Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group's Third Quarter 2020 Earnings Call. At this time all participants are in listen-only mode. Your call leaders for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO. I'll 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 statements prior to commencing our earnings call. Except for the historical information contained herein, the statement in this morning's conference call are forward-looking and are made pursuant to the Safe Harbor Provisions outlined in the Private 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 and future periods to differ materially from forecasted results. Those risks include among other things, the loss of market share through competition or otherwise, 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 factor 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.

Thank you, Alicia and Erica, and good morning, everyone, and welcome to NGSG's third quarter 2020 earnings review. Thank you for tuning in to our call. In my nearly 40 years in the energy industry, I've never experienced a more challenging environment in which to work. Pervasive weakness in energy demand and volatile commodity prices have created unprecedented financial and operational challenges for all of Natural Gas operators and as a result, the suppliers and service providers are working alongside them. While NGS is fortunate to have been well-positioned during this period of extraordinary pain for the energy industry. No company is entirely immune from the impact of these sharp and protected challenges. That said and as we noted last quarter, our ability to act rapidly to reduce our cost structure and respond to our customers' needs that resulted in less impact to many of our peers on both our financial and operational condition. While sales and service revenues declined in the quarter, our rental revenues were solid and grew on a year-over-year basis, or really modestly affected this quarter. Though just gross margins came in at 50% and adjusted EBITDA was 35% of revenue. Although not unusual especially not in downturns, we've seen a higher degree of volatility and our compressor sales business. This is primarily due to customers' budget cuts and the current reluctance to restore them in any appreciable manner. Compressor sales are already at a relatively low level from last quarter were severely impacted this quarter by customer redesigns, push delays to completion of compressor sales jobs and capacity constraints due to committed higher margin contracts, displacing sales projects. As noted in our financial statements, we did not have any material compressor sales in the third quarter. Though we have not had any cancellation to work and our backlog carries forward, we're confident our compression sales business will strengthen as the market begins to firm. More important in such a challenging operating environment, NGS continues to strengthen its balance sheet and liquidity position. The company generated positive net cash flow from operating activities of $13.1 million and a free cash flow of $12.1 million during the quarter. At the end of the September quarter, NGS had a cash position of $27.6 million compared to $15.5 million at the end of the second quarter. Our cash position continued to increase through October.

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

Good morning, Steve.

Hi, Bob.

Nice execution at a pretty tough environment as you laid out, I think. My first question is really around the CapEx and Q4, maybe characterize kind of what's driving the type of projects that you're filling high horsepower, quarters that comprise of it, maybe just clarify that the CapEx of Q4?

Yes, it's made of primarily two components. One is we got a pretty good order for some 400 to 600 horsepower equipment and that's what I mentioned, our high horsepower utilization was a 9% at the end of Q3, but it's actually timed about 93% already because the stuff that was idle temporarily. The end of the quarter has now been utilized and committed, and then we're building some more. So it's primarily that and then we've also got thing of admission to the past, the potential for some leaseback purchases, purchasing some new equipment from customers and written it back to them. So those two pieces are the other biggest part of that. And I think the leaseback is pretty interesting from the point that it provides some capital to a customer. It's equipment that we actually built for them in the past and we get to convert into rental revenue and good ranks and long-term contracts. So it's interesting especially in this environment that there's at least one customer looking to monetize equipment they own and just lease it back. Probably the two biggest components, the biggest risk to that CapEx number -- is really timing is not that the projects will happen, but this is mid-November. We have holidays coming up and everything else and that's always a crunch to get into in the years to whether projects get done or whatever it is. So the numbers are pretty solid, we think. If there's any wavering to it, it'd be timing, not commitments. That's but those two components are the biggest part of that.

Thanks, Stephen . And then in utilization and kind of the bottoming in industry. You said utilization was sort of stable quarter-to-quarter here. How much visibility do you have on sort of units coming back and going out and maybe a sense of how the utilization plays out over the next few months? I know it's hard to predict exactly, but do you sort of feel like it's bottomed here?

Yes, I think it's bottomed, but I think there are still going to be some fits and sparks in this thing. The discussion everywhere is never a straight line up. It's pretty jagged, you'll have some downs and up and everything else. I think the bias is positive in it. We still got some shedding equipment that we anticipate coming back on a little more, a few -- lets analysts read reports are based fairly positive on all price next year, but of course, those reports are good the day they're written and anything can change them. So yes, I think the bias for positive utilization is good. But there's going to be some up and down to it. I think 2021 actually is going to be a fairly good year. This year has actually been a lot better than I would have guessed back in March when all this stuff happened, because it was down pretty fast. But our guys have done a great job of taking care of recovering it and continuing on and watching the cost, obviously. So, I think we'll see a trend up, but it's hard to say what that slope is.

Okay and then the last question is really on the competitive environment and this played through. Are you seeing any changes there? Is it about what you expected and pretty similar to historical cycles?

Yes, it's what I expected and it is in line with historical trends that we tend to see. Some questionable pricing in the market. So both those, where you, you typically see those in downturns, especially from people that aren't as financially strong as we are, we're able to pick and choose the jobs we want, the price we want, stuff like that. If we want to hold price and we can, if we want to get aggressive, we can, but we've got the choice to do that. A lot of competitors don't have a choice due to or other issues. But we see some weaker pricing out there. It's probably not as much as you would have guessed six months ago as to what it might be due to just the fast downturn. But we still see select stuff now. I mentioned our prices are down 2% to 3%. You'll get a little drag in price needs as it put more bigger horsepower out there, because bigger horsepower cost less dollars per horsepower. So your rental is less dollars per horsepower. That kind of looks like it's a down, but actually it's good pricing. On the decrease we saw on a unit basis was, as I mentioned, primarily the pricing from Q2, come into full force and being throughout the quarter. So we expect to get some of that back over the next two or three quarters anyway as operators start number one, putting the equipment back to work from a standby basis. And also, we intend to as things solidify, going into the new year, going back to those customers to give them some discounts to and ask them for those back. So the 2% to 3% down is explainable and reasonable and expected, but I don't think that'll continue. But we do see some weird pricing once while but again overall, probably not as bad as you would have thought six months ago. But it's still a little more than I would like.

Okay, great. Thank you. I'll turn it over.

Thanks, Rob.

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

Thanks. So thank you, Steve. Good morning. Can you talk a little more about the leaseback purchases? I was just looking at your sales. $60 million of sales of compressors and other equipment understandably since the end of 2016 . Is this an active market historically in the natural compressor and natural gas compressor industry? Or is this new -- I have not heard you talk about this before. And are you uniquely situated to take advantage of customers that want to monetize some of their equipment?

Yes. I admit that probably a little over the last couple of quarters, we probably are uniquely situated to take advantage just because we got money. When a customer wants to monetize, you got to pay him something. So we got the flexibility to do that. It's not a big market. Typically when someone approaches you on that stuff, it's stuff that we don't want. There's a reason why they're trying to monetize it. They don't want it either and not because of financial issues, but maybe the equipment is older than they want or worse shape or something like that. So most of these things just don't take very long to look at and say we're not interested, or they don't fit our fleet makeup, or they're smaller horsepower -- all kinds of reasons. This came to us, just to customer we've dealt with for a long time and do a lot of a lot of work with over the years and things like that and within -- it's not really a situation of a customer having to have cash, I guess, from the point of being financially in bad shape or something like that. And this is good. It's more that customers now looking at, ‘You know what, I've got a finite amount of dollars. I can spend it on drilling or I can spend it on equipment. Drilling makes me all the money. That's where our return comes from, that's my expertise. Why don't I go ahead and spend money on that and rent equipment?' Rental provides some advantages -- certainly not the CapEx you have to spend on, but also operationally we take care of all this stuff. If you need to downsize, upsize it, we can do it. The customer doesn't have to go out and buy a whole another unit and try to figure out what are you going to do with these other than everything else. I think when you start to see downturns like this as severe and faster, they are -- plus the market demanding cash returned from operators, they feed right into rentals more and more. We don't go out and actually market this capability, but as I mentioned, I think we can take advantage of them as they come along and this is just -- I think we got $3 million or $4 million dedicated to it and as I mentioned, I think it will happen. The only question is timing to operate, to get around needing it quick enough and stuff like that. Yes, that's kind of the background of it and we're comfortable with it, because it's equipment we know.

Okay, thank you. And you answered my question earlier on some of the timing of that CapEx in the quarter. And the good order you mentioned for the 400 to 600 horsepower. If you can share roughly, that size horsepower, the average rental term lengths versus your larger horsepower? Have you talked about that before, Steve?

We're getting two to three years on those on the 400 and 600 horsepower. So we're getting good terms on them and market-leading rates on them, too. So just like any other CapEx, we're not spending any CapEx on deals. We're not trying to use our money to go get market share or anything else. We're trying to use our money to make money. And so we want longer terms and we want better rates, so we don't spend the money. We don't have to. So we know this and that's what we look at from those standpoints. But that's the other $7 million to $9 million this year. It's all pointed to and dedicated to longer terms and high rates.

The larger horsepower units, particularly the equipment that you've built in the last year and-a-half, are they more than a year in rental terms typically as well? And I understand that can change based on ?

Yes. The biggest ones say, the 1,400 horsepower units yes, we typically go three to five years on those./ We want a good long term on that stuff and it's not too hard to get that sometimes. It depends on customer, obviously, but the equipment is so big and so expensive, and takes so much time to install and operate, and the customers paying for a lot of this. The installation, the freight and all this other stuff that I dare say you could rent it on a one-month term. It's going to stay out there a long time. But obviously, we like the security of contracted rentals. Generally, the bigger the equipment, the longer we go on terms and then that kind of mid-horsepower will be some midterms of two to three years stuff and smaller stuff is, 12-month terms. Not only we try to extend terms overall and all the equipment to get a little longer rental period and security with it.

Thanks. And last one for me. I know the whole industry and the balance between more people talking about renewables going forward. Have you ever talked about that? And more utilities are mentioning trying to get renewable natural gas into pipelines? And I think some of that process needs compressors. Has that market ever been an opportunity for you or can it be going forward?

Yes. I guess it hadn't been a big overt market in the past just because the answers hadn't been on the SG part of it as much. Now obviously that's growing. And natural gas just by virtue of being a cleaner fuel is going to gain in some of that and obviously contribute to better environment, cleaner air, etcetera. But I think there are opportunities to capitalize on that. Yes, we feel like we've already got some real clean equipment from the point of the engines, very tightly controlled from a mission standpoint. Kind of converters of fuel ratio controllers and actually every one of our engines in the fleet, engines that drive the compressors meet or exceed the worst of any state's regulations. So typically -- and I hesitate to say -- we exceed all of this stage, but it's the vast majority that we exceed. We decided that a while back. So we got real clean engines. The skin itself is different, it gathers fluids, etcetera, and we've got some recycling components on the units to conserve oil, to capture gas and things like that. But I think there is more opportunity to do more number one, mechanically and physically to the equipment in some of our practices in the field; and number two, to adequately market that to customers so they know that. I think the customers are going to get more and more sensitive to clean equipment versus the not-so-clean equipment. And I think we've got an advantage, taken a little more share out of that piece of it. But there's more to do and I think you'll see more and more gains and certainly out of us, more and more emphasis on that part of it.

Thank you, Steve, for all the comments. Have a great rest of the day.

Okay. Thanks, Tate.

At this time, we have no further questions.

Okay. Thank you, Erica, and thanks, everyone, for joining me on the call. I appreciate your time this morning. Hope your holidays are healthy and happy and wish each of you a more prosperous new year. I look forward to speaking with you about NGS in 2021. Thank you.

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