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Description of Business | 9 Months Ended
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Sep. 30, 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, resulted in a significant, rapid decline in global and U.S. economic conditions. This significant drop in economic activity caused global demand for crude oil to drastically decline. According to the International Energy Agency’s (“IEA”) Oil Market Report for July 2020, global crude oil demand during the second quarter of 2020 declined 16.4 million barrels per day (“MMbpd”) compared to the second quarter of 2019, a decrease of more than 15%. 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. In April 2020, OPEC+ agreed to cut production by 9.7 MMbpd starting in May 2020, while Saudi Arabia voluntarily cut another 1 MMbpd starting in June 2020. Meanwhile, oil production dropped dramatically in non-OPEC countries, including the U.S. Burdened by low prices and takeaway issues, U.S. producers (including several of our customers) shut in production to varying degrees in April and May, and drilling and completion activities dramatically declined. According to IEA’s Oil Market Report for August 2020, U.S. production in May dropped 2 MMbpd from April and 2.9 MMbpd from its all-time high in November 2019. According to IEA’s July report, global oil supply fell to a nine-year low of 86.9 MMbpd in June. As states throughout the U.S., as well as many other countries around the world, began to lift restrictions and reopened their economies to varying degrees, global demand for crude oil partially recovered. This increased demand, combined with the production cuts mentioned above, resulted in the oil markets coming back into balance. After trading below $20 per barrel in the second half of April and averaging $28.53 per barrel in May, WTI crude oil has averaged approximately $40 per barrel from June 1 through early November with greatly reduced price volatility. While oil markets have remained in balance, crude oil supply and demand grew significantly during July and August. According to IEA's Oil Market Reports for August and September 2020, global supply grew by a combined 3.6 MMbpd, while according to IEA’s Oil Market Report for October 2020, global demand in July increased 3.4 MMbpd from June. These issues discussed above resulted in an increasing number of unit returns and shut-in notices from our customers during April and May 2020, which primarily impacted our small (125 HP or less) and medium (126 HP – 399 HP) horsepower units. In late May and throughout June as oil prices partially recovered and stabilized, we received restart notices for several wells that were recently shut in. As a result, our rental revenue, unit utilization, and horsepower utilization declined 6.0%, 5.2% and 4.5%, respectively, in the second quarter when compared to the first quarter of 2020. While we continued to receive several additional restart notices in July and August for wells that were recently shut-in, our utilization has remained stable from June through September. Compared to the second quarter, the Company’s rental revenue declined 1.8%, while the Company’s unit utilization and horsepower utilization remained steady (0.1% and 0.2% increases, respectively) in the third quarter. Unit pricing has also been stable since June. Nevertheless, risks remain high in this environment. As restrictions have been reduced in many states and countries, the rate of COVID-19 infections, hospitalizations and deaths has increased. Since October, the rate of infections has risen very quickly in several countries, with the U.S. setting new records for daily infections in November. This has resulted in a reinstatement, to varying degress, of restrictions in several states and countries, including several European countries. If states and countries need to put further restrictions in place to help prevent the spread of the virus, crude oil demand could decline again. Due to the resurgence of COVID-19 in Europe and the United States, the IEA (in its November Oil Market Report) lowered its near-term global demand outlook for the remainder of 2020 and the first quarter of 2021. While positive news about potential vaccines has provided some support for oil prices, the IEA notes that vaccines are unlikely to significantly boost oil demand until well into 2021. All of these risks could negatively impact oil prices, which would impact our utilization, rental revenues and overall financial performance during the remainder of 2020 as well as 2021. Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2020 and early 2021, as exploration and production companies have significantly reduced their capital expenditures budgets. In regards to our costs, we implemented various cost cutting measures with respect to operating expenses and capital expenditures during the second quarter. Our operating expense reductions included 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. These cost cutting measures helped our financial performance and liquidity during the third quarter, and we expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2020 and into 2021. In addition, as we have done during prior downturns, we have significantly reduced our capital expenditures budget. We invested $12.0 million in capital expenditures during the first nine months of 2020, including $1.0 million during the third quarter of 2020. Depending on customer needs, we plan to incur another $7-$9 million in capital expenditures during the fourth quarter of 2020, bringing our 2020 capital expenditures budget to $19-$21 million, down from $69.9 million in 2019. Finally, in keeping with current commercial precautions and practices in our industry, we have continued to implement guidelines to mitigate health risks to our employees and customers during this outbreak. We adopted remote work processes at our Midland headquarters. Due to continued and resurgent positive COVID-19 cases in the Midland area, including exposure and positive tests among the Company’s professional staff and immediate families, the Company’s corporate headquarters has remained closed through the date of this filing, and is staffed at minimum levels throughout the past and present quarter. Our continued office closure and staffing challenges resulted in delays in our collection and assimilation of financial data related to the completion of our interim financial statements required for this filing. In addition, we 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 of service 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 the remainder of 2020 or 2021.

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