Performance Under Pressure
2024
ANNUAL REPORT
To Our Shareholders,
2024 marked a record year for our company Ͷ a year defined not only by exceptional financial
and operational performance, but also by significant changes that continue to position us for
long-term success. Our material key metrics moved meaningfully in the right direction,
underscoring the strength of our strategy and the commitment of our team.
Our utilized horsepower rose from approximately 420,000 at the end of 2023 to nearly 500,000
by the end of 2024. Over that same time period, our utilized large horsepower increased from
approximately 280,000 to nearly 350,000. Rental revenue also increased from $106 million in
fiscal year 2023 to $144 million in fiscal year 2024, while adjusted EBITDA grew from $46 million
to just under $70 million. We also improved our rental adjusted gross margins from 54% to 61%.
These gains were achieved despite total debt increasing by only $6 million over 2024 ʹ we
materially improved the capital efficiency of our business. This kind of performance speaks to the
operational leverage in our business and our ability to grow profitably while maintaining a
prudently leveraged balance sheet.
Behind these numbers is the tireless work of our team. Much of our success is driven in the field.
Our service technicians and field personnel consistently go above and beyond to keep our fleet
running efficiently and reliably. Their attention to detail, technical expertise, and commitment to
safety are critical to maintaining the uptime and performance upon which our customers rely.
We are proud of their work and grateful for their continued dedication.
2024 was also a year of significant transition in our leadership. After many years of service, we
marked the retirements of Steve Taylor, our long-serving President and Chief Executive Officer,
and Jim Hazlett, our Chief Technology Officer. Their leadership helped shape our culture and
operational foundation, and we are grateful for the legacy they leave behind. Steve remains as
our Chairman of the Board, providing invaluable service to the company and shareholders as a
new management team continues the growth of the business. We welcomed new leadership as
Justin Jacobs joined as our new Chief Executive Officer and Ian Eckert was appointed Chief
Financial OfficerͶthese appointments position the company for our next chapter of growth.
We continue to add valuable experience to the Board with Jean Holley joining in fiscal year 2024
and Anthony Gallegos in April 2025. Ms. Holley is a former Chief Information Officer with
significant experience in rental-focused businesses. Her expertise will be instrumental as we
modernize our systems, harness data more effectively, and enhance decision-making across the
organization. Mr. Gallegos is currently the Chief Executive Officer and a Director of Independence
Contract Drilling, Inc. His senior management experience in the oilfield services industry provides
the Board and the company with valuable perspective. In-depth experience in the areas of
Letter to Shareholders
building digital infrastructure, creating organizational depth, and understanding the direction of
the oil and gas industry are critically important as we continue to scale.
Looking ahead, we see a strong runway for continued growth. We are planning to add
approximately 90,000 horsepower to our fleet over the course of 2025 and early 2026. All this
added capacity will be large horsepower, secured under pre-contracted terms ranging from four
to five years. This expansion not only reflects demand from our existing customer base, but also
the addition of a second major anchor customer Ͷ a milestone that diversifies our revenue and
strengthens the foundation of our long-term cash flow profile.
We are also investing in the next generation of compression technology, including the
introduction of large horsepower electric motor drives into our fleet. This positions us to support
customers who are seeking to reduce emissions through technology investment. Our SMART
system continues to lead the industry in improving run-time while our eComp technology is
delivering meaningful reductions in fugitive emissions. Together, these innovations make our
fleet not only more efficient, but also more aligned with the evolving environmental priorities of
our customers and regulators.
Despite a constructive demand outlook entering 2025, we are mindful of macroeconomic risks.
Although our natural gas compression equipment is primarily sourced from within the United
States, recent tariff actions have introduced uncertainty into the global economic environment
and industrial activity in North America. The nature of our long-term contracts, the depth of our
customer relationships, and our modest leverage provide us with a high degree of visibility and
resilience. While our business is well-insulated from various industry pressures, we are not
immune to broader macroeconomic forces. We are, however, better positioned than many of
our peers to withstand volatility and continue investing through cycles.
As we enter 2025, we are more confident than ever in the direction we are heading. We have a
differentiated fleet, a disciplined financial approach, and an attractive group of long-term
customers. Most importantly, we have a team that knows how to execute. We are excited about
the opportunities ahead and remain focused on driving long-term value for our shareholders.
On behalf of the entire organization, thank you for your continued support.
Sincerely,
Justin C. Jacobs
Stephen C. Taylor
Chief Executive Officer
Chairman of the Board
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2024
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________________________to__________________________
Commission file number: 1-31398
NATURAL GAS SERVICES GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado
75-2811855
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
404 Veterans Airpark Lane, Suite 300, Midland,
T
79705
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
(432) 262-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $.01 par value
NGS
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report.
☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the Registrant included in the filing
reflect the correction of an error to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any
of the Registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2024, was approximately $139.0
million based on the closing price of the common stock on that date on the New York Stock Exchange.
At March 14, 2025, there were 12,506,522 shares of the Registrant’s common stock outstanding.
Documents Incorporated by Reference
Certain information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the Registrant’s definitive proxy statement for the annual
meeting of shareholders expected to be held on June 5, 2025.
NATURAL GAS SERVICES GROUP, INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2024
TABLE OF CONTENTS
Item No.
Page
PART I
Item 1.
Business
1
Item 1A.
Risk Factors
12
Item 1B.
Unresolved Staff Comments
22
Item 1C.
Cybersecurity
22
Item 2.
Properties
23
Item 3.
Legal Proceedings
24
Item 4.
Mine Safety Disclosures
24
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
25
Item 6.
Reserved
25
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 8.
Financial Statements and Supplementary Data
40
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
40
Item 9A.
Controls and Procedures
40
Item 9B.
Other Information
41
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
41
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
42
Item 11.
Executive Compensation
42
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
42
Item 13.
Certain Relationships and Related Transactions, and Director Independence
42
Item 14.
Principal Accountant Fees and Services
42
PART IV
Item 15.
Exhibits and Financial Statement Schedules
43
Item 16.
Form 10-K Summary
44
Signatures
45
Index to Consolidated Financial Statements
46
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and information pertaining to us, our industry and the oil and gas industry that is based on the
beliefs of our management, as well as assumptions made by and information currently available to our management. All
statements, other than statements of historical facts contained in this Annual Report on Form 10-K, including statements
regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future
operations, are forward-looking statements. We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,”
“continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements. You should read
statements that contain these words carefully and should not place undue reliance on these statements because they discuss
future expectations, contain projections of results of operations or of our financial condition and/or state other “forward-
looking” information. We do not undertake any obligation to update or revise publicly any forward-looking
statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable
assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct. 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, the following factors and the other factors described in Part I, Item 1A. “Risk Factors” and Part
II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on
Form 10-K:
•
conditions in the oil and gas industry, including the supply and demand for oil and gas and volatility in the prices of oil
and gas;
•
our reliance on major customers;
•
failure of projected organic growth due to adverse changes in the oil and gas industry, including depressed oil and gas
prices, oppressive environmental regulations and competition;
•
our inability to achieve increased utilization of assets, including rental fleet utilization and monetizing other non-cash
balance sheet assets;
•
failure of our customers to continue to rent equipment after expiration of the primary rental term;
•
our ability to economically develop and deploy new technologies and services, including technology to comply with
health and environmental laws and regulations;
•
failure to achieve accretive financial results in connection with any acquisitions we may make;
•
fluctuations in interest rates;
•
regulation or prohibition of new well completion techniques;
•
competition among the various providers of compression services and products;
•
changes in safety, health and environmental regulations;
•
changes in economic or political conditions in the markets in which we operate;
•
the inherent risks associated with our operations, such as equipment defects, malfunctions, natural disasters and
adverse changes in customer, employee and supplier relationships;
•
our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with
our debt;
•
inability to finance our future capital requirements and availability of financing;
•
capacity availability, costs and performance of our outsourced compressor fabrication providers and overall
inflationary pressures;
•
impacts of world events, such as acts of terrorism and significant economic disruptions and adverse consequences
resulting from possible long-term effects of potential pandemics and other public health crises; and
•
general economic conditions.
We believe that it is important to communicate our expectations of future performance to our investors. However,
events may occur in the future that we are unable to accurately predict or that we are unable to control. When considering our
forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Annual Report on
Form 10-K.
i
Glossary of Industry Terms
“basin” – A large, low-lying geological depression containing a complex of petroleum source rocks. The Permian
Basin, within which we operate a substantial portion of our compressor fleet, is considered to be the largest petroleum
producing basin in the United States (“U.S.”).
“compressor” – In the energy industry, a compressor is utilized to facilitate a mechanical process to increase the
pressure of natural gas by reducing its volume so that it can be transported through gathering and pipeline systems, injected into
a reservoir for storage or injected into a well to enhance the recovery of petroleum products, among other applications. Various
forms of compressors are used in the energy industry including reciprocating and screw types, among others.
“flare” – A tall stack equipped with burners used as a safety device at wellheads, refining facilities, gas processing
plants, and chemical plants. Flares are used for the combustion and disposal of combustible gases.
“gas lift” – A production technique whereby natural gas is injected into a well to increase/improve the oil
production.
“horsepower” – A unit of measurement for the power produced by an engine in a compressor unit. Horsepower is
calculated by multiplying the amount of force (in pounds) by the speed (in feet per second). One horsepower is equivalent to the
power necessary to move 550 pounds one foot in one second. We classify our compressor units as large, medium or small based
on their horsepower. Our large horsepower compressor units are 400 horsepower or more, medium horsepower are 200 to 399
horsepower and small horsepower units are below 200 horsepower.
“oil shale” – Also referred to as tight oil, is petroleum that consists of light crude oil contained in petroleum-bearing
formations of low-permeability, often shales or tight sandstones.
“OEM” – Original equipment manufacturer refers to the company that makes a product to be sold by another
company under its own name. We have several key OEM vendors that provide critical components to our compressor units
including Caterpillar, Cummins and Waukesha for engines, Ariel for compressor frames and FW Murphy for controls, among
others.
“OPEC” – The Organization of Petroleum Exporting Countries. Through its actions, this organization has a
significant impact on the determination of global crude oil prices.
“play” – A geological term that refers to a group of oil and gas prospects within the same region that are controlled
by the same set of geological circumstances. Plays are generally considered “conventional” when the resources can be extracted
through traditional vertical wells or “unconventional” whereby the resources are tightly bound to the rock (generally shales and
sandstones) requiring specialized measures for extraction including directional or horizontal drilling and hydraulic fracturing.
“reciprocating compressors” – A reciprocating compressor is a positive displacement device which compresses gas
and/or vapor by using a piston in a cylinder and a back-and-forth, or reciprocating, motion.
“screw compressors” – A positive displacement compressor used in low-pressure and vapor compression
applications where two rotating rotors intermesh to create pockets of continuously decreasing volume, in which the gas is
compressed and its pressure is increased.
ii
PART I
ITEM 1.
BUSINESS
Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Natural Gas Services
Group,” the “Company,” “NGS,” “we,” “us,” or “our” refer to Natural Gas Services Group, Inc. and its consolidated subsidiary,
NGSG Properties, LLC. Certain specialized terms used in describing our natural gas compressor business are defined in
“Glossary of Industry Terms” on page ii.
Description of Business
We were incorporated in December 1998 and initially operated as a holding company of a group of subsidiaries that
were engaged in the manufacturing, operation and leasing of natural gas compression equipment, flares and related assets to the
natural gas industry with a focus on unconventional natural gas production plays in the U.S. (such as coalbed methane, gas
shales and tight gas). We completed our initial public offering in October 2002 and our common stock began trading on the
American Stock Exchange under the symbol “NGS.” In October 2008, our common stock began trading on the New York
Stock Exchange.
Today, we are a premier provider of natural gas compression equipment and services to the energy industry. We rent,
operate and maintain natural gas compressors for oil and gas production and processing facilities. In addition, we design and
assemble compressor units for rental to our customers. We also provide aftermarket services in the form of call-out services on
customer-owned equipment as well as commissioning of new units for customers. We are headquartered in Midland, Texas,
with an assembly facility located in Tulsa, Oklahoma and service facilities located in several major oil and gas producing basins
in the U.S.
Our primary business and source of revenue and gross profit is derived from the rental of natural gas compressor units
for applications associated with oil and gas production with a focus on large and medium horsepower applications. Our
customers, specifically for large and medium horsepower units, are exploration and production (“E&P”) companies that utilize
our compressor units for artificial lift, or “gas lift,” applications (i.e., production enhancement enabled with high-pressure gas
compression equipment) in unconventional oil wells on single and multi-well pads. In addition, our customer base includes oil
and gas E&P companies that focus primarily on natural gas production (with typically smaller horsepower applications). Our
largest rental area is the Permian Basin (75 percent of rental revenues in 2024), with the majority of our remaining rental
revenue generated in other oil and gas producing regions and basins in Texas, New Mexico and Oklahoma, including the San
Juan Basin, the Texas Panhandle/western Oklahoma, the Barnett Shale, the Eagle Ford Shale and central Oklahoma. Other
regions and plays in which we provide services include the Utica and Marcellus Shales in Ohio, and the Antrim Shale in
Michigan.
Recent Developments
For the past several years, we have been undergoing a deliberate and strategic shift by (i) focusing our business
development efforts on expanding our rental revenue sources primarily in large (400 horsepower or greater) compressor units
and crude oil artificial lift applications and (ii) de-emphasizing internal assembly of compressor units and the related support of
extensive facilities associated with such activities.
Regarding the shift in revenue sourcing, we are continuing to invest in our larger compression units (400 horsepower
or greater) which provide for greater revenues and more scalable costs resulting in higher overall profitability. In addition, the
emphasis on the larger units is consistent with a focus on supporting our customers’ crude oil production efforts primarily
through artificial lift applications which generally require larger units as opposed to natural gas production which generally
requires our low and medium compression units. Due primarily to more favorable pricing for crude oil production vis-à-vis
natural gas, our customers are continuing to dedicate their investments in favor of crude oil production which supports a
growing demand for our larger horsepower units and services.
With respect to our assembly of compressor units for lease or sale to our customers, we have been transitioning from
assembling a majority of our compressor units in-house to contracting with third-party fabricators who assemble the units to our
specifications, utilizing parts and components from OEM. We continue to design and engineer our compressors and under this
arrangement, we procure and pay for the components of our compressor packages which are delivered to one of our third-party
fabricators, who then assemble the components and test the compressor units prior to our receiving them. During the assembly
process, we hold title to the compressors and related components.
1
In connection with the transition to third-party fabrication, we initiated the termination of fabrication and assembly
activities at our Midland, Texas facility during the fourth quarter of 2023 and began to wind down activities throughout 2024.
On January 28, 2025, we announced our intent to close this facility and cease operations by April 1, 2025. In addition, we have
initiated efforts to market the facility and the underlying real property. In connection with this action, we have transferred all
inventory from this facility to our regional district locations and our Tulsa, Oklahoma facility. We continue to maintain new
unit assembly capability at our Tulsa, Oklahoma facility.
We are committed to this transition for a number of reasons, including (i) we feel that the cost advantage of fabricating
and assembling new units at the Midland facility has declined substantially in recent years; (ii) our assembly facilities are not
capable of producing large horsepower units as efficiently as certain third-party service providers; (iii) third-party service
providers have improved in quality and cost competitiveness; and (iv) use of third-party fabricators relieves us of issues related
to efficiency, inventory and labor scarcity.
Please see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
for further information regarding our operations.
Our Operating Units
We identify our operating units based upon major revenue sources as (i) Rental, (ii) Sales and (iii) Aftermarket
Services.
Rental. Our rental compression units provide large, medium and small horsepower applications for conventional and
unconventional oil and gas production. Our rental contracts generally provide for initial terms ranging from six to 60 months
and generally extend on a month-to-month basis thereafter. We believe that, by outsourcing their compression needs, our
customers are able to increase their revenues by producing higher volumes of oil and gas due to higher equipment run time,
decrease their operating and maintenance cost of operating compression, lower their capital investment needs and more
efficiently meet their changing compression needs. We maintain and service all of the compression equipment that we rent to
our customers.
The size, type and geographic dispersion of our rental fleet enables us to provide our customers with a range of
compression units that can serve a wide variety of applications, and to select the correct equipment for the job, rather than the
customer trying to fit the job to its own equipment. We base our compressor rental rates on several factors, including the cost
and size of the equipment, the type and complexity of service desired by the customer, the length of contract and the inclusion
of any other services desired, such as installation, transportation and daily operation.
As of December 31, 2024, we had 1,912 natural gas compressors in our rental fleet totaling 598,840 horsepower. Of
this total, we had 1,208 natural gas compressors totaling 491,756 horsepower rented to 68 customers. The unit utilization rate of
our rental fleet as of December 31, 2024, was 63.2 percent, while our horsepower utilization for the same period was 82.1
percent. During 2024, we placed into service 220 unit sets, including 198 from our existing fleet and 22 new units, with a total
of 154,909 horsepower. A total of 111 of those units, including 22 new units, were 400 horsepower or larger, representing
approximately 87.4 percent of the total horsepower set. This activity resulted in a 360 basis point increase in our average
annual horsepower utilization from 78.2 percent during to 81.8 percent for 2024.
Sales. We design and assemble compressor components manufactured by OEM suppliers, as well as certain
proprietary compressor frames and cylinders into compressor units that are ready for rental or sale. In order to provide customer
support for our compressor sales business, we also stock varying levels of replacement parts at our Tulsa, Oklahoma facility
and our field service locations. We also provide an exchange and rebuild program for small horsepower screw compressors and
maintain an inventory of new and used compressors to facilitate this part of our business.
Aftermarket Services. We service and maintain compressors owned by our customers on an “as needed” and contract
basis, as well as providing services related to the installation and start-up of new compressor units. We perform engine and
compressor overhauls on a condition-based interval or a time-based schedule or at our customers’ request.
2
Business Strategy
Our long-term intentions to grow our revenue and profitability are based on the following business strategies:
•
Optimize existing utilized fleet. We believe there are opportunities to modestly improve the profitability of our
existing utilized rental fleet through targeted price increases, particularly in geographic areas that have experienced
high rates of cost inflation, along with operational efficiencies by using improved data collection and analysis to
optimize our labor, parts, and maintenance costs.
•
Improve asset utilization. We believe we can improve the overall cash flow of the business by increasing utilization of
the existing fleet as well as monetizing non-cash assets. We have a significant number of unutilized units—we will
review these assets to determine where relatively low-cost capital expenditures can improve the marketability and cash
flow potential of the units. We also have a significant amount of capital tied up in non-cash assets (including accounts
receivable, inventory and other fixed assets, primarily real property) that we believe can be monetized and invested
back in the fleet at or above target levels of return on invested capital.
•
Expand rental fleet. We intend to prudently increase the size of our rental fleet mainly through pre-contracted
agreements with our customers. We believe our future growth in this part of our strategy will be primarily driven
through our placement of larger horsepower, centralized wellhead natural gas compressors for unconventional oil
production, with select increases in medium horsepower units to meet customer demand beyond our inventory.
•
Execute accretive mergers and acquisitions. We believe there are opportunities in mergers with or acquisitions of
competitive rental compression companies or related businesses providing similar services. While there is no certainty
as to the probability of any particular deal, we will continue to evaluate potential acquisitions, joint ventures and other
opportunities that could enhance value for our shareholders.
All of the above strategies are subject to revisions and adjustments as a result of several factors discussed in Item 1A.
“Risk Factors.”
Competitive Strengths
We believe our competitive strengths include:
•
Strong operational performance. We deliver very high levels of mechanical availability to our customers. Mechanical
availability is defined as the percentage of time that our units are capable of operating as designed and is a measure of
reliability. The cost of rental compression is an appreciable operating expense for a producer and the improved
productivity delivers material incremental profitability to customers. This creates significant value for our customers
and we believe our high levels of mechanical availability, particularly for our large horsepower rental compression
units, is a competitive differentiator for customers selecting our units.
•
Innovative rental compression units. We have made a series of technical innovations to our rental compression units
that have improved operational performance while also reducing the environmental impact, largely related to the
volume of fugitive emissions. Environmental considerations have increased in importance for our customers,
particularly with recent environmental regulations and taxation, most notably the Methane Emissions Reduction
Program. We use “eComp” technology with existing equipment to reduce emissions through vent capture and
electronic valving. Our use of proprietary System Management and Recovery Technology (“SMART”) on our
compressor units reduces unplanned shutdowns and increases productivity and our new equipment includes telemetry
software to meet customer demands for operational data to analyze and streamline production. We believe the superior
operating and environmental performance of our natural gas engine and electric-drive units, particularly our large
horsepower units, is a significant competitive differentiator.
•
Long-standing customer relationships. We have developed long-standing relationships providing compression
equipment to many major and independent oil and gas companies. Our customers generally continue to rent our
compressors after the expiration of the initial terms of our rental agreements, which we believe reflects their
satisfaction with the reliability and performance of our services and products.
•
High level of customer service. Our ability to provide a broad range of compressors has enabled us to effectively meet
the evolving needs of our customers. We believe this ability, coupled with our personalized services and in-depth
knowledge of our customers’ operating needs and growth plans, have allowed us to enhance our relationships with
existing customers as well as attract new customers. The size, type and geographic diversity of our rental fleet enable
us to provide customers with a range of compression units that can serve a wide variety of applications. We are able to
select the correct equipment for the job, rather than the customer trying to fit its application to our equipment.
3
•
Availability of new units. The rental compression industry has undergone significant change over the last several
years. Capital constraints, in the form of reduced debt availability, higher interest rates, and shareholder demands for
return of capital, have forced capital discipline upon the industry. These factors, along with supply chain challenges,
led to a dearth of available rental compression units at a time of solid customer demand. Our strong balance sheet
allowed us to strategically gain market share with desirable customers renting large horsepower units on pre-contracted
basis. We believe our relatively modest leverage remains a strategic advantage for us to continue to gain market share
on attractive terms for shareholder return.
Industry Overview and Outlook
The oil and gas industry has historically been cyclical and production levels of oil and gas are dependent upon
numerous factors. The market for compression equipment and services is highly dependent on the production levels and pricing
of oil and gas.
Crude Oil. The level of production for crude oil and capital expenditures activity has generally been dependent upon
the prevailing view of future crude oil prices, which are influenced by numerous supply and demand factors, including
availability and cost of capital, well productivity and development costs, global and domestic economic conditions,
environmental regulations, policies of OPEC and Russia, and other factors. We feel that the current crude oil market production
outlook is favorable, with current prices creating strong incentives for our customers to maximize their production levels. While
crude oil prices have historically been volatile, we expect demand for our existing compressor fleet to remain positive assuming
crude oil prices remain within reasonable bands with respect to current pricing levels.
Natural Gas. We believe the market outlook for natural gas production in the U.S. remains steady while short term
price volatility remains a factor due to geopolitical influences and shifts in LNG exports. We believe opportunities for
increased utilization of our small and medium horsepower units are supported by continued investment in shale gas
development, particularly in the Permian basin and Marcellus Shale.
We will continue to evaluate our business and operating strategy and we will continue to remain prudent in both our
allocation of capital and our capital structure. Nevertheless, if any of these circumstances change significantly, our business
could be adversely affected. Please read Item 1A., “Risk Factors,” in this report.
Major Customers
Rental and sales activity with Occidental Permian, LTD. (“Oxy”) for the years ended December 31, 2024, 2023 and
2022 amounted to 54 percent, 50 percent and 42 percent of our revenue, respectively. No other single customer accounted for
more than 10 percent of our revenues in 2024, 2023 or 2022. We do anticipate diversification of our revenue concentration
during 2025 in connection with commitments we are currently processing with certain other large E&P customers. This
development will likely reduce our revenue concentration attributable to Oxy.
Oxy amounted to 52 percent of our accounts receivable as of December 31, 2024, and 64 percent of our accounts
receivable as of December 31, 2023. No other customers amounted to more than 10 percent of our accounts receivable as of
December 31, 2024 or 2023. The loss of this key customer would have a material adverse effect on our business, results of
operations, financial condition and cash flows, depending upon the demand for our compressors at the time of such loss and our
ability to attract new customers.
Sales and Marketing
Our sales force pursues the rental and sales market for compressors and other services in their respective
territories. Additionally, our personnel coordinate with each other to develop relationships with customers who operate in
multiple regions. Our sales and marketing strategy is focused on communication with current customers and potential
customers through frequent direct contact, technical assistance, print literature, direct mail and referrals. Our sales and
marketing personnel coordinate with our operations personnel in order to promptly respond to and address customer needs. Our
overall sales and marketing efforts concentrate on demonstrating our commitment to enhancing our customers’ cash flows
through enhanced product design, assembly, installation, operations, customer service and support.
4
Competition
The compression services business is highly competitive. We have several competitors in the natural gas compression
industry, some of which have greater financial resources. We believe that we compete effectively on the basis of price,
compression unit availability, customer service, flexibility in meeting customer needs, and quality and reliability of our
compressors and related services.
Compressor industry participants can achieve significant advantages through increased size and geographic
breadth. As the number of rental compressors in our rental fleet increases, the number of sales, support, and maintenance
personnel required and the minimum level of inventory may not increase proportionately.
Backlog
As of December 31, 2024, we had no sales backlog compared to $0.8 million as of December 31, 2023. The absence
of a sales backlog is indicative of our efforts to de-emphasize selling compression equipment in favor of rentals. Sales backlog
consists of firm customer orders for which a purchase or work order has been received, satisfactory credit or a financing
arrangement exists, and delivery is scheduled. In addition, the major components of our compressors are acquired from
suppliers through periodic purchase orders that currently require three to six months or more of lead time prior to delivery of
the order. We do not believe that backlog is a critical indicator of the future growth potential of our business.
Liability and Other Insurance Coverage
Our equipment and services are provided to customers who are subject to hazards inherent in the oil and gas industry,
such as explosions, fires, and oil spills. We maintain liability insurance that we believe is customary in the industry and which
includes environmental cleanup but excludes product warranty insurance because the majority of components on our
compressor unit are covered by the OEM manufacturers and our outsourced fabrication service providers. We also maintain
insurance with respect to our facilities. Based on our historical experience, we believe that our insurance coverage is
adequate. However, there is a risk that our insurance may not be sufficient to cover any particular loss or that insurance may not
cover all losses. In addition, insurance rates have in the past been subject to wide fluctuation, and changes in coverage could
result in less coverage, increases in cost or higher deductibles and retentions.
Intellectual Property
We believe that the success of our business depends more on the technical competence, creativity and marketing
abilities of our employees than on any individual patent, trademark, or copyright. Nevertheless, as part of our ongoing research,
design and development activities, we may seek patents when appropriate on inventions concerning new products, processes
and product improvements. With respect to our executive officers and certain key, senior employees, we maintain
confidentiality and proprietary information agreements with these officers and employees.
Suppliers and Raw Materials
Preparing our rental compressors for service involves the purchase by us of engines, compressors, coolers, frames and
other components, and the assembly, primarily by third-party service providers, of these OEM components on skids for delivery
to customer locations. These major components of our compressor units are acquired through periodic purchase orders placed
with third-party suppliers on an “as needed” basis, which typically requires a three to twelve month lead time with delivery
dates scheduled to coincide with our estimated assembly schedules. Although we do not have formal continuing supply and
service contracts with any major supplier or third-party assembly service provider, we believe we have adequate alternative
sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major
components for our compressors. However, the occurrence of such an event could have a material adverse effect on our results
of operations, financial condition and cash flows, particularly if we are unable to increase our rental rates and sale prices
proportionate to any such component price increases.
5
Government Regulation
All of our operations and facilities are subject to numerous federal, state, foreign and local laws, rules and regulations
related to various aspects of our business, including containment and disposal of hazardous materials, water quality and
wastewater discharges, oilfield waste and other waste materials and protection of human health.
To date, we have not been required to expend significant resources in order to satisfy applicable environmental laws
and regulations. We do not anticipate any material capital expenditures for environmental control facilities or extraordinary
expenditures to comply with environmental rules and regulations in the foreseeable future. However, compliance costs under
existing laws or under any new requirements could become material and we could incur liabilities for noncompliance. And as
noted below, we may be indirectly affected by environmental laws that affect our customers.
Our business is generally affected by political developments and by federal, state, foreign and local laws and
regulations, which relate to the oil and gas industry. The adoption of laws and regulations affecting the oil and gas industry for
economic, environmental and other policy reasons could increase our costs and could have an adverse effect on the demand for
our services and our operations. The state and federal environmental laws and regulations that currently apply to our operations
could become more stringent in the future.
Climate Change
In response to findings that emissions of carbon dioxide, methane and other Greenhouse Gases (“GHGs”) endanger
public health and the environment, federal legislation has been considered from time to time to reduce GHG emissions.
Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of natural gas, are examples of
GHGs. At the federal level, the government could seek to pursue legislative, regulatory or executive initiatives that may impose
significant restrictions on fossil-fuel exploration and production and use such as limitations or bans on hydraulic fracturing of
oil and gas wells, bans or restrictions on new leases for production of minerals on federal properties, and imposing restrictive
requirements on new pipeline infrastructure or fossil-fuel export facilities.
The Inflation Reduction Act of 2022 (the “IRA 2022”) imposes a methane emissions charge on certain oil and gas
facilities, including onshore petroleum and natural gas production facilities, which emit 25,000 metric tons or more of carbon
dioxide equivalent gas per year and exceed certain emissions thresholds. We do not operate any facilities that are subject to this
emissions charge. In July 2023, the U.S. Environmental Protection Agency (“EPA”) proposed to expand the scope of the GHG
Reporting Program for petroleum and natural gas facilities, as required by the IRA 2022. Among other things, the proposed rule
expands the emissions events that are subject to reporting requirements to include “other large release events” and applies
reporting requirements to certain new sources and sectors. The rule took effect on January 1, 2025, for reporting year 2025 (due
March 2026) in certain circumstances, with the potential to also impact GHG reporting for reporting year 2024 (due March
2025) in certain circumstances. In January 2024, the EPA proposed a rule implementing the IRA 2022’s methane emissions
charge. The proposed rule includes potential methodologies for calculating the amount by which a facility’s reported methane
emissions are below or exceed the waste emissions thresholds and contemplates approaches for implementing certain
exemptions created by the IRA 2022. The methane emissions charge imposed under the Methane Emissions and Waste
Reduction Incentive Program for calendar year 2024 would be $900 per ton emitted over annual methane emissions thresholds,
and would increase to $1,200 in 2025, and $1,500 in 2026. The final rule for the waste emissions charge was implemented in
November, 2024. In February 2025, however, the U.S. House and Senate approved a joint resolution of disapproval under the
Congressional Review Act to repeal the methane emissions charge, which President Trump is expected to sign into law.
However, the new administration has taken quick action to pause or reverse a wide range of environmental policies.
On his first day in office, President Trump signed a series of executive orders reversing prior climate change-related federal
actions. Among them, the administration disbanded the Interagency Working Group on the Social Cost of Greenhouse Gases,
directed all agencies to disregard the social cost of carbon calculations that were previously required, declared an energy
emergency, and pulled out of the Paris Agreement. At this time, it is unclear how or when such changes will take effect, and to
what extent this administration’s climate policy will reshape the regulatory landscape. Although it is not currently possible to
predict how any proposed or future GHG legislation, regulation, agreements or initiatives will impact our business, any such
legislation or regulation of GHG emissions could result in increased compliance or operating costs, additional operating
restrictions or reduced demand for our compressor services, and could have a material adverse effect on our business, financial
condition and results of operations.
6
Other energy legislation and initiatives could include a carbon tax, methane fee or cap and trade program. At the state
level, many states, including the states in which we or our customers conduct operations, have adopted legal requirements that
have imposed new or more stringent permitting, disclosure or well construction requirements on oil and gas activities. For
instance, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory
initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and
restriction of emissions. For example, in 2019, Colorado passed a bill which delegates authority to local governments to
regulate oil and gas activities and requires the Colorado Oil and Gas Conservation Commission to minimize emissions of
methane and other air contaminants. Likewise, the New Mexico Environment Department has adopted regulations to restrict the
venting or flaring of methane.
At the international level, there is an agreement, the United Nations-sponsored “Paris Agreement,” for nations to limit
their GHG emissions through non-binding, individually determined reduction goals every five years after 2020. President Biden
pledged the renewed participation of the United States on his first day in office. In November 2021, the United States
participated in the United Nations Climate Change Conference in Glasgow, Scotland, United Kingdom that resulted in a pact
among approximately 200 countries, including the United States, called the Glasgow Climate Pact. Relatedly, the United States
and European Union jointly announced the launch of the “Global Methane Pledge,” which aims to cut global methane pollution
at least 30% by 2030 relative to 2020 levels, including “all feasible reductions” in the energy sector. In conjunction with these
pacts, the United States committed to an economy-wide target of reducing net greenhouse gas emissions by 50-52 percent
below 2005 levels by 2030. In January 2025, however, President Trump issued an executive order withdrawing the U.S. from
the Paris Agreement, and froze federal funds relating to the Agreement. The extent to which the U.S. will maintain climate
change-related pledges is currently unknown, but any future laws and regulations imposing reporting obligations on, or limiting
emissions of GHGs from, our compressors could require us to incur costs to reduce emissions associated with our operations.
Litigation risks are also increasing, as a number of cities and other local governments have sought to bring suits
against the largest E&P companies in state or federal court, alleging, among other things, that such companies created public
nuisances by producing fuels that contributed to global warming effects, such as rising sea levels, and therefore are responsible
for roadway and infrastructure damages, or alleging that the companies have been aware of the adverse effects of climate
change for some time but defrauded their investors by failing to adequately disclose those impacts.
There are also increasing financial risks for fossil fuel producers and oil and gas field service providers (such as us) as
shareholders currently invested in fossil-fuel energy and related service companies concerned about the potential effects of
climate change may elect in the future to shift some or all of their investments into non-energy related sectors. Institutional
lenders who provide financing to fossil-fuel energy and related companies also have become more attentive to sustainable
lending practices and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, the lending
practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature,
by environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate
change not to provide funding for fossil fuel producers. Limitation of investments in and financings for fossil fuel energy
companies could result in the restriction, delay or cancellation of drilling programs or development or production activities of
our customers, which in turn could have a material adverse effect on our business.
The adoption and implementation of new or more stringent international, federal or state legislation, regulations or
other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and gas sector or otherwise
restrict the areas in which this sector may produce oil and gas or generate GHG emissions could result in increased costs of
compliance or additional operating restrictions or reduced demand for our compressor products and services, and could have a
material adverse effect on our business, financial condition,results of operations and cash flows. The current administration has
shown its willingness to reduce the number of regulations that increase compliance costs on companies such as ours, but the
extent of changes are, as of yet, unclear. Further, the new administration has signed an executive order declaring a national
energy emergency in the hopes of reducing regulatory costs in the oil and gas industry.
We believe that our existing environmental control procedures are adequate and that we are in substantial compliance
with environmental laws and regulations, and the phasing in of emission controls and other known regulatory requirements
should not have a material adverse effect on our financial condition, results of operations and cash flows; however, it is possible
that future developments, such as new or increasingly strict requirements and environmental laws and enforcement policies
thereunder, could lead to material costs of environmental compliance by us. While we may be able to pass on the additional cost
of complying with such laws to our customers; however, there can be no assurance that attempts to do so will be successful.
Some risk of environmental liability and other costs are inherent in the nature of our business; however, and there can be no
assurance that environmental costs will not rise.
7
To the extent that new laws or other governmental actions restrict the energy industry or impose additional
environmental protection requirements that result in increased costs to the oil and gas industry, we could be adversely affected.
The new administration has signaled its interest in rescinding or nullifying regulations which financially adversely impact the
oil and gas industry, although the extent of any such changes is unclear at this time. We cannot determine to what extent our
future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
Site Remediation and Waste Management and Disposal
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as
the Superfund law, and analogous state laws impose liability on certain classes of persons, known as potentially responsible
parties (“PRPs”) for the disposal or release of a regulated hazardous substance into the environment. These PRPs include (1) the
current owners and operators of a facility, (2) the past owners and operators of a facility at the time the disposal or release of a
hazardous substance occurred, (3) parties that arranged for the offsite disposal or treatment of a hazardous substance, and (4)
transporters of hazardous substances to off-site disposal or treatment facilities. PRPs under CERCLA may be subject to strict,
joint and several liability for the costs of investigating and cleaning up environmental contamination, for damages to natural
resources and for the costs of certain health studies. In addition to statutory liability under CERCLA, common law claims for
personal injury or property damage can also be brought by neighboring landowners and other third parties related to
contaminated sites.
The Resource Conservation and Recovery Act (“RCRA”), and comparable state statutes and their implementing
regulations, regulate the generation, transportation, treatment, storage, disposal, and cleanup of hazardous and solid (non-
hazardous) wastes. Under a delegation of authority from the EPA, most states administer some or all of the provisions of
RCRA, sometimes in conjunction with their own, more stringent requirements. Federal and state regulatory agencies can seek
to impose administrative, civil, and criminal penalties for alleged non-compliance with RCRA and analogous state
requirements. In general, hazardous waste is waste with properties that can potentially endanger human health or the
environment.
Under CERCLA, RCRA and analogous state laws, we could be required to remove or remediate environmental
impacts on properties we currently own and lease or formerly owned or leased (including hazardous substances or wastes
disposed of or released by prior owners or operators), to clean up contaminated off-site disposal facilities where our wastes
have come to be located or to implement remedial measures to prevent or mitigate future contamination. Compliance with these
laws may constitute a significant cost and effort for us. No specific accounting for environmental compliance has been
maintained or projected by us at this time. We are not presently aware of any material environmental demands, claims, or
adverse actions, litigation or administrative proceedings in which either we or our acquired properties are involved in or subject
to or arising out of any predecessor operations.
We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support
of our operations for a number of years. We have utilized operating and disposal practices that were or are currently standard in
the industry. However, materials such as solvents, thinner, waste paint, waste oil, wash down water and sandblast material may
have been disposed of or released in or under properties currently or formerly owned or operated by us or our predecessors.
Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons,
hazardous substances, or other regulated wastes may have been disposed of or released on or under the properties owned or
leased by us or on or under other locations where such materials have been taken for disposal by companies sub-contracted by
us. In addition, some of these properties may have been previously owned or operated by third parties whose treatment and
disposal or release of hydrocarbons, hazardous substances or other regulated wastes was not under our control. These properties
and the materials released or disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws,
we could be required to remove or remediate historical property contamination, or to perform certain operations to prevent
future contamination. We are not currently under any order requiring that we undertake or pay for any cleanup activities;
however, we cannot provide any assurance that we will not receive any such order in the future.
Under CERCLA and analogous state laws, we could be required to remove or remediate environmental impacts on
properties we currently own and lease or formerly owned or leased (including hazardous substances or wastes disposed of or
released by prior owners or operators), to clean up contaminated off-site disposal facilities where our wastes have come to be
located or to implement remedial measures to prevent or mitigate future contamination. Compliance with these laws may
constitute a significant cost and effort for us. No specific accounting for environmental compliance has been maintained or
projected by us at this time. We are not presently aware of any material environmental demands, claims, or adverse actions,
litigation or administrative proceedings in which either we or our acquired properties are involved in or subject to or arising out
of any predecessor.
8
Furthermore, the modification of existing laws or regulations or the adoption of new laws or regulations that result in
the curtailment of exploratory or developmental drilling for oil and gas could materially and adversely affect our operations by
discouraging our customers from drilling for hydrocarbons, disrupting revenue through permitting or similar delays. Demand
for our compression products and services could be diminished in connection with these initiatives. Further, to the extent that
the review results in the development of additional restrictions on exploration and drilling, limitations on the availability of
leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations by
reducing our customers’ compression needs and the demand for our services.
Air Emissions
The federal Clean Air Act (“CAA”) and implementing regulations and comparable state laws and regulations regulate
emissions of air pollutants from various industrial sources and also impose various monitoring and reporting requirements,
including requirements related to emissions from certain stationary engines, such as those on our compressor units. These laws
and regulations impose limits on the levels of various substances that may be emitted into the atmosphere from our compressor
units and required us to meet more stringent air emission standards and install new emission control equipment on all of our
engines built after July 1, 2008.
In recent years, the EPA has lowered the National Ambient Air Quality Standard (“NAAQS”) for several air
pollutants. For example, in 2013, the EPA lowered the annual standard for fine particulate matter from 15 to 12 micrograms per
cubic meter. In 2015, the EPA published the final rule strengthening the standards for ground level ozone, and the states are
expected to establish revised attainment/non-attainment regions. State implementation of the revised NAAQS could result in
stricter permitting requirements, delay or prohibit our customers’ ability to obtain such permits, and result in increased
expenditures for pollution control equipment, which could negatively impact our customers’ operations by increasing the cost
of additions to equipment, and negatively impact our business.
In 2012, the EPA finalized rules that establish new air emission controls for oil and gas production and natural gas
processing operations. Specifically, the EPA’s rule package included New Source Performance Standards (“NSPS”) to address
emissions of sulfur dioxide and volatile organic compounds (“VOCs”) and a separate set of emission standards to address
hazardous air pollutants frequently associated with oil and gas production and processing activities. The rules established
specific new requirements regarding emissions from compressors and controls at natural gas processing plants, dehydrators,
storage tanks and other production equipment as well as the first federal air standards for natural gas wells that are hydraulically
fractured. The EPA has taken a number of steps to amend or expand on these regulations since 2012. For example, in June
2016, the EPA published NSPS that require certain new, modified or reconstructed facilities in the oil and gas sector to reduce
methane gas and VOC emissions. These standards expanded the 2012 standards by using certain equipment-specific emissions
control practices, requiring additional controls for pneumatic controllers and pumps as well as compressors, and imposing leak
detection and repair requirements for natural gas compressor and booster stations. In addition, in December 2023, the EPA
proposed a rule to further reduce methane and VOC emissions from new and existing sources in the oil and gas sector. These
standards, as well as any future laws and their implementing regulations, may impose stringent air permit requirements, or
mandate the use of specific equipment or technologies to control emissions. We cannot predict the final regulatory requirements
or the future costs to comply with such requirements with any certainty.
We are also subject to air regulation at the state level. For example, sources of air emissions within Texas are
controlled by the Texas Commission on Environmental Quality (“TCEQ”). Air emission sources that emit at greater than de
minimis levels must obtain a permit prior to operation through the TCEQ. In addition, TCEQ has implemented revisions to
certain air permit programs that significantly increase the air permitting requirements for new and certain existing oil and gas
production and gathering sites for a number of counties in the Barnett Shale production area that established new emissions
standards for engines, which impact the operation of specific categories of engines by requiring the use of alternative engines,
compressor packages or the installation of aftermarket emissions control equipment. Expansion by the TCEQ of this type of
program and the adoption of similar regulations in other states may increase our compliance costs.
9
Water Discharge
Clean Water Act. The Clean Water Act (“CWA”) and the Oil Pollution Act of 1990 and implementing regulations
govern:
•
the prevention of discharges, including oil and produced water spills, and
•
liability for drainage into waters.
The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants,
including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated
waters and wetlands is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state
agency. The CWA also requires the development and implementation of spill prevention, control and countermeasures to help
prevent the contamination of navigable waters in the event of a petroleum hydrocarbon spill or leak at hydrocarbon facilities. In
addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of
storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and
criminal penalties as well as other enforcement mechanisms for non-compliance with discharge permits or other requirements
of the CWA and analogous state laws and regulations. Our compression operations do not generate process wastewaters that are
discharged to waters of the U.S. However, the operations of our customers may generate such wastewaters subject to the CWA.
While it is the responsibility of our customers to follow CWA regulations and obtain proper permits, violations of the CWA
may indirectly impact our operations in a negative manner.
Safe Drinking Water Act. Some of our customers’ natural gas production is developed from unconventional sources
that require hydraulic fracturing as part of the completion process. Legislation to amend the Safe Drinking Water Act
(“SDWA”) to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal
permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical
constituents of the fluids used in the fracturing process, have been proposed from time to time and the federal government
continues to consider legislation to amend the SDWA. Some states have also proposed or adopted legislative or regulatory
restrictions on hydraulic fracturing, including prohibitions on the practice. We cannot predict the future of such legislation and
what additional, if any, provisions would be included. Additional levels of regulation or interpretation are adopted at the federal
or state level could lead to increased operating costs and prohibitions or curtailment of current hydraulic practices could reduce
demand for our compression services, which could materially adversely affect our financial position, results of operations and
cash flows.
Occupational Safety and Health
We are subject to the requirements of Occupational Safety and Health Administration (“OSHA”) and comparable state
statutes. These laws and the implementing regulations strictly govern the protection of the health and safety of employees. The
OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA, and similar
state statutes require that we maintain and/or disclose information about hazardous materials used or produced in our
operations. We believe that we are in compliance with these applicable requirements and with other comparable laws.
Human Capital
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and
integrating our existing and new employees into our company. We offer competitive and comprehensive compensation and
benefits including: (i) a 401(k) plan with employer matching contributions, (ii) medical, dental and eye care insurance benefits,
(iii) health savings and flexible spending accounts and (iv) paid time off, among others. We also provide cash and equity
incentive plans in order to attract, retain and reward our employees through the granting of cash-based and stock-based
compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to
perform to the best of their abilities and achieve well-defined short- and long-term business goals. The Compensation
Committee of our Board of Directors is responsible for designing and administering executive compensation programs for our
executive officers.
We are committed to providing a work environment that is free of discrimination and harassment. We are an equal-
opportunity employer. We make employment decisions on the basis of an individual’s qualifications and our business needs. As
new employees join us, they learn more about our policies and culture through orientation and onboarding, our Employee
Handbook, Code of Conduct, and compliance trainings.
10
We are committed to maintaining a healthy, safe and secure work environment that protects our employees,
contractors, business partners, customers and visitors to our facilities. We comply with applicable health, safety, and
environmental laws as well as our internal policies and procedures. Safety is a core value to us and safety performance is a key
metric that is included in the incentive compensation of certain employees, including our executive officers. We actively
promote the highest standards of safety behavior and environmental awareness and strive to meet or exceed all applicable local,
state and federal regulations.
As of December 31, 2024, we had 245 total employees, none of which are represented by a labor union. A total of 54
employees were based at our Midland, Texas headquarters location while the remaining 191 employees were deployed to our
operating facilities throughout our operating regions. We believe that we have good relations with our employees.
Available Information
We use our website as a channel of distribution for Company information. We make available free of charge on the
Investor Relations section of our website (www.ngsgi.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q, and Current Reports on Form 8-K. We also make available through our website other reports filed with or furnished to the
Securities and Exchange Commission (“SEC”) under the Exchange Act including our proxy statements and reports filed by
officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Business Ethics and the charters to our
various Committees of our Board of Directors. Paper copies of our filings are also available, without charge upon written
request. Please mail requests to Natural Gas Services Group, Inc., 404 Veterans Airpark Lane, Suite 300, Midland, TX 79705.
The information contained on our website is not part of this Report.
11
ITEM 1A.
RISK FACTORS
You should carefully consider the following risks associated with owning our common stock. Although the risks
described below are the risks that we believe are material, they are not the only risks relating to our industry, our business and
our common stock. Additional risks and uncertainties, including those that we have not yet identified or that we currently
believe are immaterial, may also adversely affect our business, results of operations, financial condition and cash flows.
Risks Associated With Our Industry
Decreased oil and gas prices and oil and gas industry expenditure levels adversely affect our revenue.
Our revenue is derived primarily from expenditures in the oil and gas industry, which, in turn, are based on budgets to
explore for, develop and produce oil and gas. When these expenditures decline, as they have at various times during the past
several years, our revenue will suffer. The industry’s willingness to explore for, develop and produce oil and gas depends
largely upon the prevailing view of future oil and gas prices. Prices for oil and gas historically have been, and are likely to
continue to be, highly volatile. Many factors affect the supply and demand for oil and gas and, therefore, influence oil and gas
prices, including:
•
the level of oil and gas production;
•
the level of oil and gas inventories;
•
domestic and worldwide demand for oil and gas;
•
the expected cost of developing new reserves;
•
the cost of producing oil and gas;
•
the level of drilling and completions activity;
•
inclement weather;
•
domestic and worldwide economic activity;
•
regulatory and other federal and state requirements in the U.S.;
•
the ability of OPEC, national oil companies and other large producers to set and maintain production levels and prices
for crude oil;
•
political conditions in or affecting oil and gas producing countries;
•
terrorist activities affecting traditional supply routes and other possible terrorist activities in the U.S. and elsewhere;
•
the cost of developing alternative energy sources;
•
environmental regulation; and
•
tax policies.
The rental contracts of many of our operating compressor units have a short-term duration, and oil and gas companies
tend to respond quickly to upward or downward changes in prices. Any prolonged reduction in drilling and production activities
has historically eroded both rental pricing and utilization rates for our compression equipment and services and adversely
affected our financial results. As a result of any such prolonged reductions, we may suffer losses, be unable to make necessary
capital expenditures or be unable to meet our financial obligations.
The intense competition in our industry could result in reduced profitability and loss of market share for us.
We compete with the oil and gas industry’s largest equipment and service providers who have greater name
recognition than we do. These companies also have substantially greater financial resources, larger operations and greater
budgets for marketing, research and development than we do. They may be better able to compete because of their broader
geographic dispersion and ability to take advantage of international opportunities, the greater number of compressors in their
fleet, their product and service diversity or a lower cost of capital. As a result, we could lose customers and market share to
those competitors. These companies may also be better positioned than us to successfully endure downturns in the oil and gas
industry.
12
Our operations may be adversely affected if our current competitors or new market entrants introduce new products or
services with better prices, features, performance or other competitive characteristics than our products and
services. Competitive pressures or other factors also may result in significant price competition that could harm our revenue and
our business. In addition, our customers may purchase and operate their own compression fleets in lieu of renting compressors
and using our compression services. Additionally, we may face competition in our efforts to acquire other businesses.
Adverse macroeconomic and business conditions may significantly and negatively affect our results of operations.
As a result of the COVID-19 outbreak and other economic conditions in the United States and abroad, our revenue and
profitability were adversely affected in the ensuing years. Although the effects of the outbreak have generally abated,
pandemics or other public health crises could significantly impact public health, economic growth, supply chains and markets.
The extent to which our operations and financial results and condition may be affected by future pandemics or other public
health crises will depend on various factors and consequences beyond our control, such as the duration and scope of such
pandemic or public health crisis, the actions by governments and the private sector in response to the pandemic and the
recovery speed and effectiveness of responses to combat any such pandemic or public health crisis. Thus, any future pandemic
or public health crisis may materially adversely affect our operating and financial results in a manner that is not currently
known to us and may be material and pose significant risks to our operations.
The condition of domestic and global financial markets and the potential for disruption and illiquidity in the credit
markets could have an adverse effect on our operating results and financial condition, and if sustained for an extended period,
such adverse effects could also become significant. Uncertainty and turmoil in the credit markets may negatively impact the
ability of our customers to finance utilization of our products and services and could result in a decrease in, or cancellation of,
contracts or adversely affect the collectability of our receivables. If the availability of credit to our customers is reduced, they
may reduce their drilling and production expenditures, thereby decreasing demand for our products and services, which could
have a negative impact on our financial condition. A prolonged period of depressed prices for oil and gas would likely result in
delays or cancellation of projects by our customers, reducing the demand for our products and services.
Continued elevated levels of inflation could have an adverse impact on our operating results.
The U.S. economy has experienced elevated levels of inflation since early 2022. While such levels of inflation have
moderated somewhat, inflation pressure continues and uncertainty remains regarding expectations of inflation during 2025.
Should inflationary pressures continue or increase, the result will be an increase in our cost structure, including labor costs,
parts costs, lubricants and other items used in our operations. If such cost increases occur, we may be unable to pass along such
increases to our customers in the form of higher rental rates for our compressor units. Increases in inflation could also increase
the costs of new compressor units, making them less attractive and decreasing the demand from our customers for such assets.
In addition, inflation may adversely affect customers’ financing costs, cash flows, and profitability, which could adversely
impact their operations and our ability to collect receivables. Should any of these items occur, they could negatively impact our
results of operations, financial condition and cash flows.
A reduction in demand for oil could adversely affect our business.
Our results of operations depend upon the level of activity in the energy market, including oil development,
production, and transportation. Oil and gas prices and the level of drilling and exploration activity can be volatile. As a result,
the demand for our natural gas compression services can be adversely affected. A reduction in demand has, and could in the
future continue to, force us to reduce our pricing substantially. Additionally, our customers’ production from oil-weighted
reserves constitutes a substantial portion of our business. These are considered unconventional sources and are generally less
economically feasible to be developed in low crude oil price environments. A decline in demand for oil and gas generally has
an adverse effect on our business, results of operations, financial condition and cash flows.
Our industry is highly cyclical, and our results of operations may be volatile.
Our industry is highly cyclical, with periods of high demand and high pricing followed by periods of low demand and
low pricing. Periods of low demand intensify the competition in the industry and often result in rental equipment being idle for
long periods of time. At times, we have been required to enter into lower rate rental contracts in response to market conditions
and our revenues have decreased as a result of such conditions. Due to the short-term nature of most of our rental contracts,
changes in market conditions can quickly affect our business. As a result of the cyclicality of our industry, we anticipate our
results of operations will be volatile in the future.
13
Increased regulation or ban of current fracturing techniques could reduce demand for our compressors.
From time to time, for example, legislation has been proposed in Congress to amend the federal SDWA to require
federal permitting of hydraulic fracturing and the disclosure of chemicals used in the hydraulic fracturing process. Further, the
EPA completed a study finding that hydraulic fracturing could potentially harm drinking water resources under adverse
circumstances such as injection directly into groundwater or into production wells lacking mechanical integrity. Further,
legislation to amend the SDWA to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the
definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as
legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been
proposed in recent sessions of Congress. Several states and local jurisdictions also have adopted or are considering adopting
regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating
standards and/or require the disclosure of the composition of hydraulic fracturing fluids. While we do not perform hydraulic
fracturing, many of our customers do and their activity level drives demand for our products.
More recently, federal and state governments have begun investigating whether the disposal of produced water into
underground injection wells has caused increased seismic activity in certain areas. The results of these studies could lead federal
and state governments and agencies to develop and implement additional regulations.
A ban of hydraulic fracturing would likely halt some projects, including unconventional projects, at least temporarily.
Expanded regulations are likely to introduce a period of uncertainty as companies determine ways to proceed. Any curtailment
could result in a reduction in demand for our compressors, potentially affecting both rentals and sales of our units.
We are subject to extensive environmental laws and regulations that could require us to take costly compliance actions that
could harm our financial condition.
Our fabrication and maintenance operations are significantly affected by stringent and complex federal, state and local
laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental
protection. In these operations, we generate and manage hazardous wastes such as solvents, thinner, waste paint, waste oil,
wash down wastes, and sandblast material. We attempt to use generally accepted operating and disposal practices and, with
respect to acquisitions, will attempt to identify and assess whether there is any environmental risk before completing an
acquisition. Based on the nature of the industry, however, hydrocarbons or other wastes may have been disposed of or released
on or under properties owned or leased by us or on or under other locations where such wastes have been taken for
disposal. The waste on these properties may be subject to federal or state environmental laws that could require us to remove
the waste or remediate sites where they have been released. We could be exposed to liability for cleanup costs, natural resource
and other damages as a result of our conduct or the conduct of, or conditions caused by, prior owners, lessees or other third
parties. Environmental laws and regulations have changed in the past, and they are likely to change in the future. If current
existing regulatory requirements or enforcement policies change, we may be required to make significant unanticipated capital
and operating expenditures.
Any failure by us to comply with applicable environmental laws and regulations may result in governmental
authorities taking actions against our business that could harm our operations and financial condition, including the:
•
issuance of administrative, civil and criminal penalties;
•
denial or revocation of permits or other authorizations;
•
reduction or cessation in operations; and
•
performance of site investigatory, remedial or other corrective actions.
Increasing attention to environmental, social and governance matters and future related reporting requirements may impact
our business, financial results and stock price.
In recent years, increasing attention has been given to corporate activities related to environmental, social and
governance (“ESG”) matters in public discourse and the investment community. A number of advocacy groups, both
domestically and internationally, have campaigned for governmental and private action to promote change at public companies
related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds,
universities and other members of the investing community. These activities include increasing attention and demands for
action related to climate change and energy transition matters, such as promoting the use of substitutes to fossil fuel products
14
and encouraging the divestment of fossil fuel equities, as well as pressuring lenders and other financial services companies to
limit or curtail activities with fossil fuel companies.
Members of the investment community have begun to screen companies for sustainability performance, including
practices related to climate change. In addition, organizations that provide information to investors on corporate governance and
related matters have developed ratings systems for evaluating companies on their approach to ESG matters. These ratings are
used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to increased
negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have
a negative impact on our stock price and our access to and costs of capital.
Regulatory requirements related to ESG or sustainability reporting have been issued in the European Union that apply
to financial market participants. In the United States, such regulations have been issued related to pension investments in
California, and for the responsible investment of public funds in Illinois. Additional regulation is pending in other states. We
expect regulatory requirements related to ESG matters to continue to expand globally. If we are not able to meet future
sustainability reporting requirements of regulators or current and future expectations of investors, customers or other
stakeholders, our business and ability to raise capital may be adversely affected.
Increasing attention to climate change, increasing societal expectations on companies to address climate change, and
potential consumer use of substitutes to energy commodities may result in increased costs, reduced demand for our customers’
hydrocarbon products which will likely translate to reduced demand for compression services, reduced profits, increased
investigations and litigation, increased governmental regulations and negative impacts on our stock price and access to capital
markets.
International, national and state governments and agencies continue to evaluate and promulgate legislation and regulations
that are focused on restricting GHG emissions. Compliance with climate action regulations applicable to our customers’
operations may have significant implications that could adversely affect our business and operating results in the fossil fuel
sectors, and boosting demand for technologies contributing to the climate action agenda.
In the United States, the EPA has taken steps to regulate GHG emissions as air pollutants under the CAA. The EPA’s
Greenhouse Gas Reporting Rule requires monitoring and reporting of GHG emissions from, among others, certain mobile and
stationary GHG emission sources in the oil and gas industry. In addition, the U.S. government has proposed rules in the past
setting GHG emissions standards for, or otherwise aimed at reducing GHG emissions from, the oil and gas industry. Caps or
fees on carbon emissions, including in the U.S., have been and may continue to be established and the cost of such caps or fees
could disproportionately affect the fossil fuel sectors. We are unable to predict whether and when the proposed changes in laws
or regulations ultimately will occur or what they ultimately will require, and accordingly, we are unable to assess the potential
financial or operational impact they may have on our customers and therefore our business.
Risks Associated With Our Company
Approximately one half of our compressor unit rental agreements, representing approximately one quarter of our rented
horsepower, are month-to-month in duration, which, if terminated or not renewed, would adversely impact our revenue and
our ability to recover our initial equipment costs.
The length of our compressor rental agreements with our customers varies based on customer needs, equipment
configurations and geographic area. In certain cases, under currently prevailing rental rates, the initial rental periods are not
long enough to enable us to fully recoup the average cost of acquiring or assembling the equipment. On a unit basis, of the
1,208 compressors rented at December 31, 2024, 573 were rented on a month-to-month basis. On a horsepower basis, of the
491,756 total rented horsepower, we had 115,071 of that total rented on a month-to-month basis, with the remainder on
contracts expiring between 2025 and 2029. We have limited ability to increase prices during our initial contract terms. As a
result, we are unable to pass unexpected increases in the prices of the equipment, materials and services we utilize to provide
contract operations services, as a result of inflation of otherwise, onto our customers, which could result in a negative impact on
our results of operations, financial condition and cash flows. Given the volatility of the oil and gas market, we cannot be certain
that a substantial number of our customers will continue their rental agreements or that, if such agreements were terminated we
will be able to re-rent the equipment to new customers or that any re-rentals would be at comparable rental rates. The inability
to timely renegotiate or re-rent a substantial portion of our compressor rental fleet could have a material adverse effect upon our
business, financial condition, results of operations and cash flows.
15
We depend on particular suppliers and are vulnerable to product shortages and price increases.
In recent years, we have transitioned from in-house assembly of compressors, and we now purchase the majority of
our compressors from third-party assemblers and suppliers. If we are unable to purchase compression equipment or other
integral equipment, materials and services from third party suppliers, we may be unable to retain existing customers or compete
for new customers, which could have a material adverse effect on our business, results of operations, financial condition and
cash flows. Our reliance on these suppliers involves several risks, including price increases (as a result of inflation or
otherwise), quality issues and a potential inability to obtain an adequate supply of such equipment, materials and services in a
timely manner. Additionally, we may experience long lead times from our suppliers of compression equipment, which may
negatively impact our ability to deliver compressors to our customers in a timely manner. If we are unable to meet the
demands of our customers, our existing customers may terminate their contractual relationships with us or curtail future orders,
or we may not be able to compete for business from new customers, which, in either case, could have a material adverse effect
on our business, results of operations and financial condition. Further, supply chain issues could adversely affect our ability to
obtain necessary materials, parts or lubricants used in our operations or increase the costs of such items. A significant increase
in the price of such equipment, materials and services as a result of inflation, or other factors, could have a negative impact on
our business, results of operations, financial condition and cash flows.
Our operations entail inherent risks and we could be subject to substantial liability claims that could harm our financial
condition. Our insurance coverage may not insure against all potential losses and we could be materially harmed by
unexpected losses and liabilities.
Our compressors are used in production applications where an accident or a failure of a product can cause personal
injury, loss of life, damage to property, equipment or the environment, or suspension of operations. While we maintain
insurance coverage, we face the following risks:
•
we may not be able to continue to obtain insurance on commercially reasonable terms;
•
we may be faced with types of liabilities that will not be covered by our insurance, such as damages from significant
product liabilities and from environmental contamination;
•
the dollar amount of any liabilities may exceed our policy limits; and
•
we do not maintain coverage against the risk of interruption of our business.
Any claims made under our policies will likely cause our premiums to increase. Any future damages caused by our
products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles,
would reduce our earnings and our cash available for operations.
A significant amount of our revenues and accounts receivable are related to one customer and a loss of this customer or
other current customers could adversely affect our results of operations.
Our business is dependent not only on securing new customers but also on maintaining current customers. We had one
customer that accounted for an aggregate of approximately 54 percent of our revenue for the year ended December 31, 2024,
and the same customer accounted for an aggregate of approximately 50 percent of our revenue for the year ended December 31,
2023. As of December 31, 2024, this same customer accounted for an aggregate of 52 percent of our accounts receivable.
Unless we are able to retain our existing customers, or secure new customers if we lose one or more of our significant
customers, our revenue and results of operations would be adversely affected. In addition, the default on payments by our
significant customer or other important customers would negatively impact our cash flows and current assets.
Loss of key members of our management could adversely affect our business.
Our success depends on our ability to attract, retain and motivate a highly-skilled management team and workforce.
Failure to ensure that we have the depth and breadth of management and personnel with the necessary skill sets and experience
could impede our ability to achieve growth objectives and execute our operational strategy. As we continue to expand, we will
need to promote or hire additional staff, and, as a result of increased compensation and benefit packages in our industry, as well
as inflationary pressures, it may be difficult to attract or retain such individuals without incurring significant additional costs.
16
In keeping with our streamlined approach to our business, our executive management team consists of three officers:
our (i) Chief Executive Officer, (ii) President and Chief Operating Officer and (iii) Chief Financial Officer. In addition, we
employ a number of key employees in connection with our business, including in connection with the design and engineering of
our compressors. While we do have employment agreements with our three executive officers, the loss of any of our executive
officers or other key employees could have an adverse impact on our business. We do not carry any key-person insurance on
any of our officers or directors.
The erosion of the financial condition of our customers could adversely affect our business.
Many of our customers finance their exploration and development activities through cash flows from operating
activities, the incurrence of debt or the issuance of equity. During times when the oil and gas markets are weak, our customers
are more likely to experience a deterioration in their financial condition. Many of our customers’ equity values and liquidity
substantially decline during declines in oil and gas prices, and in some cases access to capital markets may be an unreliable
source of financing for some customers. The combination of a reduction in cash flow resulting from declines in commodity
prices, an increase in the interest rates charged for debt financing, a reduction in borrowing bases under reserve-based credit
facilities and the lack of availability of debt or equity financing may result in a reduction in our customers’ spending for our
products and services. For example, our customers could seek to preserve capital by canceling month-to-month contracts,
canceling or delaying scheduled maintenance of their existing natural gas compression equipment or determining not to enter
into any new natural gas compression service contracts or purchase new compression equipment.
We might be unable to employ qualified technical personnel, which could hamper our present operations or increase our
costs.
Many of the compressors that we rent are mechanically complex and often must perform in harsh conditions. We
believe that our success depends upon our ability to employ and retain a sufficient number of technical personnel who have the
ability to design, utilize, enhance and maintain these compressors. Our ability to maintain and expand our operations depends in
part on our ability to utilize and increase our skilled labor force. The demand for skilled workers is high, and supply is
limited. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force
or cause an increase in the wage rates that we must pay or both. If either of these events were to occur, our cost structure could
increase and our operations and growth potential could be impaired.
We may require a substantial amount of capital to expand our compressor rental fleet and grow our business.
We have a five-year senior secured revolving credit agreement, as amended (the “Credit Facility”), with a total
commitment of $300.0 million. We also have a right to request from the lender, an increase to the potential aggregate
commitment of up to $50.0 million; provided, however, the aggregate commitment amount is not permitted to exceed
$350.0 million. As of December 31, 2024, our borrowing base under the Credit Facility was approximately $300.0 million, with
$170 million outstanding, leaving approximately $130.0 million available for future borrowing.
During 2025, the amount we will spend on capital expenditures related to compression equipment will be determined
primarily by the activity of our customers, our financial resources and access to capital. The amount and timing of any capital
expenditures may vary depending on a variety of factors, including the level of activity in the oil and gas exploration and
production industry and the presence of alternative uses for our capital, including any acquisitions that we may pursue. In
addition, although a significant portion of the value of a new compressor increases our borrowing base under our Credit Facility
once it has been fully constructed and put into service, we generally have an approximate lag of 9 to 12 months between
borrowing money under the Credit Facility to fund progress payments to build a compressor unit and the time it becomes
eligible for inclusion in our borrowing base. This lag can reduce the amount of future borrowings available for working capital
purposes and new compressor unit acquisition until the unit is placed into service.
During the past year, we funded our capital expenditures through cash flows from operating activities and borrowings
under the Credit Facility. Although we believe that cash on hand, cash flows from operating activities and borrowing under our
Credit Facility will provide us with sufficient cash to fund our planned capital expenditures for 2025, we cannot provide
assurance that these sources will be sufficient considering the factors and limitations noted above.
In addition to expanding our existing business through organic growth opportunities, we may require additional capital
to fund any significant unanticipated capital expenditures, such as a material acquisition. To the extent we would require any
necessary capital, due to the existing constraints noted above and any issues or limitations in the equity and debt capital
markets, such capital, may not be available to us when we need it or on acceptable terms. Our ability to raise additional capital
17
will depend on the results of our operations and the status of various capital and industry markets at the time we seek such
capital. Failure to generate sufficient cash flows from operating activities, together with the absence of alternative sources of
capital, could stagnate our growth and have a material adverse effect on our business, financial condition, results of operations
or cash flows.
Our debt levels may negatively impact our current and future financial stability.
During 2024, we increased the borrowing commitment of the Credit Facility from $225 million to $300 million and we
have the right to request an increase in the potential commitment by $50 million (subject to borrowing base limitation and
customary covenants). As of December 31, 2024, we had $170 million of borrowings outstanding under the Credit Facility and
anticipate additional borrowing under the Credit Facility through 2025. Should we utilize our full debt capacity, growth beyond
that point could be impacted. As a result of our indebtedness at any given point in time, we might not have the ability to incur
any substantial additional indebtedness. The level of our indebtedness could have several important effects on our future
operations, including:
•
our ability to obtain additional financing for working capital, acquisitions, capital expenditures and other purposes may
be limited;
•
a significant portion of our cash flows from operating activities may be dedicated to the payment of principal and
interest (which is variable under the Credit Facility) on our debt, thereby reducing funds available for other purposes;
and
•
our leverage, if increased to an unacceptable level, could make us more vulnerable to economic downturns.
If we borrow under the Credit Facility and are unable to service our debt, we will likely be forced to take remedial steps that
are contrary to our business plan.
If we were to materially borrow further under the Credit Facility or other borrowing arrangements, it is possible that
our business will not generate sufficient cash from operating activities to meet any debt service requirements and the payment
of principal when due depending on the amount of borrowings at any given time. If this were to occur, we may be forced to:
•
sell assets at disadvantageous prices;
•
obtain additional financing on less favorable terms; or
•
refinance all or a portion of our indebtedness on terms that may be less favorable to us.
Our current Credit Facility agreement contains covenants that limit our operating and financial flexibility and, if breached,
could expose us to severe remedial provisions.
Under the terms of our current Credit Facility agreement, we must:
•
comply with various leverage, commitment coverage and other customary financial ratios;
•
not exceed specified levels of debt;
•
comply with limits on asset sales;
•
comply with limits on cash dividends; and
•
other customary financial and operational limitations.
Our ability to meet the financial ratios and tests under the Credit Facility can be affected by events beyond our control,
and we may not be able to satisfy those ratios and tests. A breach of any one of these covenants or requirements could permit
the lending organization to accelerate outstanding amounts so that it is immediately due and payable. If a breach occurs, no
further borrowings would be available under our Credit Facility. If we are unable to repay any outstanding amounts, the lender
could proceed against and foreclose on the assets we pledged as collateral to secure payment of our indebtedness.
18
Our current Credit Facility agreement contains a variable interest rate and increases to such rate may increase our
borrowing cost.
The interest expense charged on our outstanding borrowings under the Credit Facility agreement is based upon a
variable rate which fluctuates as interest rates change. Changes in macroeconomic conditions outside of our control could result
in a higher interest rate being charged on our outstanding borrowings and an increase in the overall interest costs charged. This
could have an adverse impact on our operations, our free cash flow and our ability to invest in future growth.
If we fail to acquire or successfully integrate additional businesses, our growth may be limited and our results of operations
may suffer.
As part of our business strategy, we evaluate potential acquisitions of other businesses or assets. However, there can be
no assurance that we will be successful in consummating any such acquisitions. The successful acquisition of businesses or
assets will depend on various factors, including, but not limited to, our ability to obtain financing and the competitive
environment for acquisitions. In addition, we may not be able to successfully integrate any businesses or assets that we acquire
in the future. The integration of acquired businesses is likely to be complex and time-consuming, place a significant strain on
management and may disrupt our business. We also may be adversely impacted by any unknown liabilities of acquired
businesses, including environmental liabilities. We may encounter substantial difficulties, costs and delays involved in
integrating common accounting, information and communication systems, operating procedures, internal controls and human
resources practices, including incompatibility of business cultures and the loss of key employees and customers. These
difficulties may reduce our ability to gain customers or retain existing customers, and may increase operating expenses,
resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.
Failure to effectively manage our business and growth could adversely affect our operating results and our internal
controls.
In 2024, we had significant growth in our revenue and operations. Our strategy envisions the continued expansion and
growth of our business, subject to the demand for oil and gas and the impact of the other risks set forth in this risk factor section
and elsewhere in this Report. Continued rapid growth will likely challenge and place a strain on our management systems and
resources if we are unable to timely adapt and expand such systems and resources. Many of our ongoing reporting functions
rely on data capture and recording using manual entry of transaction data. In order to efficiently and effectively manage our
planned growth, we will need to continue to analyze and upgrade our use of information technology (“IT”), including our
enterprise resource planning and other operating systems and this will likely require future capital investment. We must
continue to refine and expand our business capabilities, our workforce, our systems and processes, and our access to financing
sources. As we continue to grow, we must continue to hire, train, supervise and manage new employees. We cannot assure that
we will be able to:
•
meet our capital needs;
•
upgrade and expand our office and field management infrastructure so that it is appropriate for our level of activity;
•
continue to improve our IT systems effectively or efficiently and in a timely manner, including financial and
management controls, reporting systems and procedures; and
•
attract, hire, train and retain additional highly skilled and motivated officers, sales staff, district managers and
employees and allocate our human resources optimally.
If we are unable to manage our growth, our financial conditions and results of operations may be adversely affected.
Liability to customers under warranties and indemnification provisions may materially and adversely affect our results of
operations.
We provide warranties as to the proper operation and conformance to specifications of the equipment we rent and
sell. Our equipment is complex and often deployed in harsh environments. Failure of this equipment to operate properly or to
meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts and
equipment or monetary reimbursement to a customer. We have in the past received warranty claims and we expect to continue
to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, our ability to
obtain future business and our results of operations, financial condition and cash flows could be materially and adversely
affected.
19
Our rental and sales contracts provide for varying forms of indemnification from our customers and in most cases may
require us to indemnify our customers. Under some of our rental and sales contracts, liability with respect to personnel and
property is customarily assigned on a “knock-for-knock” basis, which means that we and our customers assume liability for our
respective personnel and property. However, in certain rental and sales contracts we assume liability for damage to our
customer’s property as well as the property of certain other third parties on the site resulting from our negligence. Since our
products are used in production applications in the energy industry, expenses and liabilities in connection with accidents
involving our products and services could be extensive and may exceed our insurance coverage.
Our ability to to use net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
Our ability to utilize net operating loss (“NOL”) carryforwards to reduce future taxable income is subject to limitations
under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“IRC”). As disclosed in Note 11 (“Income
Taxes”) to our Consolidated Financial Statements, we have substantial NOL carryforwards. The utilization of such
carryforwards may be limited by the occurrence of certain ownership changes, including the purchase or sale of our common
stock by significant shareholders and the offering of our common stock during any three-year period resulting in an aggregate
change of more than 50 percent in our beneficial ownership. In the event of an ownership change, Section 382 of the IRC
imposes an annual limitation on the amount of our taxable income that can be offset by our NOL carryforwards. Under such
circumstances, it is possible that the limitations imposed on our ability to utilize pre-ownership change NOLs could cause a
significant increase in our U.S. federal income tax liabilities and could cause U.S. federal income taxes to be paid earlier than
they otherwise would be paid if such limitations were not in effect.
Failure to maintain effective internal controls could have a material adverse effect on our operations.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal
control over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports and to help
prevent financial fraud. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial reports or
prevent fraud, our business decision process may be adversely affected, our business and operating results could be harmed,
investors could lose confidence in our reported financial information, and the price of our stock could decrease as a result.
We rely on computer and telecommunications systems, and failures in our systems or cyber security attacks or breaches
could result in information theft, data corruption, disruption in operations and/or financial loss.
In the conduct of our business, we rely heavily on IT systems (“digital technology”), including internet-based systems,
to process, transmit and store electronic information. In particular, we depend upon our digital technology for supply chain
management, inventory management, payment processing and data storage. Like many companies, we have become
increasingly dependent upon digital technology to conduct daily operations. Our business partners, including customers,
vendors, service providers and financial institutions, are also dependent upon digital technology.
We are continually exposed to various cybersecurity risks, including but not limited to, unauthorized access to our
systems or data, malware and ransomware attacks, denial-of-service attacks, phishing, theft or loss of intellectual property, and
data breaches. These risks could result from malicious actors, employee error, malfeasance, or other operational vulnerabilities.
A cybersecurity attack could have a significant adverse impact on our business operations, results of operations, financial
condition, cash flows and reputation. Potential consequences include loss of sensitive or proprietary information, disruption of
business operations, financial losses from remedial actions, litigation and potential legal liabilities and damage to customer and
investor confidence.
We have taken steps to protect against cyber-attacks to minimize the risk of our systems being penetrated and
compromised by implementing a comprehensive cybersecurity program, such as risk assessments and penetration testing,
deployment of firewalls and intrusion detection systems, deployment of encryption technologies, implementation of access
controls and the development of incident response and recovery plans. Additionally, we have employed data backup and
storage measures that could allow for recovery of our data. However, we cannot assure that our efforts to prevent such an attack
or, that if an attack were to occur, that we would be able to access our data in a timely fashion.
20
Risks Associated With Our Common Stock
The price of our common stock may fluctuate.
The trading price of our common stock and the price at which we may sell securities in the future are subject to
substantial fluctuations in response to various factors, including our ability to successfully accomplish our business strategy, the
trading volume of our stock, changes in governmental regulations, actual or anticipated variations in our quarterly or annual
financial results, our involvement in litigation, general market conditions, the prices of oil and gas, announcements by us and
our competitors, our liquidity, our ability to raise additional funds, and other events such as those discussed in the factors above.
Future sales of our common stock could adversely affect our stock price.
Substantial sales of our common stock in the public market, or the perception by the market that those sales could
occur, may lower our stock price or make it difficult for us to raise additional equity capital in the future. According to filings
made with the SEC through March 14, 2025, an aggregate of approximately 35 percent of the outstanding shares of our
common stock are owned by five institutional investors, each of which owns more than 5 percent of our outstanding shares as
of the date of their respective filings. Potential sales of large amounts of these shares in a short period of time by one or more of
these significant investors could have a negative impact on our stock price. In addition, potential sales of our common stock by
our directors and officers, who beneficially own approximately 6 percent of the outstanding shares of our common stock as of
March 14, 2025, and because of the negative perception of sales by insiders, could also have a negative impact on our stock
price.
We have a comparatively low number of shares of common stock outstanding and, therefore, our common stock may suffer
from limited liquidity and its price will likely be volatile and its value may be adversely affected.
Because of our relatively low number of outstanding shares of common stock, the trading price of our common stock
will likely be subject to significant price fluctuations and limited liquidity. This may adversely affect the value of your
investment. In addition, our common stock price is subject to fluctuations in response to variations in quarterly operating
results, changes in management, future announcements concerning us, general trends in the industry and other events or factors
such as those described above.
If we issue debt or equity securities, you may lose certain rights and your ownership may be diluted.
If we raise funds in the future through the issuance of debt or equity securities, the securities issued may have rights
and preferences and privileges senior to those of holders of our common stock, and the terms of the securities may impose
restrictions on our operations or dilute your ownership in our Company.
We currently have on file with the SEC an effective “universal” shelf registration statement on Form S-3, which
enables us to sell, from time to time, up to $200 million of our common stock and other securities, including debt securities,
covered by the registration statement in one or more public offerings. The shelf registration statement allows us to enter the
public markets and consummate sales of the registered securities in rapid fashion and with little or no notice. Issuances of
securities under our shelf registration statement may dilute our existing shareholders.
If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts
publish about us or our business. We do not control these analysts. Furthermore, there are many large, well-established,
publicly traded companies active in our industry and market, which may mean that it is less likely that we will receive
widespread analyst coverage. If one or more of the analysts who do cover us downgrade our stock, our stock price would likely
decline rapidly. If one or more of these analysts cease coverage, we could lose visibility in the market, which in turn could
cause our stock price to decline.
21
Provisions contained in our governing documents could hinder a change in control.
Our articles of incorporation and bylaws contain provisions that may discourage acquisition bids and may limit the
price investors are willing to pay for our common stock. Our articles of incorporation and bylaws provide that:
•
directors are elected for three-year terms, with approximately one-third of the board of directors standing for election
each year;
•
cumulative voting is not allowed, which limits the ability of minority shareholders to elect any directors;
•
advance notice for nominations of directors by shareholders and for shareholders to include matters to be considered at
our annual meeting;
•
the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes
entitled to be cast by the holders of all shares entitled to vote in the election of directors is required to change the size
of the board of directors; and
•
directors may be removed only for cause or by the holders of not less than 80% of the votes entitled to be cast on the
matter.
Our Board of Directors has the authority to issue up to five million shares of preferred stock. The Board of Directors
can fix the terms of the preferred stock without any action on the part of our shareholders. The issuance of shares of preferred
stock may delay or prevent a change in control transaction. In addition, preferred stock could be used in connection with the
Board of Directors’ adoption of a shareholders’ rights plan (also known as a poison pill), which would make it much more
difficult to effect a change in control of our Company through acquiring or controlling blocks of stock. Also, our directors and
officers as a group will continue to beneficially own stock and although this is not a majority of our stock, it confers substantial
voting power in the election of directors and management of our Company. This would make it difficult for other minority
shareholders to effect a change in control or otherwise extend any significant control over our management. This may adversely
affect the market price and interfere with the voting and other rights of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 1C.
CYBERSECURITY
Information Technology and Cybersecurity Risks.
Our IT systems and digital technology has been an important part of our operations and our ability to compete
successfully. We continue to invest in technology solutions to improve inefficient systems, to streamline and automate
workflows and to provide digital and mobile applications for our field service personnel. We are committed to maintaining
robust cybersecurity measures, continuously evaluating and updating our cybersecurity practices, and being prepared to respond
to and recover from cybersecurity incidents. We face ongoing risk from cybersecurity threats. There can be no assurance that
our efforts will prevent or mitigate all cybersecurity events, which, if realized, could have a material impact on our operations
and financial results. See Part I, Item 1A “Risk Factors” of this Report for additional information.
Cybersecurity Incidents
We have not experienced any material cybersecurity incidents nor have we identified risks from known threats that
could likely materially impact our operations or financial results.
22
Management of Cybersecurity Risk
We maintain a Cybersecurity Event Plan (“Cybersecurity Plan”) which outlines how we identify and manage our
cybersecurity risk. The Cybersecurity Plan contains the following elements:
•
Incident Identification and Reporting – outlines the steps used to promptly identify cybersecurity risks and report those
through appropriate means;
•
Incident Assessment – after collecting information about a potential risk or threat, a protocol has been developed and
outlined that will allow a cross-functional team to assess the threat;
•
Incident Containment – provides for action to be taken to isolate and attempt to contain and minimize any potential
threat;
•
Resolution and Recovery – outlines the steps to be taken, based upon the incident and the systems potentially
impacted, to mitigate the potential impact of the threat and restore system access and functionality in the minimum
amount of time;
•
Training and Awareness – development of training and awareness programs to allow employees to understand how to
promptly respond in the event of a perceived threat.
Governance
Our Board of Directors has an active role in oversight of our risks and is assisted by our management in the exercise of
these responsibilities. Our Manager of Information Technology (“IT Manager”) prepares and provides a presentation to the
Board of Directors at each of its quarterly meetings, which includes updates on cybersecurity. Our IT Manager is responsible
for assessing and managing risks from cybersecurity threats and carrying out our formal cybersecurity event plan. Our IT
Manager is also responsible for reporting material incidents to our Chief Executive Officer, who in turn will report to the Lead
Independent Director. Our IT Manager has over 20 years of IT experience in the energy industry.
ITEM 2.
PROPERTIES
The table below describes the material facilities that we owned or leased as of December 31, 2024:
Location
Status
Square Feet
Uses
Tulsa, Oklahoma
Owned and Leased
91,780
Compressor fabrication, rental and services
Midland, Texas
Owned
70,000
Compressor repair and overhaul, services
Lewiston, Michigan
Owned
15,360
Compressor fabrication, rental and services
Midland, Texas
Owned
45,000
Corporate office
Pecos, Texas
Leased
7,500
Office and parts and services
Bloomfield, New Mexico
Owned
7,000
Office and parts and services
Godley, Texas
Leased
5,000
Parts and services
Bridgeport, Texas
Leased
4,500
Office and parts and services
Midland, Texas
Owned
4,100
Parts and services
Carlsbad, New Mexico
Leased
4,000
Office and parts and services
Carrollton, Ohio
Leased
2,600
Parts and services
Wheeler, Texas
Leased
2,160
Parts and services
We believe that our properties are generally well maintained and in good condition and adequate for our purposes. As
discussed in Part I, Item 1. “Business,” we announced our intent to close our repair and overhaul services facility in Midland,
Texas and cease operations by April 1, 2025. In addition, we have initiated efforts to market the facility and the underlying real
property.
23
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are a party to various legal proceedings in the ordinary course of our business. While
management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these
actions will not have a material effect on our financial position, results of operations or cash flow. We are not currently a party
to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we are not aware of any material
threatened litigation.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
24
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock currently trades on the New York Stock Exchange under the symbol “NGS.” As of December 31,
2024, as reflected by our transfer agent records, we had 7 record holders of our common stock. This number does not include
any beneficial owners for whom shares of common stock may be held in “nominee” or “street” name. On March 14, 2025, the
last reported sale price of our common stock as reported by the New York Stock Exchange was $22.64 per share.
Dividends
To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying a
cash dividend on our common stock. Although we intend to retain our earnings, if any, to finance the growth of our business,
our Board of Directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future
will depend upon our earnings, capital requirements, and other factors which our Board of Directors may deem relevant. Our
Credit Facility agreement also contains restrictions on our paying dividends under certain circumstances.
Equity Compensation Plans
For disclosures regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12.
“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10–K.
Sale of Unregistered Securities and Issuer Repurchases
None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
ITEM 6.
RESERVED
25
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis of our financial condition and results of operations for each of the years ended
December 31, 2024 and 2023 are based on, and should be read in conjunction with, our audited Consolidated Financial
Statements and the related notes included elsewhere in this 2024 Annual Report on Form 10-K. For a discussion and analysis of
changes from 2022 to 2023 and other financial information related to prior periods, refer to Part II, Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 Annual Report on Form 10-K.
The following discussion contains forward-looking statements that include risks and uncertainties. For a description of
limitations inherent in forward-looking statements, see “Special Note Regarding Forward-Looking Statements” on page i and
Part I, Item 1A. “Risk Factors” in this Report.
All dollar amounts included in the tables that follow are presented in thousands unless otherwise indicated. Certain
variances presented as changes in year over year amounts that represent results that are not meaningful are indicated as “NM.”
Overview
We rent, design, sell, service, operate and maintain natural gas compressors and related equipment for oil and gas
production and processing facilities, generally using equipment from third-party fabricators and OEM suppliers along with
limited in-house assembly. A limited level of assembly work is done in-house and an increasing amount is done by third-party
contractors. We also provide an exchange and rebuild program for compressors and maintain an inventory of new and used
compressors to facilitate this business. Our primary focus is on the rental of natural gas compressors. Our rental contracts
generally provide for initial terms of six to 60 months, with our larger horsepower units having longer initial terms than our
small and medium horsepower units. After the initial term of our rental contracts, most of our customers have continued to rent
our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of the
rented compressor units.
We conduct our operations in several oil and gas producing basins throughout the United States including the Permian,
Barnett Shale, Anadarko, San Juan, Utica/Marcellus Shale, Eagle Ford Shale and Antrim Shale. We have operating facilities in
five states including Texas, Oklahoma, New Mexico, Michigan and Ohio. A total of 75 percent of our rental revenue is
generated from the Permian Basin and approximately 75 percent of our rental revenue supports oil production primarily in the
form of gas lift operations. We operate in one reporting segment.
In December 2023, we decided to cease fabrication of new compressor units for sale or rental to customers at our
Midland, Texas facility. We continue to maintain new unit compressor fabrication capability at our Tulsa, Oklahoma facility as
well as having relationships with multiple outsourced compressor fabrication providers.
State of the Industry and Outlook
Our strategy for growth is focused on our compressor rental business. Gross margins, exclusive of depreciation and
amortization, for our rental business have historically been in the mid-40 percent to low-60 percent range, while margins for the
compressor sales business tend to be substantially lower.
The oil and gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the
outlook for the industry is the worldwide supply and demand for oil and gas and the corresponding changes in commodity
prices. As demand and prices increase, oil and gas producers typically increase their capital expenditures for drilling,
development and production activities, although recent equity capital constraints and demands from institutional investors to
keep spending within operating cash flow have meaningfully restrained capital expenditure budgets of domestic exploration and
production companies. Generally, increased capital expenditures result in greater revenues and profits for service and
equipment companies.
Generally, higher commodity prices lead to higher capital expenditures by oil and gas producers and higher levels of
production. In general, we expect our overall business activity and revenues to track the level of activity in the oil and gas
industry, specifically production levels, with changes in crude oil and condensate production and consumption levels and prices
affecting our business more than changes in domestic natural gas production and consumption levels and prices. In recent years
we have increased our rental and sales in unconventional oil shale plays, which are more dependent on crude oil prices. With
this shift towards oil production the demand for overall compression services and products is driven by two general factors; (i)
an increased focus by producers on artificial lift applications, e.g., production enhancement with compression assisted gas lift;
26
and (ii) declining reservoir pressure in maturing natural gas producing fields, especially non-conventional production. These
latter types of applications have historically been serviced by wellhead size compressors, and continue to be, but there has also
been an economic move by our customers towards centralized drilling and production facilities, which have increased the
market need for single and multiple larger horsepower compressor packages. We recognized this need in recent years and have
shifted our cash and fabrication resources towards renting gas compressor packages that range from 400 horsepower up to
2,500 horsepower. While this is a response to market conditions and trends, it also provides us with the opportunity to compete
as a full-line compression service provider.
We typically experience a decline in demand during periods of low oil and gas prices. In recent years, our level of
activity has become more largely driven by the price of crude oil as opposed to natural gas. Generally, we feel that the level of
demand for our compressor services is more closely tied to production activities, which are likely to fare better than drilling
activity in periods of declining commodity prices.
Operating Highlights
The following table summarizes our key operating statistics as of the dates or for the periods presented, as applicable:
December 31,
2024
2023
2022
Rented horsepower (at period end)
491,756
420,432
318,350
Average rented horsepower
457,302
369,484
308,065
Fleet horsepower available (at period end):
598,840
520,365
425,340
Fleet horsepower available - average
558,752
472,360
423,054
Horsepower utilization (at period end)
82.1 %
80.8 %
74.8 %
Average horsepower utilization
81.8 %
78.2 %
72.8 %
Units utilized (at period end)
1,208
1,247
1,221
Fleet units (at period end):
1,912
1,876
1,869
Unit utilization (at period end)
63.2 %
66.5 %
65.3 %
Rental revenues
$
144,236
$
106,159
$
74,465
Total revenues
$
156,742
$
121,167
$
84,825
Rental revenues as a percent of total revenues
92.0 %
87.6 %
87.8 %
Of the total horsepower utilized as of December 31, 2024, 376,685 of horsepower was being rented under contracts
expiring between 2025 and 2029 and 115,071 of that horsepower was being rented on a month-to-month basis. Of the 1,208
compressors utilized as of December 31, 2024, 573 were being rented on a month-to-month basis.
Our Performance Trends and Outlook
The oil and gas industry has historically been cyclical and production levels of oil and gas are dependent upon
numerous factors. The market for compression equipment and services is highly dependent on the production levels and pricing
of oil and gas.
Crude Oil. The level of production for crude oil activity and capital expenditures has generally been dependent upon
the prevailing view of future crude oil prices, which are influenced by numerous supply and demand factors, including
availability and cost of capital, well productivity and development costs, global and domestic economic conditions,
environmental regulations, policies of OPEC and Russia, and other factors. We feel that the current crude oil market production
outlook is favorable, with current prices creating strong incentives for our customers to maximize their production levels. While
crude oil prices have historically been volatile, we expect demand for our existing compressor fleet to remain positive assuming
crude oil prices remain within reasonable bands with respect to current pricing levels.
Natural Gas. We believe the market outlook for natural gas production in the U.S. remains steady while short term
price volatility remains a factor due to geopolitical influences and shifts in LNG exports. We believe opportunities for
increased utilization of our small and medium horsepower units are supported by continued investment in shale gas
development, particularly in the Permian basin and Marcellus Shale.
27
Non-GAAP Financial Measures
We utilize certain financial and operating metrics to analyze our performance and assess our operating results and
overall profitably and liquidity. The most significant of these measure are “Adjusted Gross Margin” and “Adjusted EBITDA”
both of which are measurements that are not explicitly defined in accordance with generally accepted accounting principles in
the United States of America (“GAAP”), or non-GAAP financial measures, and may vary among different industries and the
participants therein.
Adjusted Gross Margin
We define “Adjusted Gross Margin” as total revenue less costs of revenues (excluding depreciation and amortization
expense). Adjusted gross margin is included as a supplemental disclosure because it is a primary measure used by our
management as it represents the results of revenue and costs (excluding depreciation and amortization expense), which are key
components of our operations. Adjusted gross margin differs from gross margin, in that gross margin includes depreciation and
amortization expense. We believe Adjusted gross margin is important because it focuses on the current operating performance
of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in
those operations. Depreciation and amortization expense does not accurately reflect the costs required to maintain and replenish
the operational usage of our assets and therefore may not portray the costs from current operating activity. Rather, depreciation
and amortization expense reflects the systematic allocation of historical property and equipment costs over their estimated
useful lives.
Adjusted gross margin has certain material limitations associated with its use as compared to gross margin. These
limitations are primarily due to the exclusion of depreciation and amortization expense, which is material to our results of
operations. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and our
ability to generate revenue. In order to compensate for these limitations, management uses this non-GAAP measure as a
supplemental measure to other GAAP results to provide a more complete understanding of our performance.
As an indicator of our operating performance, Adjusted gross margin should not be considered an alternative to, or
more meaningful than, gross margin as determined in accordance with GAAP. Our Adjusted gross margin may not be
comparable to a similarly titled measure of another company because other entities may not calculate Adjusted gross margin in
the same manner.
The following table calculates our gross margin, the most directly comparable GAAP financial measure, and
reconciles it to Adjusted gross margin with further detail by revenue classification for the periods presented:
Year Ended December 31,
2024
2023
2022
Total revenue
$
156,742 $
121,167 $
84,825
Cost of revenue, exclusive of depreciation and amortization
(68,756)
(62,454)
(46,357)
Depreciation allocable to cost of revenues
(30,813)
(25,856)
(23,551)
Gross margin
57,173
32,857
14,917
Depreciation allocable to cost of revenues
30,813
25,856
23,551
Adjusted gross margin
$
87,986 $
58,713 $
38,468
Adjusted gross margin by revenue classification:
Rental
$
87,333 $
57,282 $
36,715
Sales
(290)
2
918
Aftermarket services
943
1,429
835
Total adjusted gross margin
$
87,986 $
58,713 $
38,468
28
Adjusted EBITDA
“Adjusted EBITDA” is a non-GAAP financial measure that we define as net income (loss) before interest, taxes,
depreciation and amortization, as well as an increase in inventory allowance, impairments, retirement of rental equipment, non-
recurring restructuring charges including severance and non-cash equity-classified stock-based compensation expenses. This
term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a
measure of performance calculated in accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a
substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or
other income or cash flow statement data prepared in accordance with GAAP. However, management believes Adjusted
EBITDA is useful to an investor in evaluating our operating performance because:
•
it is widely used by investors in the energy industry to measure a company’s operating performance without regard to
items excluded from the calculation of Adjusted EBITDA, which can vary substantially from company to company
depending upon accounting methods and book value of assets, capital structure and the method by which assets were
acquired, among other factors;
•
it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by
removing the impact of our capital structure and asset base from our operating structure; and
•
it is used by our management for various purposes, including as a measure of operating performance, in presentations
to our Board of Directors, as a basis for strategic planning and forecasting, and as a component for setting incentive
compensation.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute
for analysis of our results as reported under GAAP. Some of these limitations are:
•
Adjusted EBITDA does not reflect all our cash expenditures, future requirements for capital expenditures, or
contractual commitments;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our
debts; and
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often
have to be replaced in the future, and Adjusted EBITDA does not reflect any capital expenditures for such
replacements.
There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to
analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of
results of operations of different companies. Please read the table below to see how Adjusted EBITDA reconciles to our net
income (loss), the most directly comparable GAAP financial measure.
The following table reconciles our net income (loss), the most directly comparable GAAP financial measure, to
Adjusted EBITDA for the periods presented:
Year Ended December 31,
2024
2023
2022
Net income (loss)
$
17,227 $
4,747 $
(569)
Interest expense
11,927
4,082
364
Income tax expense
4,439
1,873
528
Depreciation and amortization
31,347
26,550
24,116
Impairments
841
779
—
Inventory allowance
1,863
3,965
83
Retirement of rental equipment
28
505
196
Severance and restructuring charges
33
1,224
2,537
Stock-based compensation
1,821
2,054
1,910
Adjusted EBITDA
$
69,526 $
45,779 $
29,165
29
Results of Operations
Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023
Rentals
We generate revenue from renting compressors to our customers. These contracts, which all qualify as operating leases
under GAAP, may also include a fee for servicing the compressor unit during the rental contract. Our rental contracts typically
range from six to 60 months. Our revenue is recognized over time, with monthly payments over the term of the contract. After
the terms of the contract have expired, a customer may renew its contract or continue renting on a monthly basis thereafter. The
primary costs associated with providing our compressor fleet to our customers includes routine maintenance and repairs, fluids,
primarily motor oils, and labor and related support costs for our field service facilities and employees that are geographically
dispersed throughout our operating regions.
The following table summarizes the revenues, costs, adjusted gross margin and related operating statistics with respect
to our rentals of compressors for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Rental revenue
$
144,236
$
106,159
$
38,077
35.9 %
Cost of rentals (excluding depreciation and amortization)
56,903
48,877
8,026
16.4 %
Rental adjusted gross margin
$
87,333
$
57,282
$
30,051
52.5 %
Rental adjusted gross margin percentage
60.5 %
54.0 %
6.5 %
Percent of total company revenues
92.0 %
87.6 %
4.4 %
Rented horsepower
491,756
420,432
71,324
17.0 %
Percent of fleet horsepower utilized
82.1 %
80.8 %
1.3 %
Units utilized
1,208
1,247
(39)
(3.1) %
Percent of fleet units utilized
63.2 %
66.5 %
(3.3) %
Customers under contract
68
84
(16)
(19.0) %
Rental revenue increased for the year ended December 31, 2024, compared to 2023 due primarily to an increase in
rented horsepower despite a nominal decrease in the number of units rented and a decrease in total customers. The increase in
revenue reflects a continuing trend of growing demand for our higher horsepower units (400 horsepower and greater) which
provide for higher rental rates and realized adjusted gross margins. The increase in utilized horsepower reflects the continued
addition of high horsepower compressor units to our fleet during 2024 consistent with our emphasis on larger units over the past
two years. During the year ended December 31, 2024, we placed into service a total of 220 newly set units, including 198 from
our existing fleet and 22 new units. Of those sets, a total of 111 were high horsepower units and 22 of those were new units to
the fleet. The decline in customers is primarily attributable to E&P industry consolidation as well as the acquisition of existing
producing oil and gas properties among E&P companies; however, it has not resulted in any meaningful decrease in our level of
business activity. The cost of rentals increased on an absolute basis due to the effects of supporting a larger quantity of utilized
horsepower and inflationary pressures primarily in labor and parts costs. As a result of these factors, our adjusted gross margin
increased on both an absolute basis as well as a percentage of revenues for the year ended December 31, 2024, compared to the
year ended December 31, 2023.
30
Sales
We generate revenue by the sale of custom/assembled compressors and parts, as well as exchange/rebuilding customer
owned compressors and sale of used rental equipment. Costs of sales include purchases of engines, compressors, coolers and
other component materials as well as direct and indirect labor attributable to the assembly of equipment to meet the unique
specifications of our customers. In addition, our costs of sales include overhead and related support costs attributable to our
assembly, repair and overhaul facilities in Midland, Texas and Tulsa, Oklahoma.
The following table summarizes the revenues, costs and adjusted gross margin with respect to our sales of
compressors, parts and equipment and repair/overhaul services for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Sales revenue
$
7,613
$
8,921
$
(1,308)
(14.7) %
Cost of sales (excluding depreciation and amortization)
7,903
8,919
(1,016)
(11.4) %
Sales adjusted gross margin
$
(290)
$
2
$
(292)
NM
Sales adjusted gross margin percentage
(3.8) %
— %
(3.8) %
Percent of total company revenues
4.9 %
7.4 %
(2.5) %
Sales revenue declined for the year ended December 31, 2024, compared to 2023. Sales are subject to fluctuations in
the timing of industry activity related to our customers’ capital projects and, as such, can vary substantially between periods.
Due to these circumstances as well as the costs of maintaining support facilities relative to revenues, we continue to shift our
business away from sales of new compressor packages to renting our owned units to our customers. While the costs to support
our sales revenues declined on an absolute basis, primarily reflecting a lower volume of business, the gross margin declined to a
negative value due primarily to indirect labor and fixed overhead costs that are not otherwise subject to capitalization at our
assembly, repair and overhaul facilities.
Aftermarket Services
We provide routine or call-out services on customer-owned equipment as well as commissioning of new units for
customers. Revenue is recognized after services in the contract are rendered. The primary costs associated with our aftermarket
services are labor, support costs, materials and supplies.
The following table summarizes the revenues, costs and adjusted gross margin with respect to our aftermarket services
for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Aftermarket services revenue
$
4,893
$
6,087
$
(1,194)
(19.6) %
Cost of aftermarket services (excluding depreciation and
amortization)
3,950
4,658
(708)
(15.2) %
Aftermarket services adjusted gross margin
$
943
$
1,429
$
(486)
(34.0) %
Aftermarket services adjusted gross margin percentage
19.3 %
23.5 %
(4.2) %
Percent of total company revenues
3.1 %
5.0 %
(1.9) %
Third party aftermarket services revenues, costs and margin declined for the year ended December 31, 2024, compared
to 2023. The decline is primarily attributable to a lower volume of service call-out work performed during 2024 compared to
2023. Aftermarket services only represented 3.1 percent of our revenue in 2024, providing minimal impact on our overall
adjusted gross margin.
31
Selling, General and Administrative Expenses
Our selling, general and administrative (“SG&A”) expenses include compensation and benefits, including stock-based
compensation, commissions and other support costs of departments serving administrative and corporate governance functions,
such as executive management, finance and accounting, sales and marketing, human resources, information technology, health,
safety and environmental and investor relations. In addition, SG&A includes non-personnel costs, such as occupancy costs, IT
support costs, professional fees and other supporting corporate expenses including public company compliance costs. When
applicable, SG&A expenses also includes severance benefits and related costs associated with exit activities and restructuring
actions.
The following table summarizes the components of our SG&A expenses for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Primary selling, general and administrative expenses
$
19,158
$
13,660
$
5,498
40.2 %
Stock-based compensation
1,821
2,054
(233)
(11.3) %
Severance and restructuring charges
33
1,224
(1,191)
NM
Total
$
21,012
$
16,938
$
4,074
24.1 %
SG&A expenses as a percent of total revenues
13.4 %
14.0 %
(0.6) %
SG&A expenses increased for the year ended December 31, 2024, as compared to 2023 on an absolute dollar basis
while continuing a steady decline as a percent of revenues. As our revenues have increased commensurate with our growth,
total SG&A expenses have consistently declined as a percent of revenues despite our incurring a higher level of costs to
appropriately scale our administrative function. The absolute dollar increase was primarily impacted by (i) higher salaries,
benefits and commissions of $3.3 million reflecting new executive leadership and support staff growth as well and higher
commissions attributable to higher revenues, (ii) higher consulting expenses of $1.2 million primarily attributable to recruiting
charges and interim staffing for certain senior and executive roles, (iii) higher public company compliance-related costs of $1.0
million consistent with our change in SEC filer status and (iv) higher information technology support costs of $0.4 million in
support of our growth. These items were partially offset by lower stock-based compensation expense of $0.2 million as certain
prior year awards were fully amortized and lower legal fees of $0.4 million. In addition, we incurred less than $0.1 million of
severance charges in 2024 associated with certain restructuring activities at our assembly facilities. The 2023 period included a
restructuring charge of $1.2 million associated with a previously disclosed compensation arrangement with our former CEO
who served in an interim role from mid-November of 2022 through mid-February of 2024.
Depreciation and Amortization
Depreciation and amortization expenses reflect the depreciation of our rental compressor fleet as well as the
depreciation and amortization of our operating and corporate facilities, vehicles and other equipment, and the amortization of
finance leases and intangible assets.
The following table summarizes the components of our depreciation and amortization expenses for the periods
presented:
Year Ended December 31,
2024
2023
Change
% Change
Depreciation and amortization allocable to cost of revenues:
Rental
$
30,453
$
25,507
$
4,946
19.4 %
Sales
296
260
36
13.8 %
Aftermarket services
64
89
(25)
(28.1) %
30,813
25,856
4,957
19.2 %
Corporate depreciation
413
569
(156)
(27.4) %
Intangible asset amortization
121
125
(4)
(3.2) %
Total
$
31,347
$
26,550
$
4,797
18.1 %
Depreciation and amortization as a percent of total revenues
20.0 %
21.9 %
(1.9) %
32
Depreciation and amortization expense increased on an absolute basis and declined as a percent of revenues during the
year ended December 31, 2024, compared to 2023. The increase is primarily the result of new units added to our rental fleet in
2024 and 2023. We placed into service 22 high horsepower units (approximately 28,740 horsepower) to our fleet in 2024 and
92 units (approximately 98,349 horsepower) in 2023. All 22 in 2024 and 73 of those units in 2023, were 400 horsepower or
larger, representing a substantial portion of the total horsepower added during each year, respectively. These higher horsepower
unit additions, which began in earnest during 2023, are reflective of our strategic plans to concentrate our business development
on these higher margin applications.
Impairments
We assess our long-lived assets for impairment on an annual basis or when indicators of impairment are present. An
impairment loss is recognized if the future undiscounted cash flows associated with the asset (or asset group) and the estimated
fair value of the asset are less than the asset’s carrying value.
The following table indicates the charges incurred for impairments for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Impairments
$
841 $
779 $
62
8.0 %
During 2024, we fully impaired an intangible asset attributable to a trade name for $0.7 million. Consistent with our
shift in focus away from the sales of compressor and related technology, we determined that we will no longer market the
technology associated with the trade name. Please see Note 8 (“Intangible Assets”) to our Consolidated Financial Statements
for additional information. In addition, we fully impaired certain information technology assets in the amount of $0.2 million
for which we have terminated plans to develop and utilize the associated applications. During 2023, we fully impaired certain
information technology assets in the amount of $0.8 million under similar circumstances.
Inventory Allowance
We routinely review our stock of inventory for obsolescence and realizability. When the carrying value exceeds the net
realizable value, a charge is recorded to operating income.
The following table indicates the charges incurred for inventory allowance for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Inventory allowance
$
1,863 $
3,965 $
(2,102)
(53.0) %
Due primarily to the slow-moving nature, obsolescence of a portion of our long-term inventory and inventory related
to the retirement of certain rental equipment, we recorded an increase of $1.9 million to the inventory allowance reserve for the
year ended December 31, 2024. During 2023, we recorded an increase of $4.0 million to the inventory allowance reserve under
similar circumstances as well as our decision to cease further assembly activities at our facility in Midland, Texas. We ended
2024 with an inventory allowance balance of $5.9 million. Please see Note 4 (“Inventory”) to our Consolidated Financial
Statements for additional information regarding the inventory allowance.
33
Retirement of Rental Equipment
We routinely review the rental fleet to determine which units are no longer of the type, configuration, make or model
that our customers are demanding or that are not cost efficient to refurbish, maintain and/or operate. When appropriate, we
retire such units from the fleet and write-off any remaining carrying value.
The following table indicates the charges incurred for the retirement of rental equipment for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Retirement of rental equipment
$
28 $
505 $
(477)
NM
Retirements of compressor units during 2024 were minimal as compared to 2023 during which time we determined 95
units should be retired from our rental fleet for which we recorded loss on retirement of rental equipment during the year.
Gain on the Sale of Property and Equipment
As circumstances warrant, we will market certain property and equipment, primarily trucks, when we have determined
that there is no longer a productive use for such assets or favorable opportunities arise to monetize otherwise idle assets. Gains
and losses are recognized accordingly upon the completion of such transactions.
The following table presents the gains recognized upon the sale of property and equipment for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Gain on the sale of property and equipment, net
$
430 $
481 $
(51)
(10.6) %
Gains recognized during the years ended December 31, 2024 and 2023 are primarily attributable to the sales of trucks
after the completion of their useful lives. In addition, amounts are included during both years for sales scrap materials.
Interest Expense
Interest expense primarily reflects the costs of borrowing, including commitment fees and the amortization of debt
issue costs, under our Credit Facility, net of amounts capitalized attributable to certain capital projects. Also included is interest
expense on our financing leases.
The following table summarizes the components of our interest expense for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Interest on borrowings, finance leases and related fees
$
15,904
$
9,156
$
6,748
73.7 %
Amortization of debt issue costs
746
425
321
75.5 %
Capitalized interest
(4,723)
(5,499)
776
(14.1) %
Total
$
11,927
$
4,082
$
7,845
NM
Weighted-average interest rates on borrowings
8.82 %
8.88 %
(0.06) %
Weighted-average outstanding borrowings
$
169,008
$
120,558
$
48,450
Interest expense increased during the year ended December 31, 2024 as compared to 2023 due primarily to over $48
million of higher average borrowings outstanding under our Credit Facility during 2024. In addition, we incurred higher debt
issue cost amortization due primarily to costs associated with amendments to the Credit Facility and lower capitalized interest
as a result of a smaller capital expenditures program in 2024 as compared to 2023. These increases were marginally offset by
the effect of lower average interest rates which declined in the second half of 2024 consistent with Federal Reserve interest rate
reductions.
34
Other Income (Expense)
This caption primarily reflects non-operating items of income and loss including non-cash gains and losses attributable
to our corporate-owned life insurance (“COLI”) policies related to our deferred compensation plan. Please see Note 12
(“Deferred Compensation Plan”) to our Consolidated Financial Statements for additional information regarding the plan.
The following table indicates our other income (expense) for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Other income (expense), net
$
268 $
245 $
23
9.4 %
Other income was relatively consistent during the year ended December 31, 2024 as compared to 2023 with net gains
from investments supporting our COLI policies comprising the majority of the amounts for each period. Other amounts include
certain vendor rebates and other miscellaneous non-operating income.
Income Tax Expense
Income tax expense represents our income tax provision as determined in accordance with GAAP. It considers taxes
attributable to our obligations for federal taxes under the IRC as well as to various states in which we operate, primarily Texas.
Please see Note 11 (“Income Taxes”) to our Consolidated Financial Statements for additional information.
The following table summarizes our income tax provision for the periods presented:
Year Ended December 31,
2024
2023
Change
% Change
Income tax expense
$
4,439
$
1,873
$
2,566
NM
Effective tax rate
20.5 %
28.3 %
(7.80) %
Income tax expense increased for the year ended December 31, 2024, compared to 2023 due primarily to substantially
higher pre-tax income during 2024 despite a lower effective tax rate. Our effective tax rate for both years differs from the U.S.
federal statutory rate of 21%. The effective tax rate declined during 2024 from that during 2023 largely due to certain executive
severance compensation expenses incurred during 2023 that were non-deductible for income tax purposes. Only a minimal
portion of our total income tax expense is current while $4.2 million and $1.8 million is considered deferred for 2024 and 2023,
respectively.
35
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity include cash on hand, cash provided by operating activities and borrowings under our
Credit Facility. The Credit Facility provides us with up to $300 million in borrowing commitments with an additional $50
million at our request. The borrowing base under the Credit Facility was $300.0 million with $168.0 million of borrowings
outstanding as of March 14, 2025, leaving $132.0 million of availability under the Credit Facility.
Our cash flows from operating and investing activities are subject to a degree of volatility due primarily to (i) the
consistency of our customers in remitting amounts owed to us for our services in full and on a timely basis and (ii) the timing of
payments to our vendors and suppliers for capital projects which are often made well in advance of placing new compressor
equipment into service. In order to mitigate such volatility we employ disciplined efforts to monitor customer credit and
maintain communications to support collection efforts when necessary. Furthermore, and in certain circumstances, we require
deposits in advance of transactions that require substantial investment on our part. To the extent necessary, we rely on the
availability of our Credit Facility to fund capital expenditures beyond that provided by our cash flows from operating activities.
Our forecasted capital expenditures for 2025 will continue to be directly dependent upon our customers’ compression
requirements and our capital availability, while maintaining prudent levels of debt.
The level of our capital expenditures will vary in future periods depending on energy market conditions and other
related economic factors. Based upon existing economic and market conditions, we believe that cash on hand, cash flows from
operating activities and borrowings under the Credit Facility will be sufficient to satisfy our capital and liquidity requirements
for at least the twelve months subsequent to the date that this Annual Report on Form 10-K was filed. We also believe we have
flexibility with respect to our financing alternatives and adjustments to our capital expenditure plans if circumstances
warrant. We do not have any material continuing commitments related to our current operations that cannot be met with our
cash on hand, cash from operating activities and borrowings under our Credit Facility.
If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions
of other businesses, joint ventures or other opportunities, this additional capital could exceed our current resources and might
not be available to us when we need it, or might not be on acceptable terms. In addition, our financing capacity could be
negatively impacted by other economic factors. Please see Part I, Item 1A, “Risk Factors”, of this Report.
For a detailed analysis of our historical capital expenditures, see the “Cash Flows” discussion that follows.
Cash From Operating Activities. As of December 31, 2024, we had $2.1 million of cash on hand. For additional
information and an analysis of or historical cash flows from operating activities, see the “Cash Flows” discussion that follows.
Credit Facility Borrowings. During 2024, we borrowed $6.0 million, net of repayments, under the Credit Facility.
Through March 14, 2025, we repaid $2.0 million, net of borrowings under the Credit Facility. The following table summarizes
our borrowing activity under the Credit facility for the periods presented:
Borrowings Outstanding
End of Period
Weighted-
average
Maximum
Weighted-
average Rate
Three months ended December 31, 2024
$
170,000 $
172,230 $
180,000
8.47 %
Year ended December 31. 2024
$
170,000 $
169,008 $
180,000
8.83 %
For additional information regarding the terms and covenants under the Credit Facility, see the “Capitalization”
discussion that follows.
36
Proceeds from Sales and Monetization of Assets. We continually evaluate the potential sale of assets, including
underutilized or retired compressor units, obsolete and slow-moving inventory and non-strategic real estate assets, among
others. For additional information and an analysis of or historical proceeds from sales of assets, see the “Cash Flows”
discussion that follows.
Capital Markets Transactions. From time-to-time and under market conditions that we believe are favorable to us, we
may consider capital markets transactions, including the offering of debt and equity securities. We maintain an effective shelf
registration statement with the SEC for up to $200 million for a variety of securities to provide financing optionality.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2024
2023
Net cash provided by operating activities
$
66,463 $
18,033
Net cash used in investing activities
(71,440)
(153,888)
Net cash provided by financing activities
4,373
135,229
Net decrease in cash and cash equivalents
$
(604) $
(626)
Cash Flows from Operating Activities. Our cash flows from operating activities increased by $48.4 million during
2024 from 2023. From a broad perspective, cash flows improved due to substantial growth in our high horsepower unit rentals
which also provide for higher realized margins. In addition, we made substantial progress in improving our processes for
billings and collections from certain customers and lowering our “days sales outstanding” statistics for accounts receivable.
These efforts arose from the negative impact on working capital during 2023 as our rental activities began to grow significantly.
We anticipate a continued focus on these efforts into 2025 as we concentrate on further improvements to our working capital
performance statistics.
Cash Flows from Investing Activities. For the years ended December 31, 2024 and 2023, we invested approximately
$71.9 million and $153.9 million, respectively, in rental equipment, property and other equipment. Included in these totals for
2024 and 2023 were $66.9 million and $152.5 million in new equipment to our rental fleet and $5.0 million and $1.4 million in
other property and equipment, respectively. Our investment in rental equipment includes any changes to work-in-progress
related to our rental fleet projects at the beginning of the year compared to the end of the year. Our rental work-in-progress
increased by $0.8 million and $13.8 million during 2024 and 2023, respectively. We paid $0.2 million and $0.4 million for
COLI policy purchases during 2024 and 2023. We also received proceeds from the sale of property and equipment of $0.5
million and $0.5 million during the same periods, respectively.
Cash Flows from Financing Activities. During 2024, we had net borrowings of $6.0 million under the Credit Facility
while 2023 included net borrowings of $139.0 million. The decrease in net borrowings is due primarily to the substantial
investment in large horsepower units during the prior year consistent with our strategy of directing our business to these larger,
higher margin applications. While we incurred and paid debt issuance costs during both years, the amounts paid during 2023
were $1.7 million higher as the Credit Facility was substantially upsized with the amendment and restatement in February 2023.
We received proceeds from the exercise of stock options of $0.3 million during 2024 while none were received during 2023 and
taxes paid related to the net share settlements of equity awards were $0.2 million and $1.0 million for 2024 and 2023,
respectively.
37
Capitalization
The following table summarizes our total capitalization as of the dates presented:
December 31,
2024
2023
Credit facility borrowings
$
170,000
$
164,000
Total stockholders’ equity
255,057
235,894
Total capitalization
$
425,057
$
399,894
Debt as a percent of total capitalization
40.0 %
41.0 %
Credit Facility. We have a five-year senior secured revolving credit agreement, as amended, or the Credit Facility,
with Texas Capital Bank, National Association (the “Lender”) as administrative agent, TCBI Securities, Inc., as joint lead
arranger and sole book runner and Bank of America, N.A., as joint lead arranger, with a total commitment of $300.0 million.
We also have a right to request from the Lender, an increase to the potential aggregate commitment of up to $50.0 million;
provided, however, the aggregate commitment amount is not permitted to exceed $350.0 million. The obligations under the
Credit Facility are secured by a first priority lien on most of our assets, including inventory and certain accounts receivable as
well as a variable number of our leased compressor units. The maturity date of the Credit Facility is February 28, 2028.
Our Credit Facility is subject to: (i) a borrowing base calculation, (ii) variable rates of interest on borrowings that are
determined, in part, upon our actual leverage ratio, as defined in the Credit Facility, (iii) commitment fees, (iv) certain financial
and other covenants and (v) events of default and acceleration, among other terms and conditions that are customary for such
credit instruments. Please see Note 10 (“Long-Term Debt”) to our Consolidated Financial Statements for a thorough discussion
of these matters regarding our Credit Facility.
As of December 31, 2024, we had $170.0 million outstanding under our Credit Facility with a weighted average
interest rate of 8.12%. As of December 31, 2024, we had approximately $130.0 million available for borrowing under the
Credit Facility, subject to borrowing base determination. As of December 31, 2024, we were in compliance with all financial
covenants in our Credit Facility.
Critical Accounting Estimates
We describe our significant accounting policies in Note 2 (“Summary of Significant Accounting Policies”) to our
Consolidated Financial Statements. We believe that the application of these policies on a consistent basis enables us to provide
the users of our financial statements with useful and reliable information regarding our results of operations, financial condition
and cash flows.
The preparation of our Consolidated Financial Statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. In the ordinary
course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of our Consolidated Financial Statements. We evaluate our estimates and assumptions on
an ongoing basis. Our estimates are generally based on historical experience and various other assumptions that we believe to
be reasonable in consideration of our circumstances and expectations for the future based on available information. Our actual
results could differ significantly from those estimates under different assumptions and conditions.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about
matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are
reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current
period, would have a material impact on our financial condition or results of operations.
We believe that the following discussion addresses our most critical accounting estimates, which are those that are
most important to the portrayal of our results of operations, financial condition and cash flows and require our most difficult,
subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain.
38
Inventories
We value our total inventory (current and long-term) at the lower of the actual cost and net realizable value. We
regularly review inventory quantities on hand and record an allowance for excess and obsolete inventory based primarily on
current and anticipated customer demand and production requirements. We assess anticipated customer demand based on
current and upcoming capital expenditure budgets of our major customers as well as other significant participants in the
industry, along with oil and gas price forecasts and other factors affecting the industry as a whole. Our estimates and
assumptions regarding these factors are subject to significant variability and can result in provisions for valuation allowances of
our inventory. For the year ended December 31, 2024, our provision for excess and obsolete inventory totaled $1.9 million
which increased our allowance for obsolescence to $5.9 million as described more fully in the discussion of our Results of
Operations above and Note 4 (“Inventory”) to our Consolidated Financial Statements.
Long-Lived Assets
Depreciation
Depreciation expense is computed using the straight-line method over the estimated useful lives of the underlying
long-lived assets. Our rental equipment has estimated useful lives ranging from 15 to 25 years, while our property and
equipment has estimated useful lives which range from 3 to 39 years. The estimated useful lives and salvage values of these
long-lived assets are based on estimates and assumptions that reflect our historical experience and expectations regarding their
future utilization, obsolescence, technical developments, market demand and geographic location. The use of different estimates
and assumptions in the determination of depreciation, particularly with respect to useful lives, could result in significant
differences to our results of operations. We regularly review the appropriateness of the estimated useful lives of our long-lived
assets and may shorten or extend such lives as appropriate based on business circumstances.
Impairments
We assess our long-lived assets, including rental equipment, other property and equipment and intangible assets for
impairment whenever events or changes in circumstances indicate that the net carrying values may not be recoverable. The
following factors could trigger an impairment review: significant underperformance relative to historical or projected future
cash flows; significant adverse changes in the extent or manner in which an asset (or asset group) is being used or its condition,
including a meaningful decline in fleet utilization over prior periods; significant negative industry or company-specific trends or
actions, including meaningful capital expenditure budget reductions by our major customers or other sizable exploration and
production or midstream organizations, as well as significant declines in oil and natural gas prices; legislative changes
prohibiting us from leasing our units; or poor general economic conditions. After the assessments of such circumstances, an
impairment loss is recognized if the future undiscounted net cash flows associated with the asset (or asset group) and the
estimated fair value of the asset are less than the asset’s (or asset group’s) carrying value. During the year ended December 31,
2024, we fully impaired our indefinite-lived intangible asset attributable to a trade name (see the discussion in “Results of
Operations” above and Note 8. (“Intangible Assets”) to our Consolidated Financial Statements).
Income Taxes
In connection with the process of preparing our financial statements, we are required to estimate our federal income
taxes as well as income taxes in each of the states in which we operate. This process involves us estimating our actual current
tax exposure together with assessing temporary differences resulting from differing treatment of items for income tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are reflected on our Consolidated
Balance Sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income
and, to the extent we believe that recovery is not probable, we must establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance during a period, we must include an expense in the tax provision in the
Statement of Operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets
and liabilities and any valuation allowance recorded against our net deferred tax assets. In this process, we consider all available
positive and negative evidence including scheduled reversals of deferred tax liabilities, projected future taxable income, tax
planning strategies and recent results of operations. As of December 31, 2024, we have no valuation allowance and fully expect
to utilize all of our deferred tax assets.
Please see Note 11 (“Income Taxes”) for a more thorough discussion of our income taxes.
39
Off-Balance Sheet Arrangements
From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance
sheet obligations. As of December 31, 2024, we did not have any material off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
Please see Note 2 (“Summary of Significant Accounting Policies”) to our Consolidated Financial statements for a
discussion of recently issued accounting pronouncements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risk to
which we are exposed is interest rate risk.
Our interest rate risk is attributable to our borrowings under the Credit Facility, which are subject to variable interest
rates. As of December 31, 2024, we had borrowings of $170.0 million under the Credit Facility at a weighted average interest
rate of 8.12%. Assuming a constant borrowing level under the Credit Facility and excluding any changes in other financial
metrics that would impact the applicable margin applied to Credit Facility borrowings, an increase (decrease) in the interest rate
of one percent would result in an increase (decrease) in interest expense of $1.7 million on an annual basis.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is presented in Part IV, Item 15. “Exhibits and Financial Statement Schedules”
of this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),
evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2024. We maintain “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that
information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure. Based upon the evaluation, our CEO and CFO concluded that, as of such date, our
disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed
in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to
our CEO and CFO, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including the CEO and CFO, is responsible for establishing and maintaining adequate internal
control over financial reporting (“ICFR”), as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our
management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2024, based on the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. Based on the results of management’s evaluation described above, management
concluded that our ICFR was effective as of December 31, 2024.
40
Remediation of Previously Identified Material Weakness
As previously reported in Part II, Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year
ended December 31, 2023, we disclosed a material weakness related to inventory. Specifically, control activities related to year-
end inventory count procedures and the process to review and approve inventory adjusting journal entries.
We have completed the execution of our remediation plan for this material weakness and, as of December 31, 2024,
successfully remediated the material weakness by implementing and successfully testing the following actions:
•
We updated and implemented new policies and procedures related to work in process inventory.
•
We hired additional management with a focus on inventory control and inventory best practices.
•
We relocated certain inventory to centralized warehouses.
•
We improved and enforced our formalized inventory count and inventory adjustment procedures which were applied
to our end-of-year inventory counts.
•
We added additional inventory safeguards in our warehouses limiting physical access to our inventory.
•
We limited the number of employees authorized to record adjustments in our accounting software through additional
IT controls with respect to inventory transfers.
•
We have enhanced efforts to ensure our employees understand the importance of internal controls and compliance with
corporate policies and procedures.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of ICFR as of December 31, 2024 was audited by Ham, Langston & Brezina LLP, an independent
registered public accounting firm, as stated in its report included in Part IV, Item 15 “Exhibits and Financial Statement
Schedules” of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2024, except as discussed above, there were no other changes in our ICFR
during the year ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our ICFR.
ITEM 9B.
OTHER INFORMATION
Stephen C. Taylor, our Chairman of the Board of Directors, adopted a Rule 10b5-1 trading agreement that is intended
to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to an aggregate of 100,000 shares of the Company’s
common stock, subject to various volume amounts and price thresholds. The plan became effective on August 21, 2024 and the
plan provided that it would terminate on August 19, 2025, unless sooner terminated under its terms. The 10b5-1 Plan was
entered into during an open insider trading window and no sales commenced under the plan until completion of the required
cooling off period under Rule 10b5-1. The 10b5-1 Plan terminated pursuant to its terms on or about January 21, 2025, in
connection with the final sale of shares covered by the plan.
No other director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or
“non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K, during the three months
ended December 31, 2024.
ITEM 9C.
DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
41
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the sections “Election of
Directors,” “Executive Officers,” “Corporate Governance” and “The Board of Directors and its Committees” in our definitive
proxy statement which will be filed with the SEC within 120 days after December 31, 2024 or as such period may be extended
by action of the SEC.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees. The
Code of Business Conduct and Ethics is posted in the “Investor Relations” section of our website at www.ngsgi.com. The Code
of Business Conduct and Ethics maybe obtained free of charge by writing before to Natural Gas Services Group, Inc., Attn:
Investor Relations, 404 Veterans Airpark Lane, Ste 300, Midland, TX 79705.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the section “Executive Compensation” in
our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2024 or as such period may
be extended by action of the SEC.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the section “Principal Shareholders and
Security Ownership of Management” in our definitive proxy statement which will be filed with the SEC within 120 days after
December 31, 2024 or as such period may be extended by action of the SEC.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the sections “Related Person
Transactions” and “Corporate Governance” in our definitive proxy statement which will be filed with the SEC within 120 days
after December 31, 2024 or as such period may be extended by action of the SEC.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section “Principal Accountant Fees
and Services” in our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2024 or as
such period may be extended by action of the SEC.
42
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K.
1.
Consolidated Financial Statements. The following financial statements are filed as a part of this Annual Report on
Form 10-K:
Reports of Independent Registered Public Accounting Firm (PCAOB ID 298)
F-1
Consolidated Balance Sheets
F-3
Consolidated Statements of Operations
F-4
Consolidated Statements of Stockholders’ Equity
F-5
Consolidated Statements of Cash Flows
F-6
Notes to Consolidated Financial Statements
F-7
2. Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or the information is set forth in
the Consolidated Financial Statements or Notes thereto.
3. Exhibits
A list of exhibits to this Annual Report on Form 10-K is set forth below:
Exhibit No. Description
3.1
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed with the
Securities and Exchange Commission and dated November 10, 2004).
3.2
Bylaws, as amended (Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 10, 2021).
4.1
Description of Securities (Incorporated by reference to the Registrant’s Registration Statement on From 8-A, filed
with the Securities and Exchange Commission on October 27, 2008).
4.2
Form of Senior Indenture (Incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on
Form S-3 (No. 333-238794) and filed with the Securities and Exchange Commission on December 13, 2024).
4.3
Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration
Statement on Form S-3 (No. 333-238794) and filed with the Securities and Exchange Commission on December
13, 2024).
10.1†
2019 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 4.3 of the Registrant’s Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on July 12, 2022).
10.2†
Stock Option Plan, as amended and restated (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2016).
10.3†
Retirement Agreement dated May 17, 2022 between Natural Gas Services Group, Inc. and Stephen C. Taylor
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 19, 2022).
10.4†
The Executive Nonqualified Excess Plan Adoption Agreement, referred to as the Nonqualified Deferred
Compensation Plan (Incorporated by reference to Exhibit 10.11 of the Registrant’s Quarterly report on Form 10-Q
filed with the Securities and Exchange Commission on May 6, 2016).
10.5
Amended and Restated Credit Agreement dated February 28, 2023, among Natural Gas Services Group, Inc., the
other Loan Parties thereto, Texas Capital Bank, in its capacity as Administrative Agent and the Lenders party
thereto (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 6, 2023).
10.6
Amended and Restated Pledge and Security Agreement dated February 28, 2023, among Natural Gas Services
Group, Inc., the Grantors thereto, Texas Capital Bank, in its capacity as Administrative Agent, for the Lenders and
other Secured Parties (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 6, 2023).
10.7
First Amendment to Amended and Restated Credit Agreement dated November 14, 2023, among Natural Gas
Services Group, Inc., the other Loan Parties thereto, Texas Capital Bank, in its capacity as Administrative Agent
and the Lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 15, 2023).
43
10.8
Second Amendment to Amended and Restated Credit Agreement dated June 6, 2024, among Natural Gas Services
Group, Inc., the other Loan Parties thereto, Texas Capital Bank, in its capacity as Administrative Agent and the
Lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 10, 2024).
10.9
Third Amendment to Amended and Restated Credit Agreement dated June 25, 2024, among Natural Gas Services
Group, Inc., the other Loan Parties thereto, Texas Capital Bank, in its capacity as Administrative Agent and the
Lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 28, 2024).
10.10†
Retention Agreement dated September 19, 2023 between Natural Gas Services Group, Inc. and James Hazlett
(Incorporated by reference to Exhibit 10.11 of the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 14, 2023).
10.11†
Employment Agreement between Brian L. Tucker and Natural Gas Services Group, Inc. dated October 9, 2023
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 10, 2023).
10.12†
Employment Agreement between Justin C. Jacobs and Natural Gas Services Group, Inc. dated January 29, 2024
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 1, 2024).
10.13†
Employee Non-Compete Agreement between Justin C. Jacobs and Natural Gas Services Group, Inc. dated January
29, 2024 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 1, 2024).
10.14†
Employee Proprietary Rights Agreement between Justin C. Jacobs and Natural Gas Services Group, Inc. dated
January 29, 2024 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 1, 2024).
10.15†
Form of Restricted Stock Unit Award under the Natural Gas Services Group, Inc. 2019 Equity Incentive Plan, as
amended (Incorporated by reference to Exhibit 10.12 of the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on April 1, 2024).
10.16†
Form of Performance Stock Unit Award under the Natural Gas Services Group, Inc. 2019 Equity Incentive Plan, as
amended (Incorporated by reference to Exhibit 10.13 of the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on April 1, 2024).
10.17†
Employment Agreement between Ian M. Eckert and Natural Gas Services Group, Inc. dated November 1, 2024
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on November 7, 2024).
19*
Amended and Restated Insider Trading Policy.
21.1*
Subsidiaries of the registrant.
23.1*
Consent of Ham, Langston & Brezina L.L.P.
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97.1
Natural Gas Services Group, Inc. Clawback Policy (Incorporated by reference to Exhibit 97.1 of the Registrant’s
Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2024).
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
† Management contract or compensatory plan or arrangement.
* Filed herewith.
ITEM 16.
FORM 10-K SUMMARY
None.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATURAL GAS SERVICES GROUP, INC.
March 17, 2025
By: /s/ Justin C. Jacobs
Justin C. Jacobs
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Justin C. Jacobs and Ian M. Eckert, jointly and severally, as his/her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Justin C. Jacobs
Chief Executive Officer (Principal Executive Officer)
and Director
March 17, 2025
Justin C. Jacobs
/s/ Ian M. Eckert
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
March 17, 2025
Ian M. Eckert
/s/ Stephen C. Taylor
Chairman of the Board of Directors
March 17, 2025
Stephen C. Taylor
/s/ Donald Tringali
Director
March 17, 2025
Donald Tringali
/s/ Nigel J. Jenvey
Director
March 17, 2025
Nigel J. Jenvey
/s/ Jean K. Holley
Director
March 17, 2025
Jean K. Holley
/s/ Georganne Hodges
Director
March 17, 2025
Georganne Hodges
45
NATURAL GAS SERVICES GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm (Ham, Langston & Brezina, LLP; Houston,
Texas; PCAOB ID 298
F-1
Consolidated Balance Sheets as of December 31, 2024 and 2023
F-3
Consolidated Statements of Operations for the Year Ended December 31, 2024, 2023 and 2022
F-4
Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2024, 2023 and 2022
F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 2024, 2023 and 2022
F-6
Notes to Consolidated Financial Statements:
1. Description of Business
F-7
2. Summary of Significant Accounting Policies
F-7
3. Trade Accounts Receivables
F-11
4. Inventory
F-12
5. Rental Equipment
F-12
6. Property and Equipment
F-13
7. Leases
F-13
8. Intangible Assets
F-15
9. Supplemental Balance Sheet Disclosures
F-15
10. Long-Term Debt
F-15
11. Income Taxes
F-17
12. Deferred Compensation Plan
F-18
13. Commitments and Contingencies
F-19
14. Stockholders’ Equity
F-19
15. Revenues from Customers
F-20
16. Stock-Based and Other Long-Term Incentive Compensations
F-20
17. Restructuring Activities
F-24
18. Related Party Transactions
F-24
19. Earnings (Loss) per Share
F-24
20. Subsequent Events
F-25
46
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Natural Gas Services Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Natural Gas Services Group, Inc. (the “Company”) as of
December 31, 2024 and 2023, and related consolidated statements of operations, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 2013, and our report dated March 17, 2025 expressed an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matter
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on
the accounts or disclosures to which they relate. We determined that there are no critical audit matters.
/s/ Ham, Langston & Brezina LLP
Houston, Texas
March 17, 2025
We have served as the Company’s auditor since 2022.
F - 1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Natural Gas Services Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Natural Gas Services Group, Inc.'s (the Company) internal control over financial reporting as of December 31,
2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013 (“COSO”). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal
Control — Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets as of December 31, 2024 and 2023, and related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024, and the
related notes (collectively referred to as the “consolidated financial statements”) of the Company and our report dated March
17, 2025 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting in the accompanying “Item 9A, Management’s
Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ham, Langston & Brezina LLP
Houston, Texas
March 17, 2025
We have served as the Company’s auditor since 2022.
F - 2
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2024
2023
ASSETS
Current Assets:
Cash and cash equivalents
$
2,142 $
2,746
Trade accounts receivable, net of provision for credit losses
15,626
39,186
Inventory, net of allowance for obsolescence
18,051
21,639
Federal income tax receivable
11,282
11,538
Prepaid expenses and other
1,075
1,162
Total current assets
48,176
76,271
Long-term inventory, net of allowance for obsolescence
—
701
Rental equipment, net of accumulated depreciation
415,021
373,649
Property and equipment, net of accumulated depreciation
22,989
20,550
Intangible assets, net of accumulated amortization
—
775
Other assets
6,342
6,783
Total assets
$
492,528 $
478,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
$
9,670 $
17,628
Accrued liabilities
7,688
15,085
Total current liabilities
17,358
32,713
Credit facility
170,000
164,000
Deferred income taxes
45,873
41,636
Other long-term liabilities
4,240
4,486
Total liabilities
237,471
242,835
Commitments and contingencies (Note 13)
Stockholders’ Equity:
Preferred stock, 5,000 shares authorized, no shares issued or outstanding
—
—
Common stock, 30,000 shares authorized, par value $0.01; 13,762 and 13,688 shares
issued, as of December 31, 2024 and 2023, respectively
138
137
Additional paid-in capital
118,415
116,480
Retained earnings
151,508
134,281
Treasury shares, at cost, 1,310 shares for each of December 31, 2024 and 2023,
respectively
(15,004)
(15,004)
Total stockholders’ equity
255,057
235,894
Total liabilities and stockholders’ equity
$
492,528 $
478,729
See accompanying notes to these consolidated financial statements.
F - 3
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
Year Ended December 31,
2024
2023
2022
Revenue:
Rental
$
144,236 $
106,159 $
74,465
Sales
7,613
8,921
8,568
Aftermarket services
4,893
6,087
1,792
Total revenue
156,742
121,167
84,825
Cost of revenues (excluding depreciation and amortization)
Rental
56,903
48,877
37,750
Sales
7,903
8,919
7,650
Aftermarket services
3,950
4,658
957
Total cost of revenues (excluding depreciation and amortization)
68,756
62,454
46,357
Selling, general and administrative expenses
21,012
16,938
13,892
Depreciation and amortization
31,347
26,550
24,116
Impairments
841
779
—
Inventory allowance
1,863
3,965
83
Retirement of rental equipment
28
505
196
Gain on sale of property and equipment, net
(430)
(481)
(250)
Total operating costs and expenses
123,417
110,710
84,394
Operating income
33,325
10,457
431
Other income (expense):
Interest expense
(11,927)
(4,082)
(364)
Other income (expense)
268
245
(108)
Total other expense, net
(11,659)
(3,837)
(472)
Income (loss) before income taxes
21,666
6,620
(41)
Provision for income taxes
(4,439)
(1,873)
(528)
Net income (loss)
$
17,227 $
4,747 $
(569)
Earnings (loss) per share:
Basic
$
1.39 $
0.39 $
(0.05)
Diluted
$
1.37 $
0.38 $
(0.05)
Weighted average shares outstanding:
Basic
12,412
12,316
12,305
Diluted
12,554
12,383
12,305
See accompanying notes to these consolidated financial statements.
F - 4
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Preferred Stock
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Total
Stockholders’
Equity
Shares
Amount
Shares
Amount
Shares
Amount
December 31, 2021
—
$
—
13,394
$
134
$ 114,017
$ 130,103
775 $ (8,344) $
235,910
Stock-based compensation
—
—
—
1
1,909
—
—
—
1,910
Vesting of restricted stock
—
—
125
—
—
—
—
—
—
Taxes paid related to net shares
settlement of equity awards
—
—
—
—
(515)
—
—
—
(515)
Purchase of treasury shares
—
—
—
—
—
—
535 (6,660)
(6,660)
Net loss
—
—
—
—
—
(569)
—
—
(569)
December 31, 2022
—
$
—
13,519
$
135
$ 115,411
$ 129,534
1,310 $ (15,004) $
230,076
Stock-based compensation
—
—
—
2
2,052
—
—
—
2,054
Vesting of restricted stock
—
—
169
—
—
—
—
—
—
Taxes paid related to net shares
settlement of equity awards
—
—
—
—
(983)
—
—
—
(983)
Net income
—
—
—
—
—
4,747
—
—
4,747
December 31, 2023
—
$
—
13,688
$
137
$ 116,480
$ 134,281
1,310 $ (15,004) $
235,894
Stock-based compensation
—
—
—
—
1,821
—
—
—
1,821
Vesting of restricted stock
—
—
51
1
(1)
—
—
—
—
Exercise of common stock
options
—
—
23
—
293
—
—
—
293
Taxes paid related to net shares
settlement of equity awards
—
—
—
—
(178)
—
—
—
(178)
Purchase of treasury shares
—
—
—
—
—
—
—
—
—
Net income
—
—
—
—
—
17,227
—
—
17,227
December 31, 2024
—
$
—
13,762
$
138
$ 118,415
$ 151,508
1,310 $ (15,004) $
255,057
See accompanying notes to these consolidated financial statements.
F - 5
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2024
2023
2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
17,227 $
4,747 $
(569)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization
31,347
26,550
24,116
Impairments
841
779
—
Inventory allowance
1,863
3,965
83
Retirement of rental equipment
28
505
196
Gain on the sale of property and equipment, net
(430)
(481)
(250)
Amortization of debt issuance costs
746
425
48
Deferred income taxes
4,237
1,838
511
Stock-based compensation
1,821
2,054
1,910
Provision for credit losses
433
492
—
(Gain) loss on company owned life insurance
(156)
235
389
Changes in operating assets and liabilities:
Trade accounts receivables
23,127
(25,010)
(4,279)
Inventory
2,477
(669)
(4,143)
Prepaid expenses and prepaid income taxes
152
(7)
(250)
Accounts payable and accrued liabilities
(17,727)
2,436
10,033
Other
477
174
(31)
NET CASH PROVIDED BY OPERATING ACTIVITIES
66,463
18,033
27,764
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of rental equipment, property and other equipment
(71,894)
(153,943)
(65,122)
Purchase of company owned life insurance, net
(22)
(422)
(329)
Proceeds from sale of property and equipment
476
477
372
NET CASH USED IN INVESTING ACTIVITIES
(71,440)
(153,888)
(65,079)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility borrowings
28,000
139,000
25,000
Repayments of credit facility borrowings
(22,000)
—
—
Payments of other long term liabilities
(780)
(95)
(3)
Payments of debt issuance costs
(962)
(2,693)
(77)
Proceeds from exercise of stock options
293
—
—
Purchase of treasury shares
—
—
(6,660)
Taxes paid related to net share settlement of equity awards
(178)
(983)
(515)
NET CASH PROVIDED BY FINANCING ACTIVITIES
4,373
135,229
17,745
NET CHANGE IN CASH AND CASH EQUIVALENTS
(604)
(626)
(19,570)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,746
3,372
22,942
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
2,142 $
2,746 $
3,372
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid
$
18,394 $
7,053 $
276
Income taxes paid
$
—
—
—
NON-CASH TRANSACTIONS:
Transfer of rental equipment to inventory
$
51 $
665 $
—
Transfer of right of use assets to property and equipment
$
2,641
—
—
Accrued purchases of property and equipment
$
2,687
—
—
Right of use asset acquired through a finance lease
$
2,174 $
1,146 $
—
Right of use asset acquired through an operating lease
$
563 $
63 $
229
See accompanying notes to these consolidated financial statements.
F - 6
NATURAL GAS SERVICES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts or where otherwise indicated)
1.
Description of Business
Natural Gas Services Group, Inc. (the “Company”, “NGS,” “Natural Gas Services Group,” “we,” “us” or “our”) (a
Colorado corporation), is a leading provider of natural gas compression equipment, technology and services to the energy
industry. We rent, design, sell, install, service and maintain natural gas compressors and related equipment for our customers’
oil and gas production and processing facilities, generally using equipment from OEM suppliers along with limited in-house
assembly. We are headquartered in Midland, Texas, with an assembly facility located in Tulsa, Oklahoma, a repair and overhaul
shop in Midland, Texas, and service facilities located in major oil and gas producing basins in the United States (“U.S.”).
2.
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying Consolidated Financial Statements were prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) and include the accounts of the Company, its subsidiary,
NGSG Properties, LLC, which owns our headquarters office building and the rabbi trust associated with our deferred
compensation plan (see Note 12). All significant intercompany accounts and transactions for the periods presented have been
eliminated in consolidation.
Certain reclassification have been made to prior periods to conform to the current presentation. In our Consolidated
Statements of Operations, (gains) and losses on the sale of property equipment have been reclassified from selling, general and
administrative expenses to a stand-alone caption included within total operating income.
Use of Estimates
The preparation of our Consolidated Financial Statements in conformity with GAAP requires our management to make
estimates and assumptions that affect the amounts reported in these Consolidated Financial Statements and accompanying
notes. Actual results could differ from those estimates. Significant estimates include fixed asset lives, provision for credit losses
and the allowance for inventory obsolescence. Additionally, we conduct an annual review of our long-lived assets for
impairment. In connection with the review, determining factors are based on estimates that can significantly impact the carrying
value of these assets. It is at least reasonably possible these estimates could be revised in the near term and the revisions could
be material.
Cash and Cash Equivalents
For purposes of reporting cash flows, we consider all short-term investments with an original maturity of three months
or less to be cash equivalents. At times, cash balances at banks and financial institutions may exceed federally insured amounts.
Accounts Receivable and Credit Losses
Our trade accounts receivables are not collateralized except as provided for under certain lease agreements.We
perform ongoing credit evaluations of our customers and adjust credit limits based on management’s assessment of the
customer’s financial condition and payment history, as well as industry and general economic conditions. We continuously
monitor collections and payments from our customers, and maintain an allowance for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have identified as well as forecasts of future economic
conditions. While such credit losses have historically been within our expectations and the allowance established, we cannot
guarantee that we will continue to experience the same credit loss rates that we have in the past.
Revenue Recognition
The following is a description of principal activities from which we generate our revenue and the accounting policies
that we apply for the recognition thereof:
F - 7
Rental Revenue. We generate revenue from renting compressor equipment to our customers for the right to control the
use of the equipment ratably over the term of the underlying agreement. Our agreements for rental equipment qualify as
operating leases under Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic
842, Leases (“ASC 842”) as we retain the primary exposure to changes in the underlying equipment’s value as the lessor unlike
a sale or secured lending arrangement. Our agreements may also include a fee for servicing the equipment during the term of
the rental contract. We have applied the practical expedient provided in ASC 842, which allows us to combine lease and non-
lease components. Our rental contracts typically range from six to 60 months.
As a lessor, we recognize operating lease revenue on a straight-line basis with equal monthly payments over the term
of the underlying agreements. After the terms of the agreement have expired, a customer may renew their contract or continue
renting on a monthly basis thereafter. The leased equipment is generally skid-mounted and can be moved to different locations
at the direction of our customers. The leased equipment assets remain on our Consolidated Balance Sheets consistent with other
property and equipment. Cash receipts associated with our lease agreements are classified within cash flows from operating
activities in our Consolidated Statements of Cash Flows.
Sales and Aftermarket Services Revenue. We generate revenue from the sale of custom/assembled compressors, flare
systems and parts, as well as exchange/rebuilding customer owned compressors and sale of used rental equipment. We also
provide routine aftermarket or call-out services on customer owned equipment.
Consistent with ASC Topic 606, Revenues from Contracts with Customers (“ASC 606”), revenue is measured and
recognized based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on
behalf of third parties (i.e. sales and property taxes). Revenue is recognized when a customer obtains control of promised goods
or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize
revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue
when, or as, we satisfy the performance obligation(s). Transaction prices are not subject to variable consideration constraints.
Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our
Consolidated Statements of Operations.
For sales, revenue is recognized when control has passed to the customer generally when the equipment is completed
and shipped. We request some of our customers to make progressive payments as the product is being built; these payments are
recorded as deferred revenue within Accrued liabilities on the Consolidated Balance Sheet until control has been transferred.
These contracts also may include an assurance warranty clause to guarantee the product is free from defects in material and
workmanship for a set duration of time; this is a standard industry practice and is not considered a performance obligation. The
amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis. Revenue
for aftermarket and other services is recognized after the services in the contract are rendered.
Inventory Valuation
Inventory (current and long-term) is valued at the lower of cost or net realizable value. The cost of inventories is
determined by the weighted average method. We regularly review inventory quantities on hand and record a provision for
excess and obsolete inventory based primarily on current and anticipated customer demand and production requirements. We
routinely review our inventory allowance balance to account for slow moving or obsolete inventory costs that may not be
recoverable in the future. We assess anticipated customer demand based on current and upcoming capital expenditure budgets
of our major customers as well as other significant companies in the industry, along with oil and gas price forecasts and other
factors affecting the industry. Our long-term inventory consisted of raw materials and replacement parts that remain useable but
that we do not expect to sell or use within the next year.
Long-Lived Assets
Rental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-
progress on new rental equipment which is recorded at cost until it’s complete and added to our fleet. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets. Our rental equipment has estimated useful lives
between 15 and 25 years, while our property and equipment has estimated useful lives which range from 3 to 39 years. The
majority of our property and equipment, including rental equipment, is a direct cost to generating revenue.
We assess our rental equipment and property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The following factors could trigger an impairment
review: significant underperformance relative to historical or projected future cash flows; significant adverse changes in the
F - 8
extent or manner in which the asset (or asset group) is being used or its condition, including a meaningful drop in fleet
utilization over the prior four quarters; significant negative industry or company-specific trends or actions, including
meaningful capital expenditure budget reductions by our major customers or other sizable exploration and production or
midstream companies, as well as significant declines in oil and gas prices; legislative changes prohibiting us from leasing our
compressor units; or poor general economic conditions. An impairment loss is recognized if the future undiscounted cash flows
associated with the asset (or asset group) and the estimated fair value of the asset are less than the asset’s carrying value.
Sales of equipment out of the rental fleet are included with sales revenue and cost of sales, while retirements of units
are presented as a separate operating expense. Maintenance and repairs are charged to cost of rentals as incurred.
Intangible Assets
We amortize intangible assets with definite lives over their useful lives and review for impairment when indicators of
impairment are present. We review indefinite-lived intangible assets for impairment annually or when indicators of impairment
are present. We review intangibles through an assessment of the estimated future cash flows related to such assets. In the event
that assets are found to be carried at amounts in excess of estimated undiscounted future cash flows, then the assets will be
adjusted for impairment to a level commensurate with a discounted cash flow analysis of the underlying assets. As of December
31, 2024, we no longer have any intangible assets (see Note 8).
Leases
We determine if an arrangement is a lease at inception by assessing whether it conveys the right to control the use of
an identified asset for a period of time in exchange for consideration. GAAP requires all leases to be reported on the balance
sheet as right-of-use (“ROU”) assets and lease obligations. We determine if an arrangement is a lease at inception and
determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present
value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate
our incremental borrowing rate using information available at the commencement date in determining the present value of the
lease payments. We, as a lessee, apply the practical expedient to not separate non-lease components from lease components,
therefore, accounting for each separate lease component and its associated non-lease component, as a single lease component.
For each lease that (i) contains the same timing and pattern of transfer for lease and non-lease components and (ii) if the lease
component, if accounted for separately, would be classified as an operating lease, we have elected to not separate non-lease
components from lease components. Right of use assets and lease liabilities are recognized at the lease commencement date
based on the present value of lease payments over the lease term. As substantially all of our leases do not provide an implicit
rate, we use our incremental borrowing rate, which is based on a fully collateralized loan over the lease term, to determine the
present value of lease payments.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and net operating losses
and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory enactment date. Valuation
allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
With respect to uncertain tax positions, GAAP prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In order to
record any financial statement benefit, we are required to determine, based on technical merits of the position, whether it is
more likely than not (a likelihood of more than 50 percent) that a tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes. If that step is satisfied, then we must measure the tax position to
determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of
the benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We had no liabilities for uncertain
tax positions as of December 31, 2024 and 2023.
Our policy regarding income tax interest and penalties is to charge those items as components of interest expense and
other expense, respectively.
F - 9
Capitalized Interest
We capitalize interest from external borrowings on significant expenditures for the assembly of our natural gas
compressor equipment until such projects are ready for their intended use. Capitalized interest is added to the cost of the
underlying asset and is amortized over the useful lives of the assets in the same manner as the underlying assets.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current market conditions. GAAP provides for a fair
value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are
categorized as follows:
Level 1 - quoted prices in an active market for identical assets or liabilities;
Level 2 - quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for
similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other
means; and
Level 3 - valuation methodology with unobservable inputs that are significant to the fair value measurement.
We believe that the fair value of our cash and cash equivalents, trade accounts receivables, and accounts payable as of
December 31, 2024 and 2023 approximate their carrying values due to the short-term nature of the instruments or the use of
prevailing market interest rates. We considered the borrowings under our credit facility to approximate fair value based upon
variable interest rates currently available to us for loans with similar terms (level 2).
Segments and Related Information
GAAP defines the characteristics of an operating segment as (i) being engaged in business activity from which it may
earn revenue and incur expenses, (ii) being reviewed by the Company’s chief operating decision maker (“CODM”) for
decisions about resources to be allocated and assess its performance and (iii) having discrete financial information. Although
we review our products to analyze the nature of our revenue, costs and expenses, the net income and non-GAAP financial
measures including EBITDA and Adjusted gross margin are not captured or analyzed by these categories. Our chief executive
officer (“CEO”) serves as the CODM and does not make resource allocation decisions or assess the performance of the business
based on these categories, but rather on the entire entity in the aggregate. Accordingly, the measures of profit and loss and total
assets are effectively those of the Company as a whole as reflected in these Consolidated Financial Statements. Based on these
facts and underlying circumstances described further below, we have concluded that we operate in one business segment.
We are primarily engaged in the business of leasing natural gas compressors to our customers. In addition, we design,
assemble and sell natural gas compressors and provide aftermarket services on compressors in our fleet and to third parties.
These business activities are similar in all geographic areas in which we operate. Our customers primarily consist of entities in
the business of producing oil and gas. The maintenance and service of our products is consistent across the entire Company and
is performed by a dedicated group of employees via an internal fleet of vehicles. The regulatory environment is similar in every
jurisdiction in that the most impacting regulations and practices are the result of federal energy policy.
Recently Adopted Accounting Pronouncements
In December 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-09 “Income Taxes (Topics 740):
Improvements to Income Tax Disclosures” (“ASU 2023-09”) to expand the disclosure requirements for income taxes,
specifically related to the rate reconciliation and income taxes paid. We elected to early adopt ASU 2023-09 effective with our
financial reporting for the year ended December 31, 2024 and have applied the provisions on a retrospective basis for all
periods presented in these Consolidated Financial Statements. Accordingly, the enhanced disclosures required of ASU 2023-09
are provided in Note 11.
In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable
Segment Disclosures” (“ASU 2023-07”) which expands annual and interim disclosure requirements for reportable segments,
primarily through enhanced disclosures about significant segment expenses. We adopted ASU 2023-07 effective January 1,
2024 and the required disclosures are referenced above in our discussion of Segments and Related Information.
F - 10
Recently Issued Accounting Pronouncements Pending Adoption
In November 2024, the FASB issued ASU 2024-03 “Income Statement-Reporting Comprehensive Income-Expense
Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expense” (“ASU 2024-03”) which
expands annual and interim disclosures expenses for certain types of expenses (including purchases of inventory, employee
compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales,
selling, general & administrative expenses, and research and development). ASU 2024-03 is effective for annual periods
beginning January 1, 2027, and for interim periods beginning January 1, 2028, with early adoption permitted. The adoption of
ASU 2024-03 is not expected to have a material impact on our Consolidated Financial Statements or disclosures.
3.
Trade Accounts Receivable
The following table summarizes our trade accounts receivable from customers as of the dates presented:
December 31,
2024
2023
Trade accounts receivable
Rentals
$
14,218 $
32,871
Sales and aftermarket services
2,657
7,138
16,875
40,009
Less: Allowance for credit losses
(1,249)
(823)
Total trade accounts receivable, net
$
15,626 $
39,186
Our trade accounts receivable consist of customer obligations due under normal trade terms for (i) operating leases for
the use of our natural gas compressors, (ii) the sale of compressors and flare systems and (iii) the performance of aftermarket
services.
Major Customers and Concentration of Credit Risk
Rental revenue and sales from Occidental Permian, LTD. (“Oxy”) in 2024, 2023 and 2022 amounted to 54 percent, 50
percent and 42 percent of revenue, respectively. No other single customer accounted for more than 10 percent of our revenues
in 2024, 2023 and 2022. Oxy’s accounts receivable balances amounted to 52 percent and 64 percent of our accounts receivable
as of December 31, 2024 and 2023, respectively. No other customers amounted to more than 10 percent of our accounts
receivable as of December 31, 2024 and 2023.
Allowance for Credit Losses
The following table summarizes the changes in our allowance for credit losses for the periods presented:
Year Ended December 31,
2024
2023
2022
Beginning balance
$
823 $
338 $
1,129
Provision for credit losses
433
492
—
Write-offs
(7)
(7)
(791)
Ending balance
$
1,249 $
823 $
338
Management believes that the allowance is adequate; however, actual write-offs may exceed the recorded allowance.
F - 11
4.
Inventory
The following table summarizes our inventory, net of allowances for obsolescence as of the dates presented:
December 31,
2024
2023
Raw materials, net of allowance of $4,379 and $2,836, respectively
$
17,706 $
20,227
Work-in-process
345
1,412
Inventory - current
18,051
21,639
Raw materials - long term, net of allowance of $1,488 and $1,168, respectively
—
701
Total inventory
$
18,051 $
22,340
Our long-term inventory, which is fully reserved as of December 31, 2024, consists of excess raw materials that
remain viable but with limited market opportunities.
The following table summarizes the changes in our allowance for obsolescence for the periods presented:
Year Ended December 31,
2024
2023
2022
Beginning balance
$
4,004 $
120 $
64
Allowance for obsolescence
1,863
3,965
83
Write-offs
—
(81)
(27)
Ending balance
$
5,867 $
4,004 $
120
The allowance for 2023 was primarily related to our decision to cease future compressor assembly at our Midland,
Texas facility, which reduced the expected future demand of certain inventory items held at this facility. In 2024, we continued
actions in support of our strategy to further outsource assembly activities to third parties resulting in an additional allowance
charge.
5.
Rental Equipment
The following table summarizes our rental equipment and accumulated depreciation as of the dates presented:
December 31,
2024
2023
Compressor units
$
579,373 $
514,527
Work-in-progress
51,662
50,867
631,035
565,394
Accumulated depreciation
(216,014)
(191,745)
Rental equipment, net of accumulated depreciation
$
415,021 $
373,649
We capitalized interest totaling approximately $4.7 million and $5.5 million in connection with the acquisition and
assembly of compressor units for the years ended December 31, 2024 and 2023, respectively. No interest was capitalized during
2022. Depreciation expense for rental equipment was $28.2 million, $24.0 million and $21.9 million for the years ended
December 31, 2024, 2023 and 2022, respectively.
Retirement of Rental Equipment
We routinely review our rental fleet for retirement or obsolescence as well as an assessment to determine which units
are not of the type, configuration, make or model that our customers are demanding or that are not cost efficient to refurbish,
maintain and/or operate. As a result of these reviews, we recorded charges for the retirement of rental equipment of less than
$0.1 million, $0.5 million and $0.2 million during the years ended December 31, 2024, 2023 and 2022, respectively.
F - 12
Rental Activity
Future minimum rent payments from our customers for contractual arrangements not on a month-to-month basis at
December 31, 2024, are as follows:
Year Ending December 31,
2025
$
105,603
2026
83,878
2027
66,751
2028
35,423
2029
10,584
Total
$
302,239
6.
Property and Equipment, net
The following table summarizes our property and equipment as of the dates presented:
December 31,
Useful Lives
(Years)
2024
2023
Land
—
$
1,680 $
1,680
Building
39
19,140
19,140
Leasehold improvements
39
1,346
1,295
Office equipment and furniture
5
2,057
2,039
Software
5
589
573
Machinery and equipment
7
4,430
4,113
Vehicles
3
12,739
8,770
Work-in-progress
168
589
42,149
38,199
Less accumulated depreciation
(19,160)
(17,649)
Total
$
22,989 $
20,550
Depreciation expense for property and equipment was $2.4 million, $2.4 million and $2.1 million for the years ended
December 31, 2024, 2023 and 2022, respectively.
7.
Leases
Our operating leases are primarily related to property leases for field offices and office equipment. Our operating
leases have remaining lease terms of one to five years. Renewal and termination options are included in the lease term when it
is reasonably certain that we will exercise the option. Our finance leases were primarily related to vehicles used in our rental
business; however, we terminated all such leases during 2024 and purchased the vehicles and recorded them in property and
equipment. Prior to their termination, our finance leases generally had lease terms of three years. Our lease agreements do not
contain any contingent rental payments, material residual guarantees or material restrictive covenants.
F - 13
The following table reflects the amounts related to leases that are recorded on our Consolidated Balance Sheets as of
the dates presented:
Classification on Consolidated
December 31,
Description
Balance Sheets
2024
2023
Operating lease assets
Other assets
$
607
$
210
Finance lease assets
Other assets
—
1,045
Total right of use assets
$
607
$
1,255
Current lease liabilities - operating
Accrued liabilities
$
153
$
58
Current lease liabilities - financing
Accrued liabilities
—
307
Total current lease liabilities
153
365
Noncurrent lease liabilities - operating
Other long-term liabilities
454
173
Noncurrent lease liabilities - financing
Other long-term liabilities
—
723
Total noncurrent lease liabilities
454
896
Total lease liabilities
$
607
$
1,261
Weighted average remaining lease term (in years)
3.8
3.1
Weighted average discount rate
8.3 %
9.1 %
Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for the
years ended December 31, 2024, 2023 and 2022 were approximately $0.7 million, $0.5 million and $0.4 million, respectively.
The following table summarizes the cash paid for amounts included in the measurement of liabilities included in our
Consolidated Statements of Cash Flows for the periods presented:
Year Ended December 31,
2024
2023
2022
Operating lease cost (1) (2)
$
712 $
485 $
384
Finance lease cost
$
622 $
95 $
3
(1)
Lease costs are classified in the Consolidated Statements of Operations within cost of revenues and selling, general
and administrative expenses.
(2)
Includes costs of $0.1 million, $0.3 million and $0.2 million for leases with terms of 12 months or less and $0.6
million, $0.2 million and $0.2 million for leases with terms greater than 12 months for the years ended December 31, 2024,
2023 and 2022, respectively.
The following summarizes the future maturities of our lease liabilities for the periods presented:
Year Ending December 31,
2025
$
212
2026
210
2027
171
2028
135
2029
23
Total lease payments
751
Less: Imputed interest
(144)
Total
$
607
Rent expense under such leases was $0.6 million, $0.2 million and $0.2 million for the years ended December 31,
2024, 2023 and 2022, respectively.
F - 14
8.
Intangible Assets
In connection with our acquisition of Screw Compression Systems (“SCS”) in January 2005, we acquired certain
intangible assets attributable to developed technology and the SCS trade name. Amortization expense attributable to the
developed technology recognized in each of the years ending December 31, 2024, 2023 and 2022 was $0.1 million and the asset
is fully amortized as of December 31, 2024. During 2024, we fully impaired the trade name intangible asset as we are no longer
marketing the associated technology. There were no impairments of these intangible assets during the years ended December
31, 2023 or 2022.
The following table summarizes our intangible assets by major asset class as of the dates presented:
December 31, 2024
December 31, 2023
Useful
Life
(years)
Gross
Carrying
Value
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Value
Accumulated
Amortization
Net Book
Value
Developed technology
20
$
— $
— $
— $
2,505 $
2,384 $
121
Trade name
Indefinite
—
—
—
654
—
654
Total
$
— $
— $
— $
3,159 $
2,384 $
775
9.
Supplemental Balance Sheet Disclosures
The following table summarizes the components of accrued liabilities as of the dates presented:
December 31
2024
2023
Accrued purchases
$
2,085 $
8,629
Compensation
3,483
2,274
Right of use obligations
153
365
Interest
269
2,665
Deferred revenue
—
418
Sales taxes
355
313
Other
1,343
421
$
7,688 $
15,085
10.
Long-Term Debt
Our outstanding long-term debt consists of the following as of the dates presented:
December 31,
2024
2023
Credit facility
$
170,000 $
164,000
We have a five-year senior secured revolving credit agreement, as amended (the “Credit Facility”) with Texas Capital
Bank, National Association (the “Lender”) as administrative agent, TCBI Securities, Inc., as joint lead arranger and sole book
runner and Bank of America, N.A., as joint lead arranger, with a total commitment of $300.0 million. We also have a right to
request from the Lender, an increase to the potential aggregate commitment of up to $50.0 million; provided, however, the
aggregate commitment amount is not permitted to exceed $350.0 million. The obligations under the Credit Facility are secured
by a first priority lien on most of our assets, including inventory and certain accounts receivable as well as a variable number of
our leased compressor units. The maturity date of the Credit Facility is February 28, 2028.
F - 15
As of December 31, 2024, we had $170.0 million outstanding under our Credit Facility with a weighted average
interest rate of 8.12%. As of December 31, 2024, we had approximately $130.0 million available for borrowing under the
Credit Facility, subject to borrowing base determination. As of December 31, 2024, we were in compliance with all financial
covenants in our Credit Facility.
Borrowing Base. At any time before the maturity of the Credit Facility, we may draw, repay and re-borrow amounts
available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base
equals the sum of (a) 85% of eligible accounts receivable owed to us, plus (b) 50% of the eligible inventory, valued at the lower
of cost or market value at such time, subject to a cap of this component not to exceed $2.5 million, plus (c) the lesser of (i) 95%
of the net book value of the compressors that the Lender has determined are eligible for the extension of credit, valued at the
lower of cost or market value with depreciation not to exceed 25 years, at such time and (ii) 80% of the net liquidation value
percentage of the net book value of the eligible compressors that the Lender has determined are eligible for the extension of
credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time, plus (d) 80% of the net
book value, valued at the lower of cost (excluding any costs for capitalized interest or other noncash capitalized costs) or market
of the eligible new compressor fleet, minus (e) any required availability reserves determined by the Lender in its sole discretion.
The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of
the collateral.
Interest and Fees. Under the terms of the Credit Facility, we have the option of selecting the applicable variable rate
for each revolving loan, or portion thereof, of either (a) the Base Rate (as defined below) plus the Applicable Margin, or (b) in
the case of a Term Secured Overnight Financing Rate (“SOFR”) Loan, the Adjusted Term SOFR rate plus the Applicable
Margin. “Base Rate” means, for any day, a rate of interest per annum equal to the highest of (a) the prime rate for such day; (b)
the sum of the federal funds rate for such day plus 0.50%; and (c) the Adjusted Term SOFR for such day plus 1.00%. The
Applicable Margin is determined based upon the leverage ratio as set forth in the most recent compliance certificate received by
the Lender for each fiscal quarter from time to time pursuant to the Credit Facility. Depending on the leverage ratio, the
Applicable Margin can be 2.00% to 2.75% for Base Rate Loans (as defined in the Credit Facility) and 3.00% to 3.75% for Term
SOFR Loans and for requested letters of credit. In addition, we are required to pay a monthly commitment fee on the daily
average unused amount of the commitment while the Credit Facility is in effect at an annual rate equal to 0.50% of the unused
commitment amount. Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee,
provided that accrued interest on Term SOFR Loans is payable at the end of each interest period, but in no event less frequently
than quarterly.
Covenants. The Credit Facility contains customary representations and warranties, as well as covenants which, among
other things, condition or limit our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make
acquisitions in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments
or loans; make negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we
are subject to certain financial covenants in the Credit Facility that require us to maintain (i) a leverage ratio, as defined, lesser
than or equal to (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on or prior to December 31, 2024, (b) 3.75 to
1.00 for fiscal quarters ending on March 31, 2025 and June 30, 2025, (c) and 3.50 to 1.00 for the fiscal quarters ending
September, 30, 2025, December 31, 2025 and March 31, 2026 and (d) 3.25 to 1.00 the fiscal quarter ended June 30, 2026 and
for each fiscal quarter thereafter and (ii) a fixed charge coverage ratio greater than or equal to 1.25 to 1.00 as of the last day of
each fiscal quarter.
Events of Default and Acceleration. The Credit Facility contains customary events of default for credit facilities of this
size and type, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements
contained in the Credit Facility and the other transaction documents; inaccuracies in representations and warranties; certain
defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $1.0
million; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $1.0 million; certain ERISA
events; certain change in control events and the defectiveness of any liens. Obligations outstanding under the Credit Facility
may be accelerated upon the occurrence of an event of default.
F - 16
11.
Income Taxes
The following table summarizes our provision for income taxes for the presented:
Year Ended December 31,
2024
2023
2022
Current income tax expense:
Federal
$
(88) $
— $
—
State
(114)
(35)
(17)
Total current income tax expense
(202)
(35)
(17)
Deferred income tax (expense) benefit:
Federal
(4,456)
(1,940)
(857)
State
219
102
346
Total deferred income tax (expense) benefit
(4,237)
(1,838)
(511)
Provision for income taxes
$
(4,439) $
(1,873) $
(528)
The following table summarizes the effective tax rates for the periods presented:
Year Ended December 31,
2024
2023
2022
Statutory rate
$
(4,550)
21.0 % $
(1,390)
21.0 % $
9
21.0 %
State and local taxes
130
(0.6) %
86
(1.3) %
333
812.2 %
Stock-based compensation
195
(0.9) %
(46)
0.7 %
(24)
(58.5) %
Nondeductible compensation
(65)
0.3 %
(543)
8.2 %
(757) (1,846.3) %
Other
(149)
0.7 %
20
(0.3) %
(89)
(217.1) %
Effective rate
$
(4,439)
20.5 % $
(1,873)
28.3 % $
(528) (1,288.7) %
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are
no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2015.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response
to the economic impact caused by the COVID-19 pandemic. The CARES Act, among other things, permits federal income tax
net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before
2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five
preceding taxable years to generate a refund of previously paid federal income taxes. We generated significant NOLs during
2018 and 2019 and filed carryback claims for these losses to the preceding five years.
In connection with the filing of these claims, we initially recorded a federal income tax receivable of approximately
$15.0 million and an increase of approximately $10.1 million to our deferred tax liability as of March 31, 2020. During 2020,
we received federal income tax refunds corresponding to the 2018 NOL carryback leaving approximately $11.3 million
remaining to be refunded. In conjunction with the remaining $11.3 million income tax refund claim, we received a notice from
the Internal Revenue Service (“IRS”) on March 8, 2023, stating that our income tax returns for 2015, 2016, 2017 and 2019
were selected for examination. Furthermore and as is customary for income tax refunds of this magnitude, the IRS is required to
review the refund claim and provide a report to the Joint Committee on Taxation of the U.S. Congress (“JCT”).
F - 17
The following table summarizes the income tax effects of temporary differences that give rise to significant portions of
deferred income tax assets and (liabilities) as of the periods presented:
December 31,
2024
2023
Deferred income tax assets:
Net operating loss carryforward
$
20,600 $
22,190
Research and development credits
1,011
1,313
Stock-based compensation
269
153
Interest expense
2,756
991
Inventory reserves
1,293
893
Deferred compensation
827
792
Other
569
285
Total deferred income tax assets
27,325
26,617
Deferred income tax liabilities:
Property and equipment
(73,198)
(68,110)
Intangible assets
—
(143)
Total deferred income tax liabilities
(73,198)
(68,253)
Net deferred income tax liabilities
$
(45,873) $
(41,636)
As of December 31, 2024, we had NOL carryforwards for federal income tax purposes of $89.5 million, which may be
carried forward indefinitely and can offset up to 80% of future taxable income in any given year. Future changes in ownership,
as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”), could limit the amount of NOL
carryforwards used in any one year. In general, under Section 382 and 383 of the IRC, a corporation that undergoes an
“ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future
taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders
changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period
(generally three years). We also had state NOL carryforwards of $46.6 million with carryforward periods similar to those of our
federal NOLs.
We have no reserves for uncertain tax positions as of December 31, 2024 and 2023.
12.
Deferred Compensation Plan
Effective January 1, 2016, we established a non-qualified deferred compensation plan (the “Deferred Compensation
Plan”) for executive officers, directors and certain eligible employees. The assets of the Deferred Compensation Plan are held in
a rabbi trust and are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The Deferred
Compensation Plan allows for deferral of up to 90 percent of a participant’s base salary, bonus, commissions, director fees and
restricted stock awards. Company owned life insurance (“COLI”) policies are held in the rabbi trust are utilized as a source of
funding for the Deferred Compensation Plan. The cash surrender value of the COLI policies was $3.0 million and $3.0 million
as of December 31, 2024 and 2023, respectively, with unrealized gains and (losses) related to the policies of $0.2 million, $(0.2)
million and $(0.4) million recorded as a component of Other income (expense) in our Consolidated Statements of Operations
for the years ended December 31, 2024, 2023 and 2022, respectively.
For deferrals of base salary, bonus, commissions and director fees, settlement payments are made to participants in
cash, either in a lump sum or in periodic installments. The obligations to pay the deferred compensation and the deferred
director fees are adjusted to reflect the positive or negative performance of investment measurement options selected by each
participant and was $3.8 million and $3.6 million as of December 31, 2024 and 2023, respectively. The deferred obligations are
included as a component of Other long-term liabilities on our Consolidated Balance Sheets.
For deferrals of restricted stock awards, the Deferred Compensation Plan does not allow for diversification, therefore,
distributions are paid in shares of our common stock and the obligations are carried at their grant date fair values. As of
December 31, 2024 and 2023, respectively, there were no unvested RSUs being deferred. As of December 31, 2024 and 2023,
respectively we have released and issued 191,700 and 191,700 shares to the Deferred Compensation Plan with a value of $4.8
million and $2.7 million, respectively.
F - 18
13.
Commitments and Contingencies
Legal Proceedings
From time to time, we are a party to various claims and legal proceedings arising from our operations in the ordinary
course of our business. We are not currently a party to any material legal proceedings, and we are not aware of any threatened
material litigation. While the outcome of any potential claims and legal proceedings against us cannot be predicted with
certainty, we have concluded that it is mot considered reasonably possible that a loss resulting from any such claims or
proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our
financial position, results of operations or cash flows. Furthermore, we believe that we maintain adequate insurance coverage
against any potential litigation loss relating to insurable risks.
14.
Stockholders’ Equity
Preferred Stock
As of December 31, 2024 and 2023, we had a total of 5.0 million authorized preferred shares which may be issued in
series with rights and preferences as designated by the Board of Directors. As of December 31, 2024 and 2023, there were no
issued or outstanding preferred shares.
Common Stock
As of December 31, 2024 and 2023, we had a total of 30.0 million authorized common shares with a par value of
$0.01 per share. As of December 31, 2024 and 2023, there were 13.8 million and 13.7 million shares issued and 12.5 million
and 12.4 million shares outstanding, respectively.
Additional Paid-In Capital
Additional paid-in capital includes the cumulative amounts received in excess of the par value with respect to the
public offerings of our common stock and the issuance of shares in connection with our stock-based compensation plans. In
addition, additional paid-in capital is increased by the periodic cost of equity-classified stock-based compensation awards, net
of any forfeitures and the cost of shares used to settle income tax obligations upon vesting.
Retained Earnings and Comprehensive Income
We have not paid any cash dividends on our common stock. While not explicitly prohibited, cash dividends are
considered restricted payments as defined in the Credit Facility and may be made provided that certain conditions are satisfied
as provided for in the Credit Facility, including the absence of any defaults, among others. Our comprehensive income is
comprised only of our net income (loss) as there are no components that would be considered as other comprehensive income.
Treasury Stock
From October 23, 2020 through its expiration on September 30, 2022, we maintained an authorized share repurchase
program. During that period, we repurchased a total of 1.3 million shares of common stock for a total of $15.0 million, or an
average of approximately $11.45 per share. The reacquired shares have been recorded at cost and are reflected in Treasury stock
on our Consolidated Balance Sheets.
F - 19
15.
Revenues from Customers
Disaggregation of Revenue
The following table summarizes our revenue disaggregated by product or service type for the periods presented:
Year Ended December 31,
2024
2023
2022
Rental
$
144,236 $
106,159 $
74,465
Sales
Compressors
1,746
1,800
3,601
Flares
4
87
239
Other (Parts/Rebuilds)
5,863
7,034
4,728
7,613
8,921
8,568
Aftermarket services
4,893
6,087
1,792
Total revenue
$
156,742 $
121,167 $
84,825
We recognized $0.4 million in revenue for the year ended December 31, 2024, that was included in accrued liabilities
at the beginning of 2024. For the periods ended December 31, 2023 and 2022, we recognized revenue of less than $0.1 million
and $1.3 million from amounts related to sales that were included in deferred revenue at the beginning of 2023 and 2022,
respectively.
Transaction Price Allocated to the Remaining Performance Obligations
As of December 31, 2024, we had no unsatisfied performance obligations and as of December 31, 2023, there was
$0.4 million of deferred revenue related to unsatisfied performance obligations.
Contract Costs
We recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of
the assets that we otherwise would have recognized is one year or less. These costs are included within Selling, general and
administrative expense in our Consolidated Statements of Operations.
16.
Stock-Based and Other Long-Term Incentive Compensation
We maintain two stockholder approved plans for the issuance of stock-based compensation awards to our employees
and Board of Director members: (i) the 2019 Equity Incentive Plan, as amended (the “Equity Incentive Plan”), and (ii) the 1998
Stock Option Plan, as amended (the “Stock Option Plan”).
The following table summarizes the total stock-based compensation expense recognized during the periods presented:
Year Ended December 31,
2024
2023
2022
Equity-classified
$
1,821 $
2,054 $
1,910
Liability-classified (1)
248
—
—
$
2,069 $
2,054 $
1,910
(1)
Represents compensation expense associated with awards that may be settled in cash at the option of the grantee.
F - 20
Equity Incentive Plan
The Equity Incentive Plan provides for up to 1,150,000 shares of common stock for issuance in the form of awards for:
(i) stock options, (ii) stock appreciation rights, (iii) restricted awards in the form of restricted stock and restricted stock units
(“RSUs”), (iv) performance share awards, including performance share unit (“PSUs”) and (v) other equity-based awards. After
consideration of the activity described in detail below, a total of 262,268 shares remained available for grant as of December 31,
2024.
Time-Vested Restricted Shares and RSUs
The following table summarizes all restricted stock and RSU (fully vested and time-vested) activity during the year
ended December 31, 2024:
Number
of
Shares
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
Outstanding, December 31, 2023
133,898 $
10.66
1.57
$
1,813
Granted
97,941 $
18.44
$
1,806
Vested
(74,447) $
10.46
$
1,636
Canceled/Forfeited
(26,209) $
11.98
$
214
Outstanding, December 31, 2024
131,183 $
16.39
5.15
$
3,516
As of December 31, 2024, there was a total of approximately $1.0 million of unrecognized compensation expense
related to the unvested portion of the restricted stock and RSUs. This expense is expected to be recognized over the next 2.1
years.
Cash-Settled RSUs
The 2024 grant of RSUs to the independent Board members and Mr. Taylor that can be settled in cash represent
liability-classified awards. Accordingly, compensation expense associated with these awards accumulates as a component of
Accrued liabilities on our Consolidated Balance Sheet until the awards vest and are settled. Compensation expense associated
with these awards is based upon the fair value of NGS common stock at each reporting period relative to that portion of the
service period that has passed. Accordingly, the compensation expense is variable in nature.
The following table summarizes all cash settled RSU activity during the year ended December 31, 2024:
Number
of
Shares
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
Outstanding, December 31, 2023
— $
—
— $
—
Granted
15,069 $
19.51
$
294
Vested
— $
—
$
—
Canceled/Forfeited
— $
—
$
—
Outstanding, December 31, 2024
15,069 $
19.51
0.50
$
294
Cumulative compensation expense attributable to the cash-settled RSUs can range from zero to a maximum based on
the total number of units vesting multiplied by closing price of our common stock on the vesting date.
F - 21
Performance Share Units
In connection with the PSUs granted to our CEO, Chief Operating Officer (“COO”) and Chief Financial Officer
(“CFO”) potential payout for the PSU awards is based upon performance for a three-year period ending December 31, 2026 for
the CEO and COO and December 31, 2027 for the CFO measured against relative total shareholder return (“TSR”) compared to
a peer group of companies as established by the Compensation Committee. The PSU award payout ranges from zero (if the
Company ranks below the 31.25 percentile) and up to 200% (if the Company ranks first) based upon our relative TSR
performance ranking (subject to certain caps based on absolute TSR as defined in the PSU agreements).
With respect to vesting, the PSUs have both a service condition and a market condition. Due to the presence of the
TSR measurement for the common equity of the peer companies, including NGS common stock, which is deemed a “market
condition,” the grant-date fair values of the PSUs have been determined using a binomial pricing model, or a Monte Carlo
simulation model.
The following table summarizes the weighted average grant date fair values of PSUs granted and the assumptions used
in the Monte Carlo simulation model for the determination of the grant date fair values of our PSUs for the year ended
December 31, 2024:
Weighted-average grant date fair value of PSUs granted
$
22.47
Risk free rate
4.09% to 4.39%
Expected volatility
43.4% to 44.2%
Expected dividend yield
— %
The following table summarizes all PSU activity during the year ended December 31, 2024:
Number
of
Shares
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
Outstanding, December 31, 2023
— $
—
— $
—
Granted
56,764 $
22.47
$
—
Vested
— $
—
$
—
Canceled/Forfeited
— $
—
$
—
Outstanding, December 31, 2024
56,764 $
22.47
2.22
$
—
As of December 31, 2024, there was a total of approximately $1.0 million of unrecognized compensation expense
related to the unvested portion of the PSUs. This expense is expected to be recognized over the next 2.2 years.
Stock Option Plan
The Stock Option Plan provides for the granting of incentive and non-qualified stock options to our employees for up
to 1,000,000 shares of common stock. After consideration of the activity described in detail below, a total of, 407,419 shares
remained available for grant as of December 31, 2024. The last date that grants can be made under the Stock Option Plan is
February 28, 2026.
Option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant;
those option awards generally vest in equal increments over three years of continuous service and have ten-year contractual
terms. Certain option and share awards provide for accelerated vesting if there is a change in control of the Company (as
defined in the Stock Option Plan).
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model
that applies the assumptions noted in the following table. The risk-free rate for periods within the contractual life of the option
is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of options granted is based on the
vesting period and historical exercise and post-vesting employment termination behavior for similar grants. We use historical
data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have
similar historical exercise behavior are considered separately for valuation purposes.
F - 22
The following table summarizes the weighted average grant date fair values of options granted and the assumptions
used in the Black-Scholes option valuation model for their determination for the periods presented:
Year Ended December 31,
2024
2023
2022
Weighted-average grant date fair value of options granted
$
12.25
$
5.11
$
4.24
Risk free rate
4.36 %
3.99 %
2.99 %
Expected life
6.53
6.49
2.67
Expected volatility
48.25 %
47 %
54.5 %
Expected dividend yield
— %
— %
— %
The following table summarizes all option activity during the year ended December 31, 2024:
Number
of Shares
Underlying
Stock Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
Outstanding, December 31, 2023
129,751 $
20.59
4.10
$
274
Granted
49,000 $
22.73
$
—
Vested
(23,666) $
12.40
$
286
Canceled/Forfeited
(11,667) $
21.99
$
11
Expired
(29,667) $
30.41
$
—
Outstanding, December 31, 2024
113,751 $
20.44
5.84
$
747
Outstanding, Exercisable, December 31, 2024
64,753 $
19.93
3.30
$
469
The following table summarizes information about our stock options outstanding at December 31, 2024:
Range of Exercise Prices
Options Outstanding
Options Exercisable
Shares
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
$0.01-$18.00
29,834
7.25
$
10.72
23,168 $
10.67
$18.01-$26.00
66,167
6.19
$
22.76
23,835 $
22.81
$26.01-$30.00
17,750
2.13
$
28.15
17,750 $
28.15
113,751
5.84
$
20.44
64,753 $
19.93
The following table summarizes changes in our unvested stock options during the year December 31, 2024:
Shares
Weighted
Average
Grant Date
Fair Value
Unvested at December 31, 2023
24,335 $
5.45
Granted
49,000 $
12.25
Vested
(17,170) $
5.57
Canceled/Forfeited
(7,167) $
11.28
Unvested at December 31, 2024
48,998 $
11.35
We recognized stock compensation expense from stock options of $0.2 million, $0.1 million and $0.3 million for the
years ended December 31, 2024, 2023 and 2022, respectively. As of December 31, 2024, there was $0.3 million of unamortized
compensation cost related to unvested stock options.
F - 23
Other Long-Term Incentive Compensation
From time to time and under certain circumstances, the Compensation Committee of our Board of Directors may grant
cash-based incentive compensation awards that vest over periods greater than one year as a supplement to stock-based awards
and in addition to customary annual incentive cash bonuses. Total compensation expense related to these long-term incentive
awards was approximately $0.4 million and $1.0 million, respectively, for the years ended December 31, 2023 and 2022. The
awards associated with these compensation charges were fully vested and settled in cash prior to December 31, 2023.
Accordingly, there were no amounts remaining as unrecognized compensation and no outstanding obligations as of December
31, 2024 for these and any similar awards.
17.
Restructuring Activities
During the years ended December 31, 2023 and 2022, we incurred certain restructuring charges in the form of
severance and related compensation benefits in connection with a transition in executive leadership. Accordingly, we incurred
$2.3 million in severance and related compensation charges in connection with our former CEO as well as $0.2 million of
severance charges attributable to the resignation of the interim CEO during 2022. We incurred an additional $1.2 million of
severance and related compensation charges attributable to this transition during 2023. As of December 31, 2023, there were no
amounts outstanding with respect to this action. During the year ended December 31, 2024, we incurred an amount less than
$0.1 million associated with certain restructuring activities at our assembly facilities for which there were no amounts
outstanding as of December 31, 2024.
18.
Related Party Transactions
During the years ended December 31, 2024, 2023 and 2022 we sold $0.7 million, $0.9 million, and $0.6 million,
respectively, of compressor components to N-G Joint Venture, LLC (“N-G”) our 14% joint venture. As of December 31, 2024
and 2023, we had accounts receivable of $0.1 million and $0.2 million with N-G, respectively.
During the years ended December 31, 2024 and 2023, we paid less than $0.1 million and $0.3 million, respectively, to
Mill Road Capital, a large shareholder, for expense reimbursements primarily related to our cooperation agreement. No
amounts were paid during 2022.
19.
Earnings (Loss) per Share
The following table reconciles the numerators and denominators of the basic and diluted earnings (loss) per share
computation for the periods presented:
Year Ended December 31,
2024
2023
2022
Numerator for basic and diluted earnings (loss) per share:
Net income (loss)
$
17,227 $
4,747 $
(569)
Denominator for basic earnings (loss) per common share:
Weighted average common shares outstanding - Basic
12,412
12,316
12,305
Denominator for diluted earnings (loss) per share:
Weighted average common shares outstanding
12,412
12,316
12,305
Dilutive effect of stock-based compensation awards
142
67
—
Weighted average common shares outstanding - Diluted
12,554
12,383
12,305
Earnings (loss) per share:
Basic
$
1.39 $
0.39 $
(0.05)
Diluted
$
1.37 $
0.38 $
(0.05)
During the year ended December 31, 2024, 13,345 shares of restricted stock and RSUs and 83,917 stock options were
not included in the computation of diluted earnings per share due to their antidilutive effect. During the year ended December
31, 2023, 10,984 shares of restricted stock and RSUs and 129,751 stock options were not included in the computation of diluted
loss per share due to their antidilutive effect. During the year ended December 31, 2022, 250,847 shares of restricted stock and
RSUs and 201,584 stock options were not included in the computation of diluted earnings per share due to their antidilutive
effect.
F - 24
20.
Subsequent Events
On January 28, 2025, we announced our intent to close our repair and overhaul facility in Midland, Texas and cease
operations by April 1, 2025. In addition, we have initiated efforts to market the facility and the underlying real property. We
anticipate terminating approximately 13 employees that work at this facility and will be offering customary termination and
severance benefits.We have evaluated all events subsequent to the balance sheet date as of December 31, 2024 and through the
date this report was issued and determined that, other than the action noted above, there have been no other events that would
require adjustments or additional disclosure to our Consolidated Financial Statements.
F - 25