Good morning ladies and gentlemen, and welcome to The Natural Gas Services Group Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. . Your call leader for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO. I'll now turn the call over to Miss 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 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 expectation 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 this stated, I will now turn the call over to Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve.

Thank you, Alicia and Erica and good morning, everyone. And welcome to the Natural Gas Services Group's second quarter 2021 earnings review. Thank you for tuning in to our call. As noted in our quarterly earnings press release, the second quarter represented an important inflection point for our company. We sell 80 compression packages in this quarter including our record 28 new high horsepower units, with a majority of the high horsepower units being deployed off of standby status. Not only all of these units represent additional future revenue and profits for NGS, but the deployment of these high horsepower units continue to reinforce the success of our strategy to evolve toward a higher horsepower fleet. Clearly, higher energy commodity prices return to new production activity especially in West Texas, and overall, all sales activity provide a positive environment for our business. While we are carefully watching new variants of the Coronavirus and any impact it may have on the overall economy, we are cautiously optimistic that the macro environment will provide continued opportunities in the second half of the year. We are pleased with the progress on our rental fleet in the quarter. Of the 80 compressor packages set, over 50 of those were in the Permian Basin, and of that more than half are large horsepower units. Certainly progress, the progress does not come without costs, many of which occur ahead of realizing for quarterly rental revenues on new set equipment. Setting a record number of higher horsepower units had such an impact. The setting commissioning and starting of this many units increased our partial labor costs, as well as the cost of everyday consumables such as oil and antifreeze. This resulted in some mismatch between revenues and expense, which are timing issues that will naturally resolve themselves…

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

Morning, Steve.

Hey, Rob.

Just wanted to get a little bit into the pricing environment. You talked about some of the costs going up. Are you able to pass that into the pricing or tabling your pricing was kind of moving up but maybe how the pricing environment at this point?

Well, we're going to have some price increases in the balance of the year. We we've been moving some up slightly but the environment - the inflationary environment has really started to take effect pretty quick. So, we're planning on another one with magnitude right now, but we are planning on rental increases pretty well across the board the balance of the year. Well, we're seeing everything. I mean, steel is going up and steel doesn't matter too much except on new builds. But like I mentioned, oil going up obviously, so as expected one, antifreeze exact middle of these catalysts that stuff has been especially impacted by supply chains. And hopefully some of this stuff mitigates itself. But I'm not so sure. And so, from an inflationary standpoint, we have to take a wait and see attitude from that standpoint, but we're not taking a wait and see on some prices we've got to increase, which is what we're going to do.

Okay, great. And then you talked about some new unit placements coming in Q3 maybe at a lower rate than Q2, but how is kind of the new unit placement demand market happening now? And what do you sort of see after Q3 in terms of entering the fleet?

Q3 is going to be a lower level than Q2, which actually is not bad, because Q2 was such a high volume of equipment going out that, just everybody's just extremely busy and took lots of people in parts and manpower, et cetera to do that. So, Q3 been a little lower level is not a bad thing, kind of gives us a little chance to take somewhat of a breath and get concentrated on revenue increases and manage costs. So, that's I think Q3 is going to have good level. Beyond that, certainly, from a sales standpoint, sales are still pretty constricted from standard wellhead natural gas sort of businesses. I mentioned, we're actually seeing more energy transition projects than anything, and that's not a real high level. Yeah, we think they'll grow over time. But the sales perspective is pretty muted right now from traditional aspect. And from rental point, we think Q4 is going to be busy as little hard right now to put a finger on, we don't have a whole lot of projections for Q4 and that kind of sounds funny when we're sitting here in August. But, we think, we know of some big equipment going out, some little equipment going out. But certainly, between now and Q4, we anticipate more being added more being scheduled and stuff like that. So, the operators have, I think have surprised a lot of people with their constraints on activity and drilling and things like that for picking up activity, we think it is certainly from projects that were put on hold last year, that are going forward now. Certainly, the commodity level, even though it's so low thoughtless lately is still a lot better than what it was. So, we anticipate a good balance of the year. It's just hard to put a finger on Q4 right now until we get a little closer to it.

Okay, good. And then just one of the loopback that energy transition project comment, what types of projects are you doing in that role that is that? Can that be a rental market as well?

I'm not going to tell you exactly what kind of project just from a competitive standpoint. And it could be a rental market, we'll see. It's pretty nascent in its evolution. So, it's hard to tell, right now the jobs we've got and inquiries we've received have pretty well been just off relationships and kind of out of the blue, some hot. I mean, we know the markets out there, and we know where we can participate, et cetera. But, a lot of this is just coming from, word of mouth, our name getting out there and so that we can do some of these projects. And, these projects tend to be fairly highly engineered, when you start working with some of the exotic gases and things like that. It's a little different. And that's actually why I mentioned we've done work. We've done compressor work on jobs this quarter. We have recognized in the UK has not completed, but they're taken a fairly long time from engineering to procurement to build on some of that stuff. So, we see lonely projects. Rental, maybe. We're not necessarily opposed to it, kind of depends on the term and in the REITs. But certainly, the sell thing is here right now. And at least this quarter is pretty substantial. It's going to be volatile, maybe once we finish each project, we don't get anything for another quarter or two, or whatever. But it's certainly focused us on some of those markets and what we can do and I think the customers out there are starting to see some of that, too. So, that's my best prognostication on a market that's really just started the last couple quarters for us.

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

Yeah. Thanks, Rob.

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

Hi, thank you. Hi, Steve, and following up your last comment on the energy transition, just to clarify, most of the $2 million backlog, is that what you referred to as energy transition, are away from the wellhead, is most of that those kinds of projects?

Yeah, yeah, three quarters of it. So, the backlog is about $2 million. So approximately $1.5 million of it is energy transition projects. And, obviously, I'm using the energy transition recoveries. Number one is a great buzzword right now. And number two, I don't have to tell you exactly what the projects are.

Okay. Just to clarify that. Yup, understood. And then is in a more of all, I don't know if it's the right word is normal operating environment or excluding all what's happened with the COVID timing in the last year, is parts replacement work that you usually do fixed at the time of the contract or is it a lower margin business usually compared to the rental business?

Now, which part of the business you said parts?

You mentioned replacement, some backup work related to replacing parts or service work on the compressors? Or is that the emission standards that you talked about?

Yeah, that was more customer requested deferred maintenance. Obviously, a lot of things slowed down last year, just from the point of, primarily COVID and everybody be careful and stuff. And some of this maintenance at one absolutely necessary either through equipment requirements or anything else, some customers opted to push it back. And now that we're in a little different environment and kind of coming into a stronger year, we've rescheduled some of these things. And a lot of it was emissions testing, which drove a lot of catalyst purchases, which are I say expensive to start with, but we've seen quite an inflationary hit on that just due to the metals. And so, it was just primarily catching up on some deferred maintenance, some parts costs there, and some labor too.

Okay, and then did I hear correctly, the quarter over quarter prices were down, but is that your calculation based on not burning the full rates on the deployed equipment from this quarter - from the second quarter? Or did I miss here that?

No prices, you're talking about rental prices?

Yes, yeah. The price, yes, the average rental price per unit across your fleet?

No, it went up. It was up, I remember at 3% to 4% year over year and sequentially. So and again, that's primarily driven by that large horsepower going out.

Yup. And then with the hiring efforts, and maybe it's related to that deferred maintenance, are you back to levels where you were before COVID, or can you comment on that?

As far as headcount?

Headcount. These are hours worked in the field?

Yeah, we're above that from a headcount standpoint. So, revenues are about 3% above last year headcount. Well, the field count is higher. The fabrication facility count is lower, just because of the differences in activity, so I would guess that our overall headcount is lower due to the Q2 2020 being pre pandemic and then Q2 now. But it's been a shift a little fabrication employment down some and field employment up.

Okay, great. Thank you, Steve. Have a great rest of the day.

Yeah, thanks Tate.

At this time, we have no further questions.

Okay. Thanks, Erica. And thanks everyone for joining us on this call. I appreciate your time this morning and look forward to visiting with you again next quarter. Thank you.

This concludes today's conference call. Thank you for attending. You may now disconnect.