Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group 2016 First Quarter Earnings Call. [Operator Instructions] Your call leaders for today’s call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO. I will now turn the call over to Ms. Dada. You may begin.

Thank you, Erika and good morning, listeners. 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 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 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 Erika, and good morning and welcome to Natural Gas Services Group’s first quarter 2016 earnings review. Although activity continued to decline in the first quarter of 2016, the quarter was good operationally for NGS. Our sales revenues while down sequentially still matched the average revenue level we saw in 2015 and we were able to deliver very high gross margins in our rental business. Although revenues continued downward we're in positive net income, continued to generate appreciable levels of free cash flow and strengthened our balance sheet. 2016 has been challenging and will continue to be throughout the year. We were confident that our expense control as well as the pursuit of our sales and product initiatives will strengthen the immediate and long-term performance of the company. I'll comment on all these in more details when we review the financials. Now starting with total revenue and looking at the year-over-year comparative quarters, our total revenues decreased 13% or $3.2 million from $24.7 million in the first quarter of 2015 to $21.6 million in the first quarter of 2016. We saw gains in both sales and service and maintenance of little over $1 million. Our rental revenue saw $4.2 million decline over the past year. For the sequential quarters of the fourth quarter 2015 compared to the first quarter of this year, total revenues were off $4.2 million from $25.8 million to $21.6 million. The rental revenue decreased by $1.2 million with the largest decrease was due to compressor sales being down almost $3 million. Recall, however, that the fourth quarter of 2015 sales were unusually high due to the yearend activity. Moving to gross margin and comparing the first quarter of 2015 to this current quarter, total gross margin was down 16% from $14.2 million to…

[Operator Instructions] Our first question comes from Rob Brown from Lake Street Capital. Please state your question.

Good morning, Steve.

Hey, Rob.

First on the rental gross margins, nice work there. What’s the sustainability there, is the fleet shifting to sort of that higher margin level in the meantime until the utilization rates steps up or maybe what’s the trend line on gross margins?

Yeah, it is and it’s not unusual that on a market like this the financial hurdles as oil price or gas price or anything comes down, smaller wells get to be you know those are the ones that are shut in first. They don't have enough volume or flow to generate enough cash to keep them going. So it's kind of a natural phenomenon you have seen down market, so we are seeing that. Now it's a little larger than what I would have anticipated, it's about 30%, well 25%, 30% increase in average horsepower going out versus what's coming back. So larger than I would have thought but it's a good trend, so I think we'll see that I don't know if it will stay that gap, that big a gap all along but I think we will tend to see a higher horsepower trend over as long as the downturn lasts.

And then sort of the mix of units, has the gas side been stable and oil coming down or is it both sides coming down?

Now it's been about even, about half of what we've seen come back have been oil oriented and the other half been being gas oriented. So there has been no discrimination to commodity or area either it’s just been a pretty much of an equal opportunity downturn.

And then last question, sort of you built a nice cash balance what’s your latest view on how much cash you sort of need to prepare for the upturn?

I'm not giving you a number because everybody would be asking me what I’m going to do with that next dollar over it. As we’ve mentioned in the past, we watch it closely, we’re trying to gauge what is this market going to do, is it going to get a little worse or better or whatever it is and as I mentioned I think we are in the worst year of it but we could still see another couple of tough quarters I think. So we are going to - we need x dollars in reserve from just the point that as you start back you need some capital to get back on the game start building some additional equipment that starts to run out quicker. Just from a prudent manner you want to have a healthy cash balance just in a period like this but as we mentioned before too we are also looking forward from a point that if the free cash flow stays as robust environment we’ll want to figure out a way to, if there is no other opportunities from M&A standpoint or something like that how do we get that get that back to shareholders and what manner and what timing, so we're looking at all that stuff right now.

Our next question comes from Joe Gibney from Capital One, please state your question.

Just a question on your comments around competitive pricing just sort of worsening, I get it pursuant to commodity changes quarter over quarter, but relative to the equipment that’s come back, you said it was really no discrimination whether in terms of area or commodity type, in terms of pricing trends, are you seeing differentiation and a little bit more challenging pricing across certain horsepower classes, particular regions, just trying to sort of ascertain whether this is, [indiscernible] run to the bottom here in 1Q from some of the competitive space?

It's pretty well evenly spread, I mean if we, I guess I could peg you out, Texas is worse, that’s a pretty big place, right, with a lot of basins in it, but no, it's - we probably got some areas that we haven't had near the impact, I mean the Permian continues to be relatively bright spot from a point of activity and if you get a little more activity pricing [indiscernible] bad and we got a good base here and things like that. So that be the only place I could say that’s probably relatively not impacted as much but that I mean it’s an impact, it’s just - if you’ve had x decline [indiscernible] else maybe you had 0.8x here. But pretty widespread; it's like a miss, I think lot of these competitors have number one, some older equipment they can put out cheaper, number two, they’ve got I guess they got service and cash flow is the only way to do that. And so yeah, I think more so the latter you start seeing some of this for cash is king with some of these guys and again we try to make net income and they try to make bank payments, so there is a big difference in how you project that.

I just want to clarify a couple of data points you commented on, just to make sure I had it right, your utilization on horsepower basis was 62 and then unit basis 61, is that correct?

Right.

Okay, and then what was the compressor gross margin, I think you preferred 16, I just wanted to confirm that was accurate?

Oh, compressor sales was 16%.

Last one from me and I'll turn it back, just on the CapEx side again pretty de minimis level here in 1Q, is it the assumption being here looking into 2Q and your term that’s still focusing on adding only pre-contracted units at this point, is that sort of still a reasonable way to think about it?

Yeah, exactly, we are not building anything on spec, number one, we don’t need to, and there are just absolutely no visibility, I’m not kidding when you to talk to somebody, you’re only talking about the future, the future of some of these guys is next 30 days, they can’t get a paycheck on some of those stuff. The conversations you have with customers now are pretty, quite different not just from a point that we are pulling back but from a point, hey, we got to do things, we got to this and that, this and that, nobody is talking about what’s going to go on tomorrow. So with absolutely no visibility in it, and again, when you ask the question, you kind of get the strange look like, why are you asking that question, nobody knows. We are not - I’d say we spent $5 million first-half, we spent $2 million first quarter, we probably will spend $2 million the second quarter, so yeah, there is very, very little need for us spending capital right now.

[Operator Instructions] Our next question comes from Jason Wangler from Wunderlich. Please state your question.

Maybe just dovetailing on those previous questions, you kind of had a good rule of thumb that you’d seen in the past of kind of 1% a month and it does seem like it obviously increased in what was a pretty nasty quarter. Is it still just because of what you were mentioning that the operators just have no visibility that you’re kind of taking a day at a time as far as what you’re seeing from utilization level and it’s just kind of when the phone rings or when it doesn't, or are you able to kind of say, okay, it’s getting back to a more normalized kind of putting out equipment and getting it back.

Well, it's hard to say, we haven't got enough of a trend yet of the quarter to really see if it’s staying the same or improving or whatever. Plus, we don’t answer the phone anymore, we’re so jumpy that we just wait for stuff to show up at the yard. But now, it surged, the terminations surged in the middle of the quarter, and just almost coincidentally when all dropped to the bottom, about mid-February, when oil went down 26, 27 bucks. And coincidentally, that’s when utilization, the terminations peaked right there. Now, March is a little better, but again, I don’t want to take that one point, to start trying to extrapolate that into a trend that I might be wrong on. I mean I think the operators are still I mean just weighed out back. And I think we can see another couple of quarters of that and again, I still think ‘16 might be the bottom of the cycle, but ‘16 is 12 months long. We’re in the right of the fifth month of it and I think we can bump along the bottom here for a bit. So we can still see some contraction in that number. I think a couple of things out of that number. It obviously is not as good an indicator of revenue decline it used to be. It used to be pretty well lock step. Utilization going down, revenue going down. But as I mentioned, now, we’re seeing this mix shift from smaller horsepower to larger horsepower. So even though, utilization is coming down, on a revenue basis, it’s probably come down 0.75 or what you would have thought. And then with our cost cutting, as I mentioned, revenues are off 1.2 million and gross margins are off 0.2 million. So, the change - the effect we’re having on gross margin and the change in horsepower per unit going out and coming back is skewing that number a little. Nowhere Like 61%, 62%, although again, the whole industry is seeing that, because our relative market share has stayed the same. But it’s not quite as the corollary it used to be with the time to market. So all that mean that I don’t have any clue Jason. I think it makes Q2 or Q3 can still be rough and then maybe we start picking up towards the end a little bit, but no matter what it does, I mean obviously from the numbers we’ve shown, we’ve got it under control no matter what happens that we can still generate cash, we can still make the margins and just got to kind of ride through this, we’re still maintaining some premium pricing. It’s of course all those price points have fallen, but we’re still maintaining some of our premium and staying out there. So that’s all we can ask for right now.

I appreciate the color there. And maybe on the sales side, which continues to hold up really nicely, one, I just want to make sure I heard the numbers right, the backlog is 5 million up from 4 million and just maybe just your comments on, that’s just continuing to do very well, you mentioned that operators on the rental side are kind of doing anything that they can to throw out equipment or do whatever it is, is maybe that helping a little bit in that they may be looking at buying a piece of equipment or two with whatever money they do have, so they don’t have rental fees later or just maybe, just what you’re seeing because it obviously is very different than the last downturn when sales was just decimated, it’s actually been pretty much a bright spot it seems like the whole time that we’ve been going through this?

Right. Exactly right. And as I said in our call, it continues to surprise and I’ll say it again. At some point, it’s going to come off, because it’s about two years delayed. But we’re not seeing a shift from a customer not running and buying instead, I mean the ones that aren’t waiting are buying I’m not sure they’re eating anymore, some of these guys, but we’re not seeing a shift there. It’s just again, we have one or two good legacy customers that have continued to buy equipment during this downturn from, number one, they’re Permian based and number 1, they’ve got good prospects and they just see good deals right now and they’ve got a good balance sheet. They’re well established, well positioned and they’re taking advantage of what they can at the market right now. And again, we’re not having to go down to single digit margins to get that business, I mean ‘16, normally, we’re around that 20, 25, but as I mentioned, we’re still making good, I guess, good gross margins on that business, what’s dragging those margins down to that 16% range is this on fabrication plants when they start to idle down or usually that’s capacity, you’ve still got that fixed costs that you guys spread. And so that’s dropped to kind of, but kind of drop in those margins a little bit more than really what they are. So we’re able to get them priced well into the market and get that stuff going, but I still expect that revenue to come off at some point.

Okay. And then if I could sneak just one last one on the accounts receivable side, I know it’s something you continue to focus on, just I think it ticked up a little bit in the quarter, nothing meaningful really, but just what you’re seeing out there obviously because we’re seeing more and more bankruptcies getting announced and things out in the market, if you’re seeing any changes there, if anything different is happening on your end?

No. I mean actually, I mean it ticked up just a little bit. Actually overall, it’s a little better shape for the point that our longer term receivables are - having collected better, so our percentage of longer term receivables is better. So shorter term, what’s happening is just, everybody is dragging you, even guys are going to afford to or afford not to drag. So you get the bigger guys, they’re just going to pay you in 30, 45 days. That’s the uptick you’re seeing a little bit from that. We’ve only had I think three bankruptcies, one of them we didn’t get hurt at all and then a couple of the others are pretty small. So I’ve actually been a little surprised, pleasantly surprised by that because in the last downturn, I think in ‘09, that’s about a two year downturn, we had 11 or 12 bankruptcies. So at this point, now, there has been I think 50 or 60 E&P bankruptcies in the market, we’ve been hung with 3 and so that’s a testament to our, I guess, our ability to gauge credit upfront and maybe not get hung up for some of those guys. As you say, it’s ticked up a little, but mainly, it was some short-term stuff, guys just dragging it and the longer term stuff, we’ve actually done a little better job of collecting it.

At this time, we have no further questions.

Okay. Thanks, Erica. Thank you everybody for joining on the call. I appreciate your time this morning. We look forward to meeting with you again next quarter. Thank you.

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