Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Fourth 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; and Steve Taylor, Chairman, President and CEO. I would now like to turn the call over to Ms. Dada. You may begin.

Thank you, Paul, 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.

Thank you, Alicia and Paul. Good morning and welcome to Natural Gas Services Group's fourth quarter and full-year 2020 earnings review. In spite of the time mix up this morning, thank you for joining us. We released our fourth quarter 2020 results this morning and plan to file our annual report on Form 10-K for the 12 months ended December 31, 2020 with the US Securities and Exchange Commission on Wednesday afternoon. 2020 as well in the rearview mirror, I don't know many awful lot of operators that we're sorry to see it go. However, as mentioned in our release this morning, given the pandemic, the economic shutdown and the most precipitous decline in oilfield activity in my 40-plus year oilfield career, NGS not only survived but posted solid results. Before discussing our detailed financial operating results from 2020, a few high-level comments are in order. As I consistently indicated, with the unprecedented challenges of the past year, protecting our balance sheet and liquidity position has always been our top priority especially in the most challenging of operating environments. In 2020, we did just that. In fact, our cash position grew and our overall financial position is amongst the strongest in the industry and historically strong for NGS.

And our first question comes from Rob Brown from Lake Street Capital. Your line is open.

Great. How are you? Just wondering a little more color on the new business pipeline, I think, you talked about increasing your CapEx spending next year. Maybe where are you seeing kind of demand growth, and have you seen orders…

Well, the CapEx $15 million to $20 million. So, we spent -- and that’s for rail that's compression equipment. And we spent $13 million last year. So, it's modestly up. It's not a whole lot. But we were -- we're probably more of a back-end-loaded year on some of it. Some of the projected CapEx we've already identified as equipment being needed. And then the balance it, we feel confident will develop throughout the year. So, yeah, we think that's a pretty good number. And we'll probably be right in there. But it's a mix of our committed projects and then some future expectations.

Okay. Great. And then on the high horsepower market, I think you were obviously way through getting those higher orders fill out of those. Are those certainly in the fleet now and where are those at in terms of generating cash flow?

You're kind of breaking up just a little but are you talking about the user on standby?

No. I’m talking about the high horsepower units like had ordered and you were you were pulling out and just wondered if those were out in the field.

Oh, yeah. No, they're being -- they're in the process of some being built right now but then the others will be received probably through third quarter, maybe first part of fourth quarter they were spaced out to be some customer requirement. But then there's a little bit of spec in some of that. But now there -- some of them have gone out but I would guess probably least to have them still -- are still need to be built and will be placed out throughout the next couple of quarters.

Okay. Thank you. I’ll turn it over.

Okay. Thanks, Rob. Our next question comes from Tate Sullivan the Maxim Group. Your line is open.

Good morning. Steve. Hey, hey, Steve. Thanks for the update as always. And just on the average horsepower for rented compressor's I think you said it was 225 in 4Q and then just going forward where can I go taking full quarter of those smaller horsepower retired units and what you're planning to build already?

Well, I think it’ll just increase -- if go back, yeah I was going to look and I didn't, probably three four years ago average horsepower is close to about half that.

Yeah.

So it'll go up for a couple of reasons. Number one, the continued penetration and strategic direction with the large horsepower that we’re taking. And then over time, some of the smaller stuff will be retired, too, as it either comes off contracts in the future or we otherwise dispose of it. So both those factors will increase the average horsepower over time. I don't know if it’d go quite as fast, but it's up about 8%. I think it’s around 205 or 208 horsepower about a year ago. So it's not a real fast climb, but we certainly expect it to continue up.

Great. And on service and maintenance margin, can you comment a little bit on how compressors fared with the weather in Texas in February? And does that usually imply more service and maintenance work for you, or is it force majeure on your units or can you just give a backdrop on -- since it was in the news so much?

Yeah. Of course, wintertime is always a little more of an expensive time to operate just because it's colder, equipment stays down longer and stuff like that. But looking at the very severe weather, at least for Texas, we had in February, we actually came out of that pretty good. There were no force majeures. We didn't declare any and none were declared on us. But we were able to keep the vast majority of our equipment running. Now, that was through no small feat of our guys in the field because it's -- the problem is when a big unit like some of these 1,500 horsepower units go down and if they're down very long, they just get cold. And warming up and a unit that big either from the block itself or getting the oil moving with a little less viscosity and everything else takes some time and some effort and some brains. But our guys did a great job. I don't think we had more than out of numerous units out there, probably more than four or five that were down really -- probably more than 24 hours at any given time. So, we've got all that stuff monitored electronically so we know right when something happens. And in this case, we have cold weather. It pays dividends and that you're able to get out there quicker than if it was just somebody just found during the day. So, we did a lot better. But what we can tell then some competitors in these areas and I think the customers recognize that too. But I certainly want to give a shout out to our guys in the field so that's not an easy job when it's that cold out there.

Thanks. And your service professionals, are they -- is it extra costs when they have to do -- is it extra overtime or is it included in the service contracts for the units or really it was normal for the winter since it was only four or five units you mentioned?

Well, it's extra overtime. But it's -- that's an expense we absorb because we give a fixed rate contract on our equipment. So unless there's some sort of externally induced or customer-induced mechanical issue, that comes to us. So, we’ll have -- we’ll see a little higher labor expenses on some of that stuff. But it bounces out throughout the year. Summer times are a little easier and things like that. So you always have a little higher expense at winter time. This is extraordinary obviously. But we got there in pretty good shape. And like I mentioned, the effort the IR guys and the company expended to keep them on line.

Great. Thank you. And just last one for me. You mentioned the sales mix in the fourth quarter. Do you have sales backlog currently or how -- can you say how quickly might that come back into the mix or can you talk about that?

Our compressor sales backlog was about the same in Q3 as in Q4. We didn't have any compressor sales in Q4. Kind of makes sense, we didn't add any either. We've seen a higher level of inquiries from a sales standpoint. Generally that will translate into higher level of actual sales down the road. Now, it's hard to hard to say how long that takes a quarter or two but we're somewhat encouraged by that. We'll build out this one. There's one point $1.7 million, it doesn’t take long to build that out probably next quarter and hopefully be able to replace some more of that in there. This is the first time in our history we've had two quarters of no compressor sales. Now, again aftermarket, parts, and rebuilds and flares picked up quite a bit in the fourth quarter and helped tremendously cover helped tremendously to cover the elect press for sales. But pretty unprecedented that you give two quarters with that any compressors, sales compressors that we built some relevant compressors obviously. But any sales compressors going. So we think with the oil price being up, people getting a little more confidence and in their own economics and quality of projects, we think that that'll be continually increasing throughout the year. So I would hesitatingly forecast that our sales should be higher this year than we were last year.

Great, Steve. Thank you very much.

And we have a question from Seth Barkett, an individual investor. Your line is open.

Hi, Steve. Congratulations on that -- congrats on navigating a pretty challenging year. You guys did a nice job.

Thanks. Appreciate it.

A few questions from me. One, and I guess there's a comment and a question here in the press release. On the balance sheet, I did not see the federal income tax receivable, the $11 million there. I think it was captured in the current asset total. But I didn't see it broken out anywhere on the balance sheet. So just wanted to point that out. And then also, ask the question, any update there on when that might be received?

No. No. We check on it periodically, but you typically get no answer. So, it's just it's in the queue somewhere. I would…

Yeah.

…certainly think it'd be this year, but we don't have any indication from them. In fact, that $4 million we got last year is kind of sailed in one day as a surprise as coming. So, it's filed, it's in there. We'll let way on the government to get around to it.

Got it. Thanks for that update. And then as it relates to your small horsepower and maybe even to some extent your medium horsepower units that are either underutilized or not being utilized at all. Is there any opportunity to -- I guess, here in 2021, as we see strength in oil prices and potentially more activity in oil fields, do you see an opportunity to sell any of that underutilized or non-utilized small and medium horsepower equipment?

Well, we've commented in the past on small horsepower that we intend to -- more so each year into a medium to large horsepower organization and deemphasizes small horsepower. And certainly, some of that was driven with the fleet retirements we did this quarter and a couple we've done in the past, have been predominantly lower horsepower. From an opportunistic standpoint, it's hard to, say, some of the stuff, we -- every once in a while we’ll talk to people that might be interested in things like that. But we knew in a depressed market, people want to, I guess, I’d just say to be corrected, don't want to give you the value you deserve. But realistically, they want to steal it. And we're not looking at that. We still make money with it. Still contributes, still okay with it. But we -- yeah, we do look for opportunities. And we talk to people every once in a while. So, hopefully, maybe with the whole industry perking up a little bit this year, we'll see a little more up. From the point of, if you got a small horsepower guy that runs a small horsepower fleet, and maybe he's looking to grow, they've had just as much trouble if not more, actually probably more than us in these kind of markets. So they're not well-placed to go out and buy something. We don't have to sell it. Obviously, we’re good, cash-wise. So, we're going to be prudent about it. But opportunities come up, we’ll pursue them and see what they look like.

Got it. Thanks for that color. And then the last question for me, the company is sitting on a strong cash position. Hopefully, more cash will be generated here in 2021. Possibly election of that $11 million tax receivable. Do you guys see yourselves potentially buying back any stock? Obviously, the stock is pretty inexpensive here. You're trading at roughly $0.40 cents on the dollar. I would I would think there would be an opportunity here to really drive shareholder value by making some investment in the stock. Any discussions there internally about maybe allocating a few million dollars towards that effort?

Yeah. And I -- we will this year. We've got -- we’ve reauthorized the amount of buyback we had originally put in. I think we originally -- 2020, 2019, so 2019, I think around August, September, we had initial authorization there. Obviously not much was done with that because then we ran into 2020 head on. We didn't want to do anything in 2020 because the first quarter or two, you didn't know what was going to go on. And then we've got fairly solid footing and came out of the year good. So, yeah, we've still got the authorization there. And I don't want everyone to guarantee anything. But as far as a capital allocation tool goes, we think that's a good one to use. And so we're looking at that pretty seriously.

Great. Glad to hear that, Steve. And again, congrats on being really successful on how you navigated last year. I think you guys have done a nice job.

Our next question comes from Greg Weaver from Invicta Capital. Your line is open.

Could you talk a little bit about the rental rates and the price concessions that you gave last year? I mean, does that roll off over time or you go back and renegotiate obviously with oil up?

Yeah. Everybody gave some in the first, second quarter about March, April when all is going down overnight essentially. And then we put a time limit on the majority of them where we can negotiate that. And we're in the process of going back through those and gain those back up to those -- the rates they were before. And we've mentioned customers that even before the downturn, we saw coming into 2020 always around $40 to $45. And of course, it dropped -- the futures went below zero, but the physical commodity was down around $15, $20, something like that. So, we remind them that now we're up at least $15, $20 to the good on this stuff and looking to get some of that back. Now it's a funny deal. Not unusual, but a funny deal that you’re approached by analysts and they think that oh, my gosh, you're raising prices on me when actually you're trying to get your price back. But we were lucky enough that we didn't have to give concessions. We didn't -- number one, we didn't have to give debilitating concessions. And number two, we didn't have to do it across the board to a lot of customers. So, we -- and in fact, most of our large horsepower stayed intact from the point of being contracted long term. So, we actually came in to -- everybody wants to know 2020 where we actually came into it pretty well protected from a contract standpoint. But we are going back and trying to get some of that back and maybe a little more.

Great. I was just trying to wrap my head around if I look at fiscal 2020 rental revenue rate it was down some but some of that impacts because I’m assuming that some of these price concessions that hopefully would come back.

Well, not just that but we had to put and come back so there was no concessions on that. It all went to zero. So some of that -- that's part of the biggest impact you're seeing because real revenue year-over-year was up 7%. But in the quarters when you look at it we did lose utilization, kind of troughed in the middle of the year and start to come back up. So we've still got a little lower utilization than we had about a year ago and so you won't ever get that back. That's just revenue that was lost given the shut in wells.

Right. On that topic in terms of some standby equipment, any color there in terms of trends and things coming back online? Is that mostly all back?

No, it's not mostly all back but it's coming back. We're seeing more -- as mentioned before, more confidence from the operator and the crude price and what's going forward and things like that. And just as important as the price itself as the operators confidence is going to hold because nobody's going to go out and do something for price holds at $60 for a quarter goes back down. I think people are getting a little more confident that. In fact this margin has come out and said they still want to hold production lower for the next quarter or two. So seems like everybody is playing the same game right now. That is an -- that doesn’t mean it doesn’t change in the quarter as we’ve seen it do, too many times less through the years. But I think the confidence is coming back and we’ll see more and more equipment come off standby and go back to full rate.

Okay. Great. And just the last one for me. In your press release, talking about your liquidity. You mentioned it gives you the flexibility to swiftly respond to prospects to grow our company both intrinsically and through other strategic opportunities. Any color in other strategic opportunities?

Well, we’re always approached -- and not just us -- but the people you know who, people who want to sell something. Companies or business opportunities or stuff like that. So as I look at those -- now, we don't execute on any of them. I was going to say, hardly any, but any. Because typically, when they’re selling the company, it’s -- there’s a reason of selling and has been the case, quite a bit last two or three years. But we always look, I mean, there’s one, we were up last month that we backed off. We didn't really look at it beyond the initial glance just because the fleet didn't fit ours and there's always some issue out there on that stuff. It is the equipment itself or the financials of the business. But we were usually a recipient in the industry of anybody trying to -- a recipient of the information people trying to buy or even privately contacted on some deals. So we're always looking at them. And that's, I guess, that's kind of a catch all if something comes up, we’ve got the liquidity to do it.

Understood. Well, we appreciate your discipline. So, thank you much and keep up the good work.

Okay. Thanks, Greg.

And we have no further questions in queue at this time.

Okay. Paul, thanks. Thanks everyone for joining me on this call. Appreciate your time this morning and look forward to visiting with you again next quarter. Bye.

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