Natural Gas Services Group, Inc. (NGS) Q4 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Natural Gas Services Group Fourth 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, Erica 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 the 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 now turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Thank you, Alicia and Erica and good morning. Welcome to Natural Gas Services Group’s fourth quarter 2018 earnings review. This morning, we reported fourth quarter 2018 results and we are pleased with our operational performance in the fourth quarter of the year driven by strong sequential rental revenue growth of 7% in the quarter. While our growth included continued progress in our high horsepower category, majority of the rental revenue growth in the quarter was a result of solid performance from our core mid horsepower fleet. Sales revenue declined by about $1 million sequentially, primarily the result of our decision to reallocate production plant resources to higher margin rental fabrication, thereby reducing opportunities for sales revenue. However, our sales backlog at the end of the fourth quarter was at its highest level since the third quarter of 2017. We did have a non-recurring expense this quarter of a little over $0.01 per common share related to potential strategic growth initiatives, but our margins were generally higher in the quarter, which sets the stage for solid performance for the company in the coming year. I will provide details when we review our financial results. So, looking at total revenue, NGS reported total revenue of $16.2 million for the fourth quarter of 2018, a 3% decrease compared to the same quarter of 2017. The decrease was primarily driven by decrease of sales, the magnitude of which is largely by an increase from rental revenue. From a rental perspective, we had 102 more units running in the fourth quarter 2018 from the same period of 2017. Total revenue decreased slightly by 1% when compared to the third quarter of 2018 due to the timing of sales revenue from compressor sales. However, the decrease was partially offset by 7% sequential increase in rental revenue for the fourth quarter of 2018. Total adjusted gross margin for the 3 months ended December 31, 2018 increased at $8.2 million from $7.9 million for the same period ended December 31, 2017. Adjusted gross margin, which just not include depreciation, as a percentage of revenue for the 3 months ended December 31, 2018 was 51%, an increase from 47% for the comparable period of 2017. Sequentially, adjusted gross margin increased from $7.8 million in the previous quarter of 2018. Adjusted gross margin as a percentage of revenue increased to 51% for the 3 months ended December 31, 2018 compared to 48% in the previous quarter. The increase in the adjusted gross margin as a percentage of revenue can be attributed to higher gross margin in our rental business and the slight mix shift towards higher margin rentals this quarter. Selling, general and administrative expenses were $2.4 million, remained relatively flat for the year-over-year and sequential quarters, goes down 10% in the full year comparative periods. As mentioned we did have a non-recurring expense in the fourth quarter of over $160,000 or over $0.01 per share due to potential growth initiatives. Operating income was $106,000 in the fourth quarter compared to breakeven in the third quarter and an operating income of approximately $220,000 in the fourth quarter of 2017. Our operating income while positive is fluctuating more than usual in the comparative periods due to normally lower total revenues caused by lower sales revenues, again due to the rental unit revenue displacement. Higher depreciation expenses due to larger horsepower units being placed into service as they are fabricated and variability in SG&A expenses. We continued to experience some anomaly between our deployment of higher horsepower and lower corresponding revenues and income. This is almost totally due to the timing differences between deployment of the equipment and the receipt of forward rental revenue and associated income. The variation being caused by scheduling, commissioning and startup activities that take place after the units are build. To demonstrate this, almost 80% of our growth in higher horsepower rental revenue in 2018 was consumed by increased depreciation. Additionally, due to varied commissioning schedules only 8% of forward rental deployed higher horsepower fleet is being collected right now. These are timing delays and not permanent delays and a natural phenomenon of moving into a new market until such high capital costs and longer startup cycles. The good news here is that we are beginning to place more higher horsepower equipment every quarter which should have a positive effect on the aforementioned variability in revenue and income gains. Looking at net income, due to the non-cash adjustment for income tax expense related to executive compensation, we reported a net loss of $280,000 for the three months ended December 31, 2018 compared to net income of $18.7 million for the same period in 2017. Excluding the tax adjustment expense, net income for the period was $351,000. Excluding the $18.4 million tax benefit from the 2017 tax act in the fourth quarter last year, our adjusted net income for the three months ended December 31, 2017, was flat at $352,000. Sequentially, we adjusted net income of $351,000 in the fourth quarter of 2018 compared to net income of $236,000 in the third quarter of 2018. For the fourth quarter of 2018, the company posted a loss per diluted share of $0.02 compared to the $1.42 in 2017. Excluding the non-cash income tax adjustment in the fourth quarter, earnings would have been $0.02 per diluted share. Excluding the fourth quarter 2017 tax benefit, year-over-year quarterly earnings were flat. Sequentially, diluted earnings per share decreased $0.04. However, excluding the income tax adjustment expense earnings per diluted share increased $0.01. Earnings before interest taxes, depreciation and amortization or EBITDA for the three months ended December 31, 2018, was $5.8 million, a slight increase from $5.6 million for the same period in 2017 and $5.7 million for the third quarter of 2018. EBITDA margins have roughly averaged about 35% of revenue in all comparative periods. Total sales revenue which includes compressors, flares and aftermarket activities can be somewhat unpredictable that can cause considerable swings for the period. The uncertainty of this somewhat unpredictable nature of sales revenues can depend on the market and customer preference which often times changes period-to-period. On a year-over-year basis, NGS sales revenue decreased by $2 million to $2.9 million for the fourth quarter of 2018. The revenue drop was primarily due to a decrease in part sales when compared to the large parts order in the fourth quarter 2017, but we also saw compressor and flare sales off in that quarter too. When comparing to the previous quarter, total sales revenue fell by $1 primarily due to a shift in compressor sales revenues due to the allocation of the large part of our fabrication floor space to contracted rental fabrication. Compressor sales revenues of $1.5 million for the fourth quarter 2018 were down slightly year-over-year from $2.1 million. The sequential quarter’s sales decreased from $2.9 million in the third quarter of this year to $1.5 million this current quarter with about $1 million of that sales decline due to the aforementioned fabrication space reallocation. Fourth quarter 2018 total sales gross margin as a percent of revenue was 20% compared to 22% in the third quarter of 2018 and 21% a year ago. There can be quite a bit of margin variation period to period in our sales business due to scheduling and bidding, but significantly gross margins for the year average 23% compared to 19% for the same time period in 2017. Our sales backlog as of December 31, 2018 was approximately $14 million. This compares to sales backlogs of approximately $8 million in Q1, $4 million in Q2 and $13 million in Q3 of 2018. This is the highest backlog we have had since the third quarter of 2017. We continue to be pleased with our rental results, with rental revenue of $12.8 million for the fourth quarter of 2018 and increased sequentially year-over-year and for the full year 2018 compared to 2017. Additionally, rental revenue in the fourth quarter of 2018 was the highest since the fourth quarter of 2016. The full year 2018 versus 2017 rental revenue increased 4%. Year-over-year, quarterly rentals increased 12% and with sequential quarterly rental revenues increasing 7%, we have seen an acceleration in recent rental revenue growth. We continue to expand our large horsepower presence and receipt of additional order in January, which represents approximately $17 million in CapEx. This order, in addition to the large order I mentioned on the last call, will keep our fabrication shops full through the first quarter of 2020. Last call I mentioned that we are going to build 12 large horsepower speculative units in 2019. All of those have now been contracted in advance for their build. We do however plan to build more spec units towards the end of this year and into 2020. As of December 30, 2018, a full 18% of our utilized horse power is classified as large horsepower. This is a significant shift in our fleet makeup and demonstrates I think the strategic direction we chose a couple of years ago was a correct one. To keep up with what we take will be continued growth in large horsepower market we have secured additional fabrication space. Compared to the third quarter 2018, our average rental rates on a per unit basis increased 3% are essentially flat on an average per horsepower basis. Rental gross margins this quarter were 57%, an increase from third quarter rental gross margin of 55%, but marginally down from last year’s quarter of 58%. Fleet size at the end of December totaled 2,572 compressors in addition of 6 units or almost 5,000 horsepower in the fourth quarter. Over the past 12 months, we have added 31 new fleet units that totaled 29,500 horsepower, with 99% of that being in our large horsepower category. This represents an increase of 8% in total fleet horsepower, while rented horsepower has increased 25%. Our utilization as measured by horsepower climbed from 55% last quarter to 58% this quarter, while unit-based utilization grew from 52% to 53% this quarter. We saw an increase in rental units utilized at quarter end of 8% year-over-year and 3% sequentially. While our horsepower running in the field increased 25% year-over-year and 6% sequentially. We start 2018 with a rental compression CapEx estimate of $20 million to $25 million and in last quarter raised that to $30 million and there is rivalry in the year end. Of that, $30 million, approximately 95% has been contracted. Based on the additional higher horsepower business that we have a direct line of sight of, we estimate our 2019 rental compression CapEx to be in the range of $37.5 million to $40 million. Of this, almost 99% is already contracted. Moving to the balance sheet, our total bank debt is $417,000 as of December 31, 2018 and our cash balance remains strong at just over $53 million. This amount is down about $16 million since beginning of 2018 with a vast majority of the cash being invested in our new higher horsepower rental compression equipment and our new corporate office. Positive net cash flow from operating activities was $23.4 million for 2018 compared to $17.5 million for 2017, a 34% increase in cash flow. Overall, we are pleased with our fourth quarter and 2018 results especially given the volatile market environment in which we operate. We continued to have one of the strongest balance sheets in the industry which provides a significant competitive advantage as we evaluate both intrinsic and extrinsic growth opportunities. As we have said before, we will be patient and disciplined in evaluating opportunities, but we will not be afraid to make meaningful commitments for the right opportunities. We continue to believe we have the right tools and flexibility in place to take advantage of compelling opportunities. We continue our conservative focus on managing capital which has also served us well. Since 2010 we have self funded over $230 million in capital equipment, nearly 95% of which is additions to our rental compression fleet. Moreover, approximately 95% of the capital we are currently spending is for equipment backed by long-term contracts at above market rates with solid counterparties. However we are certain the volatility in commodity markets will continue. We are also confident that 2019 is looking to be the solid year for Natural Gas Services Group. Forecast exists at completions will continue to grow in key resource plays, which will require additional compressional horsepower. Our existing contracts for new compression including continued growth in our higher horsepower offerings support our optimistic growth outlook for the coming year. All-in-all, we are pleased with our performance in 2018 and enthusiastic about our prospects in the coming months especially given our strong start to the year. Erica, that’s the end of my prepared remarks, so please open the lines for any questions.

Ladies and gentlemen, at this time we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Rob Brown from Lake Street Capital. Please state your question.

Good morning Steve.

Hi Rob.

Just wanted to get a little more color on the high horsepower demand environment, are you seeing that accelerate from kind of earlier in the year or is it a matter of we are now taking on more kind of your self in the markets about the same and still strong?

I guess it’s accelerating a little, sort of the market is strong and I think we are making pretty good market penetration into. Just a couple of years ago we didn’t have any of this horsepower and now we are up to 8% of fleet and 18% of the utilized horsepower is big. So I don’t think it’s accelerating as much as we are capturing more of that market as we go. And as I have mentioned we are booked for the next four or five quarters in our shops and we have even secured additional space to try to add more speculative units and more anticipated contract in the units too. So accelerating maybe, but I think it’s certainly staying solid and we have got some good contracts in the last couple of quarters that we have announced. And those are keeping us busy, certainly from the higher horsepower in the next year.

Okay. And I may have missed this, how many on this new contract, how many units did you win, I think you said $17 million in CapEx, but how many units is that?

Yes. You didn’t miss it, because I didn’t say, it’s 13 units or 14 units, it’s all the bigger units of 1,400 horsepower units.

Okay, good. And then I think you talked about adding – are you adding capacity or did you find third-party capacity to build some units?

We are actually outsourcing some of it. We went out and looked at the market and we are working all things, but that’s about six months and we have secured what we think is premiere a fabricator to work with this and we are going to do up to our capacity and let them do some of the peak shaving part of it.

Okay. And then last question on the kind of the non-high horsepower market, it sounds like that’s covering a little bit as well, how are the trends there and what kind of utilization improvements you kind of see, how does that raise that’s sort of wanted to poise the quarter kind of improvement?

The high – the horsepower utilization went up 3 points and the unit utilization went up 1 point, that’s normal would this be a horsepower, the horsepower get planned faster than that. So I anticipate that kind of stay in the same, maybe see 1 or 2 points in the unit utilization and then 2 or 3 in the horsepower utilization. And it’s hard to say anything, these quarters fluctuate vary so much, but we still get a pretty good rental backlog, the make rates were still building. That medium horsepower range, which is essentially gas, wellhead gas lift compression starting to pickup, it’s been decent for about a year, but there has been so many properties change in the market and typically larger companies selling off what they consider as more mature properties. So you always give some shifting of equipment in deals like that and typically there is more optimization going on when those properties are sold to smaller guys etcetera, etcetera. So although we have set a lot of equipment, probably the first half of the year, we have got a fair amount back, although we have had about three or four quarters of growing net growth in that segment. So I think it’s going to stay good. We have been kind of waiting for it and we have frankly probably lagged the market a little on that just like our utilization has, but that’s primarily due to us maintain our pricing more than what we think the comparative landscape has or the competitors have. We didn’t go down as low on pricing, you tend to give us some share on that in a downturn, which we knew and we were okay with, because we kept generating EPS and the operating results were good. So I think we are now into the point that we have seen the pricing, general pricing come up to the market, that makes our pricing a little more attractive on a relative basis and certainly are. All that I think is combined to now start perking up that mid horsepower. And so I mentioned this the last two, three quarters if we – obviously the big horsepower is growing, growing quite well and that’s where all of our CapEx is going, but once we can get this mid horsepower starting to move, that’s a no CapEx growth story, which is great. So, if returns start to really pile up on that and incrementally get pretty good. So we think that mid horsepower started come into its own from our perspective and anticipated continuing that way.

Excellent. Thank you. I will turn it over.

Okay. Thanks Rob.

Our next question comes from Tate Sullivan. Please state your question.

Hi, thank you. Thank you all for the details, Steve. Good morning. I know you mentioned 80% of your full higher horsepower rental revenue is being collected, I know it depends on the location for those higher HP units, but what is the average timeline from the point to start collecting it the full rental revenue?

It goes from 3 to 6 months typically. So once you build this stuff and if you are familiar with this, this is big stuff. I mean, this kit is self ways, the engine compression coolers are 175,000 pounds, it’s very expensive to move them, very expensive to install them, takes a lot of time, there is more construction and not just onside from the operator, but there is more fitting up on REM between all the piping and everything on these units. So it’s a pretty big production. We knew that going in that’s what get in this market, but you do have more money involved longer cycles to get that coming in. So that’s what we are seeing of the equipment we have out now, only about the 80% of full rent is being gathered now and the other 20% is certainly in some form of scheduling, commissioning startup and stuff like that, but you will typically see a 3 to 6 month delay on any given once until you get full rent. And the good thing about it is I mean we would rather have a Day 1 right obviously 3, 6 months later, but our minimum terms don’t start until the full rent starts. So even though, we may have some interim standby rents, we give full rent for the full term once the equipment starts. So we are not giving up anything from the term standpoint when we are looking at these marginally lower rates for a little bit.

Okay. In terms of the schedule deploying previous orders into the field, I mean is it every – I mean how consistent is the cadence that it’s going out your doors if you can share or what is the potential delivery schedule look like for ‘19 if you can give…?

Yes. I am sure if I could pinpoint, it gets highly variable. And certainly we have a fabrication schedule on when this stuff is planned on what pattern and everything else and that schedule sort of change lead time by the operator. And now from the point of I mean they may want to slide something this way, we might want to slide something that way and everything else it’s always in slides. But we have got I don’t remember the exact number, but probably roughly 40 units going through the schedule over the next four quarters like we just wanted to do a quick number you could say well that’s ten a quarter. And you got 3 to 6 months where you get revenue off, I know that’s a pretty wide – if you calculate that number is pretty wide variance, but that’s probably is best I can give.

Okay. Thank you. And one more for me and then I will jump back and I think press release you mentioned strategic growth initiatives, was that based on securing additional fabrication space or is it something else?

No, it was actually, I would say it’s about $160,000 is equivalent, little over $0.01 a share, which I want to credit from all four, but it’s just us, we need to hire some advisors to look at some external opportunities and we did that and we incur that expense.

Okay, understood. Okay. Thank you very much Steve for the detail.

Okay. Thanks Tate.

Our next question comes from Kyle May. Please state your question.

Hey, good morning Steve.

Hi Kyle, how are you?

Good. One quick one just to get things going, can you say again what was the size of the rental compressor fleet at the end of the year?

Yes. Let’s see, 2,500, let me look here, 2,572.

Got it. Thanks. And one other thing I was curious about with the tax adjustment in the fourth quarter, can you give us anymore color on what’s going on there and if that should be anything we need to be mindful of going forward?

No, it’s the one-time adjustment, so it’s not a recurring expense we will have, it’s an expense the auditors require from a tax standpoint and over the – and the problem with some of these is you got to book them in the quarter, right, so maybe over a longer period than a quarter, but it’s booked in a quarter. So it’s just a one-time adjustment that the auditors required us to book and so that’s what we did.

Okay, got it. And then maybe last one for me, as you are looking at over the last couple of quarters you talked about building some spec units and it sounds like you are already making a lot of headway on getting those contracted, can you maybe talk about the environment that you are seeing with how long it takes to get those under contract and then maybe a little bit more on your thoughts for spec units in 2019?

It’s not – well, we had actually about one unit per month schedule, I think you missed it in the last call, so about 12 spec units scheduled for 2019 in addition to the other committed contracts we had. We have zero spec now because those 12 were taken. It’s good, but now we have got to try to build some more spec ones. Right now we are probably looking at another becoming dependent on shop space that’s when we look at this going outside a little. Right now just roughly we are probably looking at maybe four or five more at the end of the year and then into 2020 we haven’t looked too much into that 2020 yet. But I would go ahead to even venture guess, but if we just replicate what we would think for 2019 into one more month in 2020, that’s another 12 units, $13 million, $14 million in addition to any other contracts we think we might secure in the balance of 2019. Now, the issue you everybody has got to remember is about June or July, anything we get contracted typically fall into the next year, because you’ve now got essentially 6-month deliveries on components, engines and compressors and things. So, even if you get a contract in June or July, it’s not going to happen, that revenue piece is not going to happen until 2020. So, and what is this March, so we’re getting – we’ve got about 3 months or 4 months to secure some more contracts for this year, which we don’t have a whole lot of room for, and then the last half year we’ll start securing for 2020. So, cut the answer short, roughly maybe one a month in the last quarter of this year and into 2020. In addition to anything else we secure.

Okay, got it. Real helpful. Thanks a lot, Steve.

Okay. Thanks, Kyle.

Our next question comes from Richard Dearnley. Please state your question.

Good morning. How –

Hi, Dick.

How many units did you rehab in the make-ready bucket in the fourth quarter?

Oh gosh.

Like, was it about the 80 give or take that you’ve been running?

No, hold on. I’ve got – I might have to give you that afterwards, but I thought I had all the answers I needed here. We did about and I don’t have the exact number, but we did about – the expense ran about twice as much in the fourth quarter as it did in the third quarter, but I don’t have the number of units.

Well, if it – so if the expense was more and you did twice and you did 82 in the third quarter, would that tell me you did 160 odd in the fourth quarter?

Yes, roughly, that sounds like a high number. I’ll tell you what, I’ll need – I’ll probably just need to dig in that a little more, but yes, we are – that rental backlog continues to be strong, I mean, I’ll say that right now.

Right. And the make-readies are largely in the mid-horsepower range, aren’t they?

Yes, sir. Yes, all the big horsepower is brand new.

Yes. As – with my calculation, which is a bit of a guess be about right that you only have about one more year of make-ready units that you can make ready and then that inventories used?

We’ve got for 53% utilized. We’ve still got what 1,100 units. You’re probably right if you’re just talking about the mid-horsepower range not including the small horsepower, but it’s that market as I mentioned before just kind of flat. So, with the growth in the mid-horsepower market and that all being present fleet equipment that needs to be refurbished before it goes out. You might be right. It might be a year and a half or something like that. It’s hard to say exactly, but it – hopefully that mid-horsepower utilization keeps climbing of course. One thing you got to remember is, when we say 53% fleet utilization that’s across our whole fleet right, small, medium and large horsepower. The large horsepower is 95% plus utilized. The medium horsepower is getting into that 60% range. And the small horsepower just kind of lays around 40%, 45%. So, frankly, it’s a small horsepower, it kind of drags that overall utilization down.

Right, right, I got – I understand. And then the third-party capacity, it sounds like that’s flexible, but how – what kind of capacity does that feel like it adds?

Well, we think it can be significant if we need it. The issue always like I mentioned is long lead times on the equipment, the engines and compressors primarily. So, it’s flexible to a degree, but you can’t sit here in March and say I want something in June, because you don’t have the parts and pieces. And we’ve still got to order that stuff because they just fabricate, right, so we ordered and ship it to them and they do their thing and count on our specs. So, it’s flexible as long as there’s 6 months or 7 months out.

Okay, okay, thank you.

Okay. Thanks, Dick.

Our next question comes from Jason Wangler. Please state your question.

Hey, good morning, Steve.

Hey, Jason.

Just wanted to ask on the pricing side, you kind of mentioned it in the previous question, but with the utilization kind of taking higher, it sounds like you said maybe competitors’ pricing starting to kind of firm up a bit, just where you see the kind of market going as likely to get better on the utilization side?

Yes, we’ve seen that, overall, the market is getting tighter, obviously, big horsepower is very tight, but even the medium stuff, we’re starting to see tighten up a little too, it depends on the model. But what we’ve seen in – in this kind of have to take a macro view of this a little bit, as I mentioned, we didn’t drop pricing as much in the downturn, we never do, our utilization suffers a little more than the general industry because of that and that’s – that’s a typical phenomena. We know it’s going to happen. We’re okay with it. So, we didn’t go down as much in pricing. So, everybody else went further, so, they’ve got to catch up some. And so what we’re seeing as that catch up is obviously raising the general price of the industry even though we’re kind of staying where we are right now, we’re going to let everybody else catch up to us at least close the gap on us to our normal 5% to 10% premium. And what we’re seeing is as the market pricing comes up, we’re getting more business because that gap is closing on that. So, still think it’s great when the plan comes together right.

Right.

So, that’s what we’re seeing, just a general increase in industry pricing, we’re able to kind of stay in where we want and we’re making profit at that point. Now obviously, we’re increasing some pricing on some models and just like we’ve done for years, we use utilization to gauge which models we can go up on and which ones we need to hold on. So, we’ve got to – our pricing is more of a pinpoint for everybody else is a shotgun. We see a lot of approvals gone out there, 10% across the board or whatever. But remember most of our competitions lost money consistently throughout these downturns and we haven’t. So that’s the difference. So, we’re able to hold in a little better right now and I think that’s why we’re seeing some firming on mid-horsepower. The pricing is coming close to ours and then with our service, we’re able to win more jobs.

Okay. That’s helpful. And then on the sales backlog just what’s the timing on that, I guess, to finish that, are we talking rest of this year, is it 12 months, so just kind of what we should be kind of thinking as you squeeze that into the fabrication side?

Yes, that 14 million will – it’ll be probably a 3-month to 4-month, I mean, 3 quarter to 4 quarter backlog.

Okay.

A lot of times just quicker than that, but as I mentioned throughout, we’ve allocated more space to rental fabrications, so we’re being very particular on where we slot these sales units because we obviously want these big horsepower rental units going out. So, I think it’ll be a 3 to 4 – throughout the rest of this year essentially.

Okay. I appreciate –

And hopefully we add to it as we go to.

Okay, yes, well, if you can find the space, well –

Yes.

I appreciate it. Thanks, Steve.

Okay. Thanks, Jason.

Our next question comes from Tate Sullivan. Please state your question.

Hi, thanks. A couple of quick follow-ups.

Hi.

You mentioned medium horsepower going out the door is mostly gas lift, is that the same with the larger horsepower out the door, if you can comment?

Yes, yes, the bigger units – and the difference is, the medium horsepower is wellhead gas lift, so you’re gas lifting maybe one or two wells, and the big horsepower more centralized gas lift, where you might be gas lifting 10 or 15 wells, but it’s essentially all gas lift is what we’re building or deploying from our existing fleet.

Okay, thanks. And a little preview of the 10-K customer mix or any meaningful changes that you can highlight are pretty conservative to previous years?

No, I think everybody, I mean, we’ve increased our customer count, I was looking at that yesterday from around think about a year ago, 75 to 80 and we’re up to around 90, 95. So, the customer base is broadening back out, of course, in a downturn it shrinks a little too. So – and we’re not setting records on number of customers, but it is growing, but no I don’t think there’s any major shifts in the customer concentration right now.

Okay, thank you very much, Steve. Have a good rest of the day.

Thanks, Tate. You too. Appreciate it.

Thanks.

Our next question comes from Mike Urban. Please state your question.

Thanks. Good morning.

Hey Mike.

Hi. So, the – with the outsourced fabrication capacity that you’re layering in here. Is that going to be primarily the rental stuff, this – equipment sales or is it more a function of production schedules and how that shakes out or it could be a little both?

It’s going to be – right now it’s going to be primarily big horsepower, the bigger 1,400 horsepower units. Those are the ones that take up so much room and so much time that it really impacts the shop when you start putting those through. So that’s where we needed the most help. We can fit in most of the sales, our – say medium horsepower, so you can slot those in a little better, but the big ones take up, there’s i.e. it’s disrupting in a positive manner, they disrupt you to a shock because it take us so much time and space that that’s what we’re looking to outsource primarily just the bigger stuff.

Okay. So then the stuff your equipment sale margin shouldn’t really be impacted much, I guess, that’s where I was going, I mean, obviously, you’re going to have to pay these third-parties some things, I guess, just means maybe slightly higher CapEx and you would have otherwise, but your equipment sale margin shouldn’t be affected necessarily?

Right, right, exactly. We think the margins will stay in that 20% range, so, I mean, something we’re 20% plus or minus 2% or 3% by quarter and of course that varies. But that’s still a journey, the highest margin in the industry. But, yes, the outsource stuff, we’ll have to pay a little more obviously, but again remember, those are 3-year to 5-year rentals and we’ve got to absorb a little more cost on that and still look at good returns over the life.

Yes, makes sense. And then, I guess, just one kind of housekeeping question, apologize if I missed it. You gave us the unit count at the end of the year, what was the fleet horsepower at the end of the year?

Not sure I gave you that, but I didn’t. I think it was around 390,000 or 395,000 horsepower. I think that’s – I’m looking here in the notes, I’m sure I’ve got it here somewhere, but yes, okay, 398,765 horsepower, so almost 400,000 horsepower.

Okay, cool. And then last one for me, the utilization number 58% on a horsepower basis, 53% on a unit basis, was that – that’s at end of the year, right?

Yes, sir.

Of the average. Okay, that’s all for me. Thank you.

Okay. Thanks, Mike.

Our next question comes from Richard Dearnley. Please state your question.

Just a quickie for relative newbies. Your comment about your sales are largely medium horsepower. Could you talk about the economics of buying the medium versus running the large does – because running the rent on the large since there higher dollar go hand-in-hand with – we want to be cash flow neutral is the new mantra or what – what’s it work there?

Well, I mean, it’s just simply what the customer has ordered and how they want to get it. It’s – we saw big horsepower in the past in small and medium and right now just the concentration has been primarily medium horsepower from a sale perspective and, of course, we’re really pursuing the rental market on the big. So, there’s not really too much of a impact from one to the other. It’s really just what the customer wants and how they perceive their requirements. The big horsepower rentals, those are getting pretty popular because number one, lots of capital involved in this stuff and an operator to operate this all time, they’re better off spending that capital on drilling a well than buying compression. So that – that’s important to them, bigger horsepower takes a lot more specialized technicians in the field and things like that. So rental horsepower, big rental horsepower become more popular. And again, the medium stuff, we’ve got a lot of medium stuff rented, but sometimes people just want to buy it. So, it just depends on how the orders come in and what they want to do.

Right. Okay, thank you.

Thanks, Dick.

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

Okay. Thanks, Erica, and thank everybody for joining on this call. We look forward to a growing 2019. I appreciate your time this morning and look forward to vision with you again next quarter. Thank you.

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