Natural Gas Services Group, Inc. (NGS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call. Natural Gas Services Group to acquire Flatrock Compression Holdings. [Operator Instructions]. I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. These statements may include, among other things, the anticipated benefits of Flatrock acquisition, the expected financial and operational impact of the transaction, anticipated accretion integration plans, future growth opportunities and our expectations regarding leverage, liquidity and shareholder value creation. Investors are cautioned that forward-looking statements are not guarantees of future performance and that the actual results or developments may differ materially from those projected. These statements are subject to risks and uncertainties, including our ability to successfully integrate Flatrock and realize the anticipated benefits of the acquisition as well as other risks described in today's press release and investor presentation and our filings with the SEC, including our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026, and our Form 8-K. These documents can be found in the Investors Relations section of our website at www.ngsgi.com. Natural Gas Services Group undertakes no obligation to update or revise any forward-looking statements, except as required by law. Accordingly, you should not place undue reliance on these statements. In addition, our discussion today will reference non-GAAP financial measures, including adjusted EBITDA and related leverage metrics. For definitions of these measures to the most directly comparable measures under GAAP, please see today's Form 8-K filing. I will now turn the call over to Justin Jacobs, Chief Executive Officer. Justin?

Thank you, Anna. Good morning, everyone. Thank you for joining us. Today is an exciting day for NGS and an important milestone in our company's evolution. This morning, we announced the acquisition of Flatrock Compression, a leading rental compression business operating across the Permian and Eagle Ford basins. This transaction immediately strengthens NGS in several important ways and further solidifies our position as one of the leading compression companies in the industry. Most importantly, it aligns with the strategy we have been discussing with investors for the last several years. Over that time, we have focused on building a larger, stronger, more capable company through disciplined organic growth, operational excellence and thoughtful capital allocation. This acquisition builds directly upon that foundation and improves positioning for the opportunities we see ahead. Before discussing the transaction, I want to thank all the employees of NGS. We would not be in a position to pursue opportunities like this without their hard work, dedication and commitment. Every day, our employees earn the trust of our customers through field safety, strong execution and exceptional service. This acquisition reflects the strength of the platform they have helped build. I would also like to welcome the entire Flatrock team to NGS. Over the past several months, we have had the opportunity to spend significant time getting to know the company, its leadership team and many of its employees. The reputation they have built throughout the industry is well earned, and we are excited to have them join our organization. As we evaluated acquisition opportunities, we were fortunate to find a company that already shared our commitment to operational excellence, customer service and disciplined growth. We purchased Flatrock because they were already doing many of those things we value. Simply put, we believe Flatrock is a great business. Founded in 2001, Flatrock provides rental compression services to customers throughout the Permian Basin and Eagle Ford. The company currently operates approximately 86,000 rented horsepower with a utilization of approximately 95%. Flatrock has grown organically at comparable rates to NGS over the last several years. The fleet is significantly weighted towards large horsepower compression, includes a meaningful electric compression platform. They have assembled an impressive roster of customers, built a highly experienced field organization and established a reputation for execution that is widely respected throughout the industry. Now let me spend a few minutes discussing why we believe this transaction is such a compelling fit for NGS. Many of you have heard me discuss our approach to acquisitions over the last 2 years. While every opportunity is unique, our acquisition framework has remained consistent. When we evaluate acquisitions, we focus on four things: customer mix, basin position, fleet characteristics and valuation. Put simply, we are looking for opportunities that strengthen our customer portfolio, improve our position in key operating basins, enhance our fleet and can be acquired at an attractive valuation. That framework has not changed, and those same criteria have been outlined in our investor presentations for years. What makes this acquisition particularly exciting is that Flatrock checks every one of those boxes and does so at a very high level. It strengthens our customer portfolio, it improves our basin position, it enhances our fleet, and it was completed at an attractive valuation. Let me briefly discuss each. First, Customer mix. One of the most attractive aspects of this acquisition is the quality of the customer relationships that Flatrock has built over more than 2 decades. The company has assembled an impressive roster of customers throughout the Permian Basin and Eagle Ford, including several large publicly traded E&P operators. Prior to the acquisition, Occidental Petroleum and Devon Energy represented approximately 64% of our revenue. Following the transaction, that concentration declines to approximately 54%. At the same time, we have added two new large publicly traded E&P customers and become our third and fourth largest customer relationships. Importantly, there is relatively modest overlap between the two customer bases. This is not simply a combination of existing relationships. It expands our reach, broadens our customer portfolio and creates meaningful opportunities to grow with new customers in the years ahead, particularly considering our access to capital and demonstrated ability to deploy large horsepower. Second, Basin position. The acquisition significantly strengthens our footprint in two of the most attractive compression markets in North America, the Permian Basin and the Eagle Ford. Approximately 80% of Flatrock's horsepower is located in the Permian Basin with a particularly strong position in the Midland Basin. This complements our existing footprint extremely well, creating a stronger position across the Permian and meaningful additional scale in the Eagle Ford. Operational density matters in our business, greater concentration of equipment personnel and customer activity within a basin improves operational efficiency, enhances customer responsiveness and strengthens competitive positioning. This transaction increases our density in two of our key growth areas and strengthens our ability to serve our customers in those markets. Third, Fleet characteristics. Flatrock has assembled a highly complementary fleet that adds approximately 86,000 rented horsepower and brings our combined fleet to approximately 661,000 rented horsepower. The fleet is significantly weighted towards large horsepower compression equipment. It is also primarily a Caterpillar engine, an aerial compressor fleet. We have significant overlap in unit model types, which will provide leverage for parts and maintenance. The Flatrock fleet also meaningfully expands our electric compression platform, approximately 20% of Flatrock horsepower is electric motor driven compared to approximately 7% of NGS' existing fleet. We continue to believe electric compression represents an attractive long-term growth opportunity, and this transaction meaningfully advances our position in that segment of the market. And finally, Valuation. While this transaction is first and foremost about strategic fit, it is also a highly attractive financial acquisition. We acquired Flatrock at approximately 6.2x annualized first quarter 2026 EBITDA, which is pre-synergies. This represents a meaningful discount to NGS's current trading multiple. The transaction is immediately accretive to earnings, cash flow and EBITDA while maintaining a prudent leverage profile. As shareholders ourselves, we remain highly focused on disciplined capital allocation, and we believe this transaction reflects that discipline. When we step back and look at the transaction as a whole, we believe it represents exactly the type of acquisition opportunity we have discussed with investors for years. It strengthens our customer portfolio, it improves our basin position, it enhances our fleet, and it was completed at an attractive valuation. Most importantly, it represents another step in executing the strategy we have constantly communicated to shareholders. With that, I'll turn the call over to Ian to discuss the financial impact of the transaction.

Thank you, Justin. We acquired Flatrock Compression for a total purchase price of $120 million, consisting of approximately $110 million in cash and $10 million of NGS common stock issued at a price based on the 30-day volume-weighted average share price. The transaction was financed through our expanded credit facility and available liquidity. In conjunction with the acquisition, we amended our credit facility and increased total commitments from $400 million to $500 million while maintaining the existing $100 million accordion feature. Following the transaction, we expect pro forma leverage of approximately 3x adjusted EBITDA, which we view as a comfortable and prudent level. Importantly, we continue to maintain substantial liquidity with more than $130 million of available borrowing capacity following closing. This provides ample flexibility to fund future growth, invest in our fleet, pursue additional strategic opportunities when appropriate and continue executing our capital allocation priorities. From a financial perspective, the acquisition is immediately accretive to adjusted EBITDA, earnings, cash flow before considering any potential synergies. We are not providing a separate synergy target. The transaction is compelling on a stand-alone basis before synergies. The principal opportunities for synergies are operating density, route efficiency, procurement, parts and inventory utilization, insurance and administrative overlap, technology deployment and commercial growth with a broader customer base. We expect these benefits to build as integration progresses, and to meaningfully enhance the earnings contribution of the acquired business, while remaining modest relative to the scale of the combined company. While we are not providing updated guidance today, you can expect the impact of the transaction to be reflected in guidance provided during our second quarter earnings call in August. Overall, we believe the transaction enhances our earnings power while maintaining financial flexibility and balance sheet strength. With that, I'll turn the call back to Justin.

Thank you, Ian. Before opening the call for questions, I would encourage everyone to look at the final slide in the investor presentation we released this morning. Many of you have seen that slide before. It has remained the same for several years. We have consistently discussed four primary drivers of value creation at NGS, fleet optimization, asset utilization, fleet expansion, accretive M&A. Today, we are able to put a checkmark next to each of those drivers. Under accretive M&A, we have always discussed four key factors that matter most to us when valuing opportunities, customer mix, basin position, fleet characteristics and valuation. As I discussed earlier, Flatrock checks every one of those boxes and does so at a very high level. It is exactly the type of acquisition we've been discussing with investors for years. It strengthens our customer portfolio, improves our position in key operating basins enhances our fleet and was completed at an attractive valuation. We believe this transaction enhances our ability to create long-term value for shareholders. This is an exciting time for NGS. The compression market remains healthy, demand for large horsepower compression continues to be strong, and we remain optimistic about the opportunities ahead of us. Today's announcement reinforces that outlook. With that, Luke, please open the line for questions.

[Operator Instructions] Our first question comes from Rob Brown with the Lake Street Capital.

Congratulations on the acquisition. Just wanted to get a sense of kind of the fleet makeup. You talked a little bit about some of the characteristics, but maybe further color in terms of fleet age and kind of their kind of growth plans and where they were seeing growth relative to NGS?

Sure. If you look in the investor presentation, Slide 7, we've broken out the mix, at least from a size perspective. And you see it's very similar to NGS with a significant weighting towards the large horsepower. What I will say is similar to NGS, Flatrock has seen their growth in the large horsepower over the last several years. And as I noted in the release, and the call, they have -- they have grown at rates that are comparable to how we've grown organically over the last several years. In terms of the quality of the equipment and -- or maybe you go to makeup first, very similar model types as we look through really all of the different sizes, aligns quite well with where our fleet is in terms of model types, engine types, compressors. And then when it comes to the quality of the equipment itself, we did the extensive diligence in looking at the equipment out in the field. And this is a fleet that has been well maintained and it is operating at a very high level from a performance perspective for their customers. Once again, a very attractive characteristic from our perspective. And we don't expect any amount of maintenance or catch-up maintenance capital on this equipment. It's running very well in the field.

Okay. Great. And then you mentioned some of the categories of synergy opportunities, but I think one of them was new customer kind of growth areas, but could you elaborate further on kind of the opportunities you see in the new customer base to maybe accelerate growth or continue growth?

Sure. So the -- we mentioned specifically, there are two large publicly traded E&P customers of Flatrock. We do not or NGS did not have any business with those customers, prior to the acquisition. And as a smaller private company, Flatrock did not have the access to capital that we are fortunate to have, and so as we look at the opportunities going forward with those customers, in particular, and then the broader Flatrock customer base, we think there are some exciting opportunities for continued rates of high organic growth for us as we're looking to expand with some of those new customers.

Our next question comes from Selman Akyol with Stifel.

Congratulations. Just a couple of quick ones. First of all, could you discuss contract tenor?

Sure. As we look at the percentage that is of their fleet by horsepower base, percentage of the fleet that is under term, it's a very similar percentage and we're not going to see a material movement on the pro forma side. So really pretty similar amount of horsepower that's under contract with generally similar rates and tenor or so not material changes there on a pro forma basis.

Got it. And then as you think about sort of '27 and you were in the sale process. Did they have any orders out there for new equipment coming in?

Meaning looking at Flatrock?

Yes.

The quick answer is, they do. We'll give more color on forward as we get to the -- our second quarter call.

Got it. And then just kind of going back to the synergies and not asking for a number or anything like that. Are you keeping everyone that's at Flatrock? Are you going to keep all the senior management, et cetera?

We are certainly keeping all of the team that has generated really quite impressive growth over the last several years. It was really one of the attractive characteristics of the acquisitions. This is a business that is running quite well, and we want to integrate in all of that operational talent. So that as a combined entity, we can continue growing at higher rates. And so we've repeated a couple of times on the call, this really isn't a -- this is not an acquisition driven by cost synergies. This is an acquisition driven by capabilities and enhancing our competitive position. And so we're excited to integrate the Flatrock members into the team.

And our next question comes from Connor Jensen with Raymond James.

Congrats on the deal. Was just wondering how Flatrock's margin profile compared to NGS and if there's work to do there in pricing or if that should be accretive going forward?

Sure. So I would say that this goes in -- really in conjunction with the quality of the fleet, we see attractive pricing on a unit basis. And when looking at margins, they are at least down to the -- we'll give specifics, but they are generally similar margin characteristics to NGS.

Got it. And then post transaction, you had 3x leverage expectation. Just how are you thinking about the right leverage target for the business? And how should this trend over time?

In terms of a target, we haven't really talked about a public target for leverage with too specific of a granularity. But I would say that we're very comfortable with that leverage and expect as we're proceeding forward through the course of the year. There's obviously a significant cash flow coming off of the business. We'll have more than ample liquidity and capital availability to continue our growth plans.

Our next question comes from Kyle Krueger with Apollo Capital.

I echo everybody else's congratulations. Quick question for you, Justin. Why was Flatrock for sale? And was it an auction process, or a negotiated transaction? And in broad strokes, can you tell us what the ownership profile is, was and if it had -- if the business had traded hands in the recent past?

Sure. I appreciate the interest Kyle. Thanks for joining the call. We're not going to go into the background of kind of the transaction process itself. What I will say is that I've known the Flatrock team actually since prior to becoming CEO of the company. And so there's been a long-standing relationship there between the kind of senior management of the teams. And I would say that it is a very attractive acquisition for NGS, and I think it's a good result for the shareholders of Flatrock who are going to now become or are now shareholders in NGS as well. In terms of the ownership, it is a private company. And what I would say is that it is -- there are a reasonable number of shareholders there. So there's no concentration in terms of the receipt of the $10 million -- no material concentration is a better way to put it in terms of the $10 million of NGS common stock.

[Operator Instructions] Our next question comes from Nate Pendleton with Texas Capital.

Congrats on the acquisition. I wanted to -- I wanted to build on a prior question. Your leverage remains quite modest. And on Slide 8, you highlighted the potential for growth opportunities and the ability to return capital to shareholders. I know it's early, but can you talk about how you view those competing uses of capital based on what you're seeing in the market following the acquisition?

Sure. We've talked on prior calls as we had material increase in our dividend this past quarter and increased it several times since we've initiated that. We've been able to start off at a modest level in terms of return of capital and that, that would be steadily increasing over time without giving specific guidance. And I would reiterate that message to a reasonable degree and said, still not giving specific guidance in terms of how that will increase over time. But I would note that it is still a small percentage, certainly relative to our larger public competitors in terms of the percentage kind of available cash flow that we can deploy into growth areas. As we look at the leverage pro forma, we are still -- have great ability to grow organically. We still have a great ability to look at kind of nonorganic opportunities, which we will continue to do. And so we think this acquisition actually strengthens our ability to continue to grow both organically and inorganically while over time, increasing that return of capital to shareholder kind of portion of the capital allocation.

Got it. And then in the past, we've talked about the difficulty in finding and retaining skilled labor in the field. Can you talk for a moment about the Flatrock team and what adding their expertise provides the combined company more on a forward-looking basis with the potential for growth in compression?

Sure. So when it comes to the field team, you've hit it, Nate, I mean it's one of the most challenging parts of the business is attracting and retaining talented field service professionals. And Flatrock has done -- Flatrock team has done a great job there in building up great capabilities in their field service and in providing great service to their customers. And obviously, we want to keep all of that, all of those people and integrate them in and we think one of the attractive parts of the Flatrock team joining NGS is I think it's going to open up the opportunities they have, both personally and professionally in terms of growth. And so we are excited to have them join in to the NGS team and look forward to working with them for years to come.

And we don't have any other questions.

Well, thank you, everyone, for joining this morning on short notice. Once again, it's truly an exciting day for us, and we're thrilled to be able to make this announcement and look forward to providing more details and a forward look as we get into the second quarter earnings call. And with that, we are finished with our prepared remarks, and I appreciate your time today.

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