NATURAL GAS SERVICES GROUP, INC. AN N U A L RE P O R T 2 0 0 6 ABOUT NGS Headquartered in Midland, TX, NGS maintains a rapidly growing rental fleet of high quality rotary screw and reciprocating compressors in the 50- 500 horsepower range. At the end of 2006 our rental fleet totaled 1,111 compressor units…the largest rental compressor fleet in our U.S. market segment. We provide repair and maintenance services of our rental fleet units through our network of district offices in Midland, TX, Farmington, NM, Bridgeport, TX, Tulsa, OK, and Lewiston, MI. We maintain fabricating facilities in Midland, TX and Lewiston, MI for the construction of rental fleet compressor packages. Our engineered products subsidiary, Screw Compression Systems, Inc. (SCS), designs, fabricates and sells highly engineered rotary screw and reciprocating compressor packages ranging up to 1500 horsepower. They also fabricate compressors for additional rental fleet requirements. NGS manufactures our own proprietary reciprocating compressor product line. The CiP (Cylinders in Plane) reciprocating compressor is a unique and efficient, small horsepower design that is utilized in our rental fleet and sold to compressor packagers and distributors throughout North America. We design, fabricate, sell, install and service technologically advanced and patented industrial flare and ignition systems through our Flare King product line for use in onshore and offshore oil and natural gas production facilities. Additional services include a compressor rebuild and exchange program and compressor parts sales. Executive Officers and Directors Stephen C. Taylor Chairman of the Board, President and Chief Executive Officer Natural Gas Services Group, Inc. Earl R. Wait Vice President – Accounting and Treasurer, Natural Gas Services Group, Inc. Jim Hazlett Vice President – Technical Services, Natural Gas Services Group, Inc Paul Hensley Director, Natural Gas Services Group, Inc. President, Screw Compression Systems, Inc. Alan A. Baker Director, Natural Gas Services Group, Inc. Former President, Chairman and Chief Executive Officer of Halliburton Company’s Energy Services Group Independent Auditors Hein + Associates, LLP 14755 Preston Rd, Suite 320 Dallas, Texas 75254 Legal Counsel Lynch, Chappell and Alsup Midland, Texas Jackson Kelly PLLC Denver, Colorado Headquarters 2911 SCR 1260 Midland, Texas 79706 (432) 563-3974 (432) 563-5567 fax www.ngsgi.com Michigan 3690 CR 491 Lewiston, Michigan 49756 (989) 786-3788 (989) 786-5182 fax Investor Relations Creative Options Communications IR & PR 3204 Merrimack Lane Flower Mound, Texas 75022 (972) 355-6070 www.jdcreativeoptions.com New Mexico 3900 N. 1st Bloomfield, New Mexico 87413 (505) 632-4566 (505) 632-1364 fax Charles G. Curtis Director, Natural Gas Services Group, Inc. Retired, Former President and Chief Executive Officer of Curtis One Inc., dba Roll Stair Transfer Agent & Registrar Computershare Trust Company, Inc. Golden, Colorado William F. Hughes, Jr. Director, Natural Gas Services Group, Inc. Co-owner, The Whole Wheatery, LLC Gene A. Strasheim Director, Natural Gas Services Group, Inc. Retired, Former Chief Financial Officer, Skyline Electronics Products Richard L. Yadon Director, Natural Gas Services Group, Inc. Owner and Operator, Yadeco Pipe & Equipment President and Co-owner, Midland Pipe & Equipment, Inc. John W. Chisholm Director, Natural Gas Services Group, Inc. Founder, Wellogix, Inc. Annual Meeting of Shareholders Date: June 19, 2007, 9:00 A.M. CST Hilton Hotel – Midland 117 West Wall Avenue Midland, Texas 79701 Form 10-K Filing Earl R. Wait Vice President – Accounting and Treasurer, Natural Gas Services Group, Inc. North Texas Bldg 107 PR 1420 Bridgeport, Texas 76426 (940) 683-5322 (940) 683-5113 fax Oklahoma Screw Compression Systems, Inc. 5725 Bird Creek Avenue Catoosa, Oklahoma 74015 (918) 266-3330 (918) 971-1818 fax West Texas 4925 SCR 1303 Odessa, Texas 79765 (432) 617-5051 (432) 617-5050 fax TO OUr SHArEHOLDErS Dear Fellow Shareholders, For the fifth consecutive year, Natural Gas Services Group, Inc. (NGS) reported record results. Our revenue increased 27% to $62.7 million. This reflects a 42% increase in our rental revenues and 26% growth in our fabricated sales volume. Net income after taxes grew 71% to $7.6 million. We continued to vigorously grow our rental compressor fleet and had 1,111 units at the end of 2006. This was an addition of 246 net units, or 28%, through the year. This growth in the fleet was in addition to the 466 units we added over the prior two years. According to industry reported data, we operate the fifth largest rental compression fleet in the U.S. Our compressor sales and fabrication business also grew quite well this year. Our backlog continued to be steady and increased towards the end of 2006. We ended the year with orders booked into October 2007. Our combined sales businesses, including flare sales, parts sales, CiP compressor frame sales and compressor rebuilds, grew to a combined $38.2 million in 2006, a 26% increase. In March 2006, we completed the sale of 2,895,500 shares of our common stock in a public offering and received net proceeds of just over $47 million. From these proceeds, we retired $5 million of long-term debt Stephen C. Taylor Chairman of the Board, President and Chief Executive Officer Natural Gas Services Group, Inc. and used the balance, in addition to our internally generated cash flow, to add compressors to our rental fleet. We spent $27.7 million in 2006 on capital expenditures, with 94% going directly to rental compression and associated rental service additions, such as service trucks and tools. Our additional equity increased the number of outstanding shares by 34%, but we were still able to grow our earnings per common share. We earned 52 cents per diluted share in 2005 and 66 cents per diluted share in 2006, a 27% increase. Our balance sheet is in the strongest shape it has been in the company’s history. Long term debt was reduced to $18.4 million at the end of 2006, a $9.8 million reduction compared to year-end 2005. Shareholders’ equity increased from $45.7 million to $101.2 million year-over-year and our long-term debt-to-equity ratio went from 62% to 18% in the same period. Our credit facilities were increased under more favorable terms. The reduction in long-term debt levels and corresponding enhancement of our borrowing capacity positions us to capitalize on opportunities that may present themselves and to weather any potential market disruptions that might occur in the future. In 2006 we successfully implemented the processes necessary to comply with applicable parts of the Sarbanes-Oxley Act of 2002 pertaining to internal control over financial reporting. This was very time-consuming and expensive, but we implemented new controls in a timely manner and can now report on our internal controls in accordance with the SEC mandated safeguards. In October 2006, for the second year in a row, NGS was named to the Forbes magazine list of 200 best managed small companies in the US. We are proud of this recognition and the progress we are making while we continue to build our business. Our strategy of concentrating on the small-to-medium horsepower, wellhead rental compression market, particularly in unconventional natural gas plays, continues to drive strong growth for NGS. Natural gas from unconventional reservoirs is now the single largest and fastest growing gas source in the US and is a resource that particularly lends itself to the need for gas compression equipment. We continue to be confident of the future as it relates to your company and the industry as a whole. Our success is the result of the contributions of many, whether they are shareholders, employees, customers or suppliers and I want to thank all for their part in making 2006 a record year. I look forward to continued success for our Company in the years ahead. Sincerely, Stephen Taylor Chairman, President and CEO FiNANciAL HiGHLiGHTS $7,588 1,111 (129,158 H.P) $62,729 $49,311 $60,000 $40,000 $4,446 $6,000 $4,000 $15,958 $20,000 $1,874* $2,000 865 (97,275 H.P) 586 (64,928 H.P) 1000 800 600 2004 2005 2006 2004 2005 2006 2004 2005 2006 Total Revenue (in thousands of dollars) Net Income (in thousands of dollars) * Excluding a one-time,non-operating gain of $1.5 million Rental Unit Fleet Growth Number of Units (horsepower) “Our strategy of concentrating on the small-to-medium horsepower, wellhead rental compression market, particularly in unconventional natural gas plays, continues to drive strong growth for NGS” Comparison Of Cumulative Total Return* Among Natural Gas Services Group, Inc., The AMEX Composite Index And The S&P 500 Energy Equipment And Services Index $500 $400 $300 $200 $100 $0 10/21/02 Natural Gas Services Group AMEX Composite Index S&P 500 Energy Equipment & Services Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 * Assumes that the value of the investment in our common stock and each index was $100 on October 21, 2002, the date of our initial public offering, and that all dividends were reinvested. Historical stock performance during this period may not be indicative of future stock performance. OPErATiNG ArEAS Financial Highlights (In thousands, except for per share data) Total Revenue Rental Revenue Net Income Capital Expenditures–Rental Fleet Earnings Per Diluted Share Weighted Average Shares Outstanding (Fully Diluted) Cash Flow Provided by Operations * Excluding a one-time, non-operating gain of $1.5 million 2004 2005 2006 $ $ $ $ $ $ 15,958 10,491 1,874* 10,663 0.29* 6,383 3,198* $ $ $ $ $ $ 49,311 16,609 4,446 16,184 0.52 8,481 3,789 $ $ $ $ $ $ 62,729 23,536 7,588 25,935 0.66 11,472 16,076 Stock Data 2004 2005 2006 First Quarter Second Quarter Third Quarter Fourth Quarter Low $ 5.41 $ 7.20 $ 7.12 $ 8.07 High $ 7.20 $ 10.04 $ 9.45 $ 9.43 Low $ 9.08 $ 9.51 $ 11.55 $ 15.67 High $ 11.11 $ 11.85 $ 36.00 $ 39.99 Low High $ 16.57 $ 22.80 $ 13.77 $ 18.00 $ 12.01 $16.69 $ 12.76 $ 16.43 www.ngsgi.com Offices Headquarters 2911 SCR 1260 Midland, Texas 79706 (432) 563-3974 (432) 563-5567 fax www.ngsgi.com Michigan 3690 CR 491 Lewiston, Michigan 49756 (989) 786-3788 (989) 786-5182 fax New Mexico 3900 N. 1st Bloomfield, New Mexico 87413 (505) 632-4566 (505) 632-1364 fax North Texas Bldg 107 PR 1420 Bridgeport, Texas 76426 (940) 683-5322 (940) 683-5113 fax Oklahoma Screw Compression Systems, Inc. 5725 Bird Creek Avenue Catoosa, Oklahoma 74015 (918) 266-3330 (918) 971-1818 fax West Texas 4925 SCR 1303 Odessa, Texas 79765 (432) 617-5051 (432) 617-5050 fax $ 16.43 $ 12.76 $16.69 $ 12.01 $ 18.00 $ 13.77 $ 22.80 $ 16.57 High Low $ 39.99 $ 36.00 $ 11.85 $ 11.11 High $ 15.67 $ 11.55 $ 9.51 $ 9.08 Low $ 9.43 $ 9.45 $ 10.04 $ 7.20 High $ 8.07 $ 7.12 $ 7.20 $ 5.41 Low Fourth Quarter Third Quarter Second Quarter First Quarter 2006 2005 2004 Stock Data 16,076 11,472 0.66 25,935 7,588 23,536 62,729 $ $ $ $ $ $ 3,789 8,481 0.52 16,184 4,446 16,609 49,311 $ $ $ $ $ $ 3,198* 6,383 0.29* 10,663 1,874* 10,491 15,958 $ $ $ $ $ $ 2006 2005 2004 * Excluding a one-time, non-operating gain of $1.5 million Cash Flow Provided by Operations Weighted Average Shares Outstanding (Fully Diluted) Earnings Per Diluted Share Capital Expenditures–Rental Fleet Net Income Rental Revenue Total Revenue (In thousands, except for per share data) Financial Highlights