Natural Gas Services Gr Q3 2026 Earnings Call Transcript

Natural Gas Services Gr (NYSE:NGS) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Natural Gas Services Gr reported record rental revenue of $58.9 million and adjusted EBITDA of $29.6 million for the third quarter, driven by the acquisition of Flat Rock and organic growth.

The company increased its full-year adjusted EBITDA guidance to $105-108 million and raised its quarterly dividend by 60% year-over-year to $0.16 per share.

Strategic initiatives include fleet optimization, high asset utilization, organic growth, and accretive M&A, with significant opportunities in midstream applications and large horsepower equipment.

Natural Gas Services Gr is selling its Tulsa fabrication facility for $4.75 million to focus on rental compression, which is expected to enhance capital deployment and fleet returns.

Management highlighted continued market share gains, robust demand for LNG exports and power generation, and a favorable pricing environment despite inflationary pressures.

Full Transcript

OPERATOR

Good morning ladies and gentlemen and welcome to the Natural Gas Services Gr third quarter earnings conference call. At this time all participants are in listen-only mode. Operator assistance is available at any time during the conference by pressing 0 pound. I would now like to turn the call over to Mr. Greg Wright. Please begin.

Greg Wright (Investor Relations)

Thank you, Luke, and good morning everyone. Before we begin, I would like to remind you that during today’s conference call, the Company will be making forward-looking statements within the meaning of federal securities law. Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the Company can give no assurance that such forward-looking statements will prove to be correct.

NGS disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday’s earnings press release and in our filings with the SEC, including our Form 10-Qs for the period ended September 30, 2026, and our Form 8-Ks. These documents can be found in the Investor Relations section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussions today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income, and adjusted gross margins, among others.

For reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, please see yesterday’s earnings release. I will now turn the call over to Justin Jacobs, Chief Executive Officer.

Justin Jacobs (Chief Executive Officer)

Thank you, Greg. 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. I especially want to recognize our field service personnel. Their focus on reliability, unit performance, customer service is what allows us to deliver for our customers every day and ultimately drives the results we are reporting. This was our first quarter with Flatrock and two things stand out. First, the acquisition is already delivering against our expectations. And second, integrating it has not slowed our organic growth. We set more than 20,000 horsepower of new units in the quarter and delivered record rental revenue and record adjusted EBITDA. When we announced the Flat Rock acquisition, I described three strategic reasons for the transaction. It broadened our customer portfolio, increased our density in the Midland Basin and the Eagle Ford, and added a complementary fleet that expanded our electric compression platform. We are already seeing the benefits of all three. We are setting units and quoting additional projects with these customers.

We are using our added density to respond faster and provide better service in these basins. We are finding opportunities to convert and upgrade small and medium horsepower units across the combined fleet. I’ll cover each in more detail shortly. There was a fourth strategic reason for the acquisition and it matters more than the other three: the people. The Flat Rock team is already making Natural Gas Services Gr better. Flat Rock brought a disciplined approach to fleet management and their team members are now leading that work across the combined fleet. That work is the foundation for getting full value from our smart platform and the data we collect, which means better performance for our customers and greater efficiency for Natural Gas Services Gr.

I want to thank them for what they have done in the five months since we came together. Last quarter we said we would revisit our guidance once we had a full quarter of Flat Rock, that we expected to add 55,000 horsepower organically this year, and that we had more to do to put underutilized assets to work. Today we are raising our full year adjusted EBITDA guidance. We remain on track for 55,000 horsepower and we’ve agreed to sell our Tulsa fabrication facility. We are also increasing our quarterly dividend to $0.16 per share, 60% above where we started the program last year.

I’ll go through our four growth and value drivers with these points in mind. Our first growth and value driver is fleet optimization. This is about earning more from the fleet we already own. We made progress on both price and cost this quarter. Pricing continues to increase materially, driven by new large horsepower unit sets, contract renewals at higher rates, and the mix of the combined fleet. Despite rising labor, parts and lubricant costs, rental adjusted gross margin improved from the second quarter. Ian will go into more detail on these numbers.

We also made two advances in how we collect and use data. First, we implemented our new ERP system at the beginning of the quarter and it is already producing results. It brings much more of our operating, maintenance and financial information together and gives us a clearer, faster view of the fleet and the business. Second, we are rolling out the newest version of our smart platform. It is a step change in the amount of unit-level data we collect and what we can do with it.

Together with the fleet management work I described earlier, we believe these investments will put Natural Gas Services Gr at the forefront of the industry in how we collect and use data using AI tools available today. That data should materially improve both our performance for customers and our operating efficiency. Our second growth and value driver is asset utilization. As I said last quarter, the question we ask of every asset is straightforward: Is it producing an adequate return for our shareholders? If the answer is no, we improve its productivity or convert it into capital that can be deployed somewhere else. After the end of the quarter, we agreed to sell our Tulsa fabrication facility. We now outsource all new unit fabrication so we can focus on rental compression, which is a better business for us and the one where we have an advantage.

The facility is a drag on earnings. We are turning an asset that generated no earnings into nearly $5 million we can reinvest in our fleet at or above our hurdle return. Fleet utilization remained high at approximately 88%. The large horsepower units remain basically at a frictional idle level. Beyond large horsepower, our main opportunity is in small and medium horsepower, and we are addressing it in three ways. First, we are converting units, including to electric drive.

Second, we are upgrading units to meet current customer requirements. Third, we are working with customers to better match the equipment in the field to what they need today, which can free up units that are in higher demand. Together, we expect these efforts to put more of our idle fleet back to work and improve returns on the fleet we already own. Our third growth and value driver is organic growth. We’ve updated our investor presentation and we added a new slide, Slide 11, that I think is worth your time. It compares fleet horsepower growth over the last five years for the four public compression companies, both in total and organically. All of the data is public, but I haven’t seen it presented this way before. Excluding acquisitions, our fleet has grown organically at about 8% a year. Over that five-year period, our public peers have grown organically in the low to very low single digits.

I’d encourage you to look at that comparison alongside how the four companies are valued today. We are taking market share organically and 2026 is the fourth consecutive year we have done so. Based on the opportunities we see today, I expect that to continue. Our goal is to keep growing faster than the industry. Through the third quarter, we have added approximately 43,000 horsepower organically, which keeps us on track for 55,000 horsepower for the year.

Our organic growth continues to be focused on large horsepower and electric motor drive equipment, and the quoting activity I’ll describe in a moment points to the continued demand for both. Our fourth growth and value driver is accretive M&A. I said earlier that Flat Rock is delivering against our expectations. Here’s what that looks like. Starting with customers, Flat Rock brought strong relationships with large E&P customers, including two large public operators in the Midland Basin. Beyond the units we continue to set with them, we are quoting new large horsepower projects. Given equipment lead times, that work will take time to show up in our financial results, but it reflects the strength of the relationships Flat Rock developed and we intend to build on them.

On density, more equipment, people and customer activity in a basin improves both our efficiency and our responsiveness to customers. The Eagle Ford is a good example. Before the acquisition, our customers there told us they valued our service but wanted faster response times, and we did not have the density in that basin to provide that. Flat Rock gives us that density, which lets us respond faster. On the fleet, the Flat Rock fleet came to us in very good condition and that reflects how it was maintained. We are now using the Flat Rock team structure and processes for fleet maintenance across the combined fleet. That shows up in our maintenance spending. It is in line with expectations, and full-year guidance is only modestly above our initial 2026 range, even though the fleet is roughly 15% larger today. Ten percent of our rented horsepower is electric, and Flat Rock’s experience converting small and medium horsepower units to electric drive is part of the conversion work I described earlier.

Our acquisition framework remains disciplined. We will continue to evaluate opportunities based on strategic fit, customer mix, basin position, fleet characteristics and valuation. Turning to the market, compression demand is driven by production volumes in the upstream and throughput volumes in the midstream, and the outlook is strong for both oil and natural gas. On the oil side, WTI remains elevated, driven by geopolitical instability and a global drawdown in crude inventories. We do not expect prices to stay at these levels indefinitely and our business does not depend on them. With that said, we continue to see new unit activity.

We have significant quoting activity for the rest of 26 and 2027, and we are seeing large requests for proposals for the second half of 2027 and into 2028. On natural gas, the two largest sources of new demand are LNG exports and power generation. U.S. LNG exports averaged about 17.4 billion cubic feet per day in the first half of this year, nearly 50% higher than in 2023. Projects already under construction are expected to increase that by roughly another 50% by 2030, with some industry estimates pointing to considerably higher growth. That gas has to be produced, gathered, processed and transported, and compression is required across these stages.

For power generation, including demand driven by data centers, the range of outcomes is wider than for LNG, but many industry forecasts put the incremental gas demand through 2030 at levels comparable to the growth from LNG exports. Policy changes could reduce that to some extent, but we expect the increase to remain material for Natural Gas Services Gr. This is showing up in our new business activity. We are quoting more midstream applications than at any point in our history.

Combined with the continued demand for gas lift on the oil side, that gives us a positive outlook. At the same time, the supply of new large horsepower compression equipment remains constrained with extended lead times for engines and fabrication. A combination of strong demand and constrained equipment supply supports high utilization and a constructive pricing environment. We are also operating in an inflationary environment. Labor, parts and lubricant costs continue to rise and we are not immune to that.

We will continue to use pricing, operating data and disciplined execution across procurement and our field operations to help manage those pressures while maintaining the service levels our customers expect. With that, I’ll turn the call over to Ian to discuss our financial results in more detail.

Ian M Eckert (Chief Financial Officer)

Thank you, Justin, and good morning to those joining us on the call today. As Justin said, this was our first full quarter with Flat Rock and it produced record rental revenue and adjusted EBITDA. Third quarter rental revenue reached $58.9 million, increasing $9.5 million, or 19.1% from the second quarter. Total revenue was $61.3 million compared to $51.4 million last quarter. The largest contributor was Flat Rock’s first full quarter, with the balance coming from more than 20,000 horsepower of organic fleet additions and pricing improvements.

Rental revenue per horsepower per month reached $29.13 in the quarter with the addition of Flat Rock. We are normalizing this metric to exclude a small amount of rental revenue unrelated to compressor horsepower. On this basis, rental revenue per horsepower per month was $28.75, an increase of 6.2% year over year, underscoring the continued improvement in the underlying economics of our rental fleet. Rental adjusted gross profit margin increased $6.4 million sequentially to $36.6 million, and rental adjusted gross margin percentage improved to 62.2% compared to 61.1% in the second quarter. For the first nine months, rental adjusted gross margin was approximately 62%, above the 61% we reported in the same period in 2025. We reached that improvement despite higher operating costs, most notably lubricant oil. We are managing lubricant costs through purchasing discipline, a growing mix of electric units, contractual fluid surcharges, and pricing where available.

We do not expect to recover every increase immediately, and lubricant inflation remains a headwind. Reported SG&A expense was $9.4 million compared with approximately $9.9 million in the second quarter. Third quarter SG&A included approximately $800,000 of transaction and integration costs related to Flat Rock, down from $3.3 million last quarter, and approximately $300,000 of non-cash amortization of capitalized implementation costs for our new ERP system. That amortization will recur and it is added back in our adjusted EBITDA reconciliation.

Excluding stock-based compensation, integration costs and ERP amortization, primary SG&A as defined in our 10-Q was approximately $7.3 million or 11.9% of revenue compared with 12.1% in the prior year quarter. This reflects our continued focus on fixed cost leverage while supporting a much larger fleet. Adjusted EBITDA reached a record $29.6 million, an increase of $4.6 million or 18.2% sequentially, and 42.2% when compared to the prior year quarter. Net income was $5.6 million or $0.43 per diluted share, while adjusted net income was approximately $6.2 million or $0.48 per diluted share. The difference between reported and adjusted results primarily reflects the aforementioned transaction and integration costs. Looking ahead, we expect the fourth quarter to be the final period of meaningful integration-related expenses, with our remaining efforts focused on optimizing the combined cost structure to generate additional fixed cost leverage.

Consistent with our historical treatment, these expenses will be excluded from adjusted results. Moving on to capital allocation, third quarter capital expenditures were $25.9 million, including $20.6 million of growth capital and $5.3 million of maintenance capital. The increase from $18.8 million in the second quarter reflects higher growth spending as unit deployments ramped up. For the first nine months, we invested approximately $48.2 million in growth capital and $11.7 million in maintenance capital, consistent with our updated full year ranges.

Another meaningful development since our last call is the agreement to sell our Tulsa fabrication facility for $4.75 million. The transaction remains subject to closing conditions, with completion expected by the end of November. The facility had a net carrying value of approximately $1.5 million at quarter end. If the sale closes as expected, we will recognize a gain of approximately $3 million in the fourth quarter. This will be excluded from adjusted EBITDA.

We ended the quarter with $340 million outstanding under our $500 million credit facility, up $12 million from June, and approximately $140 million of borrowing base availability. Our leverage ratio was 2.8 times, leaving meaningful headroom below our 3.5 times bank covenant. That capacity supports organic growth, the Flat Rock integration and shareholder returns. In fact, we returned approximately $5.2 million to shareholders through dividends during the first nine months and have announced a fourth quarter dividend of $0.16 per share, up 6.7% from the third quarter and 60% above the initial dividend established just over a year ago.

We have a $6 million share repurchase authorization in place, which gives us flexibility to make opportunistic share repurchases. In summary, the third quarter showed earnings power of the combined fleet, continued organic growth and improving rental margins despite inflation. Our priority is to turn that larger base into growing cash flow and strong returns on capital. With that, I’ll turn the call back to Justin to discuss our updated guidance and closing comments.

Justin Jacobs (Chief Executive Officer)

Thank you, Ian. Based on our third quarter results, a full quarter of Flat Rock and our organic fleet additions, we are increasing our full year 2026 adjusted EBITDA guidance to $105 million to $108 million from our previous range of $103 to $108 million. With a full quarter of Flat Rock behind us and better visibility into equipment timing, we’re narrowing our full year growth capital expenditure guidance to $60 to $75 million, from $60 to $80 million, with no change to our horsepower expectations.

Maintenance capital expenditure guidance remains unchanged at $15 to $19 million. I said at the start that two things stood out this quarter. Flat Rock is delivering against our expectations and integrating it has not slowed our organic growth. We intend to keep it that way. Natural Gas Services Gr is a larger and more capable company than it was a year ago, and I do not believe we are close to exhausting the opportunities in front of us. Luke, we are now ready to open the call for questions.

OPERATOR

Ladies and gentlemen, at this time we will conduct a question and answer session. If you would like to state a question, please go ahead and press 7 pound on your phone now and you will be placed in the queue in the order received. You can press 7 pound again to remove yourself from the queue. You’re now ready to begin. Our first question comes from Rob Brown, Lake Street Capital Markets. Go ahead please.

Rob Brown (Analyst at Lake Street Capital Markets)

Good morning. Questions really on kind of the growth expectations in the next year. I know you’ve gotten some good progress with Flat Rock and I know you talked about expanding pipeline, but just wanted to get your sort of view on kind of growth, how you view growth into 27 and I guess 28 potentially. But how do you sort of view the growth steps here?

Justin Jacobs (Chief Executive Officer)

Morning, Rob. Thanks for the question. As you read the release, obviously there’s no formal guidance for 2027 at this point. We’ll have that on the fourth quarter call. The way I would describe it is there are a meaningful number of equipment commitments through 2027, enough that I am confident 2027 will be the fifth year of market share gains for us. The customer RFP activity for 2028 is already underway and there is strong demand for large horsepower and electric drive equipment. And so as we look at the growth rate going forward, without providing numbers at this point, we continue to expect it to be strong.

Rob Brown (Analyst at Lake Street Capital Markets)

Okay, great. Got it. And then on the inflationary environment you talked about in several categories, how is the visibility there? Is it a moving target and changing quite rapidly or do you feel like it’s a well-understood kind of inflationary trajectory that you can handle?

Justin Jacobs (Chief Executive Officer)

Rob, thanks for the question. You know, I’m certainly not going to attempt to forecast future inflation, but I can speak to the actions we’re taking to mitigate its impact, which I think are reflected in our year-over-year margins in the third quarter. First, we’re continuing to high-grade our fleet toward larger horsepower equipment with more attractive operating economics. Second, we’re maintaining price discipline on renewals and new contracts.

And third, we’re passing along lubricant inflation contractually, though that’s not applicable in all cases. I think these initiatives have helped us to expand our rental gross margins despite those inflationary pressures. And we believe they do position us well to continue protecting profitability going forward.

Rob Brown (Analyst at Lake Street Capital Markets)

Okay, great. Thank you. I’ll turn it over.

Justin Jacobs (Chief Executive Officer)

Thanks, Rob.

OPERATOR

Thank you very much. Our next question comes from Nate Pendleton with Dexis Capital.

Nate Pendleton (Analyst at Dexis Capital)

Good morning and congrats on the great update. Justin, I wanted to go back to Slide 11. You’ve continued taking market share over the past several years. How would you characterize competition for new large horsepower awards today and have the differentiating factors changed at all?

Justin Jacobs (Chief Executive Officer)

I think it clearly—and thanks for joining, Nate—clearly remains a competitive environment, even in the large horsepower. There are a number of factors that I think drive the customer decision, and it certainly varies by customer how much they’ll weigh each of these different factors. But I think first is the quality of the equipment, specifically the technology on that equipment, along with the service provided by the field service personnel. And I look at those two things combined and say, ultimately, that drives your customer performance, your runtime for them. The next is equipment availability, and the final is pricing. And I think those are the main factors that have driven our competitive wins over time. And I think those are the factors that will drive it going forward, and it just depends on the customer how much they may weigh each of those different factors.

Nate Pendleton (Analyst at Dexis Capital)

Got it. Thanks, Justin. And as my follow-up, this quarter you increased the dividend again, and you still have an active share repurchase program available. Can you provide an update on how the team is looking at capital allocation between shareholder returns and leaning further into growth during this investment cycle?

Justin Jacobs (Chief Executive Officer)

Yeah, Nate, I think we believe the recent share price weakness doesn’t reflect the underlying value of our business. And if that weakness persists, I think we intend to be opportunistic with our $6 million repurchase authorization, particularly when the implied multiple on forward adjusted EBITDA offers returns comparable to our organic growth investments. You know, we’ve been unable to repurchase shares over the past several weeks due to the earnings blackout period, and at this point, we’re exploring a 10b5-1 plan to provide us greater flexibility going forward during these blackout periods.

I think the piece I would add on to that, Nate, is we don’t view it as an or situation. With our prudent level of leverage and the strong cash flow characteristics of the business, it’s an and situation for us. We have the opportunity to continue to grow at levels beyond the industry organically, look to do strategic transactions, and provide return of capital to shareholders, both in the form of dividends and potentially share buybacks.

Nate Pendleton (Analyst at Dexis Capital)

All right, thanks for taking my questions.

Justin Jacobs (Chief Executive Officer)

Appreciate it, Nick.

OPERATOR

Thank you very much. Next is Tate Sullivan with the Maxim Group. Go ahead, please.

Tate Sullivan (Analyst at Maxim Group)

Thank you. Good morning. Justin, you mentioned meaningful midstream bidding opportunities. Is that something mostly that Flat Rock brought, or is that from NGS side as well, too? And then follow-up on that question.

Justin Jacobs (Chief Executive Officer)

Yeah, it’s been a mix, although it is more on the NGS side. Although I don’t necessarily read anything into that. I would expect that to be the case with the sizes of the fleet. So it’s been a little bit of both, but it is probably tilted—well, tilted significantly more towards NGS-driven side.

Tate Sullivan (Analyst at Maxim Group)

And is that opportunity in the midstream all for new and larger compressors that you’re building, or can you move some compressors from well pad locations to the midstream opportunity?

Justin Jacobs (Chief Executive Officer)

It’s a mix of newly fabricated and existing equipment. And that’s something that we look at as we are recontracting existing large horsepower. It is all large horsepower though, in terms of the application size.

Tate Sullivan (Analyst at Maxim Group)

And I imagine the contracts in the midstream space may be longer, more years, than the smaller horsepower, similar to the large horsepower market that we’ve had.

Justin Jacobs (Chief Executive Officer)

It’s pretty similar in what we’ve seen on the oil side versus upstream versus midstream. I haven’t seen a material difference there.

Tate Sullivan (Analyst at Maxim Group)

And lastly, on follow-up on the sale of the Tulsa facility. So after that sale is complete, will you no longer have a sales business line in revenue compressor sales?

Justin Jacobs (Chief Executive Officer)

Tate, I do believe we’ll still have some degree of sales, but they will be muted. Ultimately that facility was used largely for internal fabrication of new units. And just a follow-up on that, Tate, to confirm, we’re not going to be selling new fabrication packages to third parties. We hadn’t been doing that for a period of years now. It was only for the internal fleet. And now that will be entirely third party.

Tate Sullivan (Analyst at Maxim Group)

Okay, thank you very much.

Justin Jacobs (Chief Executive Officer)

Thank you, Tate.

OPERATOR

Thank you very much. And again, if you have a question, please go ahead and press 7 pound. Our next question comes from Jim Rollason with Raymond James. Go ahead, please.

Jim Rollason (Analyst at Raymond James)

Good morning, guys. Congrats on a great quarter and congrats on the new logo.

Justin Jacobs (Chief Executive Officer)

Thank you, Jim.

Jim Rollason (Analyst at Raymond James)

Guess, Justin, maybe just high-level thought on how you’re thinking about the business outlook post midterm elections and reaction in share prices of you and your peers. Just from a high level, from your point of view,

Justin Jacobs (Chief Executive Officer)

You know, in terms of the effect of the recent elections, I think it’s going to take some time to truly understand what that is, really beyond our industry—even direct impacts on us as a company or even as an industry—as we look out over the next several years. I went through in the market outlook what we see on the upstream side as it relates to oil and more in the midstream as it relates to natural gas. I think the factors that are driving a very strong environment are likely to continue, maybe on the data center impacts that will be somewhat more limited than it was or somewhat reduced from previous expectations.

As it relates specifically to the stock price, it’s not something that ultimately in the short term that we can control. What we can control is the strategy of the business, how we execute, how we perform for customers. And I view it as an opportunity to go out and talk to our existing shareholders and new shareholders and tell them about what we’ve achieved and what I think we’re going to achieve in the future.

Jim Rollason (Analyst at Raymond James)

Makes sense. And just as a follow-up on Tulsa sale, congrats on getting that done. I would suspect Midland real estate is doing reasonably well at least with this oil price environment we’ve had this year. Curious on any update on how you’re thinking about timing there. I know you’re trying to maximize value as opposed to just complete a sale, so figured I’d check in on that.

Justin Jacobs (Chief Executive Officer)

Yeah, I really have no update on the other real estate properties. We’re continuing to market, and we want to get I think a fair value for them, a place that we can transact where our shareholders are appropriately rewarded and obviously someone is willing to buy it. We don’t feel pressure that it needs to be done tomorrow, but we also don’t need to hold out and get the last penny, is how I would generally describe it.

Jim Rollason (Analyst at Raymond James)

Makes sense. Well, again, another great quarter. Appreciate it, guys.

Justin Jacobs (Chief Executive Officer)

Thank you, Jim.

OPERATOR

Thank you very much. And we don’t have any other questions.

Justin Jacobs (Chief Executive Officer)

Okay. Well, thank you everyone for your time and your questions today. I want to thank the entire Natural Gas Services Gr team, including our new team members from Flat Rock, for a strong first full quarter together. We look forward to updating you on our progress next quarter. Thank you.

OPERATOR

Thank you everyone. And this concludes today’s conference call. Thank you for attending.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.