NGS

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group, Inc. Quarter One Earnings Call. At this time, all participants are in listen only mode. Operator assistance is available at any time during this conference by pressing zero pound. I would now like to turn the call over to Miss Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal security laws. Investors are cautioned that forward-looking statements are not guarantees or future performance, and that the actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group doesn't obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements.

These and other risks are described in yesterday's earnings press release and in our filings with the SEC, including our Form 10-Q for the period ended March 31, 2026, and our Form 8-K. These documents can be found in the investor section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, and adjusted gross margin, among others. For reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release. I will now turn the call over to Justin Jacobs, Chief Executive Officer.

Thank you, Anna, and good morning, everyone. Joining me today is Ian Eckert, our Chief Financial Officer. To begin, I wanna thank the entire NGS team for another outstanding quarter. The results we are reporting today are a direct reflection of the commitment and execution of our employees across the organization. I especially want to thank to recognize our field personnel, whose focus on reliability, responsiveness, and customer service continues to differentiate NGS in the market. NGS delivered an exceptional start to 2026, highlighted by record performance for a number of key metrics, including quarterly rental revenue, adjusted gross margin, adjusted EBITDA, and horsepower utilization. In addition, subsequent to quarter end, we announced an increase to our dividend payable in the second quarter from $0.11 to $0.15 per share, representing a 36% increase.

The increase in our dividend, combined with the increase to our full year 2026 adjusted EBITDA guidance, reflects both the strong start to the year and our favorable outlook for the balance of 2026. Importantly, we continue to execute operationally, expand and optimize our fleet, and return capital to shareholders while maintaining substantial flexibility to continue funding growth opportunities. Turning to first quarter operating performance, rented horsepower ended the quarter at approximately 575,000 horsepower, representing growth of 17% compared to the prior year quarter. Horsepower utilization reached 86.9%, establishing another company record. Rental revenue totaled $47.1 million during the quarter, increasing 21% year-over-year and representing another quarterly record for NGS.

Adjusted EBITDA totaled $24.3 million compared to $19.3 million in the first quarter of 2025, also establishing a new quarterly record. Our strong performance continues to be driven by several factors, including large horsepower fleet additions, high utilization levels, pricing discipline, and the ongoing mix shift towards larger horsepower compression assets. Turning to the broader market environment, our view of industry fundamentals remains constructive. Recent customer commentary and activity levels indicate improving sentiment around oil production growth, while ongoing midstream infrastructure build-out to support increasing natural gas production should continue driving incremental compression demand. At the same time, lead times for new compression equipment continue to constrain available industry supply. These conditions support high utilization levels for existing fleets, continued pricing discipline, and longer duration customer commitments.

Additionally, the current geopolitical environment continues to reinforce the strategic importance of U.S. energy production and infrastructure, which we believe creates a favorable backdrop for domestic compression providers. While the ultimate impact of commodity prices and geopolitical developments on customer activity remains uncertain, compression demand fundamentally remains tied to production volumes, reliability requirements, and throughput needs across the energy value chain. We are also beginning to see more meaningful inflationary pressure emerge across portions of the supply chain, driven in part by geopolitical developments and broader supply chain dynamics. Labor markets across the oilfield services industry remain tight, and we continue to expect wage pressure as overall U.S. oil and gas activity remains strong. We expect these inflationary pressures to continue and potentially accelerate during the balance of the year. Even with those considerations, our overall view is positive.

Industry fundamentals remain strong, compression supply remains tight, and the pricing environment continues to be constructive. Within this environment, we believe NGS remains very well-positioned given the quality of our fleet, our service performance, customer relationships and balance sheet flexibility. I'll move next to the specific growth and value drivers supporting the performance of NGS. First, fleet optimization. Rental revenue per horsepower per month increased to $27.51 during the quarter, improving 2.5% sequentially and 2% compared to the prior year quarter. Horsepower utilization reached 86.9%, reflecting both strong market demand and the quality and reliability of our fleet. Second is asset utilization. During the first quarter, the company received $12.3 million associated with our long-standing tax refund claims and related interest.

Considering this is approximately $1 per share of cash, we are pleased to collect this and look forward to receiving the small amount remaining in the near future. We also continue to pursue monetization opportunities associated with non-core real estate assets. At quarter end, two real estate assets were classified as held for sale on the balance sheet. These are the Midland office building and the Midland fabrication facility. Monetizing these non-cash assets is consistent with our continued efforts to optimize capital allocation. Third, fleet expansion. During the first quarter, we added approximately 17,000 horsepower to the fleet. All of those additions are large horsepower units under long-term contract. The majority were electric motor drive equipment. These deployments reinforce our continued focus on higher return, longer duration compression applications, and we remain committed to deploying at least 50,000 horsepower during 2026.

Finally, strategic and accretive M&A remains an area of focus. Our balance sheet and liquidity position continue to provide substantial flexibility to act opportunistically where attractive opportunities arise. As always, our approach remains disciplined. We are focused on transactions where we believe NGS can create value through operating synergies, fleet optimization opportunities and customer relationship expansion. With that, I'll turn the call over to Ian to walk through our financial results and balance sheet in more detail.

Thank you, Justin, and good morning, everyone. As Justin highlighted, the first quarter reflected strong execution across the business. Our financial results were driven by recently deployed large horsepower units, strong utilization and continued pricing discipline. Rental revenue was a record $47.1 million, up $8.2 million or 21.1% from the first quarter of 2025. Total revenue was $48.5 million, up $7.1 million or approximately 17% from the prior year quarter. The difference between rental revenue and total revenue growth reflects part sales and services, which are not core to our operating model. In addition, the first quarter of 2025 included elevated part sales associated with the liquidation of inventory as we wound down our Midland fabrication operations.

We continue to view rental revenue growth as the primary indicator of the underlying performance and scalability of the business. Similarly, we delivered another record in adjusted gross margin as the business benefited from a larger contracted fleet, favorable mix shift toward large horsepower equipment and operating leverage. Rental adjusted gross margin was $30 million, up $6 million or 24.7% year-over-year. Rental adjusted gross margin percentage was 63.7%, up approximately 180 basis points from the prior year quarter. Importantly, our first quarter margin performance demonstrates the underlying economics of the fleet following the discrete physical inventory adjustment recorded in the fourth quarter of 2025. That said, we do not necessarily view the first quarter margin percentage as a new run rate for the balance of the year.

The first quarter was exceptionally strong operationally, with very few setbacks across the business. While that level of execution is a credit to our field service team, it is uncommon to have a quarter where almost every metric went in our favor, and we do not assume that cadence will repeat consistently throughout the year. In addition, over the last 2 years, the first quarter has been seasonally stronger than subsequent quarters, and we expect inflationary pressure associated with recent geopolitical developments to begin impacting the business in the second quarter. Even with those considerations, we remain confident in strong full year margin performance driven by large horsepower deployments, operating leverage and continued cost discipline. Moving on to SG&A expense, it was $66.5 million or 13.4% of total revenue.

The increase compared to the prior year quarter reflects the continued scaling of the organization to support a large fleet and ongoing investments in people, systems and process improvement. Over time, we target SG&A in the range of 13%-14% of revenue, which we believe supports our growth while preserving operating leverage. Lastly, for the income statement, net income was $6.8 million or $0.53 per diluted share, compared to $4.9 million or $0.38 per diluted share in the first quarter of 2025, representing another record for NGS. Moving to the balance sheet and cash flow. Accounts receivable increased during the first quarter and DSO was above the level we expect from the business as a result of a few discrete collection and process-related items.

Importantly, we identified the issues during the quarter, reinforced internal expectations, and have already seen meaningful improvement in April. Cash on hand of $2.3 million and $2.4 million of the prepaid assets were primarily timing-related. The prepaid asset was tied to a prepayment for a fleet asset bid that was refunded in early April, and the cash balances are expected to normalize consistent with our practice of using available cash to reduce revolver borrowings. Assets held for sale increased during the quarter to reflect the former headquarters property and the Midland fabrication facility, consistent with our continued efforts to monetize non-core real estate. We also retired 17,700 horsepower, representing 134 idle small and medium horsepower units during the first quarter. This action reduced idle assets, improved fleet mix, and reinforced our focus on higher return large horsepower opportunities.

First quarter capital expenditures totaled $15.2 million, including $12.3 million of growth capital expenditures and $3 million of maintenance capital expenditures. Based on our contracted deployment schedule, current and planned build activity and customer demand, we remain confident in our ability to deliver on our full year growth capital guidance and the associated horsepower additions. We ended the quarter with $226 million outstanding on the credit facility and available borrowing capacity of $174 million. Our leverage at quarter end was 2.33x which remained the lowest of the public comparable set, and we continue to maintain significant flexibility to invest in growth and drive value for shareholders. During the quarter, we made $1.4 million of dividend payments at $0.11 per share.

That will increase materially in the second quarter with the announcement that we will increase the dividend to $0.15 per share, reinforcing our confidence in cash generation and the long-term outlook of the business. In summary, the first quarter was a strong financial quarter with record rental revenue, record adjusted EBITDA, strong margins, and healthy liquidity. Company's balance sheet and liquidity position provide flexibility to fund organic fleet expansion, evaluate strategic and accretive M&A opportunities, and continue returning capital to shareholders. With that I'll turn the call back to Justin to discuss our updated 2026 guidance and closing comments.

Thank you, Ian. Based on our strong first quarter performance, high utilization, contracted fleet additions and current visibility into the remainder of the year, we are increasing our full year 2026 adjusted EBITDA guidance range to $92.5 million-$97.5 million, compared to our prior range of $90.5 million-$95.5 million. The updated midpoint represents a meaningful increase, particularly after only one quarter of the year. At the same time, we are maintaining our previously issued full year capital expenditure guidance. Growth CapEx is expected to remain in the range of $55 million-$70 million, reflecting our planned deployment schedule for contracted large horsepower units and continued customer demand. Maintenance capital expenditures are expected to remain in the range of $15 million-$18 million. I also want to briefly address our upcoming shareholder meeting, which is scheduled for June 10.

Related proxy materials were distributed several weeks ago. There are two voting items in particular that I want to highlight. We are asking shareholders to approve a proposed reincorporation of the company from Colorado to the great state of Texas. As outlined in the proxy materials, the primary driver of the proposed reincorporation is to implement more shareholder-friendly governance provisions within our governing documents. Most notably, the proposal would facilitate the de-staggering of the board, which we believe better aligns the company with shareholder interests and broader market expectations. This proactive initiative reflects the board's commitment to strong governance and alignment with our shareholders. The second item in the proxy relates to our board of directors. As previously communicated, Steve Taylor will retire from the board at the upcoming shareholder meeting.

Steve has served NGS shareholders for more than two decades and has played an instrumental role in the growth and success of this company. On a personal level, Steve was also an invaluable advisor and resource to me during my transition into the CEO role. On behalf of myself, our board, and all NGS shareholders, I want to sincerely thank Steve for his many contributions to the company over the years. We are also pleased to nominate John Jackson to the board. John is a highly experienced rental compression operator with a strong track record of operational and industry success. While no one can truly replace Steve, we are excited about the perspective, industry knowledge, and experience John will bring to the board going forward. We appreciate the continued support of our shareholders on these important items. In closing, the first quarter represented an excellent start to 2026 for NGS.

We delivered record rental revenue and record adjusted EBITDA while continuing to improve the quality and mix of our fleet through large horsepower additions and retirement of idle small and medium horsepower assets. We also increased our quarterly dividend by 36% and increased our full year adjusted EBITDA guidance. Market fundamentals remain constructive, supported by tight equipment supply, high utilization levels, and strong customer demand for reliable compression infrastructure. Looking ahead, we remain confident in our ability to continue delivering strong operational performance, growing cash flow, and creating long-term value for shareholders. Luke, we're now ready to open the call for questions.

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. If you would like to state a question, please go ahead and press seven pound on your phone now and you'll be placed in the queue in the order received. You can press seven pound again to remove yourself from the queue. We are now ready to begin. Our first question comes from Jim Rollyson, Raymond James. Go ahead, please.

Hey, good morning, guys, and congrats on the solid set of results.

Thank you.

Justin, it seems like maybe I want to start with lead times. You know, your competitors that primarily source engines, at least gas engines from Caterpillar, have talked about lead times that are now between 150-180 weeks, if I add up what's been said so far this season. Obviously, you're not sourcing engines from Cat. You guys talked about electric motor drive and obviously Waukesha. I'm curious what you're seeing on lead times and if they're materially shorter. Is that an opportunity as you go into 2027, 2028 to maybe fill some customer demand gaps that can't be filled by Caterpillar?

I think the quick answer, good morning, Jim Rollyson. Thanks for joining. The quick answer to your question is yes, it does provide an opportunity. As we look across sourcing different components for the units and then having them fabricated, lead times have extended out. Some of the long lead times that have been cited publicly are for, you know, particular components, particular engine from one of the engine manufacturers, and those are materially longer, really, than any of the other components that at least we're seeing. It's not to say that the lead times have not extended over the past several quarters. They have, but nothing to the degree that has for that particular engine.

As we look across our fleet and our growth opportunities, that is a much smaller percentage of our growth and existing fleet. I think we do have some opportunities there, even in the current environment, to pull in the growth earlier.

Got it. That's very helpful. Then just kind of circling around to margins and cost inflation. There's been a lot of discussion around higher oil prices driving, as you mentioned, you know, return of activity, which changes the labor component and lube oil and fuel prices. How do you think about, given how tight the market is, how do you think about your ability to eventually pass on higher costs? What's the lag time? Just trying to think about how margins progress through the quarter or through the rest of the year, recognizing what Ian said that 63.7% is not necessarily the new benchmark to start with. Just love some thoughts there.

Sure. As you look at our fleet, I mean, we have units that are coming off of term, really on a rolling basis throughout the year. As you look at where our pricing has been from the public, you've seen there have been, you know, modest increases certainly relative to prior years where there was pretty significant pricing inflation. You know, going forward, I think it's a little hard to predict exactly the magnitude of it. But I think everyone is feeling it to some extent already and will probably, or is maybe a better word, may see even a higher level.

That's something that we're actively going to have discussions with customers in a way that is, you know, appropriate for our shareholders, but also understanding our customer relationships. I think there's still, as what I've said in past quarters, an upward bias to pricing. Depending on where inflation comes out over the coming quarters, there may be slightly higher than an upward bias.

Appreciate the thoughts, Justin. Thank you.

Thank you, Jim. Appreciate you joining.

Thank you very much. Our next question comes from Nathaniel Pendleton with Texas Capital.

Morning, Justin and Ian, congrats on great quarter.

Thank you.

With regard to the yeah, sure. With regard to the sizable increase in the dividend you just announced, can you talk about how you view the uses of cash from here between increasing shareholder returns, investing more in organic opportunities, and potentially improving the balance sheet further, for M&A opportunities down the line?

I think when we started the dividend off, several quarters ago, we were intentional in telling our shareholders that this was, you know, a modest, first step that we would look to increase over time without commitments about exactly what that rate would be. This increase is of, you know, 36% from $0.11 a share quarterly to $0.15, is a material increase on a quarterly basis as we look at the, and a modest increase as we think about it from really a capital allocation perspective, meaning kind of, you know, percentage of EBITDA. From that perspective, it's a relatively modest increase and doesn't, in any way, you know, change our ability to fund any of the particular growth initiatives, whether, you know, acquisition of new units, or M&A opportunities.

It's really kind of starting to move more towards that capital allocation model, that I would think of as self-sustaining. Obviously, we've grown at, you know, pretty significant rates over the past several years. Over time, we'll start to move to that more framework of, you know, a certain percentage of capital is going to the different elements, whether, you know, growth, M&A, or return of capital to shareholders. It's really a step in that direction.

Got it. Thanks for that detail. If I may, kind of thinking about the fleet retirements and some of the opportunities that remains within your underutilized fleet today, can you quantify the potential opportunity that you see in upgrading some of the underutilized assets today, that could then be put to work?

I don't think we're gonna quantify that at this point. You know, you can look at the unutilized fleet and say that with what we've done over the past several quarters, there certainly is incremental opportunity there in the different portions of the fleet, which are almost entirely in the small and the medium horsepower. We think there are opportunities to increase the utilization of the existing idle fleet. It's not a number we're gonna put a target on at this point.

Understood. Thank you, Justin.

Thank you, Nate.

Thank you. Our next question comes from Josh Jayne with Daniel Energy Partners.

Thanks. Good morning. Obviously some significant commodity price changes since your last call. Maybe you could just walk around the different basins, what you're seeing and how conversations have changed over the last couple of months? Obviously, you're heavily concentrated in the Permian, but maybe just talk through what you're seeing across the lower 48 would be helpful to start?

Sure. As you mentioned, we are heavily weighted to the Permian, so I'll start there. If you went back to, you know, previous quarters, we've described this, I think even with lower oil prices at that point, we were still seeing significant new quote activity, and we're contracting a significant number of new units in terms of horsepower. The rise in oil prices, I would say, have only accelerated and increased the amount of activity on the upstream side.

As we look at other basins where we've been growing, and these are lower percentage or lower dollars, although still high percentages, we're seeing, you know, strong interest for our equipment in what I call generally kind of, you know, South Texas Eagle Ford basin. Then another area for us is up in the Marcellus Utica, where we've seen very nice growth over the last several years. Then, you know, on the midstream side, just a lot in kind of Texas generally with for us, kind of a focus at this point in the Permian, where we're seeing a lot of activity.

What are you seeing today with respect to contract terms being extended? I think in your deck it highlights average term was around 2.4 years. I would think there's a greater sense of urgency from the customer base today. As you think about where you sit today and what you're.

So for..

Move forward throughout this year.

You cut out for a second there. I'll just on terms of kind of, you know, the length of term and the 2.4 years, just to be clear, that's just the weighted average of the existing fleet. On the you know, if we're looking to put new equipment out, those are depending on the model, kind of size of the equipment, but you're typically in the 3 years to 5-year range. Then in terms of, you know, recontracting or putting on term existing fleet that's out there, you know, that's, you know, typically start at the low end, kind of a year up to several years, and we're seeing that get pushed out.

At least some, you know, requests from customers looking to push that out, and then just becomes a little bit of a question for us of, you know, how do we view price versus term. That really comes down to a customer by customer and unit by unit kind of decision.

Thanks. I'll turn it back.

Thank you.

Thank you very much. Our next question comes from Selman Akyol with Stifel.

Thank you. Good morning. I think when you guys were making your comments around working capital, you mentioned a refund for a fleet bid. I'm curious, did another large public player get that? Are you seeing other opportunities to, I presume, sale leasebacks?

We are looking to acquire new equipment in a variety of different ways. That was one of those that we did not get. You know, There are others that we have, and we're obviously contracting a lot of new equipment. I'm sorry, Selman, what was your, what was your second question? Second part of your question?

Well, I mean, yeah. Are you engaged in other, I guess, sort of sale-leasebacks? I presume it was a sale-leaseback transaction. Did we see another large player get that?

Oh, no, no, no. That wasn't, it wasn't actually related to a sale-leaseback.

Okay. Okay, never mind then. Okay. Just going back to gross margins. I don't quite think you said gross margins peaked for the year in so many words, but I think you said that. Can you just talk about where you're seeing the most pressures and in particular thinking about lube oil and just how that's, you know, filtering through and how you're gonna get that back over time?

Yeah, Selman, good morning. When we think about cost pressures, you know, as we mentioned in the prepared remarks, we're very much focused on parts, lubes and oils and labor. You know, given the geopolitical environment today, we expect to see inflationary increases in lube oil, especially heading into the second quarter, and that's what's really gonna be driving inflation over the next few quarters in comparison to the performance that we saw in the first quarter.

Just remind me, do you have some inflation adjusters built in that over time you get it back?

The quick answer, that depends on the contract, but we are increasingly adding those in and have been over the last several years. Just to hit on part of your question there, Selman, of saying that they peaked. It's really more. Well, one didn't really say that, but I understand what your question is asking. You know, we had a series of as we look across the different primary drivers of cost in the first quarter. We had a really good margin. We think, you know, over some period of time we will hit margins that look like that. It certainly, as we look at the operational metrics, say, that was one where everything went the right direction. That happens occasionally, doesn't happen every quarter.

We don't expect it to happen every quarter. It does show, as you look kind of a trend over several years, where the margins in this business are going and kind of sets a new, a new high bar for us to strive for on a quarterly basis with the kind of view of we think there's gonna be more inflation over the second half of the year. Let's see what happens.

Got it. All right, I'll leave it there. Thanks so much.

Thank you.

Again, everyone, if you have a question, please go ahead and press seven pound. Our next question comes from Rob Brown with Lake Street Capital Markets. Go ahead, please.

Good morning, Justin and Ian. Just wanted to sort of follow up on the competitive environment and some of the dynamics with higher oil, ability to gain share, I guess. When do you sort of reevaluate your CapEx needs and what will it kinda take to increase the growth rate there?

I would say going to the competitive landscape, I've talked and certainly there are a number of, you know, very strong competitors out there. You know, several of them are public. There are a couple of strong private competitors as well. The competitive landscape, you know, I look at it generally is relatively stable. If we look at what our performance has been, at least judging versus what's publicly available, we've been taking market share for the 3 years we're gonna have full results being 2023 to 2025. We are going to do that again in 2026. Based on the amount of customer activity and performance that we've had, I expect that we'll do that, continue to do that in the future.

The CapEx side is, you know, what will drive that is, you know, looking at what we're able to do in terms of securing new business at, you know, above what we're targeting from a return on invested capital perspective, and then looking at, you know, the balance sheet to make sure that we retain flexibility to grow beyond just the organic side. That's something that we're looking at on a consistent basis. I think we will continue to grow at rates that are outsized relative to our competitors, and we wanna make sure we're flexible to act opportunistically on the M&A side.

Okay. Got it. Then, on the kind of the margin discussion, I know this quarter was elevated, but, you know, could you give us a sense of where the kind of the whole margin level is with the high horsepower shift? I know it's gone up over the last few years, but, you know, is it sort of plateauing on a kinda normalized basis, or should it continue to expand?

Rob, you know, we're not gonna give any forward guidance on margin. What you should expect, as our mix continues to skew toward larger horsepower over the course of time, that margin will gradually creep up.

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

Thank you, Rob.

Thank you very much. I don't see any other questions.

Thank you, Rob. excuse me. Thank you, Luke. Thank you all for your questions and continued interest in NGS. We sincerely appreciate your support and look forward to updating you on our progress next quarter.

Thank you, everyone, and this concludes today's conference call. Thank you for attending.