Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group First Quarter 2022 Earnings Call. At this time, all participants will be in a listen-only mode. Your call leaders for today's call are Alicia Dada, IR Coordinator and Steve Taylor, Chairman, President and CEO. I would now like to turn the call over to Ms. Dada. You may begin.

Thank you, Bailey, and good morning, every one. Please allow me a moment to read the following forward-looking statement prior to commencing our earnings call. Except for the historical information contained herein, the statements in this morning's conference call are forward-looking and are made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, as you may know, involve known and unknown risks and uncertainties and which may cause Natural Gas Services Group's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; introduction of competing technologies by other companies and new governmental safety, health or environmental regulations, which could require Natural Gas Services Group to make significant capital expenditures. The forward-looking statements included in this conference call are made as of the date of this call, and Natural Gas Services undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release and also under the caption Risk Factors in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. Having all that stated, I will now turn the call over to Mr. Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Stephen?

Thank you, Alicia and Bailey, and good morning, everyone, and welcome to NGSG's First Quarter 2020 Earnings Review. Last evening, we issued a press release announcing our first quarter financial and operating results and filed our annual report on Form 10-Q with the U.S. Securities and Exchange Commission. The release and filing can be found on our website. This morning, we also issued an additional press release announcing my decision to retire as President and Chief Executive Officer of the Company. While no big like decision is easy, and there's never a perfect time for this type of transition, after 17 years at the helm of Natural Gas Services Group, this feels right. In consultation with our directors, we felt the Company's business was in a good position, and we have worked through most of the COVID-related issues, providing a good opportunity for transition. While my day-to-day responsibilities will slow a bit, I will remain Chairman of the Board of Directors while continuing to work closely with key customers of the Company and will serve as an adviser during the transition. Most importantly, I remain a significant shareholder and will continue my commitment to doing everything I can in my role to build shareholder value. I'm happy to say that our lead independent director, John Chisholm, has agreed to step in as the Interim President and Chief Executive Officer. John is the former President and CEO of Flotek and New York Stock Exchange listed Oilfield Service concern and the Co-Founder of ProTechnics, a leading reservoir characterization technology company that is now owned by core laboratories. John's willing us to step in should provide both comfort and confidence as it does for me about the future of our company. John and I work closely together in the transition, and I pledged…

Steve, thank you, and thanks to each of you on the call for taking the time and having an interest in Natural Gas Services Group. I won't take a lot of your time. I want to spend just a minute to let you know I'm excited about the opportunities ahead at NGS. That said, what is most important this morning is to acknowledge and thank Steve for his incredible effort over the last 17-plus years in the pilot seat at NGS. As I said in the press release this morning, when Steve arrived at NGS, we were a small, obscure compression company, located on the boroughs of Midland. Today, due to Steve's resilient leadership, NGS is consistently acknowledged as a leader in oilfield compression and more importantly, one of the few oilfield service concerns that has maintained financial strength and stability throughout the last oilfield cycle. Very simply, Steve is the epitome of what a good corporate leader should be. He has left the Company. He has led in better shape than when he founded. For that, Steve, all NGA stakeholders are grateful for your service and your effort, and I look forward to working with you as Chairman as we continue to move NGS forward into the future. While there is no hippocratic oath in the oilfield, my mission as the Interim President and CEO is, first and foremost, to do know hard. My goal is to build on Steve's leadership, be a good steward of capital and look for opportunities across the spectrum to grow the reach and success of NGS. In the coming weeks, we will talk more about our objectives for the balance of 2022. However, today, we will focus on Steve's success and the details of the first quarter successes. I look forward to visiting with many of you soon. Again, Steve, thank you for your nearly two decades of service. On behalf of all the associates customers and shareholders of natural gas services, we are beyond grateful for your service. As you mentioned, I'm traveling. I'll turn it back to you, my friend, Steve, to answer questions. And again, what a job?

Okay. Thanks, John. Thanks for the kind words. I look forward to working with you as we transition going forward. John has been on the NGS Board for over a decade and is very familiar with the Company. I've known John from my Halliburton days, and that's been over 20 years, and he is a very capable executive. In my new position as Chairman, I'll be able to assist and advise where I can and help maintain and grow our vital customer relationships. My holdings in NGS exceed 5% of the outstanding shares. So I want to assure everyone that I'm committed to the ongoing success of the Company. If you know the joke about the chicken and the pig, it reflects my sentiments: in a ham-and-egg breakfast, what's the difference between the chicken and the pig? The chicken provides the eggs, but is only merely interested in the quality of the breakfast. However, the pig provides the ham and is vitally and irretrievably committed. I'm the pig. I've got skin in the game. Now for final comments. We had a good quarter, and I think the building blocks are in place to capitalize on the opportunities before us, primarily being our large horsepower strategy. Rental revenues have grown quarter-to-quarter over the past year, and this quarter was especially successful compared to the industry. Our sales revenues were good this quarter, and I think there are nontraditional transitional energy opportunities that we can take advantage of. As we demonstrated what we said last quarter, our costs are getting under control, and our margins are expanding. And last but not least, commodity prices are finally cooperating. There are certainly challenges, cost and supply chains are the priorities, but we have plans in place to address those. Natural Gas Services Group remains one of the few oilfield companies with a strong recurring rental stream, no debt, a significant cash position and the ability to consistently generate meaningfully -- meaningful operating cash flows. I'm grateful for the efforts of our employees and their continued efforts as we work to make 2022 another successful year for Natural Gas Services Group. Maybe that's the end of my prepared remarks, and I'm ready to take questions now. So if you would, please open the phone lines.

And our first question will come from Rob Brown with Lake Street Capital. Rob, please state your question.

Just touching a little bit on the sales at first here in the energy transition business, what's sort of the driver there? And is that a market that you should be continuing? Or is this hard to say at this point?

Yes. I'm not going to tell you the exact type of projects just from a competitive standpoint, but they're -- I guess there's nothing exotic in transition projects. So, it's along the lines of what everybody is looking at as far as driving natural gas from, say, transitional sources. The -- as I mentioned on the call, the projects are typically high revenue, high-margin type projects. They tend to be somewhat specialized either using exotic metals, high pressures, things like that. And that's -- those are areas we built our kind of our niche expertise in the sales business over time. So we're well positioned to take advantage of those. We're continuing to pursue projects like that. We've got some bids out. We haven't heard. We're going to be doing some other stuff. But it's hard to say. It's hard to project what that business is going to be like. I mean, yes, the traditional sales business has been volatile for all 17 years I've been here. So this transitional energy business is maybe the same. It's just hard to predict right now, especially with it in this is nascent infancy. But we think there's opportunities out there. We think we're well positioned and well qualified to take advantage of them. So, we're going to kind of have to develop them to a greater degree to a higher volume and see where it comes out. But it's -- I think we're in good shape for them. We've done some in the past year, so we're going to continue to develop that piece of the business.

Okay. Great. And then on the rental side, it sounds like demand has picked up quite a bit. Maybe some further color. Are you seeing just the peer dry gas business picking up as well? And I guess the CapEx increase that you guided to, where -- what's driving that? And what areas are driving that?

Yes, we're seeing pickup in all areas. Obviously, the Permian is the primary for anybody in the oilfield nowadays, and that's primarily driving our large horsepower growth and activity, but we're seeing some pickup in the dry gas areas. Obviously, with $6 gas, which we haven't seen in years, I actually never thought we'd see it again, that's sort of got the interest of operators that are either there that want to be there. So we're -- you look at areas like the Barnett Shale, which has been flat to down for a decade. And all a sudden, we're seeing a little more drilling, but we're seeing some customers start to pick up some compression and do some more things. So it's not a land rush at this point. There's -- the operators still are pretty conservative with their dollars and what they're going to do and where they're going with it, but we're seeing some pickup in the Barnett, Central Texas and Appalachia and stuff like that. Now the CapEx part of your question, that is driven by large horsepower. Like I mentioned, I think, 90%, 95% of that is large horsepower and about the same is already contractual, it's committed. So what we're building in the increase were just talked about our committed projects already signed up at good rates and good terms. So that CapEx driver is going to be horsepower. It has been for last three or four years, but it's continuing that way. From a small horsepower and even a medium horsepower standpoint, we really don't need to spend any CapEx on that. We've got adequate inventory of equipment that we can just make ready and put out, and that's what we're doing for it. There's very little call for CapEx in that medium to small horsepower range, which has been by design over time. So majority of our capital goes to high horsepower, it matches our strategy. And as I mentioned, we've been successful in implementing that strategy growing into that piece of the market and intend to continue it.

Okay. Great. And then on the margin improvement, I know there's sort of one-time costs in Q4, but is this a good margin level? Or how do you get this margin level in terms of rental? How do you get this margin level to increase? Is it pricing? Or are there things you can do on the cost structure?

It's going to be all the above is going to be higher revenues, can be lower cost and there's going to be some price increases. So nowadays, with upward pressures on cost from inflation, supply chain issues and stuff like that, I mean, you've got to use every lever you've got. I mentioned the price increase we've put in place, about 8.5% on May 1. We've still got some others to implement. But we got a lot of them in. So, we've got to have these price increases to do some of these cost increases. And then additional horsepower just to add incremental revenue to our established infrastructure and obviously, cost reductions. So again, all that stuff they continue those margins up. And as I mentioned, as I committed to the last quarter's call, we intend to be at gross margin on the rental side by the end of the year, we're at 46% now. So, the trajectory is in the right direction. And so in spite of cost and supply chain issues, we intend to hit that mark and that's how we're going to do it.

And our next question comes from Tate Sullivan with Maxim Group.

Steve, congratulations on your next steps and a great transition for the next year to the Chairman spot and continue to be customer facing.

Yes. Thank you.

And then regarding facing customer and the customer mix as well, I mean, you ended -- you had 79 customers in the first quarter, down slightly, are you seeing some smaller customers that are a bit more aggressive than the larger customers? Or can you please comment on your customer mix in general? Has it changed in the last year?

Most of the growths we're seeing from our CapEx and revenue standpoint are larger customers because it is larger horsepower stuff. And it's pretty expensive to bills. It's a decent operating expense for the operator. So it takes a larger company to typically stand that staff and employ this equipment and things like that. So most of the CapEx drive and most of the revenue drive are larger customers. Now where we're seeing smaller customers kind of come back in a little bit is in these dry gas areas where over time. Not surprisingly, those have migrated down to smaller customers. And again, as I mentioned, the smaller equipment, the smaller areas or smaller customers, that stuff has tended to become commoditized over the past decade, and that's why we've moved out of it quite a bit over those periods. But we are seeing those guys kind of pop up a little more. And so, the small to medium customers are the ones kind of driving some of the just pure natural gas activity that we're seeing. It's not -- as I mentioned, it's not a big deal right now. I think over time, we'll still see some growth in that area. But if you want to try to split the customers up, it's the small to medium ones in the natural gas plays and then, say, some larger, medium and large customers in the oil plays.

And then following up Rob's question from earlier. You mentioned the nontraditional purchasers of your compressors. Can you -- what was sales backlog? And can these non-traditional energy customers be potentially rental customers? So, two questions, please.

The sales backlog, I'd say, is only $100,000, like we finished up a couple of big projects this quarter. If you recall, we reported no compressor sales last quarter. And this is the volatility of the sales piece we've always talked about. Although there are no revenues recorded, that didn't mean we weren't building stuff. And obviously, we were building these projects that we were able to book this quarter. So the backlog is admittedly small. But as I mentioned, we've filled in our shops now with a lot of rental committed rental equipment on the large horsepower side. The non-traditional business right now is pretty much a sales type business and not a rental business. And that's really because there are so many government incentives in that arena that actually, these guys are swimming in money. They're getting extraordinary prices for their gas on a per Mcf basis. So money always has bounced, right? But sometimes it seems like there's not a whole lot of bounce in some of this stuff, that's obviously tax payer-driven and tax-driven. So right now, it's pretty much of a sales-type market. And some of that stuff, we're okay with it being a sales market. When you get into some of these areas to where you have some ultra-high pressures or you have some very corrosive gases, that doesn't make very good rental equipment because it's highly specialized. If you ever get it back, it never goes out. So you've got to spend money on it to refurbish it and refabricated, actually. So right now, we're okay with the B&A sales market. Obviously, the ups and downs are part of sales. But as we develop it, we'll learn more where there may be rental opportunities, if any. Some of the maybe more recurring revenues we see out of that business is maintenance. We can sell the equipment, but a lot of these people we're dealing with are not familiar with, say, heavy-duty oilfield-type equipment like this. And although they need it, they're not familiar with it. They don't know how to operate and things like that. So we're starting to see some inclines of some decent maintenance revenues out of some of the stuff. So right now, it's a sales market, but the recurring revenue seems to be potentially some maintenance activities. But that's right now. We'll see how it develops, and we'll be aware -- try to be aware of rental opportunities. But again, will they come or not will also depend on whether we want to do them or not. This just may be primarily a sales market.

And our next question comes from Kyle Krueger with Apollo Capital.

Yes, thank you for taking my question. Stephen, any -- is there a plan or a search underway to find a permanent replacement for the CEO position?

The Board has put together a plan on going forward. Obviously, with the Interim title, John's not expected to be a 5- or 10-year sort of person. John is imminently qualified to come in and take the day-to-day. Obviously, I'll assist all I can. But the Board is -- got the plan to put John in there, and we'll be looking for someone to be more permanent. Now again, when that permanent person comes in is a matter of question right now, but these are plan in place. So that's really I can't predict anything beyond -- from a timing standpoint, anything beyond John's interim now. And right now, we're just focused on the transition going forward.

Okay. As long-time CEO and a major shareholder, you're very closely identified with the Company with your departure. Let me ask this, has the Board considered an outright sale of the Company?

That's -- the Board, and I've been on the board 17 years, too, we always consider what might come up, what people approach us with and things like that. That's certainly our responsibility as a Board. There's no current discussions of selling the Company, putting it up for sale or things like that. But I'd be remiss as Chairman I think the Board would be remiss, if we didn't say that if an irresistible opportunity comes along, we've got to look at those things. Now sometimes, there are just some opportunities turn out being resistible. We've seen some of that in the past. But right now, the focus of the Board and the Company is really to grow the Company, as we've mentioned. Make the transition, I'll be -- I'm going to be Chair through another year. So certainly, I'm here to help John transition, providing assistance he wants, concentrate on a few particular areas. But no, the current discussions aren't a sale. The current discussions are growing the business and looking at opportunities to continue to grow it.

And there are no further questions at this time. I will turn the call back over to Mr. Taylor.

Okay. Thank you, Bailey. Although, I'll continue to be involved with the Company, I want to thank everyone I've had the pleasure of getting to know over these past years. Obviously, that includes all our employees, customers and suppliers, but it also includes the investor community, investors and analysts. I learned a lot from everyone. I consider most friends, and I look forward to staying in touch. Again, thank you for joining us on our quarterly conference call. I appreciate your time this morning. Where you're likely to hear a different set of voices next time, we are confident that the future of Natural Gas Services Group is bright. Thank you.

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