Marvelous Microcaps
Natural Gas Services Group, Inc.
INTRO:
At Perritt Capital Management, we take focused positions in companies where we have a high conviction in their success; companies that are out of the mainstream of small cap investing. To highlight our process, we are pleased to present the newest installment in our ongoing series “Marvelous Microcaps – Big Ideas on Small Companies.” This series profiles companies that we believe have a niche in their existing markets or are launching a product that could disrupt their marketplace.
THE COMPANY:
Natural Gas Services Group, Inc. is a provider of natural gas compression equipment and services to the energy industry in the continental United States. They engineer and fabricate, operate, rent, and maintain natural gas compressors for oil and natural gas production and plant facilities. They also design, manufacture, and sell a line of reciprocating natural gas compressor frames, cylinders, and parts. The company also provides flare tip burners, ignition systems, and components used to combust waste gases before entering the atmosphere. They market their products to exploration and production companies that utilize compressor units for artificial lift applications.
The company offers products and services to companies operating in Colorado, Michigan, New Mexico, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming. They operated a fleet of 1,995 small, medium, and large horsepower units totaling 561,000 horsepower. They were founded in 1998 and are headquartered in Midland, Texas.
WHY WE OWN: THE PERRITT ADVANTAGE
We were attracted to Natural Gas Services Group due to their service-oriented approach to serving the oil and gas industry. The advent of shale oil production necessitated the use of gas compression as an integral part of enhancing the production of oil wells through gas-lift operations. Essentially, pumping gas into an oil well to increase pressure and enhance the production profile of the well. In fact, compression equipment is often required to boost a well’s production profile to economically viable levels. Natural Gas Services Group is positioned well to meet the demand in the industry for these services by leasing out compression equipment.
Oil production is growing in the U.S. and is slated to continue to grow. It has increased dramatically in the past 10 years growing from roughly 8.5 million barrels per day to 13.2 million barrels per day. Much of this increase in production has come from wells drilled with unconventional methods like fracking and horizontal drilling. Most of these new wells require some form of artificial lift to enhance their production profiles and make them economically viable. At the same time, supply chain shortages and long lead times from Original Equipment Manufacturers (OEMs) have led to a shortage of compression equipment available in the marketplace. This has created an environment where Natural Gas Services Group can sign customers up for attractive lease terms.
Natural Gas Services Group signs up customers with initial rental terms of 6-60 months with many customers continuing to rent past the initial term. This is due to high switching costs born by the producers for switching out their equipment for a competitor’s. This leads to strong recurring revenues for the company with strong, stable cashflows. In addition to the compression equipment, Natural Gas Services Group provides leading, proprietary systems to enhance recovery in the form of their System Management and Recovery Technology. This technology platform helps to limit unplanned shutdowns and increases productivity by 5-8%. They also offer technologies that help to reduce emissions from wells by burning off waste gases prior to them entering the atmosphere.
In keeping with the adage regarding the gold rush that the way to make money was by selling picks and shovels, we believe that buying a company that provides essential services to oil and gas producers is an effective way to play the oil boom. Natural Gas Services Group does just that, providing essential services in an area that is experiencing scarcity due to supply chain issues and long lead times for new equipment. We believe these macro factors coupled with the long-term nature of their contracts makes for a steady, predictable cash flowing business that makes for a great investment.