Natural Gas Services Group Inc Q3 FY2025 Earnings Call

Good morning, everyone, and welcome to the Natural Gas Services Group, Inc. Quarter 3 Earnings Call. I will now hand the call over to Ms. Anna Delgado. Please proceed.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's earnings press release and in our filings with the SEC, including our Form 10-Q for the period ended September 30, 2025, and our Form 8-Ks. These documents can be found in the Investors section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted gross margin, among others. For a reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release. I will now turn the call over to Justin Jacobs, Chief Executive Officer.

Thank you, Anna, and good morning, everyone. Thank you for joining our Q3 earnings call. Joining me today is Ian Eckert, our Chief Financial Officer. NGS delivered record results again in the third quarter, extending our momentum and reinforcing the value we provide our customers through high unit run time and great service. These results were achieved through the dedication of our people. I want to start by thanking the entire NGS team. Once again, I want to pay special thanks to our exceptional field service technicians who are the backbone of NGS. Ultimately, they are the reason that customers, both existing and new, are increasingly looking to Natural Gas Services to provide their compression needs. Starting with third quarter performance, we delivered a record quarter across several key metrics, including total rented horsepower, horsepower utilization, adjusted EBITDA and earnings per share. This performance was driven by strong field service execution and excellent technology-enabled uptime. We continue to take market share in large horsepower compression, reflected by the 27,000 horsepower increase in the quarter. All new sets were large horsepower under long-term contract and roughly half were large horsepower electric units. I'd also like to call out the disclosure in our 10-Q regarding Devon Energy, which now represents more than 10% of year-to-date revenue. Devon is a long-time customer that we have had a significant amount of horsepower sets over the past year. We are proud to partner with them and look forward to delivering on their needs for years to come. We delivered third quarter adjusted EBITDA of $20.8 million, up approximately 15% year-over-year and 6% sequentially. These results allow us to raise full year 2025 adjusted EBITDA guidance to $78 million to $81 million from the prior $76 million to $80 million range. Additionally, we paid out NGS' inaugural quarterly dividend of $0.10 per share, another important step in enhancing shareholder returns. Our compelling performance, durable operating cash flows and confidence in the 2026 outlook make it possible to increase our fourth quarter dividend by 10% to $0.11 per share or an annualized $0.44 per share. While investors should not expect a dividend increase every quarter, the Board wanted to communicate its clear understanding of the importance of a continuous and growing dividend. These shareholder distributions do not preclude continued high levels of growth. NGS maintains the best leverage position among its public compression peers, giving us the flexibility to fund both growth and shareholder returns. Our competitive position continues to improve through technology leadership and service excellence. As we discussed on previous calls, when comparing to year-end 2024 horsepower, we expect to add approximately 90,000 horsepower over the course of 2025 and early 2026. The significant addition of new electric and gas units in the third quarter keeps us on track for that number. Looking at 2026, we already have a significant number of new large horsepower units under contract. This is a mix of both gas and electric units. Additionally, our opportunity pipeline remains quite active for 2026 sets, driven by both existing and new customers. This indicates strong continued demand for compression. While it is still early, based on visibility we have today, we would provide an initial expectation for 2026 growth CapEx of $50 million to $70 million. I'll provide more color in the guidance section of this call. Turning to the broader market, we have delivered strong and sustainable results through September year-to-date, despite persistent volatility and global macroeconomic uncertainty. Regardless of whether these conditions persist, we remain confident in our ability to deliver improved performance because our business is tied to existing production where demand for compression continues to grow. Our customers in oil production currently have a heavy focus on production efficiency, reliability and emissions performance. These are all areas where NGS is advantaged. Furthermore, rising electricity demand and LNG infrastructure build-out create durable compression-intensive growth opportunities. AI and data center expansion, both domestically and internationally, further drive natural gas production and compression needs. Overall, we are optimistic. Compression is essential to delivering production throughput and our fleet, technology and service position NGS to deliver value to both customers and shareholders. I'll move next to our growth and value drivers. First, fleet optimization. We continue to optimize our fleet assets as reflected in continued improvement in rental revenue per horsepower performance. We finished the quarter at $27.08 per horsepower per month, a 1.7% sequential increase driven by new unit sets and price capture through contract renewals. Beyond price and mix, the next leg of optimization comes from data. We are more deeply integrating operational performance from our units and broader operations directly into our enterprise systems, so that commercial and operational decisions are made faster and with more precision. Customers increasingly recognize this as a differentiator. The ability to drive uptime and gas flow through data analytics has become a real competitive advantage for NGS. These investments have tangible payoffs, lower maintenance costs per unit hour, higher customer retention and improved fleet performance. On asset utilization, we have consistently improved working capital efficiency and continue to pursue targeted optimization initiatives. The income tax receivable has been improved by the joint committee on taxation, and we are awaiting payment processing once the federal government shutdown ends. Prior to the beginning of the shutdown, my expectation was that we were going to announce the receipt of this receivable on this call. Regarding real estate monetization, we will provide greater transparency on these efforts in the coming quarters. As I've said before, we are not real estate investors. Our goal is to convert non-productive assets into productive horsepower in the field. These non-cash asset monetization efforts provide additional capital to support fleet expansion as reflected in this quarter's additions and our commitment to add significantly more horsepower. Momentum is building with both existing and prospective customers. As I now repeat on these calls, we are clearly taking market share organically. One simple way to quantify this is to look at our growth capital to EBITDA ratio. For NGS, our growth CapEx is for new units under long-term contracts. When you compare our growth CapEx to EBITDA, we are materially higher than each of our publicly traded competitors in 2023, 2024 and now again in 2025. I'm highly confident this trend will continue in 2026. I believe our market share gains are driven by our service, our unit technology, and our lower leverage. With that, I'll turn the call over to Ian to review detailed financial and operating results before returning for closing comments on guidance.

Thank you, Justin, and good morning to those joining us. As Justin emphasized, we delivered a very strong quarter, reflecting significant new fleet additions that position NGS well to continue delivering shareholder value. To recap the third quarter, total rental revenue grew 11.1% year-over-year and 4.9% sequentially to $41.5 million. This growth reflects the 27,000 rented horsepower increase during the quarter. Rental adjusted gross margin was $25.5 million, up $2.6 million year-over-year and $1.5 million sequentially. The rental adjusted gross margin percentage was 61.5%, an improvement of 19 basis points year-over-year and 75 basis points sequentially, reflecting sustained pricing discipline, large horsepower fleet additions, and lower maintenance parts consumption. Adjusted EBITDA for the quarter was $20.8 million, up $2.7 million year-over-year and $1.2 million sequentially. Net income was $5.8 million or $0.46 per diluted share, up $800,000 year-over-year and $600,000 sequentially. Rented horsepower ended the quarter at approximately 526,000 compared to 475,000 a year ago and 499,000 in the second quarter of 2025. That's an 11% increase year-over-year and 5% sequentially. Fleet utilization reached a record 84.1%, up 204 basis points year-over-year and 45 basis points sequentially, with essentially all large horsepower equipment fully utilized. Operating cash flow for the quarter was $16.8 million, supported by continued improvement in accounts receivable with quarter-end DSO of 28 days. Capital expenditures totaled $41.9 million, including $39.1 million of growth CapEx and $2.8 million maintenance. Sequentially, growth CapEx increased by $17 million as fabrication ramped up to deliver new unit sets. We ended the quarter with $208 million outstanding on our upsized revolver and $163 million in available liquidity. Our leverage ratio was 2.5x, up modestly from 2.31x in the second quarter and remains the lowest among our public compression peers by a significant margin. Regarding capital returns, our approach remains disciplined and balanced, focused on delivering a growing dividend over time. While investors should not expect dividend increases every quarter, the decision to raise the fourth quarter dividend by 10% to $0.11 per share underscores confidence in the durability of our operating cash flow. Speaking of outlook, I'll now hand it back to Justin to discuss guidance.

Thank you, Ian. Looking ahead, based on our year-to-date performance and a strong second half deployment schedule, we are raising full year 2025 adjusted EBITDA guidance to $78 million to $81 million. This is a 2% increase at the midpoint from our previous guidance. We expect 2025 growth CapEx of $95 million to $110 million, a modest tightening of the range due to improved visibility on payment timing with no impact on total horsepower additions. Looking beyond this year, our preliminary expectation is that 2026 growth CapEx will be $50 million to $70 million. While it is still early, we wanted to communicate to our investors that 2026 will be another year of organic growth for NGS. I have a very high degree of confidence in the low end of that range. How far we go in or above that range will be determined as much by timing as customer needs. As I noted earlier on the call, new unit quote activity for 2026 remains significant for both existing and new customers. I would also comment that regardless of where we are in the range, we expect to materially outpace our publicly traded competitors when comparing growth CapEx to EBITDA. Further, we are starting to see 2027 RFPs and the amount of horsepower indicates continued growth into the future. Our 2025 maintenance CapEx remains $11 million to $14 million, and our ROIC target is unchanged. In closing, we delivered multiple company records in the third quarter. This momentum reflects technology and service-enabled share gains with our customers along with operational and capital efficiency. NGS is set up for strong performance for the remainder of this year, next year and beyond. We are materially increasing the size of our fleet through strategic investments in large horsepower compression, including electric motor drives with what we believe is industry-leading technology and service. Luke, we're now ready to open the call for questions.

Our first question comes from Selman Akyol with Stifel.

Congratulations on the impressive results. I would like to begin by discussing the outlook for 2026. Can you share how the conversations with customers are progressing? Are they exhibiting more hesitance in the current environment? Are they taking longer to make decisions? Additionally, we have noticed that acquiring new units is becoming a 60-week process. Are you experiencing similar challenges in the supply chain? If so, how do you plan to secure additional units for 2026?

Thanks for joining, Selman. To address your question about customer activity, we are not observing any hesitancy in the RFPs or the units we have already contracted for '26 and '27. This is encouraging, especially given the lower oil prices that raised some concerns. We are witnessing a broad range of interest in our signed contracts and potential agreements, though it is challenging to determine how much of this is due to market share gains versus stronger activity than expected. I believe it's likely a combination of both. We are encouraged by the demand we see, particularly for gas lift in the Permian. Regarding the lead times for new unit fabrication, they vary significantly. As we look ahead to 2026, particularly in the latter half of the year, we believe we can secure some new contracts to meet customer demand. However, there will be timing challenges for new units in the first half of the year, though it is not impossible. We are more confident about supplying certain types of units in the second half of the year.

Got it. And then just one other quick one for me. Opportunities for margin improvement from here?

I believe that in the short term, the low 60s figure we've achieved over the past several quarters will remain consistent as we move ahead. However, as we look further out, the shift towards larger horsepower will likely continue to enhance our margins. Regarding business optimization, it's still too early for us to provide specific guidance on that.

Our next question comes from Tate Sullivan with Maxim Group.

In terms of the end market uses for the larger natural gas compressors, is it still the majority of the demand for gas lift in the Permian? And can you reconcile that with your comments about growing demand for data center natural gas load?

Sure. Thanks for joining, Tate. While not all of our new unit demand is for gas lift in the Permian, it certainly makes up a significant majority. We're still seeing a good amount of activity around that in terms of existing contracts and potential new projects. The compression needs for data centers, AI, and LNG create additional opportunities for us since we are primarily focused on gas lift applications today, which utilize similar equipment. This maintains tightness in the market for high horsepower and is an area where we aim to grow in the future.

Are your compressors now large enough to be placed on pipeline, for example, for pipeline extensions to dedicated natural gas plants?

Yes. Yes, they are. Those are typically north of 1,000 horsepower, 1,600 horsepower units, 2,500 horsepower units, and that's where a lot of our new unit sets are.

So do you already have existing units placed for natural gas pipeline compression purposes?

We do not have midstream applications today.

But that's an opportunity. Okay, understood.

Our next question comes from Rob Brown with Lake Street Capital Markets.

On your '26 outlook or CapEx outlook, you said confidence in the low end of the range, but sort of what's the ins and outs on getting that or growing that number? Is it really just timing of contract win or just a sense of what can move that around?

I think it's that. I mean it's still early. We're in November now. And as I said in response to one of the earlier questions, we certainly still have some opportunities in the second half of the year for new unit sets. And so that's something that we'll be able to give, I think, better clarity around on the next quarter call, but we just wanted to indicate to our investors that we're going to have significant growth again next year and a very large portion of that is already contracted. And as we engage with customers over the coming couple of months to finalize 2026, our hope is to push that number up.

Okay. Great. You had some good market share gains. What is your perspective on that? Do you think it can continue? Do you need to focus on acquiring new customers, or is it primarily about gaining share with your existing customers?

I think it's a combination of both. As we mentioned earlier, we announced a new 10% customer. We've been installing a lot of equipment with Devon and are very pleased with that partnership, looking forward to increasing our horsepower with them in the future. As I consider 2026 and beyond, I expect we will continue to grow with our current customers and see potential opportunities with new customers that could be quite significant, though it's still early, and we need to secure some of those wins.

Our next question comes from Nate Pendleton with the Texas Capital.

Congrats on the strong quarter.

Thanks, Nate.

Can you talk about your decision to increase the dividend here given the strong outlook you're messaging for future growth potential? And maybe how you balance that increasing return of capital goal with the growth opportunities ahead of you?

Sure. I think it's important to find a balance as we look towards establishing a clear capital allocation strategy. This involves determining a specific amount of EBITDA and how we convert that into distributable cash flow and decide on its allocation. We had our inaugural dividend last quarter, and I want to clarify that I don't want to set the expectation of an increase every quarter. However, considering our business performance and outlook, we wanted to communicate to investors that we recognize the desire for a steady and growing dividend. As mentioned in our prepared remarks, this will not affect our ability to continue growing in financial terms. We believe it's a good way to demonstrate our commitment to increasing dividends and returning capital to shareholders while still achieving significantly higher growth than our public competitors.

Got it. And then maybe going back to Devon. Specifically, how was NGS able to make inroads there? And how did that relationship develop?

It's been a long-time relationship. If you go back, I'm not sure how many years, but quite a few years ago, they were a disclosed customer. So they've been a long-time customer. And it was, I think, a great example for us of what some of the technology that we have on our units that are proprietary to us led to a significant expansion of our relationship with an existing customer. And as they understood some of the capabilities of our units and some of the data that they would be able to get off of that. That was the primary driver on top of a reputation from a service perspective to deliver their needs and what is a mission-critical service for them. And so it really boiled down to the 2 simple things or maybe 3 simple things of a long-time existing customer gets an understanding of some of the current capabilities we have and the run time that we've delivered for our customers, including for Devon that allowed the significant expansion of that relationship.

Great. Congrats again.

Thanks, Nate.

Our last question comes from Jim Rollyson at Raymond James.

And again, congratulations on another solid quarter. Justin, following up on that, you mentioned how Devon expanded from being just a customer. Can you share a bit about new customer opportunities? Is news spreading about how your technology and service quality are benefiting Oxy and Devon and attracting new potential customers? How are you positioning yourself to acquire new customers? I'm curious.

I think it's an ongoing effort and I believe we are seeing success there. Devon is something we can point to for public quantification. In terms of conversations with existing customers, particularly smaller ones, we are having multiple discussions, conducting demonstrations, and demonstrating how the technology works. We highlight the benefits our customers gain from this, engaging with their operational and engineering teams, both with existing and potential new customers. While it's certainly a process, I'm encouraged by the positive feedback from customers who begin to see the advantages from a service and data performance perspective. So, it's ongoing, and there are several positive indicators, but it's something we need to continue to focus on.

For sure. I appreciate that. And maybe just back up on the CapEx. If I go back 2023, you guys had a very heavy CapEx year, delivered a lot of new units and you kind of took '24 to maybe absorb some of that, get it all make sure operations are running the way you wanted to and then you lean back in this year. And so I guess, as I think about the $50 million to $70 million kind of starting point for CapEx, do we think about '26 maybe as kind of a '24 type of year, and then things continue to build for '27 potentially ramping back up if the macro still kind of cooperates. Is that a good way to think about it?

I think generally, we looked at 2026 and believe it will be similar to 2024. If we consider 2023, it stands out as an exceptional year in terms of numbers. It's quite significant. For 2025, we expect the midpoint to be in the low hundreds. This is partly due to some particularly large customer wins, which may not happen every year, although we are still engaged in activity. We are optimistic about the opportunities in 2026, and for 2027, we are beginning to see requests for proposals from customers who are proactive in their ordering. These present substantial potential growth opportunities. As we look ahead, we're confident in our ability to continue growing significantly through organic means, and I observe that we are gaining market share overall.

Awesome. Look forward to that growth.

Thanks very much, Jim. Appreciate it.

Thank you very much. And with that, we have no other questions.

Excellent. Well, thank you, Luke. Thank you to everyone for joining the call this morning. We appreciate the time, the interest, and we look forward to continuing to report strong results for our investors. And so we'll see you again on the next quarterly call. Thank you for your time.

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