Good morning. My name is Dennis and I will be your conference operator today. I would like to welcome everyone to the Natural Gas Services Group Inc. Third Quarter 2022 Conference Call. All lines have been placed on mute to eliminate any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the conference over to Micah Foster, Chief Financial Officer. Please go ahead.

Thank you, Dennis, and good morning, everyone. Before we begin, I need to remind you that during this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations, as well as assumptions made by information currently available to Natural Gas Services Group's leadership team. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the United States Securities and Exchange Commission for the factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures including EBITDA, adjusted EBITDA, and adjusted gross margin, among others. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday afternoon's press release in our Forms 8-K, 10-K, and 10-Q furnished to the SEC. I will now turn the call over to John Chisholm.

Thank you, Micah. As most of you likely read in our press release last night, I've resigned as Interim CEO for NGS but will remain as a Director until March 1, 2023. My focus over the past 15 years as a Director with NGS has always been on what creates the most shareholder value for NGS, but I concluded that with my other growing obligations, some of which are international, the time required that I can provide would not be sufficient. I want to thank the employees of NGS and my fellow directors for this last six months leading the company. I trust that I've extended the foundation of NGS and contributed to our value creation. Now, my longtime friend and colleague, Steve Taylor. Steve?

Good morning, everyone and thank you, John, and thanks for your contributions to NGS. We all value your knowledge and insight. I look forward to your continued guidance. And thank you for the assistance you have given me during this transition. Before I get to my prepared remarks, I do want to reiterate and reinforce that the company will continue our search for a permanent CEO, which is ongoing. We will provide updates as required. I would also like to note that in addition to Micah Foster, our Chief Financial Officer, with us today is Jim Hazlett, our Vice President of Technical Services. Micah, Jim, and I will be happy to answer your questions after our discussion of the third quarter results and the current operating environment. Turning our attention to the business, as we noted in our second quarter earnings call, the current macro environment for the energy industry is unique in my career. Upstream operating customers have typically continued with their capital restraint, which supports higher commodity prices. There's clearly weak supply and strong demand dynamic in play influenced by traditional natural gas demand, declining pressures and volumes in existing basins, and continued strength in crude oil commodity prices with a large amount of crude oil produced through gas compression-assisted techniques. It's a unique dynamic that demonstrates gas compression demand is presently divorced from appreciably higher capital spending. Absent a large-scale geopolitical event, we believe that we are at the beginning of at least a couple of years of high commodity prices. NGS, with our past financial discipline, is well positioned to take advantage of these opportunities beginning this year into 2023 and beyond. We have been and will continue to be focused on operational efficiencies; our visibility of organic growth opportunities and a large horsepower market has never been stronger. We have worked diligently with our customers to understand their needs in 2023 and beyond and have started discussions with our financing partners to provide us with the needed liquidity to build out significant new large horsepower additions at highly accretive rates. We have always been protective of our balance sheet. We have the financial ability to execute on opportunities and we are now in a land of opportunity. While the ultimate amount of capital required for the 2023 program has not yet been finalized, we are working with our board and bank to complete the process. Along with this, we have already begun work on meaningful amounts of new large horsepower compression that has already been committed under long-term contracts. In addition, our previously announced electrification conversion project on several of our 250 horsepower units is well underway and we anticipate that we will complete the conversion of 60 of these units by mid-year 2023. Furthermore, our plans to deploy our first 2500 horsepower electric units are scheduled for next year. Most of our capital is committed to traditional gas-powered engine additions, but we are seeing more demand for high horsepower electric units from our customers, and we do believe there will be more opportunities in this realm. Turning to our quarterly results, we are pleased to report our seventh consecutive quarter of increased rental revenues. Rental revenue increased 15% to $18.6 million from $16.2 million in the third quarter last year and 3% over the second quarter's rental revenue of $3.1 million. Q3 saw a slight decline in operating margins on our rental business after consecutive quarters of improved margins. Inflationary pressures, primarily in labor, lubricants, and parts drove this decline. During the quarter, we worked with our customers to increase our rental pricing given these inflationary pressures. The price increases we rolled out impacted approximately half of the active rental fleet in the fourth quarter, while the remainder of the fleet will see increases beginning in January 2023. These price increases were needed to not only recapture operating costs due to inflation but to prudently roll back negotiated price concessions over the last two to three years and during the pandemic. These will have a positive and sustained impact on revenues and EBITDA. We believe these price increases are appropriate in the current cost environment and will restore our margins to the levels needed to continue to invest in the business and bring out new compression to support our customers' activities. As you're all aware, we began our strategic shift towards the higher horsepower market nearly five years ago and this has been and continues to be an excellent source of cash margins and return. Our asset mix, however, by unit count is still heavily weighted towards small to medium-sized compression. Our large horsepower assets comprise approximately 14% of our current utilized fleet by unit count, but these units provide approximately 45% of our current rental revenue stream. As the small to medium-sized compression market is the most competitive and thus most price-sensitive, we anticipate that our unit utilization will experience some volatility over the coming months, but it will not have a meaningful impact on our current revenue stream. However, we anticipate that our horsepower utilization will continue to grow reflecting our large horsepower growth. With that, I'll turn the call over to Micah to discuss our quarterly results in more detail.

Thank you, Steve. As previously mentioned, total revenue for the three months ended September 30, 2022, increased to $20.7 million from $18.2 million for the three months ended September 30, 2021. Rental revenue increased 15% to $18.6 million in the third quarter of this year from $16.2 million in the third quarter of last year due to the increased deployment of rental units, primarily higher horsepower packages. As of September 30, 2022, we had 1196 rented units representing 305,953 horsepower, compared to 1221 rented units representing 288,706 horsepower as of September 30, 2021. We ended the third quarter with 60.5% utilization on a per unit basis and 72.2% utilization on a horsepower basis. Utilized horsepower increased by 6% in the third quarter when compared to the year-ago period, while revenue per horsepower increased 6.8% when comparing the same periods. Sequentially, total revenue increased 4.1% to $20.7 million in the third quarter of 2022 compared to $19.9 million in the second quarter of 2022, primarily due to a $0.5 million increase in sales revenues, and a $0.5 million increase in rental revenues, partially offset by a $200,000 decrease in service and maintenance revenues. As noted in our release this morning, adjusted rental gross margin of $8.6 million increased 17% when compared to $7.4 million in the same period in 2021, with a marginal decline of 300 basis points when compared to the $8.9 million recognized in the second quarter of this year. Adjusted rental gross margin as a percent of rental revenues was 46% for both the third quarter of 2022 and '21 and 49% for the second quarter of 2022. Operating loss for the three months ended September 30, 2022, was $1.5 million compared to an operating loss of $1.6 million for the three months ended September 30, 2021. Operating loss improved primarily due to higher rental margins, partially offset by increased G&A, primarily driven by severance costs related to the retirement of our former Chief Executive Officer, Steve Taylor. Sequentially, reported operating income of $700,000 in the second quarter of 2022. The decline in operating income during the current period was a product of severance charges and, to a lesser extent, increased rental expenses. Our net loss for the three months ended September 30, 2022, was $80,000, or $0.01 per basic and diluted share, compared to a net loss of $3.6 million or $0.27 per basic and diluted share for the three months ended September 30, 2021. Improved rental margins combined with a $1.3 million gain on the sale of certain assets from our rental fleet were the primary contributors to the decreased net loss. We recorded a net loss of $70,000 in the second quarter of the year, or $0.01 per basic and diluted share. Adjusted EBITDA increased to $7.7 million, or 44% for the three months ended September 30, 2022, from $5.4 million for the same period in 2021. This increase was primarily the result of higher rental margins and gains recorded on asset dispositions. Sequentially, adjusted EBITDA increased 13% from $6.7 million, primarily as a result of asset dispositions. SG&A in the quarter was approximately $4.1 million, a $1.4 million increase from the year-ago period, and an increase of approximately $1.8 million in the second quarter of this year. These increases were primarily attributable to severance expenses related to the retirement agreement between the company and our former CEO, as well as other costs related to our executive transition process. While we anticipate fluctuations in SG&A, we expect severance and executive transition costs to be temporary in nature and do not expect them to impact our business beyond the midpoint of 2023. Our cash balance as of September 30, 2022, was approximately $2.6 million, with $2 million outstanding under a revolving credit facility. In the first nine months of the year, we realized cash flow from operations of $18.8 million and used $35.4 million for capital expenditures, $34.6 million of which was expended on our rental fleet. As noted in our second quarter earnings call, the compression market remains strong and we are fielding calls daily from our customers inquiring about the availability of new compression, primarily higher horsepower. During the second quarter, we accelerated our new equipment development program and anticipate we will end the year at the high end of our previously forecasted $40 million to $50 million of CapEx spend. With that, I'll turn the call back over to Steve.

Thanks, Micah. In my opening comments, I mentioned that we will be fabricating and installing 2500 horsepower drive units, which is significant, but I also want everyone to understand that this is only part of the new phase in our large horsepower strategy. We started on this shift to remake our fleet almost five years ago and we have been quite successful, evidenced by the fact that today 45% of our rental fleet revenue is associated with our large horsepower assets. We're now embarking on another complementary phase, which is moving into 2500 horsepower asset size. Besides providing an additional growth avenue, we will be able to leverage our existing large horsepower compression infrastructure that has already been established. In the past, we've been fortunate in being awarded rental contracts with longer terms at higher prices than the general market. These positive aspects continue with the contract equipment in the 2500 horsepower range. With our entry into the very large compression horsepower market, we anticipate our utilized horsepower will see double-digit growth by this time next year. Supply chain disruptions and customer delays certainly impact that, but generally we anticipate this level of activity. Besides the promise we're seeing in our traditional business, we also think we have the optimum type of gas compression packages to capitalize on the methane reduction initiatives that continue to be legislated, as recently evidenced in the Inflation Reduction Act. Combined with our technological prowess and experience, our gas compression package will not only reduce the carbon footprint of our equipment, but will simultaneously reduce the taxes operators pay related to those emissions. If you have followed NGS for any time at all, I'm pretty conservative when it comes to predicting the future. But it certainly looks like we are uniquely positioned to take advantage of this positive cycle. I did not expect to be coming back to NGS in the daily operating room, but through John's efforts and contributions from the NGS team, we are in an excellent position to grow the company. Our focus will continue to be on capital execution, deployment of new compression equipment, and maintaining our service quality. I will, of course, provide further updates on our end-of-year call. Now we're happy to take any questions. So Dennis, please open up the lines.

Your first question comes from Rob Brown with Lake Street Capital. Please go ahead.

Good morning, Steven. Good to be talking again.

Hey, Rob.

On the demand environment, you said it's quite strong, and you're seeing customer activity increasing. I guess, is that strength across the board, or is it really focused on the high horsepower market? Or what’s driving demand? And where are you seeing it?

We are seeing some increase across the board, but I mean, natural gas prices are good. But it's primarily the big horsepower that we're seeing, and the majority— I think the number was 80% or 85%—of our CapEx has been spent on large horsepower, which has been pretty indicative over the last few years anyway. But overall, we're concentrating and seeing large horsepower demand. Jim, do you want to add anything to that?

Well, Steve, you're absolutely correct. Most of our build-out or planned build-out will be in the large horsepower, 1500 horsepower, 2500 horsepower size units. As you know, there are some small ones, but not very much.

Yes. Thanks to Jim. Rob, maybe just the natural gas price has been very volatile, but I think still pretty decent compared to last decade. There is uplift everywhere, I mean, in traditional, just pure natural gas basins, Barnett and San Juan, South Texas, places like that. Really what's driving the large horsepower demand are oil commodity prices and gas lift techniques with the power compression. So it's kind of an indirect activity. But that gas lift market is really the one that is driven. Are we seeing the end of horsepower last four or five years? So I don’t want any bad thing— that's a transient thing. Just that higher oil prices are driving the vast majority of big horsepower demand.

Yes. Okay. Great. Thank you. And then, on the methane reduction kind of market, that's opening up and the government support? How do you see that in terms of opportunity for you and kind of growth drivers next year and beyond?

Well, it's a double-edged sword, right? It's an opportunity, but it's also driven by legislation, and that legislation makes the Inflation Reduction Act quite a misnomer. It's having some portions of it directed towards methane reduction. I think they're even doubling down a little bit on some of that stuff. So we're seeing that from a legislative standpoint every quarter. Certainly, it is an opportunity from the point that cleaner the machine gets, the more popular you’re going to be—you're going to be the girl with the answer that gets all the boys because all the stuff has come along. And one of the things I think was in the Inflation Reduction Act, and Jim correct me if I'm wrong, but I think there is a tax regime in there based on carbon emissions, methane emissions, and stuff like that. And so when you start looking at that, particularly with the equipment that we are using—whether it's the engines or going to electric drives, or the compression phase of our type of equipment—we can reduce operating taxes quite a bit just due to taxes imposed on methane emissions. So there are all kinds of opportunities around, whether it's environmental or financial. Quite a bit and we’re just going to get started on it, and it’s just going to grow. So Jim, I don't know if you've got anything else about that act or our equipment you want to weigh in on.

It involves capturing the escaping methane from traditional packaging, and we do it by changing our end devices and things like that, we can get it down quite a bit. On the electric drives, we can move it down pretty close to zero. So, Steve, you're right—it's also, I would like to mention that I heard yesterday that New Mexico is increasing their quota restrictions on methane. So it's coming down to who can do more and better. So you're right; it's the girl at the dance.

So, Jim mentioned New Mexico, and that’s part of the Permian Basin. The Permian is driving a lot of this big horsepower, a lot of the concentration on this, et cetera. So we're going to be well positioned in that, and I think we start testing some phases of the equipment in about a month or so. But we're going to be able to offer the operator a pretty clean machine.

Okay, great. That's great color. Thank you. And then your last question is on the pricing environment. You talked about increasing pricing and then maybe a second round for the rest of your fleet. How, what sort of the degree of pricing increases can you get and how could that flow into the average?

Well, as we mentioned, about half the fleet will see price increases in the fourth quarter, while the other half will see increases in the first quarter of the next year. Maybe go into how much the increases were; are they varied and depending on the current price of equipment and over time, in the rental business, for the same size and type of equipment, different rental rates on them. With the same customers, or certainly among customers, because depending on when you put that stuff out and the environment and whether it's a high activity or low activity environment, things like that, and your costs in certain areas that are higher than others. So you get different rental rates out there, and one of the things you've got to do is obviously get everything up to a decent return profile. So the increases were all different; generally, they were, instead of a broad approach like we did in March, which was flat across the board by 7% to 8%, this is more surgical and we did that to approach your down some credit circling that effort, and that will come in as well. Micah, I don't know if you have anything else to say on the price increases?

Yes, I think you hit it, Steve. When we say 50%, we're really looking at that from a revenue basis, right? So half of our revenues will see a price uplift in the fourth quarter with the balance rolling into the first quarter. The big piece of that we've got one large customer whose equipment is primarily still under contract terms. So negotiating price increases there, we can't just do that unilaterally; it’s a real negotiation there where we've got to prove out, here’s the cost burden we’re bearing and going to prove that out to them. So that's what we're expecting to come in the first quarter. But in the fourth quarter, this is across the rest of our customer base. As we kind of mentioned within the script, a lot of this is on small compression that is obviously the most competitive in the market as far as price is concerned. And so, we anticipate, Rob, a little volatility in our utilization going forward as some of these units come back to us. We also have on several occasions, when we've talked with the customer and said here is the price that we need to realize to keep operating this machine in the field for you. This is some older equipment that does—it’s not really part of our core strategy going forward and those customers at times have kind of raised their hand and said, hey, would you sell that to us and then maintain it for us? And so we've done that as well. So we're working through all the options available to us to help our customers continue to operate, but at the same time help us realize the margins that we need to go forward to continue to invest in the business.

Rob, as you know, there are a lot of inflationary pressures and a lot of supply chain issues still. On the supply chain, it’s getting a little better in some respects but not in others; certainly, price inflation driven pricing has not abated, in spite of what the government says. Obviously, excuse my digression, Biden has not been to a grocery store or hasn't bought a compressor part in a while because they are all still advancing in cost pretty significantly. So as I mentioned in the narrative, a lot of this is to recover some costs and certainly get our margins to where we need them to continue to provide equipment. There is a lot of demand out there, and it is unique; it's pretty high, and we're fortunate that we're in the immediate market right now to 1500 to 2500 horsepower realm, which is pretty active. So we think we're going to be in good shape going forward. And the new contracts that we’re getting, as I mentioned on the bigger equipment, are excellent too. So I think you'll see that flow through certainly into 2023, and as long as we don't have some disruption in the market, pricing should hold for a bit.

Okay. That's excellent color. Thank you. I'll turn it over.

Your next question is from Tate Sullivan with the Maxim Group. Please go ahead.

Hey, Steve, nice to hear your voice again. You commented earlier on maybe seeking other financial partners to finance building larger compressors. I mean, in this type of market, I mean, being just as the customer demand, not to rationalize using more debt than you have historically, and how comfortable are you with using more debt to build a higher horsepower?

Well, it's not going to be too hard to use more than we have—more, definitely have traditionally because traditionally has been zero. And yes, as I mentioned, we're talking to others about additional liquidity and things like that, but the issue you get in when we start moving into 1500 horsepower and medium horsepower, you run into equipment that runs brand new, maybe $250,000, $300,000; you move into the 1500 horsepower realm and you get stuck; that's $1.5 million to $2 million. Start moving into 2500 horsepower and you get $2.5 million to $3 million. So the magnitude of the expenditures grows, even though the number of equipment that— So yes we're going to have to, and that’s what we're doing, and Micah is leading the charge on that. We're going to have some other sources outside of our operating cash, sorted escrow going to be stronger. But we're going to have to supplement just because, number one, you get the higher cost of the equipment and just have such a demand that our cash flow just can't take advantage of it right now. Micah, you want to go a little more on that?

No. I think you hit it right on, Steve. It's something, as we've said numerous times, we've been very protective of the balance sheet, waiting for the right opportunity. In the market that we're seeing today, with the wide gap between supply and demand, the rights we can secure with these new large horsepower additions are very accretive and something that doesn't bother us to take on leverage in this kind of operating environment. It's just the rights that you can get and the returns you can achieve on those investments are too good to pass up. So it's something we're working on diligently, talking with our banks and others to ensure that we have the financing lined up so we can execute on the opportunities available to us.

Tate, I will mention that we're keeping an eagle eye on the balance sheet, but I didn't want to go out there and leverage five to six times EBITDA and stuff like that. So we're going to keep it in a reasonable realm while still being able to grow the fleet pretty vigorously.

And then related to the larger 2500 horsepower, is it not an element of the industry for customers to do installment payments or any upfront payments as they go to the larger horsepower? Or do you have to finance the whole construction until the receiving rental?

Well, yes, on rental, it's all on us. Now we're building some for somebody, certainly we get upfront payments, progress payments, things like that, but that's not a capital expense. That's just to build and sell the margins. So we're not too worried about that stuff right there; that won’t impact our capital profile too much. It is the rental equipment that we've got to put the whole bill for and then we turn around and rent it for that return.

Okay, great. Thank you, Steve. Thank you, Micah.

Okay. Thanks, Tate.

At this time, there appear to be no further questions. I will now turn the call over to Steve for any closing remarks.

Okay. I appreciate everybody for calling in and certainly want to again thank John for his contribution to the company and continue to incite and appreciate Jim and Micah joining the call and certainly all of the NGS employees. We've got a lot of opportunities in front of us. So thanks everybody and we will see you next quarter. Thank you.

This does conclude the Natural Gas Services Group Inc., third quarter 2022 conference call. We thank you for your participation. You may now disconnect.