Natural Gas Services Group, Inc. (NGS) is a leading provider of natural gas compression equipment, technology, and services to the energy industry. Founded in 1998 and headquartered in Midland, Texas, the company has established itself as a key player in the oilfield services sector, serving customers across major oil and gas producing basins in the United States.
Business Overview and History
NGS was formed on December 17, 1998, with the goal of providing reliable and efficient natural gas compression solutions to energy producers. The company’s initial focus was on rental compression services, allowing customers to access the equipment they needed without the burden of ownership and maintenance. Over the years, NGS has expanded its offerings to include the design, sale, installation, service, and maintenance of natural gas compressors.
In the early years, NGS operated primarily in the Permian Basin region of West Texas and New Mexico. However, the company has steadily grown its geographic footprint, establishing service facilities in major oil and gas producing basins across the United States. Today, approximately 74% of NGS’s units are generating revenue from production in the Permian Basin.
As the energy industry has evolved, NGS has remained at the forefront of technological advancements. The company has continuously invested in research and development to enhance the efficiency and performance of its compression equipment, leveraging a combination of in-house assembly and partnerships with third-party fabricators and OEM suppliers.
NGS has also expanded its operational capabilities over the years. In addition to its headquarters in Midland, Texas, the company now operates an assembly facility in Tulsa, Oklahoma, a rebuild shop in Midland, Texas, and service facilities located in major oil and natural gas producing basins throughout the United States.
The company faced a significant challenge in 2019 when it recorded a $10.04 million impairment of capital assets. This setback occurred during a period of difficult industry conditions, but NGS demonstrated its resilience by continuing operations and maintaining its position as a leading provider of natural gas compression equipment and services.
Despite the challenges faced in 2019, NGS showed its ability to adapt and recover. In 2020, the company generated $68.06 million in total revenue and returned to profitability, reporting net income of $1.81 million. This turnaround highlighted the company’s adaptability and strong market position in the face of changing industry dynamics.
Financial Performance and Outlook
NGS has demonstrated strong financial performance in recent years, with a focus on growing its rental revenue and improving overall profitability. For the fiscal year ended December 31, 2023, the company reported total revenue of $121.17 million, a 43% increase from the previous year. Net income for the same period was $4.75 million, a significant improvement from the net loss of $569,000 reported in 2022.
The company’s rental revenue, which accounted for 91.3% of total revenue in 2023, has been a key driver of growth. NGS has strategically positioned itself to capitalize on the increasing demand for natural gas compression services, particularly in the large horsepower segment. As of September 30, 2024, the company’s rental fleet included 1,230 natural gas compressors with a total of 475,530 horsepower, representing an 18.7% increase in rented horsepower compared to the prior year. This increase in rented horsepower, while the number of rented units remained relatively flat, reflects the growing demand for NGS’s higher horsepower compressors, which generate higher rental revenue per unit.
Looking ahead, NGS remains optimistic about its growth prospects. In its latest guidance, the company has increased its 2024 Adjusted EBITDA outlook to a range of $67 million to $69 million, up from the previous range of $64 million to $68 million. This updated guidance represents a 48% increase over fiscal 2023, following growth of 56% in the previous year. The growth is supported by the company’s focus on expanding its large horsepower compression rental fleet, with plans to invest between $65 million and $75 million in growth capital expenditures during 2024 and $90 million to $110 million in 2025. The midpoint of the 2025 growth CapEx guidance represents a more than 40% increase over the 2024 midpoint, indicating the company’s confidence in strong market conditions and demand for its compression services.
Financials
NGS has shown consistent improvement in its financial performance over the past few years. The company’s revenue growth, particularly in the rental segment, has been a key driver of its success. With a strong focus on operational efficiency and strategic investments in its rental fleet, NGS has been able to improve its profitability and cash flow generation.
For the most recent quarter (Q3 2024), NGS reported revenue of $40.69 million, up 29.7% year-over-year. Net income for the quarter was $5.01 million, a significant increase of 130.9% compared to the same period in the previous year. Operating cash flow also improved, reaching $25.92 million, up 42.9% year-over-year. However, free cash flow was negative at -$3.17 million, compared to -$2.59 million in Q3 2023, primarily due to higher capital expenditures associated with the company’s growth initiatives.
The increase in revenue, net income, and operating cash flow was primarily driven by higher rental revenue, which grew 34.8% year-over-year. This growth was attributed to an increase in rented horsepower, with a greater focus on high horsepower compression units that generate higher per unit revenues, as well as selective rental rate increases. Sales revenue also contributed to the overall growth, increasing by 30.4% year-over-year due to higher parts sales.
Liquidity
The company maintains a strong liquidity position, which provides financial flexibility to support its growth initiatives and navigate industry cycles. As of the end of Q3 2024, NGS had a healthy balance sheet with a debt-to-equity ratio of 0.649. The company reported cash of $0.41 million and $163 million outstanding on its amended and restated revolving credit facility, which has a maximum aggregate availability of $350 million.
NGS’s current ratio stood at 1.76 and its quick ratio at 1.16 as of Q3 2024, indicating a solid ability to meet short-term obligations. This strong financial position allows the company to pursue strategic opportunities and invest in its rental fleet expansion without compromising its financial stability.
The company’s maintenance CapEx guidance for 2024 remains unchanged at $8 million to $11 million, while NGS maintains a target return on invested capital of at least 20%.
Product Segments and Services
NGS primarily operates in the natural gas compression equipment rental and services market. The company’s key product and service offerings can be categorized into the following segments:
Rental Revenue
The rental business is NGS’s primary revenue driver, generating higher margins and providing more stable, recurring revenue compared to other segments. Rental contracts typically range from 6 to 60 months and include maintenance services for the rented compressors. These contracts qualify as operating leases under ASC 842. As of September 30, 2024, NGS had 1,230 natural gas compressors with a total of 475,530 horsepower rented to 69 customers, compared to 1,230 compressors with 400,730 horsepower rented to 78 customers as of September 30, 2023.
Sales Revenue
NGS generates sales revenue from the custom fabrication and sale of natural gas compressors, the sale of compressor parts, the exchange or rebuilding of customer-owned compressors, and the sale of used rental equipment. Sales revenue increased 30.4% for the three months ended September 30, 2024, compared to the same period in 2023, primarily due to higher parts sales. However, sales can be subject to fluctuations in the timing of customer capital projects, and NGS has shifted its focus more towards rentals rather than new compressor sales.
Aftermarket Services Revenue
NGS provides routine or call-out services on customer-owned equipment as well as commissioning of new units for customers. Aftermarket services revenue decreased 33.7% for the three months ended September 30, 2024, compared to the same period in 2023, due to variability in demand for these services.
Risks and Challenges
Despite the company’s strong performance and growth outlook, NGS is not without its risks and challenges. The oilfield services industry is inherently cyclical, with the demand for natural gas compression equipment closely tied to the overall health of the oil and gas industry. Fluctuations in commodity prices, changes in regulatory policies, and shifts in energy market dynamics can all have a significant impact on the company’s operations and financial results.
Furthermore, the company faces competition from both larger, established players and smaller, regional providers in the natural gas compression market. Maintaining a competitive edge through technological innovation, strong customer relationships, and operational efficiency will be crucial for NGS to sustain its growth momentum.
Additionally, the company has identified a material weakness in its internal control over financial reporting related to its inventory processes. While management has outlined a remediation plan, the successful implementation and testing of these controls over a sustained period will be essential to address this issue and ensure the reliability of the company’s financial reporting.
Conclusion
Natural Gas Services Group, Inc. has established itself as a leading provider of natural gas compression equipment, technology, and services in the oilfield services sector. With a focus on rental revenue, technological innovation, and strategic geographic expansion, the company has delivered strong financial performance in recent years and remains optimistic about its growth prospects.
The company’s strategy of expanding its rental fleet, particularly in the high horsepower segment, has proven successful, driving significant revenue growth and improved profitability. NGS’s increased guidance for 2024 Adjusted EBITDA and substantial growth CapEx plans for 2024 and 2025 demonstrate management’s confidence in the strong market conditions and continued demand for the company’s compression services.
However, NGS is not without its risks and challenges, including the cyclical nature of the industry, competitive pressures, and the need to address the material weakness in its internal controls. As the company navigates these headwinds, its ability to maintain its competitive edge, execute on its growth strategy, and improve its operational efficiency will be crucial in driving long-term shareholder value.
With a strong financial position, a clear growth strategy, and a focus on high-margin rental revenue, NGS appears well-positioned to capitalize on the opportunities in the natural gas compression market. As the energy industry continues to evolve, NGS’s commitment to innovation and operational excellence should help it maintain its position as a key player in the oilfield services sector.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.