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

Joe Gibney – Capital One Jason Wangler – Imperial Capital Robert Brown – Lake Street Capital.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group First 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, Steve Taylor, Chairman, President and CEO. I would now like to turn the call over to Ms.

Alicia Dada. Alicia, you may begin..

Thank you, Ross. And good morning, listeners. Please allow me a moment to read the following forward-looking statement prior to commencing our earnings call.

Except for the historical information contained herein, the statements in this morning's conference call are forward-looking and are made pursuant to the Safe Harbor provisions 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 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 Ross, and good morning. Welcome to Natural Gas Services Group's first quarter 2018 earnings review. NGS' rental revenues continue to solidify this quarter and our rental backlog including all horsepower classes grew dramatically, pertaining further gains in rental revenue.

We continue to set our newer, larger horsepower units and see a strong and growing backlog of orders.

Our total sales revenues were off this quarter due to variety of factors including lower flare activity, a large non-recurring engine sale in the last quarter and delayed fabrication of some large horsepower compressor sales in favor of large horsepower rentals.

But this fabrication delay was as short-term impact in the favor or a longer-term benefit and our sales backlog indicate, those sales are only delayed and should materialize in later quarters this year. We continue to report positive net income, our gross margin remained strong and SG&A decreased throughout the quarter.

Importantly, operating cash flow is solid and our cash balance provides sufficient liquidity for fleet expansion. I'll comment in more detail as we review the financials.

Our total revenues decreased in sequential quarters primarily due to scheduled compressor sales and about $2 million have been delayed to make way to build some of the larger 1,320 horsepower rental units.

I'll detail this later, but looking at the year-over-year comparative quarters, total revenues decreased $4.2 million from $18.9 million in the first quarter of 2017 to $14.7 million in the first quarter this year.

For the sequential quarters of the fourth quarter of 2017 compared to the first quarter this year, total revenues were off 12% or $1.9 million, from nearly $16.7 million to a little over $14.7 million. As previously discussed, this decrease is primarily the result of sales pushed out to later quarters.

The sales were down $1.9 million, rental revenues increased slightly from the fourth quarter at $11.5 million making the second consecutive quarter of increased rental revenues.

Moving to adjusted gross margin and comparing the first quarter of 2017 to this current quarter, total gross margin was down from $8.7 million to $7.8 million, primarily due to the lower sales revenue. However, our gross margin was higher at 53% of total revenue this quarter, versus 46% in the first quarter of 2017.

The decline in relative gross margin percentages was primarily due to higher sales gross margins and the mix shift towards relatively higher rental revenues as opposed to lower margin sales in the year-over-year period. I'll note that this is our highest overall gross margin in the last five quarters.

Sequentially, total gross margin was essentially flat from last quarter. Our selling, general and administrative expenses decreased by $1 million year-over-year and by almost $300,000 in the sequential quarters of the fourth quarter of 2017 compared to the first quarter of 2018.

If you recall, last year we had ad expenses related to a non-cash non-operational charge for accelerated stock compensation expenses of almost $1 million. Those expenses did not repeat this year and were the majority of the decreases. Operating income increased slightly in the comparative year-over-year quarters, up from $340,000 to $350,000.

Sequentially, operating income increased $150,000 despite lower revenues, primarily as a result of greater cost efficiencies, lower SG&A. In a comparative year-over-year first quarter, net income decreased to $225,000, down slightly from about $250,000 in the first quarter of 2017.

Sequentially, net income decreased now to $18.5 million from almost $18.7 million in the fourth quarter of 2017 to $225,000 in the first quarter of 2018. However, recall from our year end call, with the 2017 Tax Act, we saw one-time positive deferred income tax adjustment from nearly $18.4 million, that boosted our net income for fourth quarter 2017.

Comparing net income before taxes for the sequential quarter, we were up slightly from approximately $265,000 to about $275,000. On a year-over-year basis, adjusted EBITDA was essentially flat in the $5.7 million range for both quarters. Sequentially, adjusted EBITDA increased slightly from a little over $5.6 million to nearly $5.7 million.

Although adjusted EBITDA has been roughly constant in these comparative quarters, the revenue have been higher in the other quarters and I think it demonstrates significant strides in cost control and highlights the beginning growth of our rental segment, further strengthening our adjusted EBITDA margins.

NGS reported earnings per share this quarter of $0.02 per common share. This compares to $0.03 in last year's first quarter and $0.03 last quarter, net of federal income tax benefit. NGS continues to be one of few companies in the OFS space including competitors that have reported positive net income in every quarter to-date.

Total sales revenues, which include compressors, flares and aftermarket activities in the year-over-year quarter decreased from a little over $6.6 million in the first quarter of 2017 to $3 million in the first quarter of this year. For the sequential quarter, total sales revenues decreased $1.9 million from $4.9 million to $3 million.

Over $1.5 million of this decline was due to lower flare and part sales, in addition to a one-time $700,000 engine sale in the last quarter. We also had a fabrication schedule change driven by one of our customers that represented over $2 million of sales dropping out of this quarter, but the order will show up in later quarters this year.

Although it impacted the first quarter 2018, it enabled us to strategically shift some of the larger horsepower rental units up in the schedule and facilitate quicker rental contract starts with some of our customers.

Reviewing compressor sales alone, in the current quarter they were $1.8 million compared to $5.6 million in the first quarter of 2017 and $2.1 million in the fourth quarter of 2017.

We expect to see more volatility in quarterly compressor sales as customer demand and schedules change, as we ship resources between rental and sales fabrication with given the choice, rental-taking precedence.

The 26% gross margin on our compressor sales this quarter compared favorably with 15% in the first quarter of 2017 and the 11% gross margin we had in the fourth quarter 2017.

We see a fair amount of variability in the compressor sales margins, due primarily to different margins being called on different size of equipment, and a degree of cost absorption based on the utilization of shop space.

Our compressor sales backlog was roughly $8.5 million at the end of the first quarter of 2018 and is higher than $7 million, we reported in the fourth quarter of 2017, the prior quarter. Rental revenue had a year-over-year quarterly decrease from $11.9 million to $11.5 million for the current quarter.

Adjusted gross margins decreased from 61% last year's comparative quarter to 59% this quarter. Sequentially, rental revenues increased from $11.4 million to $11.5 million with adjusted gross margin increasing to 59% for this current quarter compared to 58% in the last quarter.

In the past, NGS has been primarily focused on the wellhead portion of the business with compressor fleet units ranging from 100 horsepower to 300 horsepower per unit. And we have reported certain metrics on a per unit basis.

As previously announced, we have started adding significant amount of large horsepower to our standard fleet mix, and using the per unit metric will not accurately reflect the addition of this larger horsepower, from a pricing or utilization basis.

As such we will begin reporting these metrics on a per unit and a per horsepower basis for the balance of this year, at which we will move strictly to a per horsepower report.

On a per unit basis, average rental rates across the active fleet were flat when compared to the first quarter of 2017, and were up a little over 4% over the fourth quarter of last year. On a for horsepower basis, we saw a 5% decrease and 1% increase, respectively. Both metrics indicated improvement in pricing in the most recent quarter.

Fleet size of the quarter ended of March 31, 2018 was 2,552 compressors or 378,826 horsepower. And we had a net addition of six rental compressors or 9,135 horsepower this quarter. Our active fleet utilization at the quarter ended March 31, 2018 was 48% on unit and 49% on a horsepower basis.

At the end of April, it was 48% on units and 50% on horsepower. Our utilization improved in April and just as importantly, our rental backlog of contracted fleet equipment substantially increased. Additionally, we contracted eight more large 1,320 horsepower rentals in April.

This should be coming online later in this year and the first quarter of next year. This alone represents over 10,000 horsepower addition and almost $10 million in capital expense. As mentioned, our rental backlog grew significantly in April, and net of any terminations, is encouraging as we progress into 2018.

This backlog is large enough that we have had to make ready more equipment in our fill losses than we usually do, and have outsourced some of the make-ready work to meet deliveries. Last call I mentioned that we would earmark $20 million to $25 million for compression capital expenses in 2018.

And so far we have capitalized $7.4 million in new compression units in this quarter. Remember, this is all growth capital, since we don't capitalize maintenance expenses. Our discussion on CapEx is usually dedicated primarily to new compression equipment. As I announced last call, we are constructing an office building for headquarters.

In this quarter we spent approximately $1.4 million on the construction. Turning to the balance sheet, our short-term and long-term bank debt remains under $500,000 as of the end of the quarter and cash in the banks was little over $65 million.

Our cash flow from operations remains strong at nearly $5 million for the quarter, and free cash flow was a negative $3.6 million with our CapEx additions. This compares to negative free cash of $5.5 million last quarter. From this, we have spent approximately $11 million in growth capital on rental free compression over the last couple of quarters.

We actually had a higher CapEx spend in this quarter than last, but our operating cash flow was stronger this quarter – sorry, net use of available cash is lower than last quarter. Approximately three quarters of the new capital equipment is committed to long-term multi-year contracts.

There is a general uneasiness in the market about energy companies particularly E&P companies spending more cash than they generate. But I want to explain that our spending is different. It's based on no borrowed fund. This is money literally in the bank and we have assured multiyear contracts, which guarantee good returns on the capital invested.

This is the strength of NGS model, having liquidity necessary to react quickly to solve opportunities. NGS strategically built cash from the downturn, so that we can optimistically expand and reinvest in other company and peers when we have the chance to grow our business.

This will be the third cycle in 13 years that we have done this and we think the model has proven itself. We have consistently delivered positive net income. Our shareholder returns are over long periods of time in the top tier. This is when our shareholders invest in NGS.

Summarizing the quarter, we have lot on our plate, although some pricing utilization pressures remain, our fundamentals and the markets are improving. And our development backlog indicates an active balance through the year. Macro-wise, we are in an interesting time.

WTI crude oil prices have firmed in the mid to high $60 per barrel range, primarily due to OPEC result, surprising in itself. We also have Venezuela imploding and recently the Iranian factor coming into play. Needless to say, the crude oil market looks to be solid for the balance of the year.

Define the augment as a price of natural gas which continues to be range bound below $3 per Mcf.

Although operators can make a return at this price, especially on existing production is generally too slim to warrant increased drilling activity, and therefore does not presently have the growth potential that comes with crude oil and associated gas activity.

Since the start of the shale oil growth in early 2010, NGS has perceived that market and now more than half of our fleet and approximately 60% of our revenue is oriented toward associated gas activities. Moving in a larger horsepower reinforces our belief in that market enables NGS to be an active player in the larger horsepower arena.

NGS' financial results and shareholder returns continue to be among the best in the industry. We are well positioned and I believe entering another growth period. That's the end of my prepared remarks, and I'll turn the call back to Ross for any questions anyone may have..

[Operator Instructions] Our first question comes from Joe Gibney from Capital One. Please go ahead, Joe..

Thanks.

Steve, how are you doing?.

Hi Joe, good..

Just a question on utilization outlook, so your comment certainly indicative of growing backlog of demand here on the rental side, your build at least in terms of fleet count pretty in line with what you'd advertised here on the CapEx front.

But bridging into 2Q, just help us gap a little bit from sort of this 50% utilization in April and sort of maybe what you think you could trend over the next couple of quarters, given what sounds like pretty robust demand building particularly on the higher horsepower side?.

Well, you know, while we're – this utilization is getting harder and harder to project. While we're fighting, it's a good fight and it's a good problem. As you know the utilization, we – it's growing, because the business looks like it's growing, but we're also adding to the denominator, because we are building a lot of this new equipment.

So, while we're increasing the numerator something, the denominator is also increasing. So, as much as we saw in the last recovery in 2010, 2014, the utilization grew at a slower rate than you'd expect just because we're idling the equipment at the same time.

So, it's going to be a little slower growth than what if you just took the number of units of horsepower that's being put out and you didn't have any growth in the fleet, but all this new horsepower obviously is new growth.

So, that's going to tap down just that growth in utilization somewhat and disconnected a bit, and I think I mentioned this last time, we're going to get a little disconnect between utilization and revenue growth over time.

But, we are seeing some growth in the other horsepower ranges that we hadn't seen as much at this point, so the 200 to 300 horsepower gas lift equipment is starting to move a little move. The VRUs is staying very popular. So, from small to large, we are seeing some growth in this side.

Now, the big horsepower is the biggest piece – the biggest factor in growth right now and of course obviously the biggest dollars and added to the horsepower. So, [profit] is low on this, because it's hard to say, but that's where we're going to run into. I think we'll see the utilization grow but not as quick as we'll see revenue grow..

Okay. Fair enough.

Could you repeat the compressor sales gross margin? Did you say 17% or was it little higher, I understand?.

No. I think it's 26% this quarter..

26%, okay. And then on the flare market, I know, it's small little piece, tends to be lumpy, but can be higher margin at time.

But you referenced a bit of a down tick there, is that just transitory or something that we should be thinking about moving ahead as element that could continue to drop off?.

No, we think it's going to be pretty decent this year. But what we had in the last quarter was just a lot of year end orders come in. People rushing to get this stuff done by fourth quarter and we had a couple of particular bigger orders that they wanted them by end of the quarter. So, the revenue level is still good.

We think it's going to stay good, but the comp was kind of rough, just because we had a year-end rush..

Got it. Okay. I appreciate it, Steve, thanks..

Thanks Joe..

Our next question comes from Jason Wangler from Imperial Capital. Please go ahead, Jason..

Hey, Steve, good morning..

Hi, Jason.

How are you?.

I am doing okay. Hope you are too.

I was just wondering all this talk in the Permian specifically, but you're hearing it in DJ and other areas too about, I need to make sure that they can capture their gas and flaring not be an option? Are you hearing more about the ability to move units in or you know gas lift operations of reinjecting things over the last few weeks or so, because it seems like that's something that would be a potential solution for some of these folks, specifically in the Delaware.

I know you are building more larger equipment which that may need, but just kind of curious if you are seeing any additional demand coming from that kind of a situation that we are seeing now?.

You mean from a reinjection perspective?.

Yeah. Just for gas lift operation..

You're talking about reinjection from pressure management standpoint or just reinjection for the gas lift?.

Just reinjection from the gas lift, basically it is finding a way to get to not flare or put the gas on the pipe, and since there may not be piped out there?.

Yeah. Well, that's the majority of what we are seeing. I mean all these large horsepower, we've started putting out the last two or three quarters is all centralized gas lift. This is what we identified two or three years ago as to when we first starting moving on the 400 to 600 that we were seeing more and more since last gas lift come along.

You're still going to have the wellhead gas lift like we've got and we are well positioned for that. But the centralized stuff start coming up too, so all these big horsepower we see going out is centralized gas lift.

In addition to what we are starting to see now on this 200 to 300 horsepower smaller units, that was more of the wellhead gas lift stuff, so that is the majority of what we are seeing right now..

Okay. And I guess, like I said, it just seems like with the conversation of basically trying to give the gas away for free if they can in the Delaware specifically that's probably happening in the Midland too.

But do you think that that changes any of the demand for them? Or is it simply, just say, if we have a well coming on, we need this equipment and do you have it or do you not? Or do you see that maybe, if they really are giving it away for free, at this point, they just need – your equipment to plus the well flow? Does that change their activity level with you at all? Or is it really just kind of the same thing, twice?.

No. I don't think it changes, because you know, in gas lift, since they are not getting anything for that gas, you know they are not selling, they are just recirculating it downhole to lift more oil out. So, you've already got the kind of the zero net revenue from gas, but obviously you make it from the oil lift and oil produced.

Now there is a lot of talk about oil pipelines being a potential bottleneck out here. And there is talk about – we haven't seen really too many pinch points from our perspective.

But there was an interesting article last day or two about a lot of the West Texas crude, since it has wider differentials to some of the other benchmarks is being shipped from here to the eastern refineries.

And they've been shipping them by – pipelines are getting full, they have been shipping them by ship actually, and now they are talking about more rail shipment. So, I think you got to a point to where the difference was attractive for this crude and that can absorb shipping costs to be moved around.

So, that tells me, there's not going to be a whole lot of bottlenecks, not any more bottlenecks development. And since we haven't really seen an impact, I mean we're growing in that part of it, I wouldn't expect you to see too much hindering our efforts in that area in the future..

I appreciate the color. Thanks Steve..

Okay. Thanks Jason..

[Operator Instructions] Our next question comes from Robert Brown from Lake Street Capital. Please go ahead, Rob..

Good morning, Steve..

Hi, Rob..

Just I wanted to follow-up on, I think you talked about an $8 million orders in April for the high horsepower, I guess congratulations there. But also what sort of driving that market increase I guess, are you gaining share or are you seeing demand growth? And just more color on that $8 million would be great? Thank you..

Well, it wasn't $8 million, so it was eight of the larger horsepower units for rental. So, it'd just be capitalized money, but we are seeing both. I mean obviously, at least for part of next year or two, anything we get is a share increase, because we're new to the market, so we're taking away from somebody that would have gotten it otherwise.

So, until we establish maybe a little more depth in that market which we intend to, everything we are going to get, I'd say over the next couple of years is going to be a share impact. But it's also just the growth at here, there is lot of compression going out here. A lot of it looks to be big stuff.

We saw the big horsepower move first, and now we're starting see some of the more medium wellhead type horsepower start to move too. So, I think you can attribute to both. Probably majority is just growth out of here, but anything we get is share from somebody right now..

Okay, good.

And are these eight units at sort of similar to your first group, are they good margins? Are the long-term contracts, just help me understand that?.

Yeah. Same sort of thing, we are trying to keep pricing in a reasonable realm, which means a little higher than market, and these are multiyear realm contracts..

Okay, good.

And then maybe just, like to hear comments on the supply chain, are you seeing availability of engines tightened? And any cost kind of growth going on in the supply chain?.

Yes. We are seeing deliveries. The engine and compressor deliveries don't seem to be getting any worse. There is development of bottleneck and gas coolers. We are seeing some of that.

What that means is, this is not really impacting our ability to deliver, just mean you got a plan a little quicker out and/or sometimes, you got to put a little longer deliveries than people like. But we're in no different shape than anybody else in that market, [heard about] Boston, the same suppliers.

So, there is – you know there is, just had to get a little ahead of the calendar there a bit. From a cost inflation standpoint, yes, all the major components are going up, the compressors, the engines, coolers, sealers are going up a little, everything else. So, you're getting some inflationary cost increases in this market.

Some inflation, which are market driven, some are just based on cost of goods, but we are seeing some of that..

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

Okay. Thanks Rob..

[Operator Instructions] And at this time, there appears to be no further questions..

Okay. Thanks Ross. And appreciate everybody joining me on the call and look forward to talking to you next quarter. Thanks..

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