What changed in this filing

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Item 1. Business

2021-03-31 compared with 2020-03-31 · 46 added, 43 removed, 213 unchanged (29% of the section changed)

Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Natural Gas Services Group,” the “Company”, "NGS", “we,” “us,” “our” or “ours” refer to Natural Gas Services Group, Inc.

Certain specialized terms used in describing our natural gas compressor business are defined in "Glossary of Industry Terms" on page 8.

We are a leading provider of natural gas compression services and equipment to the energy industry.

Certain specialized terms used in describing our natural gas compressor business are defined in "Glossary of Industry Terms" on page i.

Smaller Reporting Company

We are a “smaller reporting company” as defined by the SEC.

As such, we are eligible to comply with the scaled disclosure requirements in several Regulation S-K and Regulation S-X items.

Our disclosures in this Annual Report reflect these scaled requirements.

Natural Gas Services Group, Inc.

(the "Company", “NGS”, "Natural Gas Services Group", "we" or "our") (a Colorado corporation), is a leading provider of natural gas compression equipment and services to the energy industry.

The Company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for oil and natural gas production and plant facilities.

NGS is headquartered in Midland, Texas, with fabrication facilities located in Tulsa, Oklahoma and Midland, Texas, and service facilities located in major oil and natural gas producing regions in the U.S.

The Company has shifted its focus over the last several years to medium to large horsepower applications that apply to natural gas associated with oil-weighted production.

Our primary customers are exploration and production companies that utilize our compressor units for artificial lift applications, i.e., production enhancement enabled with high-pressure gas compression equipment, on unconventional oil wells on single and multi-well pads.

In addition, our customer base includes E&P companies that are focused on natural gas-weighted production (with typically smaller horsepower applications) as well as midstream companies.

In addition, our customer base includes oil and natural gas exploration and production ("E&P") companies that are focused on natural gas-weighted production (with typically smaller horsepower applications) as well as midstream companies.

The Company's largest rental area is the Permian Basin (approximately 45.0% of rental revenues in 2020), with the large majority of its remaining rental revenue being generated in other oil and natural gas producing regions and plays in Texas, New Mexico and Oklahoma, including the San Juan Basin, the Texas Panhandle/western Oklahoma, the Barnett Shale, and central Oklahoma.

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Our rental contracts typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months.

As of December 31, 2019, we had 2,304 natural gas compression units in our rental fleet with 429,650 horsepower.

At year end 2019, we had 1,419 natural gas compression units in service with 299,836 horsepower, resulting in horsepower utilization of 69.8%, We added 82 units with approximately 74,000 horsepower to our fleet during 2019.

Fifty-four of those units were 400 horsepower or larger (including 49 at 1,380 horsepower each), representing approximately 95% of the horsepower added.

Our revenue increased 19.8% to $78.4 million from $65.5 million for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This growth was largely the result of our rental revenue increasing 18.7% to $56.7 million in 2019 from $47.8 million in 2018.

For the year ended December 31, 2019 the Company reported a net loss of $13.9 million as compared to net loss of $466,000 for the year ended December 31, 2018.

In addition, the Company's adjusted EBITDA increased 10.5% to $24.0 million in 2019 from $21.8 million in 2018.

As of December 31, 2020, our rental compression fleet was comprised of 2,224 natural gas compression units with 438,524 horsepower.

Of this total, we had 1,274 natural gas compression units in service with 287,646 horsepower, resulting in horsepower utilization of 65.6%.

We added 42 units with approximately 23,265 horsepower to our fleet during 2020.

24 of those units were 400 horsepower or larger (including 10 at 1,380 horsepower each), representing approximately 89% of the horsepower added.

Our revenue decreased 13.2% to $68.1 million from $78.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This decline was largely the result of our sales revenue decreasing 71.4% to $5.7 million in 2020 from $19.8 million in 2019.

For the year ended December 31, 2020 the Company reported net income of $1.8 million as compared to a net loss of $13.9 million for the year ended December 31, 2019.

In addition, the Company's adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") decreased 5.5% to $22.7 million in 2020 from $24.0 million in 2019.

See "Item 6, Selected Financial Data, Non-GAAP Financial Measures" for a reconciliation of adjusted EBITDA to its closest GAAP financial measure, net (loss) income.

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As of December 31, 2020, we had 2,224 natural gas compressors in our rental fleet totaling 438,524 horsepower.

As of year end 2019, we had 1,419 natural gas compressors totaling 299,836 horsepower rented to 95 customers.

Of this total, we had 1,274 natural gas compressors totaling 287,646 horsepower rented to 80 customers.

The utilization rate of our rental fleet as of December 31, 2020 was 57.3%, while our horsepower utilization for the same period was 65.6%.

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The market for compression equipment and services is dependent on the condition of the oil and natural gas industry, including the capital expenditure budgets of domestic oil and gas companies.

The level of activity and capital expenditures has generally been dependent upon the prevailing view of future gas and 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 countries and Russia, and other factors.

In addition, capital expenditure budgets of energy companies have become significantly more constrained over the last several months due to the deterioration of energy equity markets and strong demands from institutional investors that companies keep capital spending within operating cash flow and return capital through dividends and share repurchases.

The level of activity and capital expenditures has generally been dependent upon the prevailing view of future gas and 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 countries and Russia, and other factors.

In addition, capital expenditure budgets of energy companies have become significantly more constrained over the last several year due to the deterioration of energy equity markets and strong demands from institutional investors that companies keep capital spending within operating cash flow and return capital through dividends and share repurchases.

Oil and natural gas prices and the level of development and production activity have historically been characterized by significant volatility.

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During this time, the market began to experience a decline in oil prices in response to oil demand concerns due to the global economic impacts of COVID-19.

In addition, recent events concerning OPEC and Russia resulted in Saudi Arabia significantly discounting the price of its crude oil, as well as Saudi Arabia and Russia significantly increasing their oil supply.

These actions have led to significant weakness in oil prices and ensuing reductions of exploration and production company capital and operating budgets.

As of March 31, 2020, the full impact of the COVID-19 outbreak continues to evolve daily.

With the significant decline in oil prices as well as the general economic decline caused by the impacts of COVID-19, we expect utilization to decline among our smaller horsepower and medium horsepower units during the remainder of 2020 after a minimal decline during the first quarter of 2020.

These developments have led to significant weakness in oil prices and ensuing reductions of exploration and production company capital and operating budgets.

With the significant decline in oil prices as well as the general economic decline caused by the impacts of COVID-19, we expect utilization to continue to decline among our smaller horsepower and medium horsepower units during the remainder of 2021.

In terms of sales, we expect minimal compressor sales for the year due to much lower capital expenditure budgets throughout the industry, including those of our major customers.

Finally, we have recently experienced and expect to continue to experience pricing pressure from our customers and competitors until industry and economic conditions improve.

Finally, we continue to experience pricing pressure from our customers and competitors until industry and economic conditions improve.

We are currently experiencing no issues with potential workforce and supply chain disruptions.

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Nevertheless, if any of these circumstances change, our business could be adversely affected.

While management anticipates that the industry and economic impact of the pandemic and OPEC’s actions will have a negative effect on its results of operations in 2020 and perhaps beyond, the degree to which these factors will impact our business remains uncertain.

While management anticipates that the industry and economic impact of the pandemic will have a negative effect on its results of operations in 2021 and perhaps beyond, the degree to which these factors will impact our business remains uncertain.

Please read Item 1A, Risk Factors, in this report.

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Sales and rental income to Occidental Permian, LTD.

("Oxy") for the years ended December 31, 2019 and 2018 amounted to 36% of and 28% of our revenue, respectively.

Sales and rental income to Oxy and Devon Energy Production, Inc.

for the year ended December 31, 2017 amounted to 20% and 15% of our revenue.

("Oxy") for the years ended December 31, 2020 and 2019 amounted to 30% and 36% of our revenue, respectively.

No other single customer accounted for more than 10% of our revenues in 2020 or 2019.

Oxy amounted to 35% of our accounts receivables as of December 31, 2019 and 26% of our accounts receivable as of December 31, 2018.

Oxy amounted to 35% of our accounts receivable as of December 31, 2020 and 35% of our accounts receivable as of December 31, 2019.

No other customers amounted to more than 10% of our accounts receivable as of December 31, 2020 and 2019.

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• persons who disposed of or arranged for the disposal of "hazardous substances" found at sites.

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.

For example, on January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands, including in the US Gulf of Mexico, for 60 days.

Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices.

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.

Further, President Biden has announced that he intends to take aggressive action to address climate-related issues and to set the United States on a path to be carbon-neutral by 2050.

Among these developments at the international level is the United Nations Framework Convention on Climate Change, which produced the “Kyoto Protocol”.

More recently, in December 2015, 195 countries adopted under the Framework Convention a resolution known as the “Paris Agreement” to reduce emissions of greenhouse gases with a goal of limiting global warming to below 2°C (36°F).

The Paris Agreement does not establish enforceable emissions reduction targets, but countries may establish greenhouse gas reduction measures pursuant to the agreement.

The agreement went into effect in November 2016.

The United States ratified the Paris Agreement in September 2016 but withdrew in November 2020.

President Biden has since signed an order to rejoin the Paris Agreement.

The new President has also announced a focus on climate-related issues and a goal of setting the United States on the path to net-zero carbon emissions by 2050.

Waste Management and Disposal

The federal Resource Conservation and Recovery Act ("RCRA") and analogous state laws and their implementing regulations govern the generation, transportation, treatment, storage and disposal of hazardous and non-hazardous solid wastes.

During the course of our operations, we generate wastes (including, but not limited to, used oil, antifreeze, filters, paints and

solvents) in quantities regulated under RCRA.

During the course of our operations, we generate wastes (including, but not limited to, used oil, antifreeze, filters, paints and solvents) in quantities regulated under RCRA.

The EPA and various state agencies have limited the approved methods of disposal for these types of wastes.

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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 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.

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However, it is possible that future developments, such as new or increasingly strict requirements and environmental laws and enforcement policies there under, 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, there can be no assurance that attempts to do so will be successful.

While we may be able to pass on the additional cost of

complying with such laws to our customers, 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.

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In addition, the COVID-19 outbreak poses the risk that our suppliers may be prevented from conducting their business at sufficient levels to provide us with necessary equipment and supplies in a timely and sufficient amount.

We have experienced no supply disruptions nor have we received any indications that our supplies will be disrupted during this early stage of the COVID-19 outbreak.

Nevertheless, given that we are in the early stage of the outbreak and the dynamic nature of these circumstances, we cannot reasonably predict or estimate the effects that the COVID-19 outbreak may have on our supply chain.

We have experienced no supply disruptions nor have we received any indications that our supplies will be disrupted during this stage of the COVID-19 outbreak.

To the extent we have difficulties in obtaining needed products and supplies in a timely manner, our results of operations and financial position may be adversely affected.

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The information contained on our website is not part of this Report.

Glossary of Industry Terms

"CiP" - A branded gas compressor product line designed, manufactured and packaged by the Company.

The 'Cylinder in Plane' design results in a compact and vibration-free compressor unit that particularly lends itself to unconventional wellhead applications, air compression and compressed natural gas requirements.

"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.

The gases are piped to a remote, usually elevated, location and burned in an open flame in the open air using a specially designed burner tip, auxiliary fuel, and steam or air.

Combustible gases are flared most often due to emergency relief, overpressure, process upsets, startups, shutdowns, and other operational safety reasons.

Natural gas that is uneconomical for sale is also flared.

Often natural gas is flared as a result of the unavailability of a method for transporting such gas to markets.

"gas lift" – A production enhancement technique whereby natural gas is injected into an oil well to increase/improve the oil production.

"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 shale or tight sandstone.

"reciprocating compressors" – A reciprocating compressor is a type of compressor which compresses vapor by using a piston in a cylinder and a back-and-forth motion.

"screw compressors" – A type of compressor used in low-pressure and vapor compression applications where two intermesh rotors create pockets of continuously decreasing volume, in which the gas is compressed and its pressure is increased.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business