Natural Gas Services Group’s Solid Financial Performance Amid Industry Challenges

Natural Gas Services Group, Inc. (NGS) has reported its financial results for the three months ended March 31, 2025, showcasing its resilience in the face of ongoing industry challenges. The company, which primarily rents, designs, sells, installs, services and maintains natural gas and electric compressors, has continued to navigate the volatile oil and gas market effectively.

Rental Revenue Drives Growth

NGS’s primary source of revenue is from renting compressors to its customers under contractual arrangements. During the first quarter of 2025, the company’s rental revenue increased by 15.3% to $38.9 million, compared to $33.7 million in the same period of 2024. This growth was driven by a 10.9% increase in rented horsepower, which reached 492,679 at the end of March 2025, up from 444,220 a year earlier.

The company’s focus on larger, higher-horsepower units has paid off, as these units provide higher rental rates and better profit margins. Despite a decrease in the number of units rented and a decline in the total number of customers, NGS was able to maintain a high utilization rate of 81.7% at the end of the quarter, compared to 81.9% a year earlier.

Improved Adjusted Gross Margin

NGS’s rental adjusted gross margin, which excludes depreciation and amortization, increased by 16.7% to $24.1 million in the first quarter of 2025, up from $20.6 million in the same period of 2024. The rental adjusted gross margin percentage also improved, reaching 61.9% compared to 61.1% a year earlier.

The increase in adjusted gross margin was driven by the growth in rental revenue, which more than offset the higher costs associated with supporting the larger rental fleet, including increased labor and parts costs due to inflationary pressures.

Shift Away from Sales

NGS has been shifting its focus away from the sale of custom-assembled compressors and parts, as well as the exchange and rebuilding of customer-owned compressors. Sales revenue declined by 23.0% to $1.9 million in the first quarter of 2025, compared to $2.5 million in the same period of 2024.

The company’s sales adjusted gross margin turned negative, reaching -$0.1 million, compared to a positive $0.3 million a year earlier. This decline was primarily due to the fixed overhead costs associated with maintaining the company’s assembly, repair, and overhaul facilities, which are not easily scalable with the lower sales volume.

Aftermarket Services Contribute Marginally

Aftermarket services, which include routine or call-out services on customer-owned equipment and the commissioning of new units, contributed a relatively small portion of NGS’s overall revenue. Aftermarket services revenue declined by 18.5% to $0.5 million in the first quarter of 2025, compared to $0.7 million in the same period of 2024.

However, the adjusted gross margin for aftermarket services increased by 61.8% to $0.3 million, reflecting improved profitability in this segment.

Increased Selling, General and Administrative Expenses

NGS’s selling, general and administrative (SG&A) expenses increased by 14.4% to $5.4 million in the first quarter of 2025, compared to $4.7 million in the same period of 2024. This increase was primarily driven by higher salaries, benefits, and commissions, as well as increased information technology support costs to support the company’s growth initiatives.

Stock-based compensation expense also increased by 31.0% to $0.4 million, reflecting grants made in the latter part of 2024.

Depreciation and Amortization Rises

Depreciation and amortization expense increased by 21.9% to $8.6 million in the first quarter of 2025, compared to $7.1 million in the same period of 2024. This increase was primarily due to the depreciation of the higher-horsepower units that have been added to the company’s rental fleet over the past year, in line with NGS’s strategic focus on these larger, more profitable units.

Inventory Allowance and Retirement of Rental Equipment

During the first quarter of 2025, NGS recorded a $0.1 million increase in its inventory allowance, primarily due to the transfer of inventory from its Midland, Texas facility, which was closed at the end of March 2025. The company also retired certain small and medium-horsepower compressor units, resulting in a $0.7 million charge.

Improved Interest Expense and Gain on Asset Sales

Interest expense increased by 8.0% to $3.2 million in the first quarter of 2025, compared to $2.9 million in the same period of 2024. This increase was primarily due to lower capitalized interest, as certain projects were completed during the quarter.

The company also recognized a $0.1 million gain on the sale of assets, primarily trucks, during the first quarter of 2025.

Solid Cash Flows and Liquidity

NGS’s cash flows from operating activities increased significantly, from $5.6 million in the first quarter of 2024 to $21.3 million in the first quarter of 2025. This improvement was driven by growth in accounts payable, better billing and collection processes, and higher realized margins from the company’s rental business.

The company’s capital expenditures, primarily for new rental equipment, increased from $10.9 million in the first quarter of 2024 to $19.3 million in the first quarter of 2025, as NGS continued to invest in its rental fleet to meet customer demand.

As of March 31, 2025, NGS had $2.1 million in cash on hand and $132.0 million available for borrowing under its $400.0 million credit facility, prior to the recent Fourth Amendment that increased the facility to $500.0 million. The company’s debt-to-total capitalization ratio stood at 39.2% at the end of the quarter.

Outlook and Challenges

The oil and gas industry, which is a key driver of NGS’s business, has historically been cyclical and subject to volatility in commodity prices. The company’s performance is closely tied to the production levels and capital expenditures of its exploration and production (E&P) customers.

While the market outlook for natural gas production in the U.S. remains steady, short-term price volatility remains a factor due to weather, geopolitical influences, and shifts in LNG exports. NGS believes opportunities for increased utilization of its small and medium-horsepower units are supported by continued investment in shale gas development, particularly in the Permian Basin and Marcellus Shale.

The company’s ability to maintain and grow its rental business will be crucial in navigating the industry’s challenges. NGS’s focus on larger, higher-horsepower units has proven successful, and the company will need to continue this strategy while also managing its costs and capital expenditures prudently.

Overall, NGS’s solid financial performance in the first quarter of 2025, with growth in rental revenue and improved adjusted gross margins, demonstrates the company’s resilience and ability to adapt to the changing industry landscape. As the company continues to execute its strategic initiatives, it will be well-positioned to capitalize on opportunities and weather any future industry downturns.