Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Fourth Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. Your call leaders for today’s call are Alicia Dada, IR Coordinator; and Steve Taylor, Chairman, President and CEO. I would now like to turn the call over to Ms. Dada. You may begin.

Thank you, Paul, and good morning listeners. Please allow me a moment to read the following forward-looking statements 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.

Thank you, Alicia and Paul. Good morning and welcome to Natural Gas Services Group's fourth quarter and full-year 2020 earnings review. In spite of the time mix-up this morning, thank you for joining us. We released our fourth quarter 2020 results this morning and plan to file our annual report on Form 10-K for the 12 months ended December 31, 2020 with the US Securities and Exchange Commission on Wednesday afternoon. 2020 is now in the rearview mirror; I don't know many operators that are sorry to see it go. However, as mentioned in our release this morning, given the pandemic, the economic shutdown, and the most precipitous decline in oilfield activity in my 40-plus year oilfield career, NGS not only survived but posted solid results. Before discussing our detailed financial operating results from 2020, a few high-level comments are in order. As I consistently indicated, with the unprecedented challenges of the past year, protecting our balance sheet and liquidity position has always been our top priority, especially in the most challenging of operating environments. In 2020, we did just that. In fact, our cash position grew and our overall financial position is amongst the strongest in the industry and historically strong for NGS.

And our first question comes from Rob Brown from Lake Street Capital. Your line is open.

Great. How are you? Just wondering a little more color on the new business pipeline. I think you talked about increasing your CapEx spending next year. Maybe where are you seeing kind of demand growth, and have you seen orders...

The CapEx is between $15 million and $20 million, which is for rail and compression equipment. We spent $13 million last year, so it's a slight increase. We expect that much of the spending will be back-end loaded. Some of the CapEx we've identified is for equipment we need, and we're confident that the remainder will develop as the year progresses. Overall, we believe that amount is reasonable and reflects a combination of our committed projects and anticipated future needs.

Okay. Great. And then on the high horsepower market, I think you were obviously getting those higher orders filled. Are those certainly in the fleet now and where are those at in terms of generating cash flow?

You're kind of breaking up just a little, but are you talking about the units on standby?

No. I’m talking about the high horsepower units you ordered and you were pulling out and just wondered if those were out in the field.

Oh, yeah. No, they're in the process of being built right now, but then the others will be received probably through the third quarter, maybe the first part of the fourth quarter as they were spaced out to meet some customer requirements. But now some of them have gone out, but I would guess probably at least half are still need to be built and will be placed out throughout the next couple of quarters.

Okay. Thank you. I’ll turn it over.

Okay. Thanks, Rob. Our next question comes from Tate Sullivan of the Maxim Group. Your line is open.

Good morning, Steve. Thanks for the update as always. And just on the average horsepower for rented compressors, I think you said it was 225 in 4Q and then just going forward where I can expect the full quarter of those smaller horsepower retired units and what you're planning to build already?

Well, I think it’ll just increase. If you go back, yeah, I was going to look and I didn't, probably three to four years ago average horsepower was close to about half that.

Yeah.

So it'll go up for a couple of reasons: Number one, the continued penetration and strategic direction with the large horsepower that we’re taking. And then over time, some of the smaller units will be retired as they come off contracts in the future or we otherwise dispose of them. So both those factors will help increase the average horsepower over time. I don't know if it would go quite as fast, but it's up about 8%. I think it’s around 205 or 208 horsepower about a year ago. So it's not a real fast climb, but we certainly expect it to continue up.

Great. And on service and maintenance margin, can you comment a little bit on how compressors fared with the weather in Texas in February? And does that usually imply more service and maintenance work for you, or is it force majeure on your units? Can you just give a backdrop on that since it was in the news so much?

Yeah. Of course, wintertime is always a little more expensive to operate just because it's colder, equipment stays down longer and stuff like that. But looking at the very severe weather, at least for Texas, we had in February, we actually came out of that pretty good. There were no force majeures. We didn't declare any and none were declared on us. But we were able to keep the vast majority of our equipment running. Now, that was through no small feat by our guys in the field. The problem is when a big unit like some of these 1,500 horsepower units goes down and if they're down very long, they just get cold. Warming up a unit that big, either from the block itself or getting the oil moving with a little less viscosity takes some time and effort. But our guys did a great job. I don't think we had more than out of numerous units out there, probably four or five that were down longer than 24 hours at any given time. So, we've got all that stuff monitored electronically so we know right when something happens. In this case, we had cold weather, which pays dividends, and we were able to get out there quicker than if someone just found out during the day. So we did a lot better than some competitors in these areas, and I think the customers recognize that too. I certainly want to give a shoutout to our guys in the field; it's not an easy job when it's that cold out there.

Thanks. Are there additional costs for your service professionals when they need to work extra hours, or is that covered in the service contracts for the units, or is it typical for winter given that you mentioned only four or five units?

Well, it's extra overtime. But it's an expense we absorb because we give a fixed-rate contract on our equipment. So unless there's some externally induced or customer-induced mechanical issue, the expense comes to us. So, we’ll see a little higher labor expenses on some of that stuff. But it balances out throughout the year; summer times are a little easier and things like that. So you always have a little higher expense in winter. This is extraordinary, obviously. But we got there in pretty good shape. And like I mentioned, the effort our guys and the company expended to keep operations online was significant.

Great. Thank you. And just the last one for me. You mentioned the sales mix in the fourth quarter. Do you have sales backlog currently, or can you say how quickly that might come back into the mix? Can you talk about that?

Our compressor sales backlog was about the same in Q3 as in Q4. We didn't have any compressor sales in Q4. Kind of makes sense; we didn't add any either. We've seen a higher level of inquiries from a sales standpoint. Generally, that translates into a higher level of actual sales down the road. Now, it's hard to say how long that takes—maybe a quarter or two—but we're somewhat encouraged by that. Our compressor sales backlog was about $1.7 million; it doesn’t take long to build that out, probably next quarter. Hopefully, we will be able to replace more of that in the mix. This is the first time in our history we've had two quarters with no compressor sales. Now, again, aftermarket, parts, and rebuilds picked up quite a bit in the fourth quarter and helped cover a lot of the lost press for sales. But it's pretty unprecedented that we've gone two quarters without any sales of compressors. So, we think with oil prices being up, people getting a little more confidence in their own economics and quality of projects, we believe those will continue increasing throughout the year. So, I would cautiously forecast that our sales should be higher this year than last year.

Great, Steve. Thank you very much.

And we have a question from Seth Barkett, an individual investor. Your line is open.

Hi, Steve. Congratulations on navigating a pretty challenging year. You guys did a nice job.

Thanks. Appreciate it.

A few questions from me. One, and I guess there's a comment and a question here in the press release. On the balance sheet, I did not see the federal income tax receivable, the $11 million there. I think it was captured in the current asset total. But I didn't see it broken out anywhere on the balance sheet. So just wanted to point that out. And then also, ask the question: any update there on when that might be received?

No. No. We check on it periodically, but you typically get no answer. So it’s just in the queue somewhere. I would certainly think it'd be this year, but we don't have any indications from them. In fact, that $4 million we got last year kind of came as a surprise. So, it's filed; it's in there. We'll just wait on the government to get around to it.

Got it. Thanks for that update. And then as it relates to your small horsepower and maybe even to some extent your medium horsepower units that are either underutilized or not being utilized at all, is there any opportunity to, I guess, here in 2021, as we see strength in oil prices and potentially more activity in oil fields, do you see an opportunity to sell any of that underutilized or non-utilized small and medium horsepower equipment?

Well, we've commented in the past on small horsepower that we intend to transition more into medium to large horsepower organization and deemphasize small horsepower. Certainly, some of that was driven by the fleet retirements we did this quarter and a couple we've done in the past, which have predominantly been lower horsepower. From an opportunistic standpoint, it's hard to say; every once in a while we’ll talk to people that might be interested in things like that. But in a depressed market, people tend to want to under-value your assets. We still make money with those units; they still contribute and perform adequately. But we do look for opportunities, and we talk to people every once in a while. So, hopefully, maybe with the whole industry perking up a little bit this year, we might see a little more interest. From the standpoint of anyone running a small horsepower fleet looking to grow, they have faced just as much trouble if not more than us in these kinds of markets. So, they’re not well-placed to go out and buy something. We don’t have to sell it; we’re in a good cash position. So we're going to be prudent about it, but should opportunities arise, we’ll pursue them and see what they look like.

Got it. Thanks for that color. And then the last question for me, the company is sitting on a strong cash position. Hopefully, more cash will be generated here in 2021. Possibly the effect of that $11 million tax receivable. Do you guys see yourselves potentially buying back any stock? Obviously, the stock is pretty inexpensive here. You're trading at roughly $0.40 cents on the dollar. I would think there would be an opportunity here to really drive shareholder value by making some investment in the stock. Any discussions there internally about maybe allocating a few million dollars towards that effort?

Yeah. We will this year. We've reauthorized the amount of buyback we had originally put in. I think we originally had that authorization around August or September of 2019. Obviously, not much was done with that because then we ran into 2020 head on. We didn't want to do anything in 2020 because during the first couple of quarters, we didn't know what was going to happen. However, we've come out of the year solidly. So yes, we’ve still got the authorization there. I don't want to guarantee anything, but as a capital allocation tool, we think that's a good one to use. So we're looking at that seriously.

Great. Glad to hear that, Steve. And again, congrats on being really successful in how you navigated last year. I think you guys have done a nice job.

Our next question comes from Greg Weaver from Invicta Capital. Your line is open.

Could you talk a little bit about the rental rates and the price concessions that you gave last year? I mean, does that roll off over time or do you go back to renegotiate obviously with oil prices up?

Yeah. Everybody gave some concessions in the first and second quarter about March, April when oil prices dropped significantly. We put a time limit on the majority of them, so we can negotiate those back up to the rates they were before. We're currently in the process of revisiting those contracts and trying to restore them to previous levels. We remind customers that even before the downturn, rental rates were around $40 to $45. Obviously, it dropped sharply, but we're now back up at least $15 to $20 from those low points and looking to recover some of that lost ground. It's a bit of a tricky situation where some analysts perceive this as us raising prices, whereas we're actually just trying to recover our previous rates. Fortunately, we didn't have to offer debilitating concessions, and most of our large horsepower contracts remained intact.

Great. I was just trying to wrap my head around if I look at fiscal 2020 rental revenue rate—it was down some—but I’m assuming that’s partly due to these price concessions that hopefully would come back.

Well, not just that but we had shut-ins, and the demand came to a halt. So, that's part of the biggest impact you're seeing because revenue year-over-year was up 7%. In the quarters when you look at usage, we did lose some utilization; it troughed in the middle of the year and started to come back up. So we've still got a little lower utilization than we had about a year ago, and we might never get that back. That's just revenue that was lost due to shut-in wells.

Right. On that topic in terms of some standby equipment, any color there in terms of trends and things coming back online? Is that mostly all back?

No, it's not all back yet, but it's coming back. We're seeing more confidence from operators with the crude price and what's going forward. Importantly, what's vital is the operators’ confidence that the price will hold; nobody wants to act unless they are confident that a $60 price per barrel will maintain. I think people are becoming more confident overall in the market. In fact, this margin has come out and stated they still want to hold production lower for the next quarter or two. So, it seems like everyone is playing the same cautious game right now. Not that it can't change, as we've seen many times through the years, but I believe that confidence is returning and more equipment will come off standby and go back to full utilization.

Okay. Great. And just the last one for me. In your press release, mentioning your liquidity, you noted it gives you the flexibility to swiftly respond to prospects to grow our company both intrinsically and through other strategic opportunities. Any color on those other strategic opportunities?

Well, we’re always approached—not just us—but by companies or individuals wanting to sell something. I typically look at those, and we don't execute on nearly any of them because typically, when there’s a company for sale, there’s usually a reason for it. It’s been very much the case for the last two to three years. But we are always open to opportunities; there was one we looked at last month but backed off after just an initial glance because the fleet didn’t fit ours. There’s always some issue surrounding those opportunities, whether it be the equipment itself or the financials. But we’re usually a recipient of the industry information with people trying to buy or privately contact us on some deals. So, we’re always looking at opportunities, and we've got the liquidity to act.

Understood. Well, we appreciate your discipline. So, thank you very much and keep up the good work.

Okay. Thanks, Greg.

And we have no further questions in queue at this time.

Okay. Paul, thanks. Thanks everyone for joining me on this call. Appreciate your time this morning and look forward to visiting with you again next quarter. Bye.

This concludes today's conference call. Thank you for attending.