Natural Gas Services Group, Inc. (NGS) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Natural Gas Services Group Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode, [Operator Instructions] Your call leaders for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO. I would now hand the call over to Ms. Dada. You may begin.

Thank you, Erica, and good morning listeners. Please allow me to take 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 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; the 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 of that stated, I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you, Alicia, and Erica. Good morning, and welcome everyone to Natural Gas Services Group's fourth quarter and year end 2014 earnings review. The fourth quarter of 2014 capped a strong year for NGS. Total revenue and gross margins were the highest in our history and operating income, net income, gross margin and EBITDA increased in each quarter throughout the year. We continued to grow our rental fleet and achieved a 14% increase in rental revenues, while increasing gross margins to 60%. Although 2015 will be a challenging year, we are well positioned and confident. With our net cash position, we have the strongest balance sheet in our competitive sphere and anticipate generating free cash flow this year. We are confident that our expense control as well as the pursuit of additional sales and product initiatives will strengthen the immediate and long-term performance of the company. I will comment in more detail as we review the financials. Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues increased 17% or $4 million from $23.1 million in the fourth quarter of 2013 to $27.1 million in the fourth quarter of 2014. Rental revenues increased 11% this quarter compared to the same quarter last year and sales revenues were 44% or $1.9 million higher. The sequential quarters of the third quarter of 2014 compared to the fourth quarter 2014, total revenues were up nearly 6% or $1.5 million to $27.1 million. Rental revenues grew the compressor sales were large driver of this quarterly growth with the $1.2 million or 20% improvement. On a full year basis, total revenues increased 9% to $97 million. Our rental revenues grew 14% to $79 million. These revenue levels are above record for the company. Moving to gross margin and comparing the fourth quarter of 2013 to this current quarter, total gross margin was up 25% from $11.9 million to $14.9 million and gross margin increased from 51% to 55% of revenue. Sequentially, total gross margin increased 7% to $14.9 million, which was 55% of revenue. This compares to last quarter's gross margin of 55% with the difference being driven by higher rental margins. On a full year basis, comparing 2014 to 2013, gross margin is up 11% to $53.9 million or 56% of revenue. This is our highest gross margin dollar amount in the company's history. Selling, general and administrative expenses fluctuate depending on the comparative period. We have maintained those costs in the range of 9% to 11% of revenue over last two years. Operating income increased by 35% in the comparative year-over-year quarters by approximately $1.7 million, up to $6.7 million and increased almost 15% in sequential quarters. Operating income is running at 25% of revenue for the quarter and 23% for the year. On a full year comparative basis, operating income was steady at $20 million. This is essentially flat due to higher SG&A expenses, primarily non-cash employee stock and options and higher depreciation expenses of $3.4 million for rental additions. The comparative year-over-year fourth quarter's net income increased 27% to $4 million this year, and increased 3% in the sequential quarters Q3 2014, compared to the fourth quarter of 2014. Net income was $14.4 million in 2013 compared to $14.1 million in 2014. The slight difference is due same reasons just mentioned, our SG&A and depreciation expenses. Our income has average 15% to 16% of revenue in the comparative periods. Our income tax rate in the third quarter this year was 34.5% and increase to 36.2% in the current quarter. I also want to make an additional comment about our tax rate and the impact on our earnings. As you may know, over the past few years Congress has allowed accelerated depreciation rates called bonus depreciation. These rates vary between 50% and 100% acceleration of cash tax depreciation, but unfortunately since our Congress can't seem to get their act together, these have been renewed to last couple of years in December retroactively for the year. This obviously impacts tax planning. I want to note that we did opt to take the bonus depreciation 2014 at the expense of book taxes, but to the benefit of cash taxes. Bottom-line is that our tax rate in the fourth quarter 2014 is $0.03 in earnings higher than what it would have been otherwise, but we will benefit from a $4 million cash refund. The folly here of course is that we had to pay cash taxes at a higher rate for the year, because of congresses' late action. EBITDA increased in both, year-over-year and sequential quarters. On a year-over-year basis, EBITDA increased 25% from $9.9 million in the fourth quarter 2013 to $12.4 million in this current fourth quarter of 2014. While sequentially EBITDA climbed almost 8% and is running at 46% of revenue. Comparing the full years of 2013 and 2014, EBITDA grew 7% and averaged 45% of revenue. On a fully diluted basis, EPS this quarter was $0.32 per common share, a 28% increase over the year ago quarter and approximately 3% higher than the previous quarter. Our full-year diluted earnings per share was $1.11 per share. Total sales revenues, which include compressors, flares and aftermarket activities, grew $1.9 million in the year-over-year quarters from $4.4 million in the fourth quarter 2013 to $6.4 million in the fourth quarter of 2014. The increase is primarily attributable to higher compressor sales than last year. For the sequential quarters, total sales revenues increased $1.2 million from $5.2 million to $6.4 million. Reviewing compressor sales alone in the current quarter there were $5 million compared to $2.6 million in the fourth quarter of 2013 and $3.1 million last quarter. We ended 2014 with $10.9 million in compressor sales compared to $10.7 million in 2013, with both years within the $10 million to $15 million range we predicted. Our compressor sales backlog was approximately $5 million on December 31, 2014. We estimate that this will be built out over the next couple of quarters. This compares to a backlog of roughly $3 million in the same period at the end of 2013. Rental revenue had a year-over-year quarterly increase of $2 million or 11% from $18.5 million in the fourth quarter 2013 to $20.6 million this current quarter. Gross margins exhibited a very healthy increase from 54% in last year's comparative quarter to 62% this quarter. This margin expansion combined with our higher rental revenues contributed to 28% higher rental gross margin dollars in this current quarter. Sequentially, rental revenues grew from $20.2 million to $20.6 million with gross margins of 62% from 60% the previous quarter. Looking at the full year comparison, rental revenues increased 14% from $69.1 million to $79 million. Gross margins have continued to expand averaging 60% this year versus 58% in 2012 and 2013. Diving into this a little more, our gross margin per unit, per month has increased 22.5% since 2011 and grew by 24.5% on a gross margin per horsepower per month basis. The superior margins are due to higher pricing and effective cost management and continue to be among the highest if not the highest in the industry. Average rental rates across active fleet increased 5% in 2013 and over 3% in 2014. Average rental rates for newly set units this year are almost 10% higher than we saw in 2013, so we continue to exert appreciable pricing power on newly set equipment. Fleet size at the end of September was 2,879 compressors and we had a net addition of 37 compressor units this quarter. We added 323 compressors to the fleet in 2014 for fleet growth rate of almost 13%. The relatively lower number of compressors added in the fourth quarter was due to our previously discussed plan to scale back rental production, because there was a reallocation of factory floor space towards higher compressor sales volumes. Our active fleet utilization is essentially the same as it was last quarter or 76%, but our active and contracted compressor utilization is at the 79% level. In 2014, we spent a total of $53 million in capital expenses, with 97% of that or $51.5 million dedicated to rental fleet expansion. Looking ahead in 2015, we project that our capital expenditures will be in the $10 million to $15 million range for the first six months of the year, so half of the year. There is very little visibility from customers on what their needs may be, but we see some potential opportunities and are positioned to ramp up quickly if need be. We will adjust our capital spending up or down depending on the market, but our projected spend enables us to stay well within operating cash flow. Going to the balance sheet, our total short-term and long-term debt remains less than $500,000 as of December 31, 2014 and cash in the bank was a little over $6 million. Our cash flow from operations was $34.6 million in 2014 from liquidity's perspective; we are in an enviable state. Our line of credit was renewed a couple months ago at the same rights and levels and we have a cash balance and ability to add to it. We have funded over $170 million in capital expenditures since 2009 without borrowing any of it. That's extraordinary for capital-intensive business like ours. Now, let us talk about the market we see going into 2015, and how NGS is particularly well-positioned. First, and I am sure you are all aware is that we are on the production side of the E&P cycle. Meaning, as the drilling oriented services that tend to take the quicker and harder hits while production-oriented businesses tend to hang in better. Secondly, NGS carries a net cash position on our balance sheet and we anticipate adding to that cash balance as the year progresses, not only does that allow us more financial operational flexibility; we are also better able to capitalize on opportunities as they present themselves. We are coming into this downturn with a better mix of equipment. We are now equally exposed to oil and gas shales from a rental fleet perspective as opposed to 2009 when we were 100% gas shale-oriented when gas prices collapsed. This diversification should help buffer some of the headwinds. We have also reoriented our business more heavily towards rentals. Today, our top-line is roughly split 75% rental revenues with about 25% to sales revenues. Whereas in the last downturn, we were about a 50-50 split since rental business holds up better due to a [ph] like nature, this should also help us through this period. We earned some of the highest margins in the oil field services business, so we are no stranger to controlling our cost. If you look at our margins, our balance sheet and our overhead rates for proof of that. Our service reputation continues to be one of the best in industry. As we saw in 2009, and we are already seeing now, customers realize that the two hours response and runtime are important, especially in a downturn and they are willing to pay for it. We put all this together with a cadre of people that have experienced up and down markets. 80% of our executive and operational management have been with us since the last downturn, so we have all been tested as a team. In the midst of this maelstrom, we are also taking some aggressive actions that we think will pay off in the short and long-term. As I mentioned on the last call, we are expanding our sales staff in an effort to open some new areas and penetrate existing ones. We are about halfway to where we want to be and we have already posted new people in a couple of new areas. We are continuing our development efforts. This is a two-pronged approach with first being the design and rollout of the 350 horsepower and 500 horsepower compressor frames. As you know, we are the only rental company that has our own compressor brand and we have had a lot of success with the existing 125 horsepower and 250 horsepower frames. We see a market need for a higher horsepower product from NGS, and we should have a prototype in the field for testing this year. However, to take advantage of this market, we are already building on a pre-contracted basis, some larger units. On the other end of the spectrum, we recently rolled out our first VRU or vapor recovery unit. If you recall, the regulations to control methane emissions on locations are getting stricter and we are starting to see some interest for VRUs in our horsepower range. Certainly, we are driven by capitalistic tendencies in addressing this market, but it also allows us to repurpose and deploys some existing equipment we have. We are taking defensive actions as required, but we also see opportunities that we will be capitalizing on. No one likes a downturn, but we have positioned ourselves well and no matter what the environment we are confident that NGS will continue to execute as required. That is the end of my prepared remarks. I will turn the call back to Erica for questions that anyone might have.

Our first question comes from Joe Gibney from Capital One. Please state your question.

Thanks. Good morning, Steve.

Hi, Joe.

Just a question on sales, your backlog pickup to $5 million exiting the year pretty decent order quarter you referenced in some of your prepared remarks and that you are pursuing additional sales. I mean, upside when that typically turns out pretty quickly as we enter downturn or it sounds like you had some tailwinds at least in the fourth quarter. Could you talk a little about what transpired on the order front there in 4Q and in your outlook near-term?

Yes. We came into 2013 - I think about Q2 or so we had a pretty good backlog built up there about $10 million. Then tended to obviously be built off and come off to at the year. In Q4 we got some good orders in Q3 and continued that as I had mentioned on the Q3 call we were even having to shift some floor space towards sales away from rentals which obviously run both ways. We got more sales and then we need to tam down the rentals anyway. Going into '14 in full, we got the $5 million, a little higher than where we were comparatively last year at this time, but as you know and everybody knows sales is the one that takes the harder hit in the market like this typically, so we think that, obviously, we will build that our next couple of quarters. It still is. Kind of if you annualize that, that is still kind of in our realm that we have been telling people $10 million to $15 million kind of our steady rate on that, so I am a little encouraged by that backlog number, now we will have to see what happens going forward, because you know it is almost a new world everyday based on rig counts, what customers are saying and doing and everything else, but it is probably a little stronger than I would have expected coming into market like this. When I say we have added salespeople, we have added people primarily to push rentals and probably I am going to speak a little. We are going after sales or whatever. Obviously, we are going after. We are not going to avoid a sale if somebody wants us to build something, but we have put these people primarily to penetrate the rental markets, but I think we will get some sales out of some of that work too.

Okay. Then on sort of bill cadence on your rental fleet, the guidance you have given on CapEx at least for the first half of the year $10 million $15 million is it reasonable to be in this kind of 30 unit per quarter to 50 unit per quarter kind of run rate? Is it not dissimilar to what you saw in the fourth quarter as being reasonable and at least the first half and we will kind of market develops, is that a fair statement?

Yes. Since I cannot remember the number, I think that is going to be in a in a reasonable range. Again, like I mentioned, we adjust our capital pretty quick. Just as we did going into '09, the last downturn and as we have done here, we pull by pretty fast and kind of get to a comfort level going to an uneven market like this and we could ramp up or down pretty quick. Our guys are pretty good at doing that. It keeps them up at nights so they can do it. Yes. We are going to kind of run at that rate, annual at $10 million to $15 million. Again, just giving you a six-month look as I am not sure anybody knows what is going to happen in August or the last half of the year, so we are going to kind of run like that. We have got that schedule pretty well set out. We have got some slots we can put if we need to, so that is a very fluid number. It may go up. I don't think it will. I think that $10 million to $50 million range, I do not think it will fall down out of that range. If we see some opportunities, maybe we could get a little stronger.

Okay. Great. I appreciate Steve. I will turn it back.

Okay. Thanks, Joe.

Our next question comes from bill from Ken Sill Global Hunter Securities. Please state your question.

Yes, guys. It is nice - quarter like yours.

Thanks.

…given all the things during the last couple of months, Could you repeat the size of the fleet at the end of the quarter again? I am not sure I got the right number on that one.

Yes. I think it was 20.79 [ph].

27, okay. That is right. What are the kind of terms, how long do these rental contracts kind of run on average?

We will quote 6 months to 12 months, which is pretty much the industry standard, but typically equipment will stay on location two to three years, just because you run out the minimum term that is just a contracted obligation for the customer to keep it, so we can have a chance of getting some money out of it, They will typically keep as long as they are needed that average usually runs two to three years.

Yes. I do not expect them to be returning compressors back, but they are asking everybody for price concessions. Have you guys had any pushback on that yet?

Yes. I mean, that is something we were anticipating. It happens during these downturns. It is not a hand ring exercise; something is going to come about, so we see some of that. It has been very manageable and reasonable. I think as I kind of alluded to in some of my remarks, our service guys in the field have great reputation and experience out there with the operators, so we typically are able to hold any concessions that we may need to give to pretty reasonable amount, and certainly much less than what the market may be tend to do so. I am pretty satisfied with where we are in that realm right now from what we are having to do and then the frequency we are seeing at. Now, I will just comment a little on compressors being said and [ph], we are going to continue to see that roll over survey of compression going out, coming back and everything else. The challenge is going to be trying to keep that utilization reasonable, not reasonable, but flat or within the flat realm. I think we anticipate utilization coming off somewhat during the downturn like this. I do not think there is any way to avoid it. Even when you have a situation where we are kind of our production hunch [ph] on these wells, especially were gas lift 12s were help in lifting this oil out, you are still going to have some operators making some economic limits on some of those stuff at 50 bucks, no matter what you are doing with the gas lift unit. You got a lot and a lot of cost-cutting going on and sometimes you will just cut cost to cut cost. We anticipate having some pressure on the utilization rates, so I think we will see some of that, but I do not think it is going to be certainly that can be manageable relative to everything else we do.

I guess with the low CapEx in the first half, are you kind of keeping the compressor rental fleet where it is or will that nudge up a little bit?

Well, it will grow a little. Certainly not going to grow like it has the last three to four years, if you just take the $10 million to $15 million and annualize we are not projecting that, but just a simple calculation. They get you to know maybe about a half of the capital spin rate we were running last year. If you do that, we built little over 320 compressors, so it puts you in 150 compressor range. Now, again, we are not saying that. We are just saying, right now our visibility is only good up to about June, so $10 million $15 million. Obviously, we are going to expect some decline in our capital spend well within our operating cash flows, so we will be adding cash to the balance sheet. Again, every month, we sit down and look at what is going to the shops, what is running, what the utilization is and we base 80% of decision on utilization. If we see utilization take them up a little, we may build a little more if should take them down, we are going to conserve a little more.

Okay. Last question and I will let somebody else get on out there. You know, 60% margins are great, but it tends to attract competition and I just noticed that I do not co-in, but I noticed that Exterran is going to unwind their big experiment and break into a domestic and international company. Do you think that changes the competitive landscape for you guys or is that really not going to have a big impact?

No. I do not think it does. I mean, no matter what they do structurally, we are still competing against them head-to-head everyday out in the field. That is not going to change, so I do not see anything happening there from competitive standpoint. Like I mentioned, we have got very good reputation, very good guys in the field and we will just continue that. I mean, as we did again in '09 and we have reiterated this time to our guys, we are going to cut a lot of expenses and we are going to tighten up just like everybody else, but we are not going to cut our service response, so we are going to respond quickly, we are going to get the stuff back on line, so run time stay up, and that is what enables us to keep the margins and charge a better prices.

Make sense. All right, thank you.

Okay. Appreciate it.

Our next question comes from Peter Van Roden from Spitfire Capital. Please state your question.

Hey, Steve.

Hi, Peter.

On the rental build rate, as you said you are looking to add, I guess maybe 75 units in the first half of 2015? How many of those are spoken for versus kind of building on spec?

At any given time as the stuff goes through far out when you order the components, the engines and compressors, very little or because you got such a long delivery cycle now with engines and compressors. Compressors is not bad being our own compressor, but engine still being out in that four to five-month. Now it is going to be interesting to see how all that stuff loosens up as we go forward, but you got such a long legal on buying stuff that an operator typically won't commit to rental that far out. Usually when you get to the end of that cycle within, say, four to six weeks or something before you start getting commitments on it. Now, the stuff we are building now, the particular models we are building now still have over 90% utilization rate. Otherwise, we would not be building them. By the time it rolls off, 9 out 10 them are going to a job somewhere. That is the big thing we just to measure how to go. Right now [ph] is pricing or build is utilization and we are not going to be building anything that is probably utilized 90% or less than 90% or more and based on what sales guys see and if we anticipate some demand, that's our build. We are going to use that to gauge how we price stuff and what our capital spend will be.

Then as you think about kind of controlling margins this year in terms of price concessions in the utilization, how does that play out in the rental gross margin and how do you guys control that versus what the market is going to dictate to you?

Well, I mean, it impacts if you are not taking other actions and you are just sitting there utilizations taking a little hit and price would take a hit, it will impact it, but that is where we the other cost cutting maneuvers come in whether it is rerouting guys on what they are doing, the over time, et cetera, et cetera: There is lot of levers we pull and we have already started pulling those months ago. The other thing as I mentioned we are trying to do too is, penetrate some of these markets too with getting some additional rental sales guys out there, really try to take advantage of the downturn and a situation where some competitors can. They are going to have to cut back and everything, because of either debt or distributions or whatever it is. We think gives an opportunity to maybe going there and do some of that stuff, so it is not an easy task, but we will tend to try to maintain our margins versus trying to maintain any market share we have got. That is what we did back in '09. That is kind of our basic strategy. The problem is, when you start given up a lot of price, it takes a long time to get it back and customers are reluctant to give it back, because that kind of in the same situation, so we think we can get markets back pretty quick and we are willing to give up a little bit of share as we go through these period to maintain those margins.

Got it. Then final question from me, can you just walk me through the difference between your current utilization and utilization plus contract and then how that plays out from the end of the quarter until the next quarter?

Yes. The difference is just merely what we have already got contracted, but it is not out earning revenue yet, so either it has been contracted, it is going through the build cycle or it is in the yard getting ready to go out or it may even actually be go on a location, but have not start up and started on rent yet, so that is the difference. It is about 3% differences. It has been around that way. It looks like about the last year or so, that is only the difference. The basic utilization is just what is out earning revenue now, the basic plus contracted is what will be earning revenue.

Got it. Okay. Thanks. Great quarter.

Thanks.

Our next question comes from Rob Brown from Lake Street Capital. Please state your question?

Good morning.

Hey, Rob.

Wondering if you could kind of put maybe some numbers on your utilization, how far it goes down, what is your sort of sense on where utilization will bottom I know it is a little hard to predict, but sort of how many points utilization reduction should we think about?

Boy, a little hard to predict? It is a tough thing, because again just like I had mentioned, we will typically, we use utilization to make a lot of decisions whether it is pricing, build schedules, whatever, but on the other hand, we do not use it to drive too much of what we are trying to charge at their either. As I just mentioned, we will try to maintain margins and sometimes that is at the expense of utilization, so we had very strong pricing power. I think the best in the industry from what I can tell and we want to maintain that and hold there, so we are pretty reluctant to cut prices severely as others may and we are willing to give up some equipment or some share if it is not what we think we ought to be doing. Have you forgotten your question yet? I do not know it is real hard. Maybe it gets down to the high 60s, low 70s. I think that in one case you could say yes pretty easy and other case you would say well it all kind of depends on how much traction we gave some of the sales initiatives and as well as other. Maybe that is the best guess; maybe we get a 10% drop or something like that.

Okay. Great. Thank you. Then on the sales expansion, what territories are you expanding sales into and sort of what is driving that expansion. Is it that they are at least still active?

Yes. I am not going to disclose where we are going just from a competitive standpoint right now, but yes it is areas that we actually have some equipment in, but we haven't in the past had enough to really fill it out, because all the other areas has been so busy. Now we have got a little more leeway to do something to place equipment, or build equipment we put these guys into. Some areas just have not been big for us yet, but we think there is a lot of opportunity. We have already got people, some equipment there, some service presence and everything, so we think it is going to be a pretty efficient build-out from time and money standpoint. It is not a new. Do not worry it is not that exclusive shale or anything or anything like that. It is a pretty standard stuff that we think we can just get some incremental business off of.

Okay. Great. Thank you.

Okay. Thanks.

Our next question comes from Jason Wrangler from Wunderlich. Please state your question.

Hey. Good morning, Steve.

Hey, Jason.

Maybe kind of also on the last question, could you maybe talk about what you are seeing, maybe even specifically up in the Northeast that it seems like that market has kind of held in better at least from a spending perspective and rig count so far whether it Marcellus and Utica. Where you see your activities up there - might be an area of growth going forward?

Yes. It is. I mean the Utica looks good to us the Permian looks good to us. These are the same areas that I had mentioned before. I had mentioned before trio is Utica, Permian and Niobrara is where we thought might be the relatively stronger areas for us. Utica and the Permian are proven to be that way and Niobrara's price slowed down a little more than we anticipated, but we think there are still opportunities out there with our standard equipment and potentially these VRUs also, so those of the two to three areas that we see being really in those particular areas being growers.

Okay. Maybe could you comment the bigger unit sound like a pretty interesting opportunity. Are there certain places or certain types of wells that those are really kind of focused on? Is that maybe kind of, to your point, about were some of the areas that you are trying to go to? Just trying to understand what the plan is as far as, as you kind of go up the horsepower side?

Yes. We think there is pretty primary submarkets in that bigger horsepower markets, number one is just what you say. Sometimes you have bigger wells that our equipment really is not big enough to pump, so you either put two or three units out there. Operators do not like doing that, so a lot of times have equipment for that. Number one, get a bigger well that has got more gas and reasonable horsepower. Number two and three are things we see developing and we think we will continue over time. Number one is gas lift, a centralized gas lift, so we have been doing a lot of gas lift for last three to four years on a wellhead basis. I mean, we have made a great mark there with customers in our equipment and everything else and that is going to continue, but you are seeing more and more centralized gas that is going in to, so that is typically bigger horsepower located centrally and then just running gas lines out to wells instead of having an individual wellhead compressor. We think both markets to be good, but the centralized one is a growing one that we think we can tap into. The other is, pad drilling, pad drillings is going to be more and more popular as you go, so when you have four, six, eight wellhead on location versus one, you need bigger horsepower, because you are pumping more gas volumes, so we think that is another market. One market has always been marginal advantage is just bigger wells, but these other ones are growing we think and we think we can jump right in there. The good thing about moving up this horsepower is, we are still in the realm that we claim kind of this kind of 100 to 500 horsepower range, we are just moving up, with much more bigger into this bigger horsepower. A lot of the new revenue streams with very incremental cost, because it really give you the same sales force, same customers, same areas we are already operating in plus the kind of in-filling with some bigger horsepower.

That is great. I will turn it back. Thanks, Steve.

Okay. Thanks, Jason.

[Operator Instructions] Our next question comes from Joe Pratt from Stifel. Please state your question.

Hi. A quick question and this is random item. I think on the USAC call they mentioned that quite a better supply of lubricants were used with your compressors and the declining cost of that could help margins. Is that relevant at all?

Yes. I mean that is some of the stuff that obviously all of us do [ph] get to and then that is one of our initiatives we have got going on just like our customers come back to us and want some help we are looking to tie our suppliers too, so we are trying to spread the good news around. Yes, we are going to see lubricant prices come off, some other things hopefully we will come off too. We are still a little bit early in this cycle to see some big items come off like engines, things like that, but there can be a lot of ancillary and wearable disposable items.

Okay. Thank you very much.

Yes. I appreciate it.

Yup.

Our next question comes from Veny Aleksandrov from FIG Partners. Please state your question.

Good morning, Steve.

Hi, Veny.

The 300 and 500 horsepower, are not giving an exact date what are your plans, when do you think you are going to be able to deploy them?

Well, we have got a prototype frame already built additional back ground for our compressor brands is called CiP, and that just stand for cylinders and plainer kind of an engineering term but that has been our bread-and-butter on this gas lift stuff for four or five years. We had this product line for more than 10 years. It is a great little machine, it has got a lot of unique little features for a wellhead equipment, it helps us build a smaller footprint or lighter weight, et cetera, et cetera, so very popular with customers. What we have done obviously, we get this 125 horsepower and 250 horsepower frames that use the heck out of, but seeing these all the markets developing this 350 horsepower and 500 horsepower, we are going to go, physically it is going to be bigger in size, because you put more cylinders on and have type of bigger engines and stuff like that. We got the first prototype frame built and we are starting to contract some production items. We do not obviously own a foundry do not do the captions ourselves. We contract that stuff, so we are kind of in the mode of, number one, finding a home for the first prototype, put it out on a well using, make sure if things are working the way we think it all work, simultaneously starting to contract some of the parts and pieces to it. Then hopefully by the end of this year, we have this prototype out, worked it on the relived well, we need to do and then we will be raised or deploying into '16.

Thank you so much. Also, if we talk on the margins, the rental fleet, they are very good very impressive this quarter. At the same time you saw that you have some pricing pressure. Are we about to start seeing the pricing pressure because with pricing pressure how did you get the 62%?

That is a magic. I cannot tell you the secrets. We did not have much as much pricing pressure in Q4. We have a little, but not as much, so it was really just a matter of not seeing a whole lot of at point, but we are starting to see and it is really out there. Everything you read is true. Now the amount you read maybe true for some and not true for us as I mentioned we are able to control them. It seems a lot better than most, so we yes we will start seeing more of it kick in as we go through '15. Yes. We won't. I mean, we are now going to keep track and try to quantify what it is just except for the point that we are just seeing single-digit issues right now versus anything more extreme.

Thank you so much.

Okay. Thanks, Veny.

[Operator Instructions] At this time, we have no further questions.

Okay. Well, thanks Erica, and thank everybody for joining on the call. I appreciate your time this morning and we will look forward to visiting with you again next quarter. Thanks.