Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group, Inc. Quarter Two 2023 Earnings Call. At this time, all participants are in listen-only mode. I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Thank you, Luke, and good morning everyone. Before we begin, I 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 and 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 the non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our forms 8-K, 10-K, 10-Q furnished to the SEC. I will now turn the call over to Steve Taylor, our Chairman and Interim President and CEO. Steve?

Thank you, Anna and Luke, and good morning, everyone. Welcome to our second quarter 2023 earnings conference call. Thank you for joining us this morning. Before taking your questions, I'll highlight our financial and operational results for the second quarter, discuss the current business environment and provide comments on other aspects of our business. Reflecting on the quarter, total revenue and rental revenue grew when compared to both sequential and year-over-year quarters. Sequentially, our sales revenues declined, but our strategically important rental revenues continue to grow at a brisk pace, reflecting our tenth consecutive quarter of rental revenue growth. Our overall gross margins improved, led by higher rental margins and lower operating expenses, and operating income and net income both increased over the comparative quarters. We're starting to see the results of our 2023 capital program in our revenues, margins, and bottom lines. The overall environment in our industry continues to be positive, and we anticipate further improvement. Total revenue for the three months ended June 30, 2023 increased to $27 million from $26.6 million for the three months ended March 31, 2023, or a 1.3% increase in sequential quarter. Total revenues increased year-over-year from $19.9 million for the three months ended June 30, 2022, or a 35% increase. The small increase in sequential total revenue was due to a $1.4 million drop in sales revenues in the first quarter, although that was offset by an increase in rental revenues in our service and maintenance business. By the way, now and going forward, we will be referring to our service and maintenance business as aftermarket services. There is no change in the revenue components to make up this segment, but aftermarket services, or AMS, conforms closer to how our industry generally refers to it. Rental revenue increased 6% from $22.7 million in the three months ending March 31, 2023, compared to $24.1 million in three months ending June 30, 2023. Rental revenue increased to $24.1 million in the second quarter of 2023 from $18.1 million in the second quarter of 2022 for a 33% gain over the past year. Both comparative period increases were primarily the result of the increased deployment of high horsepower rental units, higher overall horsepower utilization across the fleet and rental price increases throughout the year. Rental revenues now compose approximately 85% to 90% of our total revenues in all comparative periods. Adjusted gross rental margin increased sequentially from $11.1 million or 49% of revenue in Q1 2023 to $12.8 million or 53% of revenue in the second quarter of 2023. This is a 15% increase in gross rental margin dollars since last quarter. On a year-over-year basis, our adjusted rental gross margin of $12.8 million in the second quarter of 2023 increased approximately 42% when compared to $9 million in the same period in 2022. In the comparative year-to-date six-month period, our rental revenues have increased 33% while adjusted gross margins grew by 42%. As of June 30, 2023, we had 1,249 utilized rented units, representing over 372,000 horsepower, compared to 1,281 rented units, representing just over 311,000 horsepower as of June 30, 2022. The net decrease in fleet units was due to the combination of a sale of rental units to a customer and the retirement of idle units, both of which happened in 2022. In spite of that, we had an approximate 20% increase in horsepower over the past 12 months. We ended the second quarter with 65.4% utilization on a per unit basis and 78.6% utilization on a horsepower basis. While unit utilization remained relatively flat, horsepower utilization increased from 77.4% in the first quarter of this year. Utilized horsepower increased to 5.7% in the second quarter when compared to the year-ago period, while revenue per horsepower increased 15.5% when comparing the same periods, demonstrating the impact of the growth in higher horsepower units and the price increases we have been able to implement over the last year. Our total fleet as of June 30, 2023 consisted of 1,911 units and 473,884 horsepower, or 250 horsepower per unit. Our average horsepower per unit has grown by 19% per unit over the last year. Notably, approximately 97% of our high horsepower fleet equipment is utilized and drawn rent. Of our $150 million capital budget this year, approximately 90% of it is presently committed to long-term agreements, with a balance anticipated to be contracted in the third quarter of this year. As of June 30, 2023, we have shipped and set approximately 50% of the units and horsepower anticipated in the 2023 capital expense budget. Presently, our large horsepower assets comprise approximately 17% of our current utilized fleet by unit count and over half of our utilized horsepower and current rental revenue stream. Approximately five years ago, NGS decided to enter the large horsepower market. At this time, with more than half our utilized horsepower and revenues emanating from larger units, I think we can say that we're an established player in this market segment. Sales revenues for the sequential quarters decreased from $3 million in the first quarter this year to $1.6 million in the second quarter. Two-thirds of the second quarter decrease was from a non-recurring idle equipment sale that occurred in the first quarter. The balance was the typical quarterly fluctuation we experienced in part sales. On a year-over-year quarterly basis, sales revenue increased slightly from $1.3 million to $1.6 million. Our SG&A expenses increased approximately $300,000 in sequential quarters and totaled 18% of revenue. Sequentially, we reported increased operating income of $712,000 in the second quarter of 2023, compared to $402,000 in the first quarter this year, a 77% increase. This improvement was primarily due to higher rental revenues and gross margin. Negatively impacting our operating income this quarter was a software obsolescence charge we took. Without that, operating income would have been roughly twice of what we reported. In either event with or without the software charge, operating income this year improved over the operating income of $658,000 for three months ended June 30, 2022. Our net income in the second quarter of 2023 was $504,000 or $0.04 per basic and diluted share. This compares to a net income of $370,000 in the first quarter of the year or $0.03 per basic and diluted share. In the year-ago quarter, our net loss was $70,000 or $0.01. Adjusted EBITDA increased 27% to $9.9 million from the first quarter number of $7.8 million and increased 48% from $6.7 million for the same period in 2022. Our cash balance as of June 30, 2023 was approximately $4.3 million. In the second quarter of this year, we realized cash flow from operations of $22.6 million compared to $13.2 million in the same quarter last year. At the end of this quarter, we've utilized $93.5 million for capital expenditures, $92.3 million of which was expended on our rental fleet. Outstanding debt on our revolving credit facility as of June 30, 2023 was $100 million. The leverage ratio was 2.53 and our fixed charge coverage ratio was 4.17. These are both well within bounds of the covenants and the company is in compliance with all terms, conditions, and covenants of the credit agreement. Last quarter, I remarked that we thought the activity we were experiencing would continue the balance of this year and likely into 2024. Based on what we're seeing and hearing internally and from customers, we think this positive forecast continues to be correct. We are in an undersupplied market, and we see little relief to it soon. Industry utilization is high. There's no appreciable capacity being added to the industry. Lead times for major components are long. Customer inquiries from established and new customers continue to flow in, and we have the ability to increase prices to ensure our shareholders get a fair return. Commodity prices and future production and consumption data all so seem to support present activity. It's been a long time since we've had this kind of positive dynamic in activity and pricing, and there appears to be a greater capital discipline from customers and competitors that may help sustain this environment. In the past, there was a mantra used when the industry was going through repeated boom and bust cycles. It was, and excuse my colloquial messaging, "Please, Lord, give us one more boom. We promise not to screw it up this time." It's taken a few decades for this to sink in, but maybe we have it right. However, there's always caution required in a volatile commodity-based industry like ours. There will be another downturn at some point, but I think NGS has somewhat mitigated that impact with long-term contracts, good pricing, exceptionally strong customers and contracts, and long-lived equipment. We are bullish on our industry over the next couple of years and hope to take advantage of the strong environment. Thanks for your time. I look forward to your questions.

Our first question comes from Rob Brown with Lake Street Capital.

Just wanted to get a little bit into your comments about the positive environment and sort of demand. How do you see that impacting your capital plan, I guess, throughout the rest of this year and into next year? And what's sort of the visibility on that activity?

It won't have much of an impact this year since, as I mentioned, 90% of our capital is already contracted and committed, and we expect the remaining amounts to come through contracts in the third quarter. So that's largely established. Regarding 2024, we are receiving inquiries about customer needs and requirements. We haven't put together any formal announcements at this point, but things look promising. As we approach the end of the year, customers will begin to publicly signal and announce their budgets, which will help solidify our outlook. Until then, the discussions are mostly informal regarding potential requirements. I remain optimistic about the rest of this year since that is already accounted for. Next year appears strong as well. We'll see how 2024 transitions into 2025, but some customers are already considering 2025 due to current equipment lead times and the market tightness, which has pushed them to plan further ahead than in the past. We're at a point where 2024 looks realistic, and 2025 is becoming the next potential target. Although we don't have specific numbers now, we believe that 2024 will be a solid year.

Okay, great. And then where are you at in terms of your sort of weighted average contract duration? I think many of these high horsepower contracts were longer term. I guess, what's sort of your contract duration at this point? And what's the incremental contract being signed at?

Any new contracts, and that includes anything that we've got committed this year that we've put out or will be put out the rest of this year, is on the bigger horsepower, the 1,500, and 2,500 horsepower units, is five years without exception. We don't need to and see any reason to go below that tenor. Overall, with some horsepower being put out about five years ago on three to five-year contracts, our average right now is in the three to five-year range. But we've actually had some contracts just go month-to-month over the past year or so, based on some of the first stuff we put out in the three or five-year terms that we put out three or four years ago. So those are actually on a month-to-month even on the 1,500 horsepower range equipment. But we've only had, I think, overall this time, maybe less than a handful of units be terminated, but then they're immediately re-rented. Terminations weren't typically due to anything other than needing to move equipment around or put it on some other locations in that respect. It wasn't due to lack of need. So, I think as I've mentioned in the past, these are minimum term contracts. So for example, the five-year stuff we're putting out now, that's a minimum term, but that doesn't mean they come back after five years. That just means that's a minimum financial and contractual commitment the customer makes to get that equipment right now. But we're already seeing equipment approaching one to two years beyond contract term. And that's what we expected when we first entered into this and that's playing out. But to answer your original question, on average, we're probably into that three to five-year range across the whole high horsepower fleet.

Okay, great. And then are you seeing the market strength in the medium horsepower area as well, or is this all really a large horsepower phenomenon?

It's primarily large horsepower. The medium horsepower hangs in there okay. Where you start getting some volatility more so is in some of the smaller horsepower, which is primarily natural gas-directed, because it's smaller, lower pressure, lower volume type equipment. And very sensitive to natural gas prices, whether it's $2 or $3, which is kind of the range that's running. So we see more movement in and out in that market. The medium horsepower is single well gas lift. And obviously, neither one of those is smaller to medium horsepower are as robust and active as a large horsepower. But they tend to just kind of hang in there and go up and down a little, et cetera. But — and that's why you see some of the — just the unit utilization flat, but the horsepower utilization climbing pretty aggressively, primarily from the large horsepower.

And our next question comes from Hale Hoak with Hoak & Company.

Congrats on a nice quarter. As you and I have talked in the past, I'm excited and supportive of your growth plan and the transition of the business and the balance sheet. The one thing that I think would be helpful for people though is if you could maybe work your way into giving a little bit more guidance or return information on the capital that you're spending. It seems like you're on a run rate of maybe exiting the year at close to $50 million of EBITDA. And maybe on the next quarterly call, you could give some guidance on what you're seeing for 2024 and your growth plans. But based on our math and compared to your peer group, this could be a $15 or $20 stock at some point. And I think it's going to be easier to get there if you could maybe articulate guidance and growth CapEx plans?

Yes. Good point. And we're sensitive to that and we're getting the models tightened up so we can give reliably a little more detail and granularity on some of that stuff. We've traditionally not given a whole lot of guidance on that. Usually, the context of the remarks gives people enough information. But you're right, with the debt, the large amounts of capital, et cetera, it's something we need to be a little more expansive about. So, we're working towards that, recognize that, and we will give additional color in that respect next quarter.

Our next question comes from Tim O'Toole with Petra Capital Management.

I usually don't participate in these calls, but I want to congratulate you on successfully executing your plan. Your positioning as you entered this cycle is commendable; you started with a strong balance sheet, unlike many of your peers who have historically been burdened with significant debt, which limited their ability to invest effectively. I have a couple of questions for further clarification. First, I understand that skilled labor in the Permian and likely in other oil basins remains relatively tight. It seems to be improving somewhat, and you're receiving better compensation, but I suspect it is still on the tighter side. Could you provide insight into the ongoing excess expenses due to the high activity levels and the necessity to contract some labor for the installation of compression sets?

Yes, you're right, labor continues to be tight. We're able to keep up with it, but it is a — it's more of a battle than it has been in the past just from the point of finding people and bringing them on, et cetera. In the Permian — and it's tight everywhere, but it's not as bad as out here. We've got operations in different parts of the country, and you're always looking for good people and having a little turnover in some areas, but it's exceptional out here. You've got the most active oil field in the U.S. and one of the most active in the world here with two towns of 150,000 people each. So there's not a big labor pool. And it's been exhausted for a little bit. I think the last official figures I saw, and I'm pulling, it's about 2%. And when you're down to that number, you're essentially fully employed because those 2% are really not the ones you want coming in. So, we're having to look a little harder and a little wider too, because most of what gets hired now are rotators or commuters, people that we have to bring in from outside the area. So Louisiana, Oklahoma, various other places. And these are the service tech. These are the field guys that maintain the equipment and keep it running, primarily the higher horsepower technicians that are harder to find. So you got to look in different places all the time. And we do that, we're able to keep up, but it is an approach in a full-time job just to do that. Of course, your environment like that drives cost, labor cost. So, we do have an impact from that. You also have an impact from essentially having to feed and shelter whoever you bring in. So it's a room and board thing. The incremental, say the premium cost on doing this, and I'm just talking about the Permian, I'm not talking about the whole company because that would dilute the cost a bit. But just from the Permian standpoint, I'd estimate based on, say, premium labor costs and mobilization, demobilization cost for people, it would be in the 15% to 20% range of our labor cost out here. It's appreciable. And we pay attention to it and try to manage it, but it's very hard to mitigate it. It's such a competitive market, you pretty much — if you want good people, you pretty much have to target them and pay them what the market is a little above and get them on the payroll.

Part of the question stems from the timing of when operations are likely to normalize. Your current level of new equipment setup is extremely high this year and is expected to remain strong into the first half of 2024. It stands to reason that at some point, this activity will stabilize, making logistics and personnel management easier—though not necessarily cheaper—allowing for better cost optimization. I'm curious if you have a timeline in mind for this. Additionally, can you give an estimate of any excess expenses on a quarterly basis? For example, is it around $1 million in excess expenses each quarter, a few hundred thousand, or possibly even more than $1 million? While getting an exact figure may be challenging, I'm trying to gauge what the situation might look like as we head into the middle of next year. I believe some of these operating costs should begin to decrease.

Yes. Cost from a labor standpoint, I don't really see much relief on that for really a couple of years. As I mentioned, '23 is busy. We already know the whole year is active and essentially sold out. We're thinking '24 is going to be busy too. So as long as it is, there's going to be a pull on labor. And especially, we'll know it's getting better when we can start finding local people, but that's a long way away. We're still going to be having to bring in people to supplement the small labor force here. So, I don't see really much abatement in labor pressures for probably a couple of years. Contingent upon the activity remaining like we think it's going to remain. And then over time, it will. And unless you get some ups in the interim that leads to a downturn, which can happen, but we don't anticipate it. So I think we still got 18 to 24 months of labor pressure on some of that and labor availability, too. From a finite number standpoint, it probably is from a total labor standpoint, $1 million probably would not be too far off if you're thinking about the 15% to 20% premium.

And actually, there's a related question. I think you alluded to this perhaps in the last quarter or the quarter before. But SG&A is running around 18%, I think, of revenues. And I think you've mentioned that that should settle out to something more like 14%, if I'm remembering correctly. And do you have some sort of a timeline on that? And I'm not even sure if my numbers are correct. I'm going by recollection notes at this point.

Yes. No, we anticipate Q3 and Q4 being lower. There's some legacy costs that — the last of which we experienced in Q2, those are gone. So I think that — I don't remember exactly, I think I might have even — probably shouldn't even get myself in trouble here. I think I’d even talked about maybe 12% or 13% in the past, but I'll take your 14% since we're at 18%. But no, we'll see those come down in Q3 and Q4.

Okay, great. And then this is kind of a quick question on some of the numbers. There's a couple of things I want to try to work through that are numbers related. One is the software impairment; you kind of called out enough information to back into something, but it kind of looks like the accounting earnings might have been around $0.09 or $0.10 without that, although I'm not sure how the tax affects that number exactly. Does that sound about right?

Well, I think the software impairment was $720,000 — $780,000. If you just take the $780,000, divide it by roughly — yes, we've got about 12.5 million, 13 million shares, just that quick math, and I'm not representing any of it being pretax or tax or whatever, but that's $0.06. So it's an appreciable charge.

Yes. Okay. All right. Yes, it wasn't kind of set out as a kind of a normalized number. So I was just trying to get a sense for that because the stock is still fairly inefficient and not broadly covered. So getting numbers off of a research base is not — is still challenging. Another question — okay, a couple of things. Another is, I think you alluded to this, and maybe I have this number right, but I've been trying to look at your fleet as kind of a tale of two fleets really, although you break it down into small, medium and large. I kind of look the rest of the industry and yourselves are benefiting from this trend in high horsepower stuff. You demark that around 400 horsepower. And if you looked at the fleet above 400 horsepower and below 400 horsepower, the fleet above 400 horsepower, did you say that the utilization rate for that part of the fleet is 97%?

Yes.

So then the stuff that's smaller, so your medium and small horsepower, what would be the utilization on that part of the fleet? It's probably no better than 50%, I would guess, or probably in that approximate range?

No. It's in the 60% to 65% range on the small and medium. It's not horrible. It's just not where we want it.

Right. And you have been kind of culling that a little bit, but you're doing it judiciously and not writing it down — not taking $0.20 on $1, but taking kind of $0.100 on the book or something, as I recall.

Yes. The utilization numbers can be a little misleading from a couple of standpoints. From — number one, the way everybody seems to calculate it differently. So, some were just same, some of it differently, but yes, you can read people's Qs and Ks and see how they calculate, there's some differences there. So, we're not smart enough to get fancy with it. We just take what we own and compare it against what's running, and that's the utilization, right? Nothing fancy about it. But also from a financial perspective, you may look at 60%, 65%, that's — what's the financial impact of that. Yes, from a — when you look at the book value of this equipment, just about all of our small horsepower is depreciated out. So there's little book value even on the books on a lot of that stuff. And the medium horsepower, generally, we're probably about two-thirds depreciated on that stuff. So we've got a lot of units in that small and medium horsepower from a unit standpoint, just not as much horsepower. And really the book value impact is relatively small, too. And we have, over time, called out certain sizes either that had gotten down to most lower utilization that didn't make any sense or some areas that we just had more in the fleet than we thought was prudent.

Okay, great. You touched on something before. And let me know if I'm — I can get back in the queue if there are people in the queue. But you touched on this before. You put in a big slug of equipment for specifically one particular customer a handful of years ago. I think you said three, four, five years ago. And some of that stuff has come off of their long-term contracts still utilized, they're still very busy, as I understand things, and still heavily Permian weighted. So that stuff is still being utilized. But one of the things that I was wondering about and maybe you could fill this in is that if you were to take one of those pieces of equipment, let's say, a 1500-horsepower unit. You basically could put that to — because the market is so tight, you could put that to work at probably higher rates than certainly went in at to begin with. And one of the dynamics I'm wondering about as we get through this period of putting new equipment into service and then renewing those contracts down the line with some of your newer customers is, what would be — if you looked at that 1,500-horsepower unit, if you were to do some maintenance CapEx on that unit and then place it in another long-term contract, let's say, five years, what would that dynamic look like? In other words, your annualized recurring revenue from the new contract would be higher by something, maybe 20%. I don't know what the number is. That maintenance number would it be 10% of the original cost of the equipment? What's the order of magnitude of that? And then what would be the cost to set that into a new location and thus, a new contract?

Well, the easy question first, the cost to move it from one location to another is borne by the customer. So, we don't have any financial impact from that. Our impact from that is primarily manpower, right? Help them get it out, have them reset it up and stuff like that. So that's primarily a customer expense. From the point of if you have a unit coming off, let's say, been on contract for three or five years or maybe it's got month-to-month and they don't need it anymore, we can't put those out at higher rates. And those rates vary. But typically, if you go to maybe a three or four-year-old one, those rates now are probably 20%, maybe even 25% higher on some of these units. So definitely, they would go out at the higher new rate. Now, you get that, but we're also getting some of those rates up, too, because you can look back at those older rates and know that you got — okay, you kind of fixed your capital expense back then and you're set there. But all the other maintenance and operating costs have gone up. And we all know the inflation environment and supply chain issues and stuff like that. And all that's gone up. So, we are going back on all those contracts and asking the customers for increases and being successful. Everybody understands what's going on, obviously, the suppliers and the customers too. So to protect and preserve and hold on to that equipment, it's just more expensive to do it for the customer and that's too because we've got these costs we've got to pay. So we're not just waiting for stuff to come off and then we raise the rate; we are trying to be proactive and going back and getting that from what we've got there. From the maintenance standpoint, when you pull a unit off, you generally need to go through it to make it ready for the next contract from the point of certainly tune-ups from the point of making them runnable. But typically, you need some sort of major or minor overhaul. And those costs can vary all over the board. So I don't want to say how much it might be. But if you're into a 20% rental increase, say you get one off, you raise your rate 20%, it goes to the next contract. The overall impact from a maintenance standpoint is not going to be different than if it just stayed on the location, because after so many hours, whether it's at that location or is moved or some other location after so many hours, you got to do maintenance on. And so you might do it a little quicker if it comes off 10,000 hours before it was scheduled, but it's just a cost of money essentially; it's not really a maintenance cost. It's just you might have to do a little quicker to get out to the location than you otherwise would.

So one of the things I'm trying to be able to model a little bit, and let's talk about this for a minute, is that if I look at your trailing four quarters of discretionary cash flow, which is the metric that a lot of your compression peers use for a variety of reasons, one is that there's — in some cases, they're supporting dividends that are — they need to cover. So they utilize that as a coverage basis also. But basically, one of my points, as you may recall, is that, that discretionary cash flow is really your accounting earnings. And over the last five or six years, you haven't shown much in the way of accounting earnings, but you've generated a ton of internal capital from your operations, from your discretionary cash flow that you've recycled and reinvested into the newer fleet that you're able to deploy at this point. But to get to that discretionary cash flow number, I try to look at and I'm trying to back into some sort of a maintenance CapEx number, which would include some of the maintenance CapEx on the trucks and your facilities, but also the kind of stuff on the bigger machines that you'd have to invest to reset something into a five-year contract. Your fleet is still new enough so there's probably not a ton of that in there yet, but at some point, over time, that will become part of the model. And I don't know if you can kind of verify this, but it seems like your discretionary cash flow over the past four quarters has been on the order of about $35-ish million. And that equates to something like $2.80 a share. I had — my internal model said something like $2.60 to $2.80, but that also suggests that maybe — for '23, that also suggests that you may run a little higher than that this year, but also be able to grow that next year. I don't know if you have the numbers to be able to verify whether that $2.80 number is kind of a good number or aways off? And I also wonder if you'll start to look at discretionary cash flow as a metric just because your other compression peers do, and it does seem like a germane metric.

Yes. I hesitate to hazard a guess right now on the discretionary number you've got, Tim. I can take into a little more and get back to you on how we're looking at it. But yes, it is a valid and good number to watch and keep an eye on. As you note, a lot of our competitors do it from the point of a couple of them are MLPs. That's very important to the limited partners. And it shows coverage on dividends, coverage on debt, et cetera. We haven't had to use it too much in the past because we didn't have either. But you're right; it's one we watch closely, of course, at discretionary cash flow, certainly in times of high activity like now and potentially going forward, it gets eaten up, becomes less discretionary, right? It gets eaten up pretty quick by just activity in CapEx. But let me dive into the numbers a little more with you offline, and we can talk through that one.

Okay. No, I appreciate that. And I would love to follow up in the next couple of weeks. But to Hale's point earlier, the peers are trading, I think Archrock may be at 7x or 8x discretionary cash flow. And I think Kodiak, which just came public, is probably in the 6-ish number, I want to say. And you're at $10.5 or whatever it is today on my numbers, that's sort of 4x. So it's a number of multiple points away. It does seem to be a number that the industry focuses on. I am going to — Steve, thanks very much for the feedback, and I would look forward to chatting with you in the next couple of weeks. I'm going to jump off because there may be some more people who want to ask questions, and I've been on for a bit. Appreciate the feedback and we'll look forward to talking again soon.

Okay. Very good. Thanks, Tim.

Our last question comes from Kyle Krueger with Apollo Capital.

The balance sheet transformation has been nothing short of dramatic, of course. And I have a follow-up to Mr. Hoak's question on return. Presumably, looking at the horsepower and the fact, and the utilization on high horsepower stuff, you're putting out — would indicate that you're putting the stuff out on five-year fully paid leases with good credit, which is a great model. The only thing to solve for is what is the corporate return hurdle that you are imputing into that? Number one, so that's my first question. What's your return bogey in those five-year full payout leases? And the second thing is, are you protected at all against inflation on the inputs that you guys are required to provide over that period of time?

I'll take your last question first. Some contracts have inflationary protection, but frankly, most don't. Now the ones that don't, we actually have not had any trouble getting price increases. I think those are good to have. But even if you have — just like any contract, you have something in there and the market doesn't agree with what you're doing, for example, you can have inflationary increases, but the market is slow, activity slow, things like this, you may have the contractual ability to go and ask for something, but you probably don't have in reality the marketability to go in there and ask for it from the point that your customer may not accept it. So I think contractually gives you a little more leverage, but it does not prevent you from getting your cost where they need to be. So number one, you can go in certainly after the expiration of contracts; that's not very satisfying when you have three to five-year contracts. But typically, those three to five-year contracts and what we've seen over the last few years, you can go in and ask for and justify price increases that will keep us whole. So although most of our contracts don't have it, we are starting to put more and more in. We haven't been impacted negatively by not being able to get in the price increase that we want. From the corporate hurdle on what we want to do, interest rates now, you can look at those, and hopefully, they're mitigating somewhat. We'll see. It depends on what people think about what the Fed may do. But that's into the 8%, 9%, 10% around — probably 8% or 9% currently. So certainly, you've got to factor that into that plus the return you want. And we'll give more color on that on the third quarter call, just like Hale had mentioned. I think that's a valid comment. And we'll go into a little more detail on what we see as the returns, what the returns implied by the price we're charging and things like that.

No. Thank you very much, Steve. Appreciate it.

Okay. Thanks, Kyle.

Thank you very much. Mr. Taylor, we don't have any further questions.

Okay. Thanks, Luke. And thank you, everybody, for participating in our call. I look forward to updating you on our progress in the next quarter. Thanks, again.

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