Natural Gas Services Group, Inc. Q1 FY2026 earnings call

Overall Company Performance

• NGS delivered a record start to 2026, with new all-time quarterly records for rental revenue, adjusted gross margin, adjusted EBITDA, and horsepower utilization.
• Subsequent to quarter end, the company raised its quarterly dividend from 11 cents to 15 cents per share, a 36% increase, returning additional capital to shareholders while retaining balance sheet flexibility for growth.

Market Environment

• Industry fundamentals remain constructive: improving producer sentiment around oil production growth, ongoing midstream infrastructure build-out for natural gas is driving incremental compression demand, and long lead times for new compression equipment are constraining overall industry supply, supporting high utilization, pricing discipline, and longer customer contract terms.
• Current geopolitical dynamics reinforce the strategic importance of U.S. energy production and infrastructure, creating a favorable backdrop for domestic compression providers.

Operational Growth & Capital Allocation

• Fleet optimization: Rental revenue per horsepower per month increased 2% YoY to $27.51, with 86.9% utilization reflecting strong demand and fleet reliability. The company retired 17,700 horsepower of idle small and medium horsepower units in Q1 to improve fleet mix and reduce low-return assets.
• Fleet expansion: 17,000 horsepower of new large horsepower units (mostly electric motor drive, all under long-term contracts) were added in Q1, and the company remains committed to deploying at least 50,000 total horsepower in 2026.
• Capital recycling: The company collected $12.3 million in longstanding tax refund claims and related interest in Q1. Two non-core real estate assets (Midland Office Building and Midland Fabrication Facility) are classified as held for sale as part of ongoing efforts to monetize non-core assets.
• Strategic M&A: Disciplined, accretive M&A remains a key focus, supported by the company's strong balance sheet and liquidity position; management prioritizes transactions that deliver operating synergies, fleet optimization, and expanded customer relationships.

Financial Performance

• Net income was a record $6.8 million, or 53 cents per diluted share, up from $4.9 million (38 cents per diluted share) in Q1 2025.
• SG&A expense was 13.4% of total revenue, in line with the company's long-term 13-14% target, as the business scales to support a larger fleet.
• Leverage at quarter end was 2.33x, the lowest among public peer companies, with $174 million in available borrowing capacity.

Governance Updates

• The upcoming June 10 shareholder meeting will vote on a proposal to reincorporate from Colorado to Texas to implement more shareholder-friendly governance, including destaggering the board of directors.
• Longtime board member Steve Taylor will retire from the board; John Jackson, an experienced rental compression industry operator, has been nominated to fill the open seat.

NGS operates primarily as a compression rental business, with non-core part sales and services: 1. Core Rental Segment: Q1 2026 rental revenue totaled $47.1 million, increasing 21% year-over-year, representing 97.1% of total company revenue. Rental adjusted gross margin was $30 million, up 24.7% year-over-year, with a rental adjusted gross margin percentage of 63.7% (up 180 basis points YoY). Adjusted EBITDA for the quarter was a record $24.3 million, up from $19.3 million in Q1 2025. Rented horsepower ended the quarter at 575,000 horsepower, up 17% YoY, with a record horsepower utilization rate of 86.9%. 2. Non-core Part Sales & Services: This segment does not represent core operating performance. Q1 2025 included elevated part sales from inventory liquidation during the wind-down of Midland fabrication operations, which suppressed total revenue growth relative to rental revenue growth in Q1 2026. Total company revenue for Q1 2026 was $48.5 million, up 17% YoY.

• Full year 2026 adjusted EBITDA guidance was raised to a range of $92.5 million to $97.5 million, up from the prior guidance range of $90.5 million to $95.5 million, reflecting the strong Q1 performance and positive full year visibility.
• Full year 2026 capital expenditure guidance is maintained: growth CapEx is projected to remain in the $55 million to $70 million range, and maintenance CapEx is projected to remain in the $15 million to $18 million range, aligned with contracted large horsepower deployment plans and customer demand.

• Forward-looking statements carry inherent uncertainty, and actual results may differ materially from projections due to unforeseen risks; risks are detailed in the company's SEC filings, including the Form 10-Q for the period ended March 31, 2026.
• Inflationary pressure is emerging across the supply chain, driven by geopolitical developments and broader supply chain dynamics; tight labor markets in oilfield services are expected to create ongoing wage pressure, which may accelerate through the remainder of 2026.
• Commodity price volatility and geopolitical developments could impact customer activity levels, even though compression demand is primarily tied to long-term production volumes and throughput needs.
• Q1 2026 margin performance was exceptionally strong due to very few operational setbacks, which management does not expect to repeat consistently every quarter; seasonal weakness relative to Q1 is also expected for subsequent quarters in 2026.

Q: Competitors relying on Caterpillar gas engines face 150-180 week lead times. NGS sources from Waukesha and focuses on electric motor drive — what are NGS' lead times, and is this a competitive opportunity? / A: NGS has seen some lead time extension across components, but lead times for its core supply chain are materially shorter than the 150-180 week lead times for Caterpillar engines. Since the CAT engine makes up a very small share of NGS' existing and growth fleet, NGS has a competitive opportunity to pull growth forward and fill customer demand gaps that competitors cannot fulfill in 2027 and 2028.

Q: With higher oil prices driving activity, cost inflation is rising for labor, lube oil, and other inputs. How much pricing power does NGS have to pass these costs through, and what is the lag? / A: NGS has units rolling off term contracts on an ongoing basis throughout the year. While pricing increases have been modest so far, there is a clear upward bias to pricing. Depending on the magnitude of ongoing inflation, larger price increases may be implemented through negotiations with customers, balancing shareholder interests with long-term customer relationships.

Q: The 36% dividend increase is material. How does this change the company's capital allocation priorities across shareholder returns, organic growth, and M&A? / A: The dividend increase is a material step toward a more balanced, self-sustaining capital allocation model, but it remains a modest draw on total EBITDA. It does not impact the company's ability to fund planned organic fleet expansion or pursue attractive accretive M&A opportunities, and continues the gradual approach to dividend growth outlined when the dividend was initiated.

Q: Commodity prices have risen recently. What activity trends is NGS seeing across key basins, and how are contract terms changing? / A: Activity has accelerated in the Permian (NNGS' core basin) following the rise in oil prices, and NGS is also seeing strong growth in the Eagleford and Marcellus/Utica basins, with robust midstream activity across Texas. New large horsepower units are typically secured on 3-5 year contracts, and customers are increasingly requesting longer contract terms for recontracting existing assets, with price-term tradeoffs evaluated on a case-by-case basis.