Alicia Dada – Investor Relations Stephen C. Taylor – Executive Chairman, President and Chief Executive Officer.

Robert D. Brown – Lake Street Capital Markets, LLC Jason A. Wangler – Wunderlich Securities Inc. Veny Aleksandrov – FIG Partners, LLC Joseph D. Gibney – Capital One Securities, Inc. Peter Van Roden – Spitfire Capital LLC Mark Brown – Global Hunter Securities, LLC.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Third Quarter Earnings Call. At this time, all participants are in a listen-only mode, (Operator Instructions) Your call leaders for today's call are Alicia Dada, IR Coordinator; and Steve Taylor, Chairman, President and CEO. I would now hand the call over to Ms. Dada.

You may begin..

Thank you, Erica, and good morning listeners. Please allow me to take 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 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, 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 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 of that stated, I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve..

Thank you, Alicia, and good morning, and welcome to Natural Gas Services Group's third quarter 2014 earnings review. I’m happy to report that our total revenues grew by 17% on a year-over-year and sequential quarterly basis and we continue to achieve overall gross margins in the mid to high 50% range.

When compared to the year-ago quarter rental revenues grew 13% in the current quarter and were up 4% from the last quarter. Additionally compressor sales volumes were appreciatively higher this quarter. We are well pleased with our performance, our business has grown vigorously and we continue to achieve cost savings and efficiencies.

I'll detail these comments as we go through the narrative. In the year-over-year quarters, our total revenues increased 17% or $3.7 million from $21.9 million in the third quarter of 2013 to $25.6 million in the third quarter of this year.

Rental revenues increased 13% this quarter compared to the same quarter last year and sales revenues were 34% higher. Revenues in each of our reported segments were up year-over-year. The sequential quarters of the second quarter 2014 compared to the third quarter of this year, total revenues were up 17% or $3.6 million to $25.6 million.

Compressor sales was a large driver of this quarterly improvement, but rental revenues also grew. Comparing the third quarter of 2013 to this current quarter, total gross margin was 17% from $11.9 million to $13.9 million, clocking in at 54% of revenue. Sequentially, total gross margin increased 7% to $13.9 million which was 54% of revenue.

This compared to last quarter’s gross margin of 59% with the difference being driven by the mix shift between lower margin sales and higher margin rentals.

SG&A expense was down 6% from the second quarter of 2014 when it was 12% of revenue, and improved to 10% of revenue in this current quarter which matches the 10% rate in the year-ago third quarter of 2013. This brings SG&A back into the 10% range that we like.

The comparative year-over-year and sequential quarters, operating income coincidently increased 15% or approximately $750,000 to $5.9 million. Operating income is running at 22% of revenue.

The comparative year-over-year third quarter’s net income increased 14% to $3.9 million this year, and increased 15% in the sequential quarters of the second quarter of 2014 to the third quarter of 2014. Our income tax rate in the second quarter this year was 34% and increased to 34.9% in the current quarter.

Net income ran 15% of revenue this quarter and has averaged 14% this year. EBITDA increased in both year-over-year and sequential quarters. On a year-over-year basis, EBITDA increased 17% from $9.9 million in the third quarter of 2013, to $11.5 million in this current third quarter.

Both sequentially EBITDA planned 11% and is running at 45% of revenue which matches the year-to-date average. On a fully diluted basis, earnings per share this quarter was $0.30 per common share and 11% increase over the year ago and sequential quarters.

Now looking at product line comparisons, total sales revenues, which includes compressors, flares and aftermarket activities, grew 34% in the year-over-year quarters from $3.9 million in the third quarter of last year to $5.2 million in the third quarter of this year, the increase is primarily attributable to a higher compressor sales than last year, but flare and aftermarket also experienced revenue growth.

The sequential quarter’s total sales revenues increased $2.9 million to $5.2 million. Reviewing compressor sales alone, in the current quarter there were $3.1 compared to $2.2 in the third quarter of 2013 and $500,000 last quarter.

As mentioned in the last quarter’s call we were able to complete and deliver some of the compressor packages that have been delayed by our customers in the second quarter. Our compressor sales backlog is approximately $6 million and we estimate that this will be built out over the next two quarters to three quarters.

Rental revenue had a year-over-year quarterly increase of $2.4 million or 13% from $17.8 million in the third quarter of 2013 to $20.2 million this current quarter. Gross margins were 60% of revenue this quarter compared to 58% in last year's comparative quarter.

Sequentially, rental revenues grew almost 4% from $19.5 million to $20.2 million, with gross margins steady at 60% for both quarters. We're still seeing at weaker market in our dry natural gas operating areas, but we are successfully driving quarterly growth higher through our wholesale activity.

Taking an advance look at October and the net compressor units set is actually one of the better months this year. On a nine-month year-to-date basis, rental revenues grew 16%, we averaged rental gross margins at 58% in 2012, 59% last year and have averaged 60% margins in the last two quarters.

So we’re seeing steady progress in pricing and cost management. These margins continue to be among the highest if not the highest gross margins in the industry. Average rental rates across the active fleet increased 5% in 2013 compared to 2012 and have grown almost 3% in the first nine-months of this year compared to full-year 2013.

Average rental rates for newly set units in the first nine-months of this year are 7% higher than the equivalent period last year. This confirms that we are getting consistent price increases on our newly set equipment. Fleet size at the end of September was 2,842 compressors and we had a net addition of 110 compressor units this quarter.

We have added 286 compressors year-to-date. Note that the 110 compressors added to the rental fleet this quarter was over 20% higher than we’ve seen on a quarterly basis so far this year.

We’ve ramped up to a full out build schedule in Midland and Tulsa this quarter including a new Midland expansion, knowing that the rental build rate in the fourth quarter of this year were slow due to a shift in sales and rental fabrication needs between the two facilities.

This intestinally drove our active fleet utilization to the 76% to 77% level, but our active and contracted compression utilization is at 79% to 80%. The accelerated build this quarter was meant to supplement the reduced bill pays anticipated for the fourth quarter.

In the end however, the net effect for the year will be rental fleet additions and capital expense spending inline with our forecast coming into the year. Going to the balance sheet. Our total short-term and long-term debt was less than $500,000 as of September 30, 2014, and cash in the bank was a little over $5 million.

Our cash flow from operations through the first nine-months of the year was $26.5 million. Now from macro prospective, certainly the topic reserves the price crude oil and not just the price but the rate of which it has fallen over the past few weeks.

Actually the price have been too much of a surprise to me as I was telling investors at the beginning of this year, I wouldn’t be surprised to see all of the mid-80s by now. Of course that probably would take nine-months and not nine days. There are various reasons why this has fallen and just as many predictions as to why it won’t last.

I want to add my opinion to those, but we are preparing for 2015, whether it is an up, down or flat year. We’ve already implemented certain procedures that we think will enable us to react quicker in any case. While some of our actions and plans are defensive in nature others are aggressive.

For example, we still plan to add more sales people, we have various projects and products in the midst of development to continue forward and we retain the ability to move into new areas of opportunity quickly as much as we have done in the past few years.

No matter what 2015 holds, I want to remind everyone why NGS should weather any storm in relatively a good shape. We are not drilling oriented which always suffers first in the downturn, our business is production oriented, so if lower pricing does drive rig count slower, production activities still continue and actually grow an importance.

Any potential slowdown in drilling would likely just mitigate our future growth profile and because we are in a production cycle our units will tend to stay on location to a greater degree.

A large portion of our oil shale compression is being installed on gas lift applications, this is a production of hand fit method that should be even more important and at the time in market. And we generated a robust amount of cash and possess a balance sheet essentially free of debt.

This becomes important in any downturn and just as important as the recovery begins. I’m not predicting a downturn and I only mentioned these factors to our shareholders that we are prepared for any eventuality, whether there is a higher or lower level of activity..

That's the end of my prepared remarks. I'll turn the call back for questions that anyone might have..

That's the end of my prepared remarks. I'll turn the call back for questions that anyone might have..

(Operator Instructions) Our first question comes from Rob Brown from Lake Street Capital. Please state your question..

Good morning..

Hi Rob..

On kind of the visibility on a downturn, sort of what have you seen at least at October placements, but have you seen any slowdown yet and I guess how soon would you see these things do start to look?.

Stephen C. Taylor:.

And as I mentioned, I think any potential decline that might be seen in the rig counts and I think we need to be a little realistic if the oil price is down 20% there is probably going to be some impact of that but again with our production orientation, I think any impact we might see would be delayed and mitigated somewhat versus the drilling pieces of business.

Now as far as you know how we would see it, how quick we would see it and things like that of course there is numerous ways we could catch window of things, number one even customers just tells what they are going to do or come back on programs and things like that certainly watching utilization more closer, we’ve started to go on and I think I mentioned in the past we typically will order equipment on a about every two months, we will sit down and look at it and take of you as to what we’ve got going through the plans, what sales force is saying they need and what our bill schedule is and we are going to a 30-day stock client now.

So we’ve shortened the review period to be in every month versus every couple of months. So just a few things there that we can kind of do that and then if I start waking through middle of night cold sweat that’s an indicator too..

And as I mentioned, I think any potential decline that might be seen in the rig counts and I think we need to be a little realistic if the oil price is down 20% there is probably going to be some impact of that but again with our production orientation, I think any impact we might see would be delayed and mitigated somewhat versus the drilling pieces of business.

Now as far as you know how we would see it, how quick we would see it and things like that of course there is numerous ways we could catch window of things, number one even customers just tells what they are going to do or come back on programs and things like that certainly watching utilization more closer, we’ve started to go on and I think I mentioned in the past we typically will order equipment on a about every two months, we will sit down and look at it and take of you as to what we’ve got going through the plans, what sales force is saying they need and what our bill schedule is and we are going to a 30-day stock client now.

So we’ve shortened the review period to be in every month versus every couple of months. So just a few things there that we can kind of do that and then if I start waking through middle of night cold sweat that’s an indicator too..

Okay that’s great. And then I think you said your build schedules can be a little lower in Q4, you said until the numbers there and what's driving that..

I didn’t hear the last part what you said, I know you said about the build schedule..

Yes, the Q4 build schedule, what's kind of the number you are looking at in Q4 and [indiscernible] talk through kind of what's driving that build schedule in Q4?.

Well, we knew that the Q4 is going to be a little light on the [indiscernible] build, because their sales – I assume these compressor sales that we’ve had scheduled have been pushed back and back as everybody knows, so we are starting to see some of those move to the plant.

So knowing that Tulsa would generally be pretty well consumed on a sales basis that’s why we wrapped up the Q3 build to a much higher level than normal. So we anticipate Midland carrying the load for that build and probably the average number units been in the probably 50 or 60 unit range for Q4.

One of the other things also going into Q4 is that holidays tend to cut out approximately a couple of weeks of real build time too. So some of that mitigates that also..

Great, thank you I’ll turn it over..

Okay. Thanks Rob..

Our next question comes from Jason Wrangler from Wunderlich Capital. Please state your question..

Hey, good morning..

Hey, Jason..

Steve, you kind of mentioned that there was the slower fourth quarter as far as the build.

Do you have an idea on the CapEx side, I mean I think if I’m not mistaken it was kind of around the $50 million range was what you are looking at for the year, but do you have an update kind of on that?.

Yes, we spend $18 million in Q3, so the highest of the year, so we’ll be down to about half of that because the build would be about half of that for Q4.

And on a year-to-date or a full year basis by the end of the year we will be in that low to mid-50s range on capitals and that about what we had projected coming into the year and then about 320, 330 compressors. So both of those are still on track to what we anticipate and we just had to accelerate Q3 a little more..

That’s helpful. Thank you.

And I guess just you mentioned it a lot and obviously you are all talking about the 2015 side, but have you seen maybe even it’s from competitors or anything any discussions on pricing and obviously you guys are kind of a leader on price, are you hearing anything coming back as we starting to hear kind of the E&Ps leaning on some of the service providers?.

We haven’t heard anything, that doesn’t mean a whole lot, if you go back and now saying this is an important year the same, we could go back to 2008, 2009 and last time we had a downturn, that stuff can deteriorate pretty quick certainly activity can and then pricing falls behind that, if you look back in there we saw utilization come off much faster than pricing.

So I would expect the same thing if we saw it, now we have – again based on the numbers I mentioned we are showing on new sets going out 7% higher price than last year, so we are still able to drive pricing through and that actually sets us up well for any events probably in 2015, because if we do go into a downturn of sorts and we start to see some of that pressure, at least we’ve got what I would consider a 7% head start on the market to get through it, which is about same sort of thing we had back in 2008.

But now, we are not seeing any over indications of any price we can guess at this point, but again it can – if the customers and all the competitors gets spooked it can happen pretty quick..

I appreciate it. Thanks Steve..

Yes. Thanks Jason..

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

Good morning Steve..

Hi, Veny..

My first question, you talked a little bit about the defensive measures.

Can you talk a little bit about the growth of measures expanding the sales force volume, hiring people in sales, do you want to go out here and promote new products, new technologies, what's the reasoning behind this?.

Well, it’s probably a little above. We want to put some additional sales in combination of some areas that are grown well that we're already in, that we think we can use a little more coverage in and maybe a couple of newer areas that we are high and to get a little stronger into.

So kind of a two pronged approach there, so that’s obviously just trying to take our existing products into some of that, and that a primary reason we want to do it, just we still see some opportunities in some of the places, but we are working on a couple of products that we think we’ll see come to fruition in 2015 additional compression products and things like that that certainly will go into the product mix that existing and any new sales guys could offer..

Lot’s of our opportunities – tied up in Q4, it’s not going to be the effect, it’s not going to come until 2015 right on new products and….

Oh no, no.

Any of this stuff and kind of addition I mentioned what it is because we don’t want to be button hold too much on any specific timing, but yes, the one or two products we are looking at 2015 would be more of an introduction sort of period and then if we’ve guessed right and these products are popular and a good fit and good for the markets then we think we would start seeing full contributions starting in 2016..

Thank you. I appreciate that..

Okay. Thanks..

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

Hi Steve, how are you?.

Good Joe, how are you doing?.

Doing all right. Juts a couple of quick question. Was curious on G&A, I know you’d kind of alluded that it pitched up a little bit higher with a bit more engineering and sales costs associated with the Midland capacity expansion in growing at a few targeted markets, it sounds like that sales piece is still there and growing.

But 10% is your sweet spot, and you’re settling on more at the lower end of that range versus migrating higher 10% to 11%, just curious on the modeling standpoint there..

Well and I mentioned 10% to 11% last call and I think we probably still need to kind of leave that as a rough estimate there.

Some of the advantages we are getting is as I mentioned last time, some of the larger driver this year was non-cash equity compensation for employees and so that tends to mitigate itself overtime, so we’re seeing some of that, but we’re still want to ramp up a bit, so I would still keep that 10% to 11% intact..

Okay. I apologize if I missed this in your prepared remarks, but the gross margin run rate on compressor sales alone is high 20s still, is it nudging a little bit higher, just curious as you go a little bit more throughput..

Yes.

This quarter was in the mid-20s, but yes I think for the year we are in that mid to high-20s, now I guess I would – since we are kind of in this transition phase of something-to-something with this crude oil price, I don’t know how much more I would press that going forward, but let's see, I’m just here looking on a year-to-date basis, here we are about 28%, so I think mid-20s is a good number to use..

Okay.

And last one just only alluding to new compression products, I understand if you don’t know lift the – but I’m just trying to understand what are you targeting just moving a little bit higher in terms of the horsepower offering that you bring the table or is it something more packaged even lower horsepower to begin to serve some aspects of the VRU market.

I’m just trying to understand what you’re alluding to there..

Yes. Well you know we're still trying to figure out this VRU market from the point of exactly how it’s going to play out, because obviously the [indiscernible] steps in it in effect and there is just not as much movement there in our horsepower range that we thought.

We're seeing a lot of little bitty things go out playing 20 or 30 horsepower stuff and we are frankly not real interested in that, I mean we are looking that a little from the point of – its really not a good rental product, its more of a sales for the products that it’s a really a pretty low revenue contribution.

But so we’re looking at that little but probably what I was alluding to more so was moving more into that 300 to 500 horsepower range..

Got you. Okay, I appreciate Steve. Keep hold on..

Okay. Thanks Joe..

Thanks..

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

Hey Steve..

HI Peter..

First question. So listening to some of the E&P earnings calls and it sounds like if this oil price continues to kind of struggle, they want to focus on kind of their core plays and so I guess the pain is going to felt disproportion ally across the bad shales and maybe a little less pain in the good shales.

Can you talk a little bit about how your exposure varies by kind of those different areas?.

Yes.

We think we are in the good shales and looking at 2015, if you go back what we were saying a few months ago before the oil price started to soften, we still see the same areas growing now, maybe the rates change is little, but we still think that Utica is going to be a growing area this year and we think the Permian will be a growing area this year I mean 2015, be grown in 2015, we think we’re starting to put more equipment into Oklahoma, we think that will probably be a good area for us.

So we think those are the three larger growth areas that we see out of our portfolio and I’ve looked and tried to keep track of all these breakeven points that are published out there on the different basis and everything else and I’m sure you guys do a better job than I do, but its all over the place too.

And a lot of this depends on the operator and besides just the basin how efficient they are, but we typically work for the larger operators in these areas so number one they are more active, number they got more infrastructure. So really a lot of their cost or already sunk cost, they are already in there.

So going forward, they can tend to concentrate maybe more so on drilling and certainly more so on production. So you know long answer to a short question, but we think the shales we are in are good, will provide some growth opportunities going next tear too..

Got it. And then can you go back over to the utilization numbers for the quarter, I think you said its 76%, 77% on the total fleet..

Yes, 76% to 77% out earning 79% to 80% earning revenue plus contracted..

Got it. And in general how did the natural gas units hold up this quarter.

Was it kind of – do you see an increase in things being sent back?.

No, no increase. It’s just still weak, which is what we’ve seen all year and that’s why I kind of mentioned the October.

October was a pretty strong month, so I don’t know – one point is not a trend make obviously, so I don’t really know what that means yet that’s we are getting closer to cooler weather and people are going to hold on to a gas stoves or what it is, but yes we’re certainly hoping for to mitigate some point and I think it will, typically Q4 and Q1 you will get some help on the gas side, we will need a couple of months to prove up what we saw on October..

Got it.

And then final question, as you kind of start your CapEx planning for 2015 what are you thinking about in terms of getting your engines ordered and think about that – is it going to be in the same level that it has been in 2014 from what you see now?.

Well I’m going to hesitate to answer this question too much yet. Like I say what I really want to see is by December timeframe what our customers coming out and saying and we are always market driven, customer pull on that stuff we tend to build according to what we think we can put it out there.

And we don’t build a whole lot on just the whole speculation. So I mean at a minimum I wouldn’t – I hesitate to give you a number now Peter, because I just don’t know, I just got to see what the customers are going to start saying.

Right now as I mentioned and I think you listened all the big service company’s calls and everybody is saying no change, no issue, no nothing and maybe that’s what's going to happen, but I’m just not smart enough to figure out what some of the customers are going to do. So I’ll let them tell me..

Got it. Well thanks Steve..

Okay. I appreciate it..

Our next question comes from Mark Brown from Global Hunter Securities. Please state your question..

Hey, Steve good morning..

Hey Mark..

Hey, we just wanted to ask about the flaring sales in the quarter and what's your expectation for flaring going forward. You have talked about the regulations in North Dakota in the past the flaring reduction and wanted to know if that kind of – if you think that’s going to spread to other parts of the country..

Well flares are running around $1 million to $1.25 million a quarter right now, and we’ve always said this and everybody knows this, I’m sure our pages to make sure that flare business has grown quite vigorously last especially three years and we’ve always said its open and closing window, it will get to the point where it will start closing off because of you know number one, pipeline is being laid in, you don’t need flares and or regulation and both are happening.

So we expect that business to come back down, but probably half to a third of what it peaked at last year which was around $5 million or $6 million, get back down to the dollar order of a couple of million dollars. Its coming off somewhat now, it’s not all the way down yet, probably in 2015 I would guess we would bottom on that.

So I think some of that impact is from that regulation and again pipeline is getting laid so this you don’t even need a flare, so we will get back down to the typical thing if you have a flare out there you know it’s a product that people buy and they never want to use and I think that’s where we will go to once you start getting some of the regulations and the path lines in there, you just have it out there essentially on an emergency or shutdown for a basis..

Okay. And just curious on your rental fleet if you still see the trend progressing more on conventional oil, less dry gas and if you still think we are going to see about a 50/50 split between those two in your overall rental fleet maybe by the end of the year..

Stephen C. Taylor:.

A lot of these gas suppliers come from Associated Gas now.

So it would be interesting to see what impact that will have on the gas supply and certainly if its not replaced we will be having dry gas continue to fall, and now wet gas falls so you might actually have a balanced supply demand picture on the gas side which might drive the gas price a little higher.

So you know a lot of dynamics to it right now, but I think generally its still going to be an oil driven market the next year..

Okay.

And just was curious if we do see a downturn due to persistently low oil prices, would that have more of an impact on your rental side of your business or the compressor sales side?.

Yes. Typically in a downturn sales is the one that typically gets hit and we saw that – I mean that’s been the case solved all my career that’s just the case in the industry.

NGS experienced that obviously back in 2009 when sales just dried out very quickly and we had a strategy after that point of shifting more towards the rental and we were doing that, But obviously the market shifted us very quickly towards the rental when sales went away.

And so now we are in that 75%, 25% roughly versus that quarter depending on sales, but we could go to 75% rental, 25% total sales and of that compressor sales were 10% to 15%.

We could conceivably go to zero compressor sales, 10% or 15% hit maybe on the top line overall, but a very minimal impact on the bottom line, because number one sales are that small of a piece or top line now. And then the margin difference were being about a third of rental just didn’t have as much impact on bottom lines that once did..

Okay. Well thank you very much. And very much appreciate it..

Okay, appreciate it..

(Operator Instructions) At this time, we have no further questions..

Okay, well I appreciate everybody joining in for the call. Thanks for your time and look forward to visiting with you again next quarter. Thanks..

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