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

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

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

Good morning, everyone and thank you, John, and thanks for your contributions to NGS. We all value your knowledge and insight. I look forward to your continued guidance. And thank you for the assistance you have given me during this transition. Before I get to my prepared remarks, I do want to reiterate and reinforce that the company will continue our search which is ongoing for permanent CEO. We will provide updates as required. I would also like to note that in addition to Micah Foster, our Chief Financial Officer, with us today is Jim Hazlett, our Vice President of Technical Services. Micah, Jim and I will be happy to answer your questions after our discussion of the third quarter results and under current operating environment. Turning our attention to the business, as we noted in our second quarter earnings call, the current macro environment for the energy industry is unique in my career. Upstream operating customers have typically continued with their capital restraint, which supports higher commodity prices. There's clearly weak supplies, strong demand dynamic in play is being influenced by traditional natural gas demand, declining pressures and volumes in existing basins and increased [indiscernible] and continued strength in crude oil commodity prices with a large amount of crude oil produced through gas compression assisted techniques. It's a unique dynamic that demonstrates gas compression demand is presently divorced from appreciably higher capital spending. Absent a large-scale geopolitical event, we believe that we are at the beginning of at least a couple of years of high commodity prices. NGS with our past financial discipline is well positioned to take advantage of these opportunities beginning this year and to 2023 and beyond. We have been and will continue to be focused on operational efficiencies, our visibility of organic growth opportunities and…

Thank you, Steve. As previously mentioned, total revenue for the three months ended September 30, 2022 increased to 20.7 million from 18.2 million for the three months ended September 30, 2021. Rental revenue increased 15% to 18.6 million in the third quarter of this year from 16.2 million in the third quarter of last year due to the increased deployment of rental units primarily higher horsepower packages. As of September 30, 2022, we had 1196 rented units representing 305,953 horsepower, compared to 1221 rented units representing 288,706 horsepower as of September 30, 2021. We ended the third quarter with 60.5% utilization on a per unit basis and 72.2% utilization on a horsepower basis. Utilized horsepower increased by 6% in the third quarter when compared to the year ago period, while revenue per horsepower increased 6.8% when comparing the same periods. Sequentially, total revenue increased 4.1% to 20.7 million in the third quarter of 2022 compared to 19.9 million in the second quarter of 2022 primarily due to a $0.5 million increase in sales revenues, and a $0.5 million increase in rental revenues partially offset by a $200,000 decrease in service and maintenance revenues. As noted in our release this morning, adjusted rental gross margin of 8.6 million increased 17%, when compared to 7.4 million in the same period in 2021. With a marginal decline of 300 basis points when compared to the 8.9 million recognized in the second quarter of this year. Adjusted rental gross margin as a percent of rental revenues was 46% for both the third quarter of 2022 and '21 and 49% for the second quarter of 2022. Operating loss for the three months ended September 30, 2022, was 1.5 million compared to an operating loss of 1.6 million for the three months ended September 30, 2021.…

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

[Operator Instructions]. And your first question is from the line of Rob Brown with Lake Street Capital. Please go ahead.

Good morning, Steven. Good to be talking again.

Hey, Rob.

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

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

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

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

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

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

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

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

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

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

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

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

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

[Operator Instructions]. Your next question is from the line of Tate Sullivan with the Maxim Group. Please go ahead.

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

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

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

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

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

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

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

Okay. Thanks, Tate.

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

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

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