Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Third Quarter Earnings Call. [Operator Instructions] Your call leaders for today’s call are Larry Lawrence, Chief Financial Officer and Vice President; Steve Taylor, Chairman, President and CEO. I’ll now turn the call over to Mr. Lawrence. You may began.

Thank you, Erica, 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 statements 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 and 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 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, Form 10-K with the Securities and Exchange Commission. Having all that stated, I will now turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you, Larry, and Erica, and good morning. And welcome to Natural Gas Services Group’s Third Quarter 2018 Earnings Review. This morning we reported third quarter 2018 results. The company posted solid growth in rental revenues in the third quarter reaching $12 million, the first $12 million plus quarter since the fourth quarter of 2016. Comparatively, rental revenues increased 5% sequentially and 7% when compared to the same quarter of 2017. Rental trends remained positive, which should lead to additional revenue growth in the upcoming quarters. In the quarter, we placed more active horsepower in the field, led by our shift into the higher horsepower rental compression market. And our backlog of contracted rental equipment continues to grow. Opportunities continue to present themselves in the high horsepower market, and we continue to allocate capital to meet this increase in demand. As some of our peers have indicated in the past several days, both on earnings calls and other representations, the compression market, unlike some of the other oil field service specialties, continues to strengthen. Our backlog and indication from customers suggest that growth will likely continue as we finish 2018 and enter the new year. The need for compression and unconventional production, especially gas lift operations, will continue to grow in West Texas and other resource place, which should contribute to our growth in the quarters to come. In addition, compression is the key part of the solution to the transportation and infrastructure bottlenecks in West Texas, which can provide a catalyst for growth in the coming months. With rental revenues growing, our sales backlog increasing and our capture of large high horsepower rental contract, all of which we will discuss later. We anticipate further growth as we finish 2018 and enter 2019. I’ll provide more detail as we review…

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

Good morning, Steve. Starting with the sales backlog, that stepped up nicely. Was that really the one contract you referred to? And maybe some color on that situation?

No. The contract is strictly rental, so the – and the backlog is sales. So the two, distinctly different levels of activity that we are seeing. So the sales grew quite a bit. The backlog grew quite a bit this quarter and then again we’ll receive that contract, which is 30-plus million dollars just for rental equipment.

Okay, okay. So both sides are bringing up activity. Maybe could you give us some color on that $30 million contract on rental equipment? How long that takes to get deployed and sort of how that...

That, that will be built – we’ve ordered the equipment already. We’re seeing equipment deliveries of around six months on engines and compressions and coolers. And we will be deploying that equipment throughout 2019, essentially starting Q2 of 2019 through Q1 of 2020. So that’s about the deployment schedule on that equipment. Now as we’ve seen in the past, that stuff can move around, fluctuate quarter-to-quarter and may even stretch out a little bit. But that’s the schedule as to right now.

Okay, good. And then maybe some – what kind of margin kind of headwind did you see in the quarter as you prepped units for new placements? Do you have a sense of what that was in terms of rental gross margin?

Our gross margins are holding up pretty well from the point if, X, the makeready expense, which is a big expense that’s come along this year. So if you take that out from an operating standpoint, the margins are fine. It’s just the fluctuation that you see and like I said some pressure and subdued margins right now as we go through a lot of this makeready expense. And then, so it means we have seen pressure from an operating standpoint on lubricants and gasoline and that sort of thing, but we – there shouldn’t be – it’s been fairly significant incremental this year. Yes, we’re not seeing an increase in those going forward. So future comparison should be flat on that, but this year has seen fair amount of expense on that rental gross margin because of those expenses. And again, remind everybody, we’re capitalizing this stuff. It’s all expense, so we tend to show those quarter-to-quarter as we move over the year.

Okay. Last question is really on 2019. How does the CapEx spending look there? And I guess, what sort of the opportunity set out there for new products? You said that your cash balance is giving you some opportunities, maybe some color on what those – what that could be?

Yes. I haven’t announced the 2019 CapEx, we will in the next call. But, I mean, it’s pretty easy if you add the numbers up throughout, the big rental contract involved a little over $30 million in capital. We plan on spending another $15 million for spec units. And I’d say, spec units not to alarm anybody, but this high horsepower spec stuff. You almost have to have that stuff in – within weeks of completion or in the yard to rent that stuff. And so we think we’ll be – obviously, be successful putting that stuff out too, but now you have $30 million extends like, say, from Q2 2019 to Q1 2020, so part of that’s in 2020. But pretty easily, it’ll certainly exceed or we’re seeing this year, which is what is measuring around $30 million.

Okay. Great, thanks.

Our next question comes from Richard Dearnley from Longport Partners. Please tell your question.

Good morning. What is your capacity, your manufacturing capacity at the moment? I take it, you have some – what? Let’s just leave it at that.

It’s variable and it depends a lot, number one, on what our flare sales are? What our rental – what our compressor sales are? And what our compressor rental bill requirements are? And, of course, the size of the units too. So it’s hard to give a specific number either in throughput on dollars or throughput on units. Now if you just take the numbers we just talked about, we think we can say roughly, $40 million to $50 million worth of big horsepower through the two shops in 2019, which would be 40 units to 50 units roughly, a little over $1 million a piece. Yes, that will give you a rough idea. And of course, it – that can vary plus or minus 10% to 20% depending on what’s your build and what’s going on.

Right. If you’re making smaller horsepower units, the capacity goes down?

Well...

What if you’re just making big horsepower units?

Well, the capacity goes up on a number of units. Yes, but the – yes, your corresponding CapEx is a lot lower, probably a fifth of it. For example, in 2014, I guess, we built over 300 small horsepower compressors, probably about 150 horsepower average. Yes, but that was about $50 million. So this year, we’ll build about 40 to 50 units, it’ll be about $50 million. So it’s just hard to calculate unless you have. Hey, here’s the exact number and the calculated number, but your capacity is probably historically and today, probably $50 million, $60 million worth of equipment.

Right. Thanks. And in your comments, you said that the rental backlog for all horsepower was high. That strikes me as a change because all horsepower would include small horsepower. Am I using that correctly?

Yes. I mean, the backlog is relative number obviously. So the smaller horsepower is relatively small part of that, but it’s grown a little bit. And, obviously, the big deal is, in that medium horsepower, say, the 150- to 300-horsepower, which is a primarily the wellhead gas lift stuff. That’s what we’re seeing. That’s start to perk up there. So – and then the – there’s not really a rental backlog. And while there is a rental backlog in the big horsepower, but that’s all new builds. So the makeready expense is across the board, but it’s just – it’s relative, so your small horsepower has grown a little, but it’s still a small piece.

Right. What’s your mix at the moment of gas lift to total either units or horsepower?

On a per unit basis, gas is – as far as the total fleet, it’s well fleet and utilized. It’s probably, I’d say, 60% utilized and/or the total fleet. With the big horsepower, you would probably move that up to maybe 65% on a horsepower basis. But 60%, 65%, well that units of horsepower is – yes, we will classify as gas lift sort of equipment.

I see. And if the midstream, the pipeline folks are adding capacity like mad in many basins. And in general, that’s supposed to start coming on through 2019, but a lot of it will be in place by say the end of 2019 give or take.

All right. Right.

If assuming all that continues to happen, would it be logical to expect a falloff in demand for new capacity – pipeline capacity in 2020, which would have the effect of loosening high horsepower demand in 2020? Or...

Well, I think – from our business, I don’t think so. Because the majority of our equipment is going out on gas lift whether it’s wellhead gas lift or centralized gas lift. So while this big horsepower is going out on the production site, not really on the midstream sort of perspective. Now obviously, everything feeds into the midstream, but the – you could have a adequate infrastructure of midstream, but if we’re still drilling wells and still producing gas, we’re still going need more compression out there. So you might have a little flurry in 2019 of some of the stuff and like you say the DUCs. Yes, that’s a big backlog out there. That will all come on – will not be completely same time, et cetera. So I think we got a pretty good runway on activity in the market.

Great. Thank you.

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

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

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