Good morning ladies and gentlemen, and welcome to The Natural Gas Services Group Third Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. Your call leader for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President, and CEO. I'll now 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 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 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 that stated, I will now turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve.

Thank you, Alicia and thank you Paul. And good morning everyone, and welcome to Natural Gas Services Group's Third Quarter 2021 earnings review. Thank you for tuning in. As noted in our earnings release, our overall business is growing both sequentially and on a year-over-year basis. In comparative year-over-year quarters, total revenue was up 16% in every segment of our business, rental, sales and service, and maintenance showed improvement. Sequentially, total revenues increased almost 3% and the sales segment was the only one that declined and it was by a relatively minor $100,000. Our core compression business continued to recover and grow in the third quarter, our third consecutive quarter of rental revenue growth. Compression rental revenue grew 4% sequentially and 9% on an annual basis, driven by both an increase in active rental horsepower, as well as pricing improvements. We generated adjusted EBITDA of $5.4 million this quarter, a 19% increase from last quarter, and a 33% increase in operating cash flow for the quarter, up to $7.2 million. As you can tell, this was a relatively good quarter from a revenue, EBITDA and cash flow perspective. Stronger energy markets certainly provide opportunities to maintain and improve pricing, and we remain optimistic about growth as we complete 2021 and enter the New Year. We temper our enthusiasm a bit with the realism that exploration and production spending will likely grow incrementally, because capital discipline remains the overriding mantra of domestic producers, but we think the outlook is positive. In addition to these operating highlights, during the quarter, we continued our share repurchase programs. Year-to-date, through September 30, we have repurchased over 430,000 shares at an average price of approximately $10.24 per share, which represents roughly 3.2% of our outstanding shares. Now, let's look at the financial details of the quarter. Looking further revenues, NGS reported total revenue of $18.2 million for the third quarter of 2021. This is a 15.7% increase from the same quarter in 2020 or about $2.5 million and as a result of an increase in all revenue streams, mostly due to a $1.3 million increase in rental revenue and $935,000 increase in sales revenues. As you know, the largest component of our sales revenue is compressor sales and it is historically volatile. While we reported no compressor sales in the third quarter for either 2021 or 2020, we saw a significant increase in parts sales during the current quarter. When comparing consecutive quarters, we had an increase in total revenues of 2.8% or almost $500,000. This was driven by a $580,000 or almost 4% increase in rental revenue, which was partially offset by a decrease in equipment sales of only $100,000. While sales revenues fluctuate with our customers' capital needs, our rental revenues have grown 3.7% and 9% respectively, in both sequential and year-over-year quarters. Significantly, NGS has posted an increase in rental revenue every quarter of this year. Total adjusted gross margin, which does not include depreciation through the three months ended September 30, 2021, was $7.5 million, a decrease from $7.9 million for the same period ended September 30, 2020. This is 41% of total revenue compared to 50% gross margin reported in last year's comparative periods. But along with higher revenues, we have also seen increased labor costs and setting commissioning and start expenses related to the growth in rental compression deployment, not to mention inflationary costs driven by lubricants or repair parts. Sequentially, adjusted gross margin for the second quarter of 2021 increased to $7.5 million from $6.6 million in the prior quarter. As a percentage of revenue, adjusted gross margin increased to 41% this quarter compared to 37% in the prior quarter. This increase was due to reduced levels of repair and maintenance costs and start expenses. If you recall, in the last quarter we set a record number of high horsepower units which inordinately drove higher expenses and correspondingly depressed margins. Our rental revenue still grew this quarter. As predicted, the magnitude of cost wasn't as great. The remaining cost pressures from the upfront expenses incurred in a growing inflationary environment but we are working diligently to control and counteract those. Sales, general and administrative expenses increased 8% over the third quarter of 2020 and 3.8% over the second quarter 2021. These increases were primarily generated by higher expense accruals. However, as a percentage of revenue, SG&A costs reduced from 16% of revenue last year and were flat at 15% of revenue compared to last quarter. Operating loss for the third quarter of 2021 was $1.6 million compared to a loss of $940,000 in the third quarter of 2020. This decrease is due to lower rental margins offset by an increase in sales margins as well as an increase in SG&A expense. Sequentially, operating loss decreased by $730,000 from an operating loss of $2.3 million in the second quarter of 2020. This increase in comparative quarters is primarily due to the aforementioned higher rental revenues and margins. Our net loss after-tax for this quarter was $1.3 million, almost $700,000 less than last quarter's loss of $1.9 million. This compares to a net loss of $563,000 in last year's third quarter. We reported a loss per diluted share of $0.10 for the third quarter of 2021 compared to a loss of $0.04 per diluted share in the third quarter of last year. Sequentially, this was an improvement over a $0.14 per diluted share loss reported in the second quarter of this year. Adjusted EBITDA for the three months ended September 30, 2021 was $5.4 million, a decrease from $6.2 million for the same period in 2020. Sequentially, adjusted EBITDA increased almost $860,000 or 19%, up from $4.5 million last quarter. This increase was primarily due to higher revenue and lower expenses resulting in higher overall margins. Total sales revenue, which as a reminder, includes compressors, flares and product sales was $1.5 million this quarter. This is an increase from $935,000 year-over-year and is down marginally from $1.6 million last quarter. The change in both comparative quarters is due primarily to the volatility in parts sales. For this current quarter, we had a total sales adjusted gross margin loss of $90,000. This compares to a negative gross margin of $460,000 in the third quarter of 2020, negative gross margins of approximately $200,000 in the second quarter of 2021. These gross margin improvements are primarily a combination of higher part sales and reduced expenses and losses in our compressor sales business. Although, we have some compressor fabrication projects in progress, our compressor sales business continues to be slow with no sales revenue recognized in all comparative quarters. However, despite the lack of customers' capital spending, we have lowered our total sales gross margin losses by decreasing our compressor fabrication expenses, posting higher revenues from flare and part sales, absorbing more costs and new rental fleet units being built. Our sales backlog as of September 30, 2021, was approximately $2 million, which is the same as the prior quarter. Rental revenue in the third quarter of 2021 was $16.2 million compared to $14.9 million, an increase of 9%, since the third quarter of last year. For the sequential quarters, rental revenue grew $16.2 million from $15.6 million last quarter, an almost 4% increase. Significantly, rental revenue this quarter exceeded our rental revenues in the first quarter of 2020 which was a pre-pandemic quarter. We successfully traversed the trough of our rental revenues since the start of the pandemic, due to successful execution of our high-horsepower strategy during a very uncertain period. Rental rates increased by an average of approximately 6% per unit and 3.5% per horsepower sequentially, mainly due to our continued penetration into the larger horsepower markets. Rental adjusted gross margins this quarter were 46%, a $730,000 decrease from this 55% gross margin on a year-over-year basis, but an $840,000 increase from the 42% gross margin last quarter. Lease size at the end of September 2021 totaled 2,275 compressors or over 452,000 horsepower, which replaced a net addition of 18 units or 5,480 horsepower during the third quarter. Over the past 12 months, we have added 51 new fleet units totaling just over 14,000 horsepower, 60% of that horsepower being classified in our large horsepower category. As of September 30, 2021, about 45% of our utilized horsepower is made up of compressor units that are in excess of 400 horsepower per unit. Our horsepower utilization is approximately 64% on a horsepower basis and unit-based utilization was a bit over 53% at the end of the quarter. Our capital expense for completed gas compressor rental fleet units in the third quarter which does not include work in progress was approximately $6.5 million. Earlier this year, we projected a capital expense budget of $15 million to $20 million for the year. With almost $18 million capitalized for the first three quarters, we believe we will end the year with our capital expenses above the high end of this projection. Stronger-than-anticipated demand and an acceleration of the equipment purchase lease program we have in place with one of our customers leads us to increase our estimated capital budget for 2021 by 15% to 20%. On a precautionary note, there's a possibility of delivery issues that could impact the timing of some of this added capital spending. But with demand intact, we'd only delay these expenses into early 2022. From a balance sheet perspective, we continue to have no debt outstanding at the end of the third quarter with our cash balance at the end of the third quarter at $24.4 million. This compares to cash a year ago of $27.6 million and last quarter of $26.2 million. In spite of our strong capital spending on committed rental equipment and our stock buyback program, our cash balance in all comparative quarters has continued relatively steady due to our ability to deliver strong operating cash flows. The combination of our cash balance and untapped credit line continues to provide ample liquidity in nearly every scenario. We generated positive net cash flow from operating activities in this quarter of $7.2 million or 39% of our quarterly revenue. We also reinvested $2.5 million back into the company through common stock buybacks this quarter. Our total stock buyback in an initial authorization totaled $5 million or 3.5% of our outstanding stock as of September 30, 2021. On October 1, 2021, our Board authorized the repurchase of an additional $10 million of our common stock of which we have purchased 105,650 shares for $1.2 million through the end of October. We will continue to repurchase shares as we believe the fair value of the enterprise is well above that currently reflected in the public markets. Our average purchase price for the first nine months of this year is $10.24 per share well below our calculated intrinsic value and the current market values. A final housekeeping note. In the next couple of weeks, we will renew our shelf registration on Form S-3 with the US Securities and Exchange Commission, which would allow us if needed, to issue debt or equity securities over time using our current financial filings. This is our second renewal in our history prior to expiration and allows us to effectively extend our existing S-3 filings without additional fees. While we are pleased with the third quarter results, we remain focused on improving margins and profitability as we enter the final months of 2021 into the new year. Natural Gas Services Group remains one of the few oil field service companies with a strong recurring revenue stream, no debt, a significant cash position, and the ability to consistently generate meaningful operating cash flow. While the holidays invariably impact activity in the fourth quarter, we are optimistic that our rental business is well-positioned to benefit from higher commodity prices that result in an incremental increase in production activity, a backdrop we believe will remain intact rolling into 2022. Like every other energy services and industrial company, we are feeling some impact due to supply chain issues and inflationary pressures. We are fortunate in that we control our own fabrication process. We have taken steps to minimize and mitigate any disruption. That said, we are likely to see some challenges related to supply chain disruptions and raw material inflation. As we enter the Thanksgiving season, I'm truly thankful for the remarkable members of the NGS family able to work every day to ensure that we exceed the expectations of our customers and focus on creating value for all of our stakeholders. Paul, that's the end of my prepared remarks. So, if you would please open the phone lines for any questions.

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. And our first question comes from Rob Brown from Lake Street Capital. Your line is open.

Hi Steve.

Hi Rob.

I would like to follow up on your perspective regarding the current environment with changes in commodity prices. Are you noticing, despite customers being cautious, any extended rental durations? Are gas drillers pulling more equipment in and out, or what is the impact of commodity prices at this moment?

There are two distinct markets, oil and gas. For oil, we anticipate some gradual improvement throughout the quarter and into next year. However, we don't expect a significant surge in activity given the current price levels, primarily due to the cautious capital spending by operators. Overall, we feel reasonably confident that oil prices will remain stable and there will be some increase in activity. There haven't been any notable shifts in this area, so it’s largely business as usual for oil. On the gas side, prices have reached levels that are relatively high compared to recent trends, nearing $5 or $6. However, there is skepticism about how long these prices will remain elevated. With winter approaching, we typically see price increases, but there are also storage concerns and significant LNG exports. The demand has certainly picked up following the pandemic, contributing to the rise in gas prices. Despite this, there is genuine uncertainty about the sustainability of current prices. Once we move past winter, warmer weather tends to lower prices, and supply should gradually catch up. Consequently, operators are hesitant to invest heavily in drilling and production for gas. There seems to be a reluctance to commit to longer-term contracts, as many are cautious about the duration of reasonably good pricing. I agree with this sentiment, as I expect we will experience lower prices starting in the shoulder season next year and continuing through summer. Operators are more open to longer contracts for oil than for gas.

Yeah. Yeah. Okay. Okay good. And then maybe the high-horsepower market what sort of changes have you seen more recently? Is that still an area that is active, or how are – I know, you've kind of moved some equipment from standby to fully committed, but how is that market in terms of new sales?

Yeah. We think it's going to be good. And again, the high-horsepower market for us, and everybody is a permanent. That's what's driving a lot of the centralized gas lift due to the oil volumes and oil prices. So the Permian is the result of the equation, as far as what happens from a high-horsepower standpoint. And again, high horsepower is primarily related to centralized gas lift. So the thing is going to stay active. The visibility is a little more opaque right now. So we want to see what some operator budgets look like, particularly in this area. But I think generally, we're pretty optimistic that we're going to see continued growth in that place. And we know of some growth coming our way. We're just not through the full sector and what the full year looks like yet. Everybody's – in this period everybody is keeping their cards pretty close to their vest and are not making a whole lot of projections out, not really committing to long-term projection from hey build this over this time and stuff like that so – which is I think natural coming out of the pretty uneven period we've had the last year and a half. But we think generally, it's going to be good. We just – it's just hard to quantify it yet.

Yeah. Okay. Great. Thank you. I’ll turn it over.

Thanks, Rob.

Thank you. Our next question comes from Tate Sullivan from the Maxim Group. Your line is open.

Hi. Thank you. Hi, Steve.

Hi, Tate.

I missed your comment on that. Did you say that relative to the previous CapEx guidance for 2021 you increased it by 15% to 20%, or is it still 15% to 20% for the full year?

No. Well, yeah, it was – we originally projected $15 million to $20 million for the full year. But yeah, we're projecting a 15% to 20% increase over that $15 million to $20 million. No confusion, I guess. And obviously, it's $18 million – yeah 15% to 20% is going to apply to the $18 million to $20 million range we're in now.

Perfect. And then similar to previous years the dynamic of building a higher-horsepower equipment is it already spoken for by clients? Is it – or is some of that on spec in this environment, or I mean, how many units by the end of the year pro forma with a higher spending might you have available for rent? I'm sorry for a couple of questions in there.

From a specification perspective, we currently have about one or two units, which isn't a significant amount. However, we plan to increase that next year if our predictions about heightened activity in the high-horsepower sector hold true. Equipment needs to be available promptly, as people typically prefer not to wait six to nine months to rent. In the past two to three years, we had a two-year build program that was secured long-term, but that program has now concluded. We're returning to what one might consider the regular market conditions. By the end of the year, we expect to have about one to two units in spec, but ideally, a better level for us would be around four to five units. We anticipate seeing that increase in 2022, along with any other committed units we’ve identified. Currently, aside from the one to two spec units we expect by year-end, anything we are building is already committed.

Great. You mentioned you will provide the details in the Q, but could you share the number of rented compressors at the end of the third quarter of 2021?

Of the total fleet?

Yes please.

Unit utilization was 50% and horsepower utilization was about 65%. I think we had 2,275 units. So that is correct.

With the number of units you are building at higher horsepower, can you provide a modeling question? What do you expect regarding the average horsepower for your rented compressors? It has been increasing every quarter with more higher horsepower units. Can it reach 250, or how do you view the overall dynamics of the entire fleet?

The average horsepower per unit in this third quarter is 235. Over the past year, we have increased it by about 10 horsepower per unit. It's a gradual process to improve the overall fleet on a per average unit basis, so I wouldn’t expect us to reach 250 horsepower in a year. It might be around 245, reflecting similar growth to what we’ve seen. Increasing the average across almost 2,300 compressors is challenging, but we do expect it to keep rising. Predicting the exact rate of change in average horsepower per unit is difficult.

Great. I'd like to hear more about the current situation regarding the higher lubricant costs and supply chain disruptions. With the sales backlog ending at $2 million this quarter, unchanged from the previous quarter, when you accept these sales orders, does it mean you're essentially telling your current customers that you're willing to fulfill their orders now? Are you passing on the higher prices, or what do the conversations look like when deciding to accept or decline a sales order?

Yes, it's somewhat improved compared to six or nine months ago. Job quotes from six months ago were quite restrictive. For instance, when we had stainless steel requirements, suppliers would only hold their quotes for literally 24 hours. This creates challenges in quoting accurately. Typically, our quotes are valid for 30 days, so during that time, we tried to pass along whatever we could, amend orders, and so forth. We did absorb some rising costs through change orders and optional add-ons, which helped us get the margin closer to what we initially quoted. However, quoting still faces challenges, and operators are hesitant to give us complete freedom regarding cost increases because that could lead to issues if not managed properly. There is some easing now in terms of those specific goods, but we're also noticing price increases on engines and compressors, along with general increases in oil and parts. These latter expenses tend to be more operational, falling under capital expenses. Therefore, we have to place longer lead orders for some items, while for others, we need to shop around more and find ways to economize and adjust prices where possible. It's a balancing act of trying to control costs while managing pricing effectively.

Great. Thank you, Steve. Thanks for answering my question.

Thanks, Tate.

And our next question comes from George Melas from MKH Management. Your line is open.

Great. Thank you. Good morning, Steve.

Hi, George.

Can you provide more details about CapEx? How much of the CapEx is related to the program you have with one customer for purchasing their leased equipment? Also, do you have an estimate of what CapEx might look like next year and how that composition will shape up?

The capital expenditures this year related to the leaseback program are estimated to be in the range of $5 million to $6 million, likely accounting for about one-fourth to one-third of the total. This amount has increased significantly in the last six months, exceeding our initial expectations, which is why we are looking to adjust our capital spending upward. I'm hesitant to make any predictions about next year's capital expenditures yet. We need to progress further into this quarter to gather more definitive insights from operators regarding their plans. We probably won’t have any published figures until early next year, though some may share information sooner. We’re actively engaging in conversations to collect that data. Therefore, I do not have firm figures at this moment. We will provide an update on our 2022 outlook during the next call, which will coincide with the year-end results discussion.

Okay. Great. Thanks for that. And maybe can you talk a little bit about the competitive environment? You have a number of competitors who are larger but sort of distressed financially. And maybe some updates in that respect from your perspective.

Yes. George, generally speaking about our public competitors, everyone is monitoring their performance just as they do ours. As I mentioned, we've seen a significant increase in rental revenue, and we've successfully navigated through the low points of rental revenues caused by the pandemic. We're now just slightly above pre-pandemic levels. From a rental perspective, we are in a strong position compared to others. Our sales fluctuate, but those competitors don’t have sales operations like ours. They experienced more equipment loss during the pandemic than we did, both in terms of unit numbers and horsepower, and on a percentage basis as well. We know that this equipment is still in circulation, and they're attempting to sell it, likely at unattractive prices. Such low pricing tends to drive utilization, and we've already witnessed some of that. Nevertheless, we are managing to maintain our competitive edge and gain market share. While I'm not wishing for any downfall for the competition, the quicker they can move their older, lower-cost equipment, the better it will be for everyone in the market, especially for us. Our major horsepower equipment is brand new and utilizes the latest technology and design standards, whereas much of the equipment available now is older, potentially five to fifteen years behind. While five years may not seem old in terms of its capital value over 15 to 25 years, it certainly falls short in terms of technology and emissions. Thus, the sooner they can sell off that older inventory at lower prices, the better it will be for all of us. Overall, based on public filings, we are performing quite well compared to our competitors.

Okay, great. Congratulations. Thank you.

Thanks, George.

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

Okay. Thanks Paul and thanks everyone for joining on the call. I appreciate your time this morning and look forward to visiting with you again next quarter. Thank you.

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