Natural Gas Services Group, Inc. 2026 Q2 Earnings Call

Justin? Thank you, Anna, and good morning, everyone.

Joining me today is Ian Eckert, our Chief Financial Officer. As always, I want to begin by thanking the entire NGS team, including our new colleagues from Flatrock. I especially want to recognize our field service team, whose focus on customer service and strong operational execution drove another record quarter. I also want to thank everyone across both organizations who helped us complete the Flatrock acquisition and who are now working together to integrate our people, systems, and operations. It's an exciting time for NGS. Our team delivered a record second quarter and a milestone first half of 2026, combining strong execution and organic growth with a strategic accretive acquisition that materially increased the scale and capabilities of our platform. I usually start these calls by reviewing the details of the quarter. Today, I want to start with strategy.

The second quarter results are important, but I think they are best understood in the context of the progress NGS has made over the last several years. We have continually discussed four growth and value drivers with investors. Fleet optimization, asset utilization, organic growth, and accretive M&A. These drivers have remained entirely consistent. What has changed is the scale of NGS and the progress we have made against each of them. NGS is a materially larger, stronger, and more capable company than it was three years ago. But we do not believe we are close to exhausting the opportunities in front of us. I want to spend a few minutes on what we have accomplished across each of our four growth and value drivers, and importantly, where we see additional opportunities ahead. Our first growth and value driver is optimization of the fleet we already own.

There are several ways we create value here, but two of the most important over the last three years have been pricing and fleet mix. In the second quarter of 2026, pro forma rental revenue per average horsepower per month, assuming a full quarter of Flatrock revenue, was $28.06. Three years ago, in the second quarter of 2023, that number was $21.56. That is an improvement of almost $7 per horsepower per month or more than 30%, representing a compound annual growth rate of nearly 10%. At the same time, we have fundamentally changed the composition of the fleet. Our rented large horsepower fleet now totals 501,000 horsepower and is 99% utilized. Large horsepower represents 75% of our total rented horsepower. At the end of the second quarter of 2023, our rented large horsepower fleet was 228,000 horsepower and represented 61% of the total rented horsepower.

That means our rented large horsepower fleet has grown at approximately 30% annually over the last three years and is now the vast majority of our rented fleet. That mix shift matters. Large horsepower equipment generally provides better economics, longer contract duration, and deeper customer relationships. Increasingly, our large horsepower growth also includes electric motor drive equipment, which has become an important part of our offering, representing nearly 10% of the rented fleet. Looking ahead, we continue to see opportunity on both price and operating performance. Engine and fabrication lead times remain extended while customer demand remains strong. We believe that combination should support a constructive pricing environment for large horsepower compression. At the same time, we continue to invest in how we capture, integrate, and use data across the organization. This includes financial, operational, and increasingly real-time unit level information. Our smart platform is one example.

We are using predictive analytics to anticipate maintenance needs, improve field service execution, increase uptime, and deploy our people and resources more efficiently. Ultimately, the objective is simple: generate more earnings from every horsepower we already own while providing better service to our customers. Our second driver is asset utilization. This is about looking across the entire balance sheet and asking a straightforward question: is this asset producing an adequate return for our shareholders? If the answer is no, we need to improve its productivity or convert it into capital that can be deployed somewhere else. Working capital is probably the best example of what we have already accomplished. When I became CEO in February 2024, we finished that quarter with 108 days of accounts receivable. On a pro forma basis, second quarter 2026 DSO was approximately 33 days, representing approximately $22 million of accounts receivable.

Reducing DSOs from 108 days to approximately 33 days has effectively created more than $40 million of cash. That is meaningful capital that was already inside the business. We did not need to issue equity or borrow money to create it. We simply needed to manage the asset more effectively. We applied the same philosophy to our income tax receivable. At year-end 2023, we carried an $11.5 million tax receivable that had first appeared on our balance sheet in Q1 2020. As of June 30, 2026, we had collected $13.8 million of principal and interest, and we subsequently received the remaining $300,000 of interest in July. In total, we converted approximately $14.1 million of longstanding non-cash asset into cash and brought that matter to a close. We have also materially improved the utilization of the compression fleet itself.

Horsepower utilization increased to a record 88.3% in the second quarter from 78.6% three years ago, an improvement of almost 10 percentage points. There is more to do. We are actively marketing our former Midland headquarters and fabrication facility for sale or lease. Those two properties have a combined book value of approximately $11 million, and we own four other real estate assets with a combined book value of just over $3 million. We also see a meaningful opportunity in inventory. Better procurement, demand planning, and parts standardization should allow us to reduce inventory while improving parts availability, technician productivity, and ultimately fleet uptime. The objective is the same across all of these areas: make every dollar already invested in NGS work harder. Our third growth in value driver is organic growth. The change in the size of NGS over the last three years is significant.

We ended the second quarter with approximately 759,000 available horsepower, compared with approximately 474,000 horsepower in the second quarter of 2023. That represents an increase of approximately 285,000 horsepower. Adjusting for the Flatrock acquisition, our organic annual growth rate over that period is more than 10%. Importantly, that growth has been heavily concentrated in large horsepower equipment, including electric motor drive units supported by longer duration customer commitments. Another way to look at our organic growth is relative to the public compression industry. At the end of 2022, NGS represented roughly 3% of the horsepower among the four publicly traded pure-play compression companies. Despite that relatively small starting position, we have represented approximately 12% of the organic growth capital deployed by those companies in that period. Our large competitors have grown organically in the low to mid-single digits on an annual basis.

We are growing organically at a significantly faster rate. That difference is important. We have consistently deployed growth capital at a rate materially above our relative size, and the result has been continued organic market share gains. Importantly, our objective is not growth for growth's sake. We deploy capital where we believe the expected returns justify the investment, generally supported by long-term customer commitments. The combination of attractive unit economics and growth well above our relative market share is what makes organic growth such an important value driver for NGS. Looking ahead, we believe that can continue. The long-term growth in LNG exports, increasing natural gas production, and rapidly growing electricity demand, including behind the meter power, should require substantially more compression infrastructure. Our objective is not simply to grow with the industry. We intend to continue growing faster than the industry and taking market share.