Steve Taylor – President & Chief Executive Officer Alicia Dada – Investor Relations Coordinator.

Rob Brown – Lake Street Capital Joe Gibney – Capital One Peter van Roden – Spitfire Capital Gary Farber – CL King & Associates Aleksandrov – FIG Partners Jason Wangler – Wunderlich Securities.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group’s Q1 Earnings Call. (Operator instructions.) Your call leaders for today’s call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President, and CEO. I will now turn the call over to your moderator. Ms. Dada, you may begin..

Thank you, Erica, and good morning everyone. Please allow me to take a moment to read the following forward-looking statement prior to commencing our earnings call.

Except for 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.

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, [salt], 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 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 that stated I will turn the call over to Steve Taylor who is President, Chairman and CEO of Natural Gas Services Group.

Steve?.

Okay, thank you Alicia, and thank you Eric. And good morning, and welcome to Natural Gas Services Group’s Q1 2014 Earnings Review. I’ll start our review by noting a couple highlights that we released on April 25th.

Compression sales revenues this quarter ran in the range we anticipated but the year-ago and sequential quarter comparisons will be off due to a higher level of sales in past quarters. This is not unusual since sales, and especially compression sales, are historically variable on a quarterly basis and can cause fluctuating comparisons.

However, we have seen an appreciable buildup of our backlog this quarter and that sets us up well as we go through the year. In our rental business, quarterly growth was lower than we’ve experienced recently, but we think it’s an anomaly and our growth rate should be back on track going through the year.

In spite of this, this period is our 18th straight quarter of rental revenue growth. I’ll detail these as we go through the narrative, but now let’s move on to the numbers.

Taking total revenue and in the year-over-year quarters, Q1 2014 revenues decreased $1.7 million to $22.3 million from $24.0 million in Q1 2013, with the decline attributable to varying sales revenues. For the sequential quarters of Q4 2013 compared to Q1 2014, total revenues were off $800,000, again due to fluctuating sales volumes.

It depends on the quarter, but our sales volume changes are primarily driven by compressor and flare sales. As we will discuss further, compressor sales although variable generally look to be trending up; while flare sales, a relatively small part of the business, are trending down.

My comments in the past noted that we have anticipated this with the positive aspect being that if you’re not flaring gas you’re likely compressing it.

Total gross margins comparing this current quarter to Q1 2013 – gross margins were down 2% from $12.2 million to $12.0 million while the overall gross margin ratio increased from 51% to 54% of revenue. Sequentially gross margin increased 1% to $12.0 million, again a strong 54% of revenue.

SG&A increased to 12% of total revenue, primarily due to our lower total revenue base and the award of employee stock and options incentives this quarter. This is a dual-edged sword because while we distribute these each year the significant appreciation in our stock price for the past year has driven this non-cash expense higher.

We do however anticipate this coming back into our normal range. Looking at operating income in the comparative year-over-year quarters, they reflect the decrease from $6.1 million in Q1 2013 to $4.4 million this current quarter. Sequentially operating income was off $600,000 to $4.4 million but remained in the 20% to 21% of revenue range.

In the comparative year-over-year Q1s net income decreased from $4.0 million last year to $2.9 million this year. Comparing Q4 2013 to Q1 2014 net income was off $300,000 to $2.9 million and holding steady at 13% to 14% of revenue. EBITDA was $10.7 million in Q1 2013 and $9.4 million in the current quarter, a range of 42% to 45% of revenue.

Sequentially, EBITDA was off $0.5 million to $9.4 million when compared to Q4 2013. On a fully diluted basis earnings per share this quarter was $0.23 per common share.

Looking to sales revenues in the year-over-year quarters, total sales revenues which include compressors, flares and aftermarket activities, fell from $7.8 million in Q1 2013 to $3.3 million in Q1 2014.

For the sequential quarters total sales revenues fell $1.1 million in Q4 2013 to $3.3 million in this current quarter with approximately two-thirds of the decline from flares sales. When viewing compressor sales alone in the current quarter they were $2.2 million.

This compared to $5.2 million in Q1 2013, but margins have been very strong in all comparative quarters and are running at 28% to 30% of revenue. Sequentially compressor sales were down $350,000 when compared to last quarter.

Our compressor sales backlog at the end of Q4 2013 was $3 million but it has grown substantially to $10 million at the end of Q1 2014. We anticipate compressor sales in Q2 this year at about the same level as Q1, with the majority of the backlog occurring in the second half of the year.

The backlog is presently split roughly one-half international and one-half domestic oil shale. Fluctuating sales revenues and resulting comparisons are a fact of the business and have been our historical experience, but we’ve been able to fill the backlog well this quarter.

Rental revenue had a year-over-year increase of $2.8 million or 17% from $16.0 million in Q1 2013 to $18.8 million this current quarter. Gross margins were 58% of revenue this quarter compared to 57% in last year’s comparative quarter.

Sequentially, rental revenues grew 1% to 2% from $18.5 million to $18.8 million but we did have a good move in gross margins, with an increase from 54% in Q4 to 58% this quarter. This lower rate of quarterly growth was anomalous when compared to the record number of new rental contracts we started in Q1.

In fact, and I want to emphasize this – we sent more compressors on new rental contracts in Q1 2014 than we have in any quarter over the past three years. As has been the case in the past, most of those go into oil shale liquids-orientated basins. This “top line” growth is encouraging in that we are still seeing expansion in that part of our business.

Additionally the number of net rental contracts placed in April, just this past month, places it as one of our top three most active months for net contract growth in the past three years.

The impact to our quarterly net growth was a surprisingly high rate of contract terminations in the quarter with the majority of those being equipment out of our dry gas areas.

There were various regions and different customers that sent equipment home and while there doesn’t seem to be any discernible trend to it the reasoning appears to evolve around a combination of lower gas volumes and expected prices going into summer.

Although we work hard to project the number of new units and contracts we anticipate in the future, unfortunately due to the short 30-day notice period required to return equipment there is scant visibility on contract terminations.

I’ve mentioned in the past that the majority of the oil shale units we are building and renting are going into gas lift service which is a method to enhance and increase oil production with the use of gas compression.

There’s a recent study that notes an appreciable increase in the use of gas lift on absolute and percentage increase basis and it seems to correlate with the growth we’ve seen.

This kind of external data and the growth we have seen in our oil shale business leads us to believe that our growth expectations for our rental business are still valid and our previously announced fabrication expansion continues on schedule.

Fleet size at the end of March, 2014, was 2643 compressors and we ended Q1 with rental fleet utilization of 79%. This was a net addition of 87 compressors for this quarter on a capital spend of $13.3 million for rental fleet compression expansion. Between 40% to 45% of our active fleet is now deployed in oil shale and liquids-oriented plays.

Going to the balance sheet, our total debt short-term and long-term was approximately $500,000 as of March 31, 2014, and cash in the bank was about $21 million. Our cash flow from operations through the first three months of this year was $9.6 million.

From a macro perspective, although we saw some downward movement in our dry gas markets there may be the potential for more upside activity in the future. We did not actually expect any real uplift these past months due to price spikes or storage levels, but the rest of the year will be interesting.

As you know, I do not predict natural gas prices or activity anymore since the non-winter of 2011/2012 but storage levels are now down to record low levels, and depending on summer weather which will impact the rates of storage injection, we could conceivably see a stronger gas market going into the 2014/2015 winter at the end of this year.

There is more and more speculation about what oil and gas prices may do in the next year or two, but taken as a whole we tend to think the commodity price environment will be neutral – meaning no significant changes from where we are – to positive. In any event we are confident that no matter the environment NGS will continue to execute as required.

This quarter certainly had some countervailing winds, but going forward our sales backlog is the highest it’s been for a while and top line rental growth continues to be vigorous. Overall trends look to be positive and we expect a growing, successful year. That’s the end of my prepared remarks.

I’ll turn the call back to Erica for questions anyone might have. .

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

Good morning.

On the dry gas market that showed some weakness in Q1 what sort of have you seen thus far in April and what are sort of the current trends in that market?.

Well April is looking good. I think it’s, just as I said, it kind of looks to be an aberration or an anomaly of some sort and we really haven’t seen anything going on April-wise that’s out of the ordinary. And if you looked at Q1, January we had more dry gas units coming back; February it settled down; March it picked back up.

So now April is back down and hopefully now it doesn’t pick back up. But I think once we’ve gotten out of the end of the winter and now we’re starting to go into the solar season I’m anticipating kind of being level. But so far in April we haven’t seen a repeat..

Great. The second question is in your SG&A costs, I think you talked about them spiking up a little on your option-related stuff.

What’s the sort of run rate that you expect SG&A costs to be at for the rest of the year?.

Well, we think it’ll trend back down. You know, we typically have run around the 9% to 10% range so just roughly, and of course this stuff will vary. I think we can see maybe a 0.75% to 1.00% reduction for each quarter so we’ll be back, by the second half back to our normal 9.0% to 10.0% of revenue rate..

Last question on the gas lift, you talked about that market getting better but can you give me a sense of maybe what the ROI is for the liquids operator, the oil operator for using gas lift? Just give us some color on why that market’s doing well if you can..

Well of course on a rental the [high] is almost nonexistent so it’s pretty attractive for them. But just looking at it generally, if you look at our average rental rate on these gas lift units is in the $4000 range and it’ll run higher, run lower.

And these wells, there’s no general rule of thumb you can point to, but these wells, they all rig differently.

But I can’t imagine that an operator wouldn’t be making probably 5x to 10x that cost just in increased oil production, because if you’re looking at $4000 a month for the rent, that’s only 40 barrels of oil to breakeven – that’s a barrel a day. Nobody’s going to do anything for a barrel a day.

So from what we hear and what we’ve seen it’s quite, quite substantially more than that. So that’s why it seems to be as long as the commodity price holds up, and of course some of this other data that we’ve seen and just our own experience, certainly through this year we think the market looks to be pretty vigorous..

Thank you, I’ll turn it over..

Thanks, Rob..

Our next question comes from Joe Gibney from Capital One. Please state your question..

Thanks, good morning Steve. Just curious if we can get an update on where things stand on the VRU market, anything new there. And you referenced things on track in terms of the application expansion in Midland, just remind us a little bit on timing on that. I appreciate it..

Okay. Yeah, I mean the VRU’s the same thing we’ve saw for about probably the last quarter – we’re just really not seeing a whole lot in it. The only thing we’re seeing in that market is just very, very small units below our range going out.

So typically the stuff that appears to be having a little movement is 50 horsepower or smaller type units which we don’t plan to get into on a rental basis. So that’s most of it, and I think you’re seeing that because again most of these wells that people are trying to outfit – very, very small volumes of gas off these tank vapors.

What we’re looking for now is more movement into, with these new drills, these new pad drilling and everything else where you’re starting to accumulate or combine all the wells together, tank batteries together to get higher volumes of gas vapors coming off these tanks into where the 50 horsepower to 100 horsepower range that we’re looking for starts to move.

So I think that’ll… We still anticipate there being a market out there, an incremental market and one that has existed, but it’s obviously going to be just kind of folded into the rest of the growth at a slower pace than what we anticipated a year ago.

As far as the expansion, we broke ground a couple weeks ago, still looking at probably having it online first part of Q3. And we said that we anticipate in half a year we’ll probably gain about another 50 compressor throughput, about 20%.

So we added 277 compressors to the fleet last year, so we’re just saying nominally that’ll go to 325 this year and then next year another 50 for the full year effect – so up to 375 next year..

Okay, helpful. And just one last question, and I know this is certainly a utilization-driven game, tightening things up a bit more, but where are we on pricing given this pace that you’re seeing, the record pace really in April obviously of getting liquids-directed units out into the field.

Is this an opportunity at this point to be able to nudge pricing a little bit higher on some of your liquids-directed units? Just a general sense there of kind of where we are on potential for fleet-wide rate increases..

Yeah, we’re always pushing them on an individual basis versus a fleet-wide basis. As I mentioned on the call last quarter we saw a 5% average price increase over the fleet last year, then 10% the last couple of years. Of course some of that was a mix shift but some of it’s also some pricing we’re getting on these gas lift units.

I think there probably are going to be some more opportunities on that. Now again, fleet-wide it’s, well, fleet-wide on the gas lift units, yes, there’s a possibility, certainly fleet-wide leaving out the dry gas units because obviously that’s a weak part of the business right now.

But yeah, we’re always constantly looking at that and have the ability to do that fairly quickly once we start deciding to do it. But we’re always looking either strategically from a point of either an area or a particular model or things like that to constantly increase the price, and I think that’s what you see in the last year or two..

Alright, fair enough. I appreciate it, Steve, I’ll turn it back..

Thanks, Joe..

Our next question comes from Peter van Roden from Spitfire Capital. Please state your question..

Hi Steve.

Can you give us an update on how the new market expansion is going particularly in the Marcellus and the Bakken?.

The Bakken, we’re still setting more and more equipment out there. It’s still not a big, big area for us – I think as I’ve mentioned in the past we think we’re probably a year or two before what we think would be a bigger rush for compression up there.

There are pipelines going in, there are plants going in, we see that but that infrastructure is taking a bit although it’s moving and we’re putting just a little more equipment up there. But we think most of what we would I guess call a wave of activity up there is still in the 12- to 24-month range.

There’s a lot of factors going on up there, not just the infrastructure getting built in but of course all the flaring that’s going on up there. There’s a lot of pressure to get that flaring down and as I mentioned, if you’re not flaring you’re probably compressing.

So I think as that pressure continues to mount on operators up there certainly with the infrastructure going in and just the need to get that flaring down we’re going to see just a continually growing business, and probably a little slow like I say in the next 12 to 24 months.

But after that I think it’ll, we anticipate that being a pretty big area for us. Marcellus-wise, the Marcellus itself isn’t that busy for us right now. It’s typically a larger horsepower market right now; not a lot of wellhead equipment going in.

And that’s usually the first phase you see in these newly producing developments, especially on the gas side versus the oil shale side. So you’ll typically have these wells come in, you’ll put in central compression first; and then as they decline, deplete over time you start putting wellheads.

So we’re not fully at the wellhead piece out there right now. As you scoot over to Ohio and the Utica shale, a totally different play. Of course it’s oil, oil shale base with associated gas and we’re seeing pretty good growth out there and anticipate some good growth this year.

That was an area that we moved in there in 2012, grew pretty well; ’13 waited on infrastructure, didn’t do very much last year but it looks like it’s going to pick up pretty well this year. So we’re looking for more activity out of the Utica anyway..

Got it. And then if you kind of had to pull your crystal ball out and think about natural gas demands in the next couple of years, if any of the macro forecasts are right we’re going to see a big increase in 2015-2016 of supply and demand.

How do you think you need to set up your sales structure or infrastructure differently to try to capture some of that?.

Well, I think we’re still, if that happens – and as I said, I try to avoid predicting that stuff, I’ll let you guys do it. You know, you start to develop multiple personalities when you start looking at these things, but I agree with you – generally trend-wise there’s going to be more natural gas demand.

Now we’re still, again more than half our fleet is still in dry gas areas, so the Barnett, San Juan, all the other areas we’ve got, East Texas, with dry gas activities. We’re still well placed there, have large share, still a major part of our business.

So as gas price starts to potentially come up and demand starts to move with it or vice-versa I think we’re all set.

Now, we’re going to watch some of these other areas that we didn’t ever really get moved into before the collapse of gas price in ’08 and ’09, more so being the Haynesville and the Fayetteville, but when the Haynesville went down in ’08 and ’09 those were still pretty good wells, not much compression needed on them – they were flowing at good volumes, good pressures.

It’ll be interesting to see if pricing does drive a little bit more activity in those areas how those wells come back on. But if we’re in good areas as we said now we can certainly capitalize on those. And then as we’ve shown in these oil shales in the last three to four years, we’re able to move into areas pretty quick.

So if we see demand and a need for compression, gas compression in those areas I think we can move in pretty well..

have you seen any new entrants come into the market recently or are there still kind of standard competitive dynamics that you’ve had for the past couple years?.

Yeah, not really any new ones. You’ll get somebody changing hands every year or so, things like that, but the equipment stays the same – it just gets new owners. But really nobody moving in overtly to say “I want to be part of this” and doing it.

I think one of the things that causes that, of course number one it takes a lot of capital to do this and it takes you a while to build up a fleet of any size, and especially in the field-type infrastructure where the companies in the business now have mechanics in the field, shops, warehouses, parts warehouses, rebuild facilities and things like that.

So it’s not real easy just to get in real quick. If you’re trying to get in quick and capitalize on the market it’s a little tough from this business than maybe most..

Great, thanks..

Okay, thanks Peter..

(Operator instructions.) Our next question comes from Gary Farber with CL King. Please state your question..

Yeah, hi, good morning. Just a quick question, I’m not sure if you went over it before – just your expectation for the rollout into the liquids area for this year and for next year.

How do you see the shift or what kind of shift do you see sort of in your assets deployment between that and the dry gas side?.

I mean we don’t see too much of a shift for the oil shale type compressors going out. I think Permian’s still busy and [Abrea’s] busy; Utica over in east central Texas, busy out there. So we think those areas are still going to take the majority of our capacity, our build capacity.

Oklahoma is perking up a little more for us, you may see a little more going up in there, and there’s a couple of other areas where we’re looking at moving into. But really I would say the areas we’re in now are still growing, still looking good – a lot of drilling going on, a lot of operators working there.

And probably they’ll take 90% of our increased capacity going forward..

So if you looked at your mix of your rental revenue, how much more of it do you think by the end of the year and then into next year at some point is this going to be tied into the liquids?.

Well, it seems like it’s, and again, if we just keep the same commodity price scenario – say $100 oil and $4.50 gas at the same comparison – I think we’ll continue to increase the oil portion of it. You know, getting to 50%, maybe that’d be in the next 5% tranche – it’s real hard to say.

It wouldn’t surprise me if we get there by the end of the year but it’s kind of hard to say what goes on with some of that. But we could be half and half by the end of the year, and again as long as this price differential continues between those two commodities I think we’ll continue to grow the oil shale side..

Because it’s really grown to that level in what, like four years or so?.

Right..

So should people expect that the increments are going to be smaller but you’re still going to be pacing along? Or is there still room for this thing to be pretty rapid in the near term?.

I think they’re going to be smaller, just a lot of large numbers. The percentage is going to come off just a little bit because well heck, the last three or four years our fleet’s up by a third.

So I mean I think probably the number of units going out is probably going to be the same or higher but the percentage is going to be dropping down just a little bit – although the growth will still be good..

Right, okay. Thank you..

Thanks, Gary..

Our next question comes from Vinny Aleksandrov of FIG Partners. Please state your question..

Good morning. My first question is on the margins in the quarter. Margins were healthy and they increased from the March quarter.

Was it due to the mix of compressor sales to the field (inaudible) or there was also a little bit of overhaul impact?.

Vinnie, can you repeat the last part? You’re fading. .

Or was it the overhaul impact from last quarter?.

Oh okay, alright. I think this showed what we’ve always said, that we had 54% rental margin last quarter, 58% now. And 54%, typically when we see a margin like that we’ve got a lot of overhauls and we did see that in that quarter. And but typically when you have those overhauls they end up going out into the field and that’s what we’re seeing.

As I mentioned Q1 of this year we set more new rental contracts than we have in the past three years, so that carries on with that overhaul expense that we had last quarter carrying into this one. At 58% now, they were down just a bit obviously from that number – I think we’re still going to have fluctuations on that going forward.

And certainly if we do see a pickup in natural gas activity, which again, I don’t anticipate much if any during the summer but it’ll be interesting to see how winter comes. If that happens we’ll have some more of that coming but again, we’ll get to capitalize on it the next couple quarters..

Thank you. And then my next question is on the [Quad-O].

Any change in the (inaudible) count out there? I know you commented on it last quarter, are there any changes on the Quad-O?.

Yeah, that’s the VRU thing.

No, we still haven’t seen a whole lot of activity there and we’re just surmising that the rule’s in place, the rule has been split into two different parts where this April I think it was in newer wells, wells drilled currently or the wells that are two years old had to comply starting in this April; next year wells that are older than two years old have to start complying.

So it did break it up a little which would have normally slowed it down but it’s way slower than that. And again I think what we’re seeing is just operators starting with the smaller, easier wells to handle control right now being very small horsepower – essentially what we see as the BIC lighters of the industry.

There’s kind of disposable stuff going out there, 20 horsepower, 30 horsepower equipment that we just don’t deal in..

Thank you so much..

Okay, thanks Vinny..

(Operator instructions.) Our next question comes from Jason Wangler with Wunderlich Securities. Please state your question..

Good morning, Steve. I’m just curious, you talked a lot about the gas lift.

Can you just maybe drill down a bit on what region specifically you’re seeing more demand for that? I’m just curious as far as, as you’re deploying out there what places are really starting to kind of adopt that as a better way to go?.

Historically, the last three years, say, where we saw it mostly start out was in the central East Texas area, starting there; and then of course we saw it go into the [Naibrera] and then the Utica and then the Permian.

Now, the Permian – and the Permian being really here around Midland (Inaudible) and then stretching into Mexico, the Permian part being the more recent one we’ve seen where operators are starting to try gas lift.

Gas lift has been around forever as probably most everybody knows – it just hasn’t been a real big process for people to use to get oil because it’s a little of an art and a science to it, and other activities like rod pumping and things like that are a little easier to do and grasp and don’t take as much operating time.

But I think people are seeing so much increase in production enhancement from gas lift that that’s really driven it, and of course these shales and these horizontal sections and everything else kind of lend towards gas lift. So we think the Permian… We’re seeing operators try it in the Permian and some of them work, some of them don’t.

But obviously the majority are working because we’re putting more equipment out into it. So I think we still see growing in all those areas but probably the newest one we’ve seen the uptake in is the Permian area..

Sure. I appreciate it, thank you Steve..

Okay, thanks Jason..

At this time we have no further questions..

Okay, Erica, thank you and I thank everybody for joining me on the 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..