in a downturn and this is the first time we've had this kind of backstop entering a period of depressed activity. Our horsepower utilization is 68% and unit-based utilization was 60% as of March 31, 2020. Overall, we had 25% more horsepower generating revenue this quarter compared to last year's quarter and had a small 1% decrease sequentially. I noted on a year-end call that we expected our capital expenditures to decrease approximately 75% when compared to 2019 levels, which suggests a CapEx budget of about $17.5 million for this year. We spent about $6.7 million in the first quarter, including $5.8 million on rental equipment. We have approximately $5 million to $7 million of additional capital commitments for the year, which suggests a total 2020 capital expenditure budget of only $12 million to $14 million, appreciably below the capital expenditures we estimated just last quarter. On August 12, 2019, NGS announced that our Board had approved an authorization to invest up to $10 million directly into the company through stock buyback, and as of March 31, 2020, the company has repurchased almost 38,000 shares at a cost of almost $490,000. We continue to believe our equity remains one of the most attractive investments available in the current environment. That said, given the current uncertainty in the market and the Board's belief that enhanced liquidity is prudent, we are not likely to be active participants in share repurchases at this time. We will continue to review market conditions, our business capital position as we evaluate future opportunities. Moving to the balance sheet, our total bank debt remains minimal at $417,000 as of March 31, 2020. Our cash balance remained strong at $13.1 million. In addition, we have a largely untapped credit line of $30 million available to us, which provides ample liquidity in any conceivable scenario. We generated positive net cash flow from operating activities in this quarter of $8.3 million, which represents 46% of our quarterly revenue. Free cash flow was $1.6 million and we anticipate this will increase through the year due to our recurring rental revenue and dramatically lower CapEx budget. In summary, there are not many companies in the OFS space that have a recurring rental revenue stream, essentially no debt on the balance sheet, cash reserves in the bank and a continuing ability to generate cash. Finally, I want to comment on the PPP loans we recently received and subsequently paid back. As noted in our earnings press release and our recent 8-K, we applied for and received a $4.6 million loan from the Paycheck Protection Program, which we intended to use to help maintain our employee population in a period of unprecedented turmoil in our industry and overall economy. With the assistance of our bank and under the rules at the time, we applied in good faith and received the loan. However, less than a week after we received our loan by the U.S. Small Business Administration, we were informed by our bank as well as the media that as a public company, we were deemed to have applied for and received funds that were not meant for us. Essentially, we were expected to define the intent of the SBA as it developed over a couple of weeks. Never mind these specific rules. In effect, public companies and our employees were discriminated against in what became a politically driven process. While this is not the forum to debate the merits or the politics of the program, our management and our Board believed at the time and continue to believe that NGS was and is a company that should have participated and benefited from the program. However, after carefully considering the potential costs associated with the revised PPP program and guidelines, we determined it was, on balance, in the best interest of our collective stakeholders to return the loan under the provisions set forth by the SBA after we applied and received the loan. We were charged interest on the loan for the interim period we had it. Unfortunately, the resolute nature of this government program and, in my view, the irrational response to political correctness had the opposite impact of the program's intent, as NGS was forced to reduce our workforce by 20% or roughly 50 of our team members upon the return of the loan. Before we take questions, I want to thank the entire NGS team for their dedication and efforts during this difficult period. In a very strained environment, our employees have demonstrated the utmost professionalism and responsibility. We have some challenging months ahead of us, but we will emerge stronger than most thanks to our superior financial strength and exceptional team. These are challenging times, yet we are a company that has found ways to effectively navigate through turbulence, and we will continue to focus on exceptional service alongside a strong balance sheet. Ross, that's the end of my remarks. If you would please open the phone lines for questions.

At this time, we will take questions. Our first question comes from Rob Brown from Lake Street Capital. Please go ahead, Rob.

First question is regarding the tax refund you talked about, a $15 million refund. I guess maybe when do you expect that and then maybe some clarity on sort of how you get that and some of the cash flow items in terms of the deferred tax asset in the quarter, but maybe some clarity on that tax refund would be great?

We have applied for the refund on the $4.9 million recorded this quarter. The net book impact of the $15 million cash refund will come from some previous cash taxes. Due to a change in the tax law, we can carry back net operating losses to recover those cash taxes. This is expected to bring back about $50 million in cash, though I'm not certain if it will take three or four years. In terms of timing, since it's the government, we anticipate receiving it in the next one or two quarters, but it could take longer depending on various factors. We'll receive it, but we are not exactly sure when.

Okay. But that's a net number, the $15 million that will be a net number for your actual balance sheet, correct?

Yeah, yeah, we'll get $15 million in cash.

Okay, good. And then kind of utilization rates, you talked about the high horsepower kind of maintaining utilization rates in a downturn. What sort of dynamic drives that and how sticky is that high horsepower market?

Well, these are relative questions. Right, big horsepower relatively small, but the large horsepower—and this is one of the reasons we moved into this market a couple of years ago—it is relatively sticky in that it is pretty expensive to freight and install. Once you have it there, it's hard to move it or send it back. As you know, we've got pretty good long-term contracts on this equipment, so it's going to stay out there. As of now, in an environment like this, there are obviously negotiations going on regarding discounts and terms, but that equipment is generally staying in place. We see some of the 400 and 600 horsepower come back a little, but not much. I think our large horsepower utilization, which we classify as 400 horsepower and above, has dropped still in the low 90s from the high 90s, so nothing appreciable there. That move into large horsepower has proven to be the right decision from that standpoint.

Okay, good. And then I'd be curious to get your thoughts on the latest environment over the last few weeks. How is the pricing environment? You mentioned some shut-ins and shut-offs, but how is that trending in terms of near-term utilization and pricing environment at the moment?

Talking about price right now is complex. You have to shift to discussing discounts plus shut-ins. This downturn is different from all others in that the speed of how quickly it has come down and how operators have reacted, which has obviously affected our operations as required. So, it's been a swift downturn and it really has transitioned from initially offering discounts to seesing shut-ins occurring due to extremely low oil prices. However, I think those two issues are starting to alleviate themselves. We've seen some strength in crude, though strength is relative; it has gone from $10 to $15, but it's been a long steady climb. I think we probably will hold, but we'll need to see how long it continues. Storage issues are still present, but I believe we are getting close to our peak and there are reports of storage capacity concerns. So pricing right now is tenuous.

Our next question comes from Craig Hoagland from Anderson Hoagland. Please go ahead, Craig.

I was curious, Stephen, could you talk a little bit about the various regions you operate in and where you’re seeing units being turned back and which areas are faring relatively better?

The Permian has been hit the hardest primarily because it has been the fastest grower over the last two to three years. This is not unusual due to the nature of the commodity being affected. So, we're seeing the most impact in the Permian, and a touch of it in the Mid-Continent, specifically in the Scoop Stack area in Oklahoma. Those are probably the most impacted areas. We haven't seen much action in the Rockies yet, and the San Juan has been affected somewhat, but generally speaking, the Rockies haven't seen significant effects. Barnett and South Texas also haven't seen much. So, it's primarily about how active we’ve been in the Mid-Continent or the Permian. In terms of regions faring better, it’s relative to how they have gone down; those that have gone down less are the ones that are doing relatively better.

Are there any large rigs under contract that haven’t begun work generating revenue yet?

Yes, we have a number of units on standby rates; they've been built in the past. Contract terms allow us to charge standby rates. The standby will likely extend longer than we had originally anticipated. A couple of quarters ago, we were thinking most units would be operating by mid-year or the third quarter at the latest. But now, with standby rates spanning another two to three months or quarters, we’ll still get contracted minimum term out of this equipment. While standby extends, we'll still benefit from standby rates and the full contract term at year-end, effectively deferring full rates but not losing out significantly.

And you mentioned in your prepared remarks you believe free cash flow will improve in Q2 or Q3 compared to Q1 primarily due to the drop in CapEx?

We're anticipating some decrease in cash flow. However, yes, CapEx reduces more quickly, putting us under more control. We spent perhaps too much on compression equipment, which can be curtailed quickly. With obligations coming in Q2 and some remaining from contract equipment, we expect the second half of the year to see negligible CapEx.

At our current rental run rate, are we able to cover overhead?

Yes, we will continue to generate some cash; it's going to be under pressure, but Q1 was strong and resilient. All companies, including ours, will see an impact in Q2, which is when we’ll begin to experience some real downward pressure due to the dynamics in crude from March. However, we anticipate generating free cash throughout the second half.

And Stephen, at this time there appears to be no further questions.

Okay. Thanks, Ross. And thanks everybody for joining us on the call. I appreciate your time this morning and look forward to visit with you again next quarter. Thanks.