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Description of Business
3 Months Ended
Mar. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business Description of Business
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 basins in the U.S.

Recent Events

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The effects of the COVID-19 outbreak, including actions taken by businesses and governments to contain the spread of the virus, have resulted in a significant, rapid decline in global and U.S. economic conditions. This significant drop in economic activity has caused global demand for crude oil to drastically decline. According to the International Energy Agency’s (“IEA”) Oil Market Report for April 2020, global crude oil demand during the second quarter of 2020 is expected to decline 23.1 million barrels per day compared to the second quarter of 2019, a decrease of more than 20%.

In March 2020, discussion between OPEC and Russia (“OPEC+”) resulted in Saudi Arabia significantly discounting the price of its crude oil, as well as Saudi Arabia and Russia significantly increasing their oil supply in April 2020. The dramatic decline in crude oil demand combined with this increase in supply resulted in unprecedented storage issues and a resulting severe lack of takeaway capacity for oil producers. As a result, crude oil prices reached record or multi-year lows in April. West Texas Intermediate (“WTI”) crude oil traded below $20 per barrel and Brent crude oil traded below $30 per barrel during the second half of April, including an anomalous trading day where WTI traded at negative values on low volume close to the end of a contract trading month. On May 6, 2020, WTI closed at $23.99 per barrel, while Brent closed at $29.72 per barrel.

Given current price levels and takeaway issues, domestic producers have been rapidly shutting in production, and drilling and completion activities among exploration and production companies have dramatically declined. In April 2020, OPEC+ agreed to cut production by 9.7 million barrels per day starting in May 2020, and the IEA is projecting global oil production to drop by approximately 12 million barrels per day in May 2020. Nevertheless, given the massive decline in crude oil demand due to COVID-19, the imbalance in the global oil markets is expected to keep prices down through the remainder of 2020.

These issues have resulted in an increasing number of unit returns and shut-in notices from our customers during April 2020. While we witnessed minimal change in our unit and horsepower utilization during the first quarter of 2020 compared to year-end 2019, we expect a meaningful drop in utilization among our small and medium horsepower units during the second and third quarters of 2020. Accordingly, we expect this drop in utilization and pricing pressures to negatively impact our rental revenue, rental margins and overall financial performance for the remainder of 2020. In addition, given the current economic and industry backdrop, we expect compressor sales to be minimal for the remainder of 2020, as exploration and production companies have significantly reduced their capital expenditures budgets.

We have implemented various cost cutting measures with respect to operating expenses and capital expenditures. Our operating expense reductions include reductions in our headcount from both layoffs and attrition, wage freezes, centralization of certain processes for better cost control, and the enlistment of our suppliers in our cost cutting efforts. We continue to review additional opportunities to become more efficient. In addition, as we have done during prior downturns, we have reduced our capital expenditures budget. After we spent $6.7 million in capital expenditures during the first quarter of 2020, we plan to only incur another $5-$7 million in capital expenditures for the remainder of 2020, bringing our 2020 capital expenditures budget to $12-$14 million, down from $69.9 million in 2019.

Finally, in keeping with current commercial precautions and practices in our industry, we have implemented new guidelines to mitigate health risks to our employees and customers during this outbreak. We have adopted remote and staggered work processes at our Midland headquarters, and have adapted our field and fabrication work processes as well. To
date, our field operations have continued largely uninterrupted, as the U.S. Department of Homeland Security designated our industry as part of our country’s critical infrastructure. Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain operations or caused us to incur significant costs. In addition, we have not experienced any supply chain issues in connection with the COVID-19 outbreak.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company's financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity during 2020.