Natural Gas Services Group, Inc. (NGS) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group 2017 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Your coordinators 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, Ericka and good morning listeners. Please allow me a moment to read the following forward-looking statements 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?

Okay. Thank you, Alicia and Ericka. Good morning and welcome to NGS’s first quarter 2017 earnings review. NGS had a good first quarter. Our rental utilization held relatively steady and our sales activity continued strong. We did have a significant non-cash, non-operating incremental expense increase impacting our SG&A due to the accelerated extension of some stock compensation. This negatively impacted our reported operating income, net income, EPS and EBITDA results. However, our operating performance is better than expected. As noted in the past, we anticipate utilization and pricing pressure through the first half of this year, but do anticipate some relief in the back half. Cash generation is strong. Debt is minimal and we continue to be positioned very well. 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 decreased from $21.6 million in the first quarter of 2016 to $18.9 million in the first quarter of this year. We saw gains in both sales and service and maintenance of little over $1.8 million, while rental revenues saw a $4.5 million decline over the prior year. For the sequential quarters of the fourth quarter of 2016 compared to this quarter, total revenues were up 13% or $2.2 million from $16.7 million to $18.9 million. While rental revenue decreased by $575,000, sales revenues increased $2.8 million. Moving to adjusted gross margin and comparing the first quarter of 2016 to this current quarter, total gross margin was down from $11.8 million to $8.7 million. This was primarily due to lower rental margins in the year-over-year period, and the mix shift towards relatively lower margin sales revenues. Sales comprised 35% of our business this quarter compared to 23% in the last quarter. Sequentially, total gross margin was off 4.5% or a little over $400,000 from $9.1 million to $8.7 million. Our selling, general and administrative expenses rose by $475,000 in the year-over-year quarters and by $860,000 in the sequential quarters of Q4 2016 compared to Q1 2017. NGS has consistently controlled our SG&A expenses very tightly, but this quarter they were driven appreciatively higher by an incremental non-cash, non-operational charge for accelerated stock compensation expenses. Debt expense was significant and almost $1 million. Under certain conditions or instances where all or part of stock compensation that's normally amortized over the vesting period, three years in our case, is accelerated and charged in the quarter it is granted. This is what we experienced this quarter. Not that without that incremental stock expense, our SG&A would have been lower by 4% compared to last quarter and 18% lower than the first quarter 2016. For comparison purposes, I will separate out this expense in the following comments. Operating income decreased $3.4 million in the comparative year-over-year quarters, down from $3.8 million to $343,000, and was driven primarily by rental revenue declines, and the aforementioned incremental stock compensation expense. Without the incremental stock expense, operating income this quarter would have been $1.3 million. Sequentially operating income decreased $624,000 with the majority of the decrease due to lower total adjusted gross margins plus higher SG&A from the increased stock comp expense. Without the incremental stock expense, operating income would have increased to $1.3 million, a 32% increase. Looking at net income, in the comparative year-over-year first quarters, net income dropped to $250,000 this year, down from $2.5 million in the same quarter of 2016. However, netting out the incremental stock comp expense, our net income this quarter would have been a little over $930,000. The sequential quarters of Q4 2016 and Q1 2017 saw net income decrease a little over $900,000 from almost $1.2 million to $250,000. Again netting out the added stock comp expense, net income would have been over $930,000. Our income tax rate in the first quarter this year was 26.8%, which is down from 32.9% in the first quarter of 2016, but up from a negative tax rate in the fourth quarter of 2016, driven if you recall primarily by R&D credits. EBITDA on a year-over-year basis decreased from $9.3 million in the first quarter of 2016 to $5.7 million in this first quarter of 2017. Sequentially EBITDA was down from $6.9 million to $5.7 million. Without the incremental stock comp expense, EBITDA would have decreased only $350,000 between quarters. Our reported EPS this quarter was $0.02 per common diluted share. It would have been $0.07 per diluted share without the incremental stock comp expense. Total sales revenues, which includes compressors, flares and aftermarket activities in the year-over-year quarters increased from $4.9 million in the first quarter of 2016 to a little over $6.6 million in this quarter. For the sequential quarters, total sales revenues increased $2.8 million from $3.9 million to $6.6 million. We obviously had a very good quarter in our sales business. Reviewing compressors sales alone in the current quarter they were $5.6 million compared to $4 million in the first quarter of 2016 and $2.7 million last quarter. The 15% gross margins in our compressor sales this quarter compared favorably with the 16% in the first quarter of 2016. It is off from the 25% gross margin we had in the fourth quarter of 2016, but this was largely due to the equipment mix build during the quarter. The comparison is tough too. That high a level of gross margin of compressor sales is excellent in this market. Our compressor sales backlog was roughly $6 million at the end of 2016, and had dropped to about $2.5 million on March 31, 2017, the end of the first quarter. However, we just received a large order earlier this week that increased the backlog to $8.5 million to $9 million, which is our highest compressor sales backlog in many years. Additionally the order includes a much larger horsepower sized units than we have averaged in a while. We also think this order can grow phenomenally over the year, although we probably wouldn't see added equipment delivered until 2018. This is a significant win for us and may open added opportunities with this customer and others. This backlog, which we should be able to deliver this year combined with our actual compressor sales this quarter add up to about $14 million in compressor sales we anticipate in 2017. This is already ahead of our 2016 full year compressor sales revenue of $10 million. Rental revenue had a year-over-year quarterly decrease from $16.4 million in the first quarter of 2016 to $11.9 million this current quarter. Adjusted gross margins dropped from 65% in last year's comparative quarter to 61% this quarter. Sequentially, rental revenues decreased from $12.5 million to $11.9 million, with adjusted gross margins of 61% for this quarter compared to 62% last quarter. Average rental rates across the active fleet decreased a little over 7% compared to the first quarter of 2016, and 1.8% over the fourth quarter of last year. Average rental rates for newly set units, which is what we call the spot pricing, are down this quarter nearly 20% when compared to the first quarter of 2016, and 8% lower than the fourth quarter of 2016. The fleet size at the end of March was 2531 compressors, and we had a net addition of one rental compressor this quarter. Our active fleet utilization this quarter was 50% on both the horsepower and a unit basis. This is down from 51% last quarter and appears to continue the flattening trend we have seen in the past few quarters. To recount, the delta change in utilization over the past five quarters since the fourth quarter of 2015 has been 8%, 5%, 3%, 2% and now 1%. And so we are beginning to see some stability in this and potentially a bottoming. From my activity perspective, there are some positive signs. Comparing all of 2016 to the first four months of 2017, signed contracts for rental equipment are running at an acceptance rate this year that is 50% higher than 2016. Additionally for the same period, equipment terminations are running at half the rate of 2016. This trend is also verified when we look at the churn rate that being the quarterly number of contracted units divided by the quarterly number of terminated units. A churn of one means that you are selling the same number of units as you are getting back. So obviously the higher the number, the better. Two means you are selling two units for every one terminated et cetera. In a period of declining activity that we have been in for almost three years, the numbers will run less than one, meaning we are getting back more than we are contracting. Although we still see that churn rate below one, this is the fourth quarter in a row that we have seen improvement in the ratio of rented versus terminated units on a quarterly basis. Last call I mentioned that we would earmark $5 million to $10 million for Capex in 2017. We spent a little less than $500,000 this quarter. But recall from last call that we have allocated $5 million to engine and compressors that have already been ordered and just haven’t been received, fabricated or capitalized yet. As far as the balance sheet goes, our total short-term and long-term bank debt remains under 500,000 dollars as of March 31, 2017 and cash in the bank was a little over $74 million. Our cash flow from operations was very strong with nearly $11 million for the quarter and free cash flow was essentially the same. The strong free cash flow generation this quarter was driven primarily by higher revenues, improved AR and AP performance, tax payment timing and low Capex requirements. Summarizing the quarter, there is still too much rental equipment in the market, and we continue to see bad pricing and utilization pressures as a result of that. But our results this quarter had some encouraging signs in them. First our sales win and dramatically improved backlog has positioned us well for the balance of the year in that segment of the business. Our rental fleet utilization has exhibited increasing stability over the last few quarters, and make no mistake, I think we can still see some choppiness there, but it certainly appears to be bottoming. Our rental churn rate has also improved over the past year on a quarterly basis. It is still negative, but it is pointing upwards. And consistent with my comments in the last few quarters, we think the last half of the year will continue to show improvement. Certainly due to the positive company specific indicators I just noted, but also due to some macro factors. I have always cautioned everyone that being on the production end of the business versus the drilling side, we are latter term participants in any downturn or recovery. Confirming this was a Schlumberger charge in one of the recent investor presentations showing the 6 to 9 month lag between drilling and production. Now depending on when you want to start those nine months, our turn to participate in the upturn should in the latter half of this year. Surprisingly there are more [docks] drilling uncompleted wells being drilled now than even in the past. In February of 2017, there were a record 1764 wells uncompleted in the Permian Basin alone. In that same month 395 wells are drilled, there are only 300 or 75% were completed. Some of this is an operator’s choice, but more and more is driven by the quick strengthening seen in the pressure pumping part of the industry and the intended demand for fracturing crews. They are running behind and completions are off schedule, and there are some added infrastructure issues being experienced, primarily pipelines. As these constraints were alleviated, this should ultimately lead to additional production activity in the future of which NGS should be a recipient of. Although it is still a battle, each quarter we are seeing more positive signs and I am cautiously optimistic it will continue. That’s the end of my prepared remarks. I’ll turn the call back to Ericka for questions anyone might have.

[Operator Instructions] Our first question comes from [Indiscernible] from Sidoti & Co. Please state your question.

Hi, thanks for taking my questions Steve. The great comments on the backlog growing for compressor, I mean if I back into just can you give me more detail if you can on that backlog and incremental order after the quarter, I mean it sounds like a let us say, a $6 million in total orders, I mean, is that 10 to 13 compressors or how should I look at that?

It is a – I won’t give you a whole lot of details from a competitive standpoint, but it is a varying mix of – it is over 10 compressors and it is a varying mix of horsepowers, all the way from 200 up to 1300, 1400 horsepower per compressor. So as I mentioned the smaller size we do on our [Indiscernible], the bigger ones we have done before – we do them in the Tulsa or Midland shops, but we haven't had a whole lot of those bigger horsepower unit orders in a while. So that is kind of encouraging from the point that the horsepower typical, big horsepower a little newer profile that we are seeing going forward, and a couple of things. I think this order, we do have some potential for expanding the order over time, certainly depending on what the activity and oil prices, but also the significant piece of it being large horsepower kind of opens up some additional opportunities too I think.

Thank you. Did you mention what portion of your sales, I might have missed it, is international and was this order an international order?

No, this was a domestic order. And in Q1 probably I would estimate probably two thirds of that order was international, I mean of that quarter, of the first quarter this year is international, but this new order is all domestic.

And that last one on that, it is a domestic order, is it with a rental customer more than likely too?

Yes, it was a good customer of ours. We have dealt with them a long time. We rent and sell and everything else with them.

Okay, thanks, and last one from me is that – a great commentary on completed wells too and then you mentioned some infrastructure issues, is it – I mean is that a meaningful issue in terms of lack of pipeline takeaway capacity?

It kind of depends on who you read and who you talk to right, and the areas you are in; in the Permian – the Delaware basin, the most active place. There is more of a pipeline constraint of selling that. Now you can go into different parts in the US, parts of the Marcellus still have some takeaway issues, and parts are down. So it can be spotty even within basins, but generally I think the take-off and the additional production has caused some of that. The main reason I want to – we missed that, number one, I think as these issues mitigate or work out over time we ought to see more production coming online. Now obviously that is a double-edged sword, what does production do with pricing et cetera. But from the things we have been watching is, while we enter this 6 to 9 month typical lag, okay, when is this lag going to end and what are the particulars that are causing it now, because we are in the transition hopefully from a downturn to some more activity. So, there is some different things in every upturn and downturn that impact it and you get some of these infrastructure issues, but actually one of the big ones being just frac crews, all the fracturing guys are busy and things like that. So you get a lot of factors that impinge on our timing on participating in this upturn. But again depending on when you take the beginning month and countdown nine months, somewhere in the second half is where we think we ought to be seeing some additional production from some of these factors that have been impacting us at this point.

Okay. Thank you very much Steve.

Okay. Thanks.

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

Good morning Steve. Hi Rob. just wanted to touch a little bit on pricing trends, did you note that they – have they worsened or they have stabilized or maybe just what is the trendline in pricing as things are going here in the first half?

I don't think they have worsened, but they haven't gotten better, and they were bad. So, it means we are still fighting lot of pricing and there has been kind of some interesting reports and analysis and articles on pricing issues because, this pricing thing is not an equal opportunity provider. You see certainly some of the pressure pumping companies going up in price, fracking sand companies and things like that and you are reading that stuff. Now that is good and well. But you start reading about some other portions of the business and it is not. And ours hadn't seen it, I think some of the pipe outfitting companies, distribution companies haven’t seen it, things like that. So it is a pretty spotty recovery right now. Just like I mentioned before in the productions, the actual production piece, so that is fairly spotty due to different impacts, pricing is pretty spotty too, but from our standpoint, yes, we haven't seen really any improvement in the pricing at this point. And still a lot of equipment out there and I think as we have mentioned in the past, we have got – a lot of our competitors are pretty cash constrained and cash is – they are driving no matter how much it is.

Okay, good. Thank you and then on the equipment business, is there a shift to more equipment purchasing rather than rentals or is this just a one off sort of customer growth situation?

No, no more than usual. This is just as I said, it is a customer we have dealt with for a long time. We have done a lot of work for them and we have sold them some equipment in the past and we currently rent them some equipment. But there is recovery. They have seen a lot more opportunities come up. They are starting to build out their piece of their world, and we were fortunate enough to start pushing some of the bigger horsepower capabilities we have in addition to and are aware of the small horsepower stuff. So, we were fortunate enough to get the order.

Okay, great. And then just quickly on the VRU market, how is that trending and have you seen that pick up or is that still trending with the rest of the business?

It is just – it is still positive. We are still building some VRUs and putting them out. I think like everything else, we are not going to see anything impressive in that until the whole market starts to pick up, but certainly the VRUs and the higher horsepower models we came out with in the last couple of years were the bright spots in the whole fleet, the core fleet is one that is still under pressure a bit.

Okay, thank you. I will turn it over.

Okay, thanks Rob.

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

Hi Steve.

Hi Peter.

The first question is on the equipment sales part of the business, so you mentioned based off of what you have done so far and the backlog that you have, you are expecting kind of $14 million of compressor sales, what is the other portion of the sales business, what was that in 2016 and can you give us an outlook for 2017?

In 2016 I think that was around $2 million to $3 million. Yes, it consists of flares and parts and overhauls, stuff like that. Okay, in ’16 compressor sales $10 million, total sales about $13.5 million. And I don't want to hazard a guess as to what the balance of that might be for ’17. We have seen – flares really aren’t growing. That is kind of stagnant or static market. We have seen the little parts pick up, things like that. So, I would expect us to probably have about the same differential, but that is not a problem right now.

Okay. That makes sense. And then can you say a little more perspective on the contract signed part of it, and so I think that your business is fairly quick turn, so you sign a contract and the compressor goes out fairly quickly, but are some of these contracts that you are signing a little longer dated. So these are guys who are completing wells, working through getting them on production and then they are anticipating compressor needs in the third and fourth quarter. So you have a little bit more visibility into the second half than you have had in previous years.

No, we don’t – there is none of that going on right now. Now, as things pick up maybe we will see a little more of that than we did in the last upturn in 2010 and 2011. Right now there is so much equipment in the market they don't really have to worry too much about finding the compressor unit if it is two or three weeks down the road. So you are not getting anybody really signing up for the future because they are concerned about getting equipment. There is plenty of it out there and people can deliver pretty fast. So, we don't see any of that. Now, we do know of projects that we have been slated to get that we haven't received yet, we are aware of those. But it is not a situation of signing up and then – for future deliveries.

Got it. Okay, and then final question, obviously you get this once a quarter, but the cash balance has now gotten to a point where I mean it is 25% of your market cap, and given the cash generation of the business, I just can't see you needing all of this cash forever, so what are your thoughts and what you like to do with it?

Yes, as I mentioned and you are right at least once a quarter, usually more. And as I have said in the past or there is a couple of things we can do with it from a shareholder standpoint and we are still evaluating that. But another factor that has come into play now is, if we are in the beginning of the bottoming or the turning of whatever it might be, we are starting to look at what that Capex maybe in the future. Now, the immediate question is, wait and minute, are you going to really need a whole lot? We are not going to need a whole lot of Capex for our core rental fleet. The 100 to 300 horsepower equipment, we have got plenty of it and we don’t – I don't know if I mentioned on the call, I have mentioned that the next couple of years approximately I don't think we'll be spending a whole lot of capital in the core piece of the business because we have got equipment we can put out. But when you start looking at this bigger horsepower stuff, the 400 and 600 horsepower units, and again we are sold out of those and we are billing some more. It is not a real big number now, but I anticipate that taking off in the upturn like everything else, and we don't have any of that equipment. So that is as I mentioned in the past where most of our Capex will go. If you start looking at $0.5 million a unit, 30 of those units is $15 million. 60 is $30 million et cetera. So, it wouldn't take a tremendous boom to start spending an appreciable amount of capital on that type of equipment alone. It is two or three times as much per unit is what we have done in the past. So, we are starting to consider that too in our planning, but – and I think we had very strong cash flow generation this quarter. I mentioned it, $10 million is extraordinary strong. We haven't had a quarter like that from a cash flow standpoint certainly in the last year and maybe even longer. So, kind of a anomaly a little that the cash flow is that strong. I mentioned the reasons. It will tame down a little, but you are right. We have $74 million, but these are the things we are trying to look at and certainly now of course coming to the picture is our projections for the bigger horsepower stuff now.

Got it, and then a final question, if you read the – I guess the big oilfield services transcripts, all of them are touting kind of bigger wells, bigger laterals, everything just bigger. And so does that in any way impact – I guess I mean do you need bigger compressors, but do you think a recovery will still – your lower – I guess, [Indiscernible] lower horsepower units will still be needed in any type of recovery.

Yes, because you start out certainly bigger is better right, and that is one of the reasons we have moved in to support a 600 horsepower, also to take advantage of that piece of the market in addition to pad drilling, centralized facilities, and advance, all that drives more horsepower and more gas volumes. So the 400 to 600 horses are going to help us participate in that market there. As far as our smaller equipment, when you start with 600 horse within a year you’re going to 300 horse, and then here you got into a 300 or 200 horse. So you have constantly got this step down requirement over the life of a well. So what we are doing, we are not eliminating any of what we have got. We are just stretching into the market we haven’t been, and we will still maintain where we are. And even when you have centralized facilities and pad drilling and things like that, you are still needing smaller equipment because not everything is centralized, not everything is pad drilled. You get other issues with commingling of streams and things like that. You are going to always need this smaller horsepower. But, with us moving into bigger horsepower now because the smaller horsepower over time are going to get to be a smaller and smaller component of the fleet. So they are going to be enlarging the smaller and smaller component. So, we think that certainly the move to the bigger horsepower is the right move. We think it is a good move, but it is not by any stretch abandoning who we are, and the market will need this stuff going forward, always has.

Okay. That is all I had. Thank you.

Okay. Thanks Peter.

Our next question comes from Mark Brown from Seaport Global Securities. Please state your question.

Hi Steve. Good morning.

Hi Mark.

I just wanted to see if you could give kind of an update on the regulatory changes, I think a couple of years ago we were talking about like the Quad O regulations going into effect and maybe you could give kind of an update on that and just also the EPA has proposals to pare back some of the existing regulations that limit methane emissions for the oil and gas industry, if that has any potential impact on your compression business?

Well, Quad O was I think it was 2012 that it was effective. So it is almost 5 years old now. I don't think we are going to see any change in that regulation. If there is it is going to be around the edges. That one is pretty well in. It is established. It is part of the fabric of operating. Operators have gotten used to it, and that is what is driving our VRU business. So I think you have got that pretty well intact. It will be hard for this administration to go back and undo a regulation that is that old. Now, you get the Quad OA, so four Os and an A now, which is the methane capture stuff. I think that one is probably going to either go away or be stripped down quite a bit. You read more and more – I mean, certainly the EPA has already put it under review, and this is one from our standpoint – of course, from a drilling and fracturing standpoint, you have got to go to green completions, closed loop stuff like this. So you're not doing a open air flow backs and things like that. So there is certainly an impact on that part of the business. As far as our part of the business, the big issue was what is called LDAR, leak detection and repair, I am not a big fan of the EPA to start with, but this was really an onerous regulation, where you had to go out and check every potentially leak point and a potential leak point is a bolted flange. Yes, anything might leak, but never does. So, that was getting down to being kind of silly. I think that one is probably under potential attack, and I think it should be. I don't think anybody gains anything out of that one. So, I think you have got a mixed bag. The older stuff, I think is here to stay, and it is already established. Everybody is used to it. The newer stuff I think is probably subject to change.

Okay, and I just wanted to ask on more a macro level, what sort of natural gas price would we need to see to get a – to really stimulate drilling and ultimately production that would really take the compression business as a real accelerant to the growth. Is there sort of a natural gas price that we would think about that would be that inflection point?

I think you would have to have and again price being one thing, stability of the price being another and just as important. I think you have to have a price that is consistently above $3.5. The problem is you can get spikes up to 3.50, 3.40 whatever it is and everybody knows it is a spike because it tends to come off. Some of it is seasonal. Some of it is just supply and demand. But there is – the problems you have got with gas right now is there is just so much gas, and if it is in the market that is one thing. But there is a lot of gas still underground. I mean, the Marcellus you can drill a well out there and the oil comes in at 10 to 15 million cubic feet a day with no compression required or anything else. And then with the oil recovery we are going to see more associated gas come on. That is what caught us in the last downturn coming out of ’09, everybody thought that well, gas can’t stay down this low, but nobody thought about the associated gas of oil wells. I think that is the other thing that is going to impact gas going forward. The strength of the recovery, how many oil wells are drilled and associated gas profile from those. So I think the associated gas in Marcellus were the negative factors in the gas pricing scenario. Obviously the positive factors are LNG, and there seems to be – so we got a couple of plants online now. This administration looks to be ready to approve more and maybe even lighten up the regulation on some of that stuff. So, yes, it is a mixed bag, and you get – any day you can find an article one way or the other, but I think you've got to have 3.5 plus consistently before we would start to see some steady increase in gas drilling, just gas well drilling.

Yes, it makes sense. You need to really get that stable consistency and not just as at the point in time. So I appreciate it Steve. That is all I have.

Okay, thanks Mark.

Our next question comes from Craig Hoagland from Anderson Hoagland. Please state your question.

Hi, Steve.

Hi, Craig.

I wanted to ask a question that was related to one earlier about well productivity trends, and sort of the ratio of drilling rigs to ultimately compression units, and if the rig count is going to produce more oil and associated gas with fewer rigs, what does that say about the need for compression equipment?

[Indiscernible].

No, no. That's it.

Okay, all right. There has never been a good correlation between rig count and compression required, and that is getting even worse now. So it has been bad and it is getting worse. The problem is just like we are seeing – rigs don't even – they are even getting disconnected from predicting production. One of the reasons I mention is these ducks, you have rigs drilling wells, but they are not completed. It doesn't impact production. That is just one thing. Of course, we are seeing tremendous rig efficiencies, crew efficiencies and things like that to come on. So, and I think last year was hell and one of the callers said, 900 is the new 2000, right. It is going to take 900 rigs to do what 2000 did before. So you are getting a pretty loose association between rigs and any sort of production. And rigs and compression like I said has always been bad. It is a – I think it is almost following that and even try to correlate something – you can always correlate something right. It depends on how square it is. So, I don't think we can use the rig count to determine that and that is one of the reasons I find of went into some of these macro factors in my remarks. And that sitting here with [Indiscernible] rigs are going up and this is happening and that is happening, when is my turn and you start diving into this stuff, and you see one of those still laying some of this stuff. It is just not translating into a whole lot of production yet.

Right. Would you think that amount of the compression equipment will correlate better with production then than with the number of rigs to create that production?

Yes, that would be the closer indicator just how much gas is flowing through the system. Now again, I think you can use gas volume at some plot, but you got to be a little careful with some of that too because not all – not every well needs a compressor, and some wells don't need it for a long time. Some of them need it right way, and things like that. So it is really hard to get, what I would say, a reliable indicator. The other thing it's going to be pretty general and more directional than quantitative.

Right, okay. But when you think about putting the fleet back to work and putting in some high horsepower units, do you think of that primarily being driven by associated gas or by dry gas wells?

I think it is associated gas. That is the activity now. We will see some dry gas activity I think out of the Marcellus as we go, but the majority of this is just going to be an oil driven recovery and the associated gas is what we are looking for.

Right, okay. Then last question, the last time we went – we had a dip in utilization or recovery, I think there was a bit of surprise for The Street in terms of the costs associated with putting rigs back out. I guess, it's basically a refurbishment cost or a preparation for the field. Would you expect that dynamic to be the same this time around?

Yes. We are always going to have just like everybody else you hear the pressure pumpers talk about how they are overhaul and refurbishing their fleets before they go out. The same thing with compression. when we get a unit back right now we don't do anything to it because we don't know when it might go out on a contract. So, it is preserved. It is put in the yard and it waits for the next job. And when we get a job we go through it and spend money on it. And we are doing that right now, just not at a high volume level. But as the churn goes above one, as utilization starts to climb, we will be putting more equipment out there we are getting back, and you start seeing price pressure from that standpoint, and that is what we saw in the last upturn. Margins dropped into the high 50s, still not a bad margin. But there was some margin compression due to the expense. Now obviously the good thing is there is revenue behind that expense, but we won't see the same dynamic.

Okay. Thanks a lot Steve.

Okay, thanks Craig.

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

Good morning Steve. My cash question got asked. So I guess I will have to find something else to bother you about. Actually wanted to just ask, you talked about the larger units, as you look at your manufacturing facilities, would that change anything in terms of your throughput or even just on the ordering of parts as you look at thinking that the larger units will be kind of more in demand going forward, would that change anything from kind of your getting those units out to the market, outside of the additional cost?

If you had a – say you just had a tremendous exposure on the upside of big horsepower units, you would obviously run into some constraints because those units take up more space. They take a longer time to build and things like that. If you go back to 2014 we ran 320 rental compressors through both our shops, Tulsa and Midland, so almost one a day. So if you get these bigger ones you probably got that roughly in half, but number one, the market ain’t as big. The market is about half as big again from a unit standpoint. Now we think that revenue is about the same. So that would fall in line. That would correct itself a little, and you are probably not going to have that certainly in the interim period as we move through this market, you won't have that kind of volume starting out. But it is not obviously a good problem to have, but I'm not worried about being able to keep up with that. The other thing we got the ability to do is Tulsa has typically been our historically our build shop and Midland has been our rental shop. But we have got the ability to go back and forth. So if we see more rental – bigger horsepower rental units coming up, we have got the opportunity to ship maybe some to Tulsa or things like that. So, we have got some flexibility. We can do it in advance of anything else within our capability.

Right, I know it is kind of a – it would be a good problem to get to at some point. Just in the same ilk, as you looked at, you have always talked about kind of having a pretty uniform fleet in everything, and obviously there are just larger, but I believe that they are predominantly the same type of units. Would that change anything in the manufacturing in terms of if you wanted to make a set amount of 400, a set amount of 600 or a different – a ray of units, is that pretty much plug and play just based on what you need to get out for customers?

Well, this being rental stuff, if we see the needs going up or accelerating we will go ahead and start putting our capital budget and schedules, additional equipment, just like we are doing now at a low level. I think if we are sold out, we will build some more. And you do get better. I mean there is a real learning curve on building one compressor versus building 20. And its costs better with that. And so, yes, we prefer to do it in bulk versus one or two. We will do according to what the market tells us, but if you can do volume you are a lot better off in a lot of ways from cost, from scheduling, throughput, everything.

Okay. Thanks Steve. I've turn it back.

Thanks Jason.

At this time we have no further questions.

Okay. Thank you, Ericka. Thank you Alicia, and thank you everyone for joining me on this call. I appreciate your time this morning and look forward to visiting with you again next quarter. Thanks.

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