Natural Gas Services Group, Inc. Stock

Thank you. You are muted on this call. This call is being recorded. Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter 2 earnings call. [Operator Instructions] I would now like to turn the call over to Ms. [ Hannah Delgado ]. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meanings of the federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and are not guaranteed to be effective, that actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's earnings press release and in our filings with the SEC, including our Form 10-Q for the period ended June 30, 2026, and our Form 8-K.

These documents can be found in the Investors Relations section of our website located at www.investorsrelations.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, financial results may vary materially. In addition, our discussion today will reference certain non-GAAP financial measures including EBITDA, adjusted EBITDA, adjusted net income, and adjusted gross margin, among others. For reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release. I will now turn the call over to Justin Jacobs, Chief Executive Officer. Justin. Thank you.

Thank you, [ Anna Delgado ], and good morning, everyone. Joining me today is [ Ian Eckert ], our Chief Financial Officer. As always, I want to begin by thanking the entire NGS team, including our new colleagues from Flat Rock. I especially want to recognize our field service team whose focus on customer service and strong operational execution drove another record quarter. I want to thank everyone across both organizations who helped us complete the Flat Rock acquisition and who are now working together to integrate our people, systems, and operations. It's an exciting time for NGS.

Our team delivered a record second quarter and a milestone first half of 2026, combining strong execution and organic growth with a strategic, accretive acquisition that materially increased the scale and capabilities of our platform. I usually start these calls by reviewing the details of the quarter. Today, I want to start with strategy. The second quarter results are important, but I think they are best understood in the context of the progress NGS has made over the last several years. We have continually discussed four growth and value drivers with investors: fleet optimization, asset utilization, organic growth, and accretive M&A. These drivers have remained entirely consistent. What has changed is the scale of NGS and the progress we have made against each of them. NGS is a materially larger, stronger, and more capable company than it was 3 years ago, but we do not believe we are close to exhausting the opportunities in front of us. I want to spend a few minutes on what we have accomplished across each of our four growth and value drivers, and importantly, where we see additional opportunities ahead.

First growth and value driver is optimization of the fleet we already own. There are several ways we create value here, but two of the most important over the last 3 years have been pricing and fleet mix. In the second quarter of 2026, pro forma rental revenue per average horsepower per month, assuming a full quarter of Flat Rock revenue, was $28.06. Three years ago in the second quarter of 2023, that number was $21.56. That is an improvement of almost $7 per horsepower per month, or more than 30%, representing a compound annual growth rate of nearly 10%. At the same time, we have fundamentally changed the composition of the fleet. Our rented large horsepower fleet now totals 501,000 horsepower and is 99% utilized. Large horsepower represents 75% of our total rented horsepower.

At the end of the second quarter of 2023, our rented large horsepower fleet was 228,000 horsepower and represented 61% of the total rented horsepower. That means our rented large horsepower fleet has grown approximately 30% annually over the last 3 years and is now the vast majority of our rented fleet. That mix shift matters. Large horsepower equipment generally provides better economics, longer contract duration, and deeper customer relationships. Increasingly, our large horsepower growth also includes electric motor-drive equipment, which has become an important part of our offering, representing nearly 10% of the rented fleet.

Looking ahead, we continue to see opportunity on both price and operating performance. Engine and fabrication lead times remain extended while customer demand remains strong. We believe that combination should support a constructive pricing environment for large horsepower compression. At the same time, we continue to invest in how we capture, integrate, and use data across the organization. This includes financial, operational, and increasingly real-time unit-level information. Our smart platform is one example. We are using predictive analytics to anticipate maintenance needs, improve field service execution, increase uptime, and deploy our people and resources more efficiently. Ultimately, the objective is simple: generate more earnings from every horsepower we already own while providing better service to our customers.

Our second driver is asset utilization. This is about looking across the entire balance sheet and asking a straightforward question: is this asset producing an adequate return for our shareholders? If the answer is no, we need to improve its productivity or convert it into capital that can be deployed somewhere else. Working capital is probably the best example of what we have already accomplished. When I became CEO in February 2024, we finished that quarter with 108 days of accounts receivable. On a pro forma basis, second quarter 2026 DSO was approximately 33 days, representing approximately $22 million of accounts receivable. Reducing DSOs from 108 days to approximately 33 days has effectively created more than $40 million of cash. This is meaningful capital that was already inside the business. We did not need to issue equity or borrow money to create it. We simply needed to manage the asset more effectively. We applied the same philosophy to our income tax receivable. At year-end 2023, we carried an $11.5 million tax receivable that had first appeared on our balance sheet in Q1 2020.

As of June 30, 2026, we had collected $13.8 million of principal and interest, and we subsequently received the remaining $300,000 of interest in July. In total, we converted approximately $14.1 million of a long-standing non-cash asset into cash and brought that matter to a close. We have also materially improved the utilization of the compression fleet itself. Horsepower utilization increased to a record 88.3% in the second quarter from 78.6% 3 years ago, an improvement of almost 10 percentage points. But there is more to do. We are actively marketing our former Midland headquarters and fabrication facility for sale or lease. The two properties have a combined book value of approximately $11 million, and we own four other real estate assets with a combined book value of just over $3 million.

We also see a meaningful opportunity in inventory. Credit procurement, demand planning, and parts standardization should allow us to reduce inventory while improving parts availability, technician productivity, and ultimately fleet uptime. The objective is the same across all of these areas: make every dollar already invested in NGS work harder. Our third growth and value driver is organic growth. The change in the size of NGS over the last 3 years is significant. We ended the second quarter with approximately 759,000 available horsepower compared with approximately 474,000 horsepower in the second quarter of 2023. That represents an increase of approximately 285,000 horsepower. Adjusting for the Flat Rock acquisition, our organic annual growth rate over that period is more than 10%. Importantly, that growth has been heavily concentrated in large horsepower equipment, including electric motor-drive units, supported by longer duration customer commitments.

Another way to look at our organic growth is relative to the public compression industry. At the end of 2022, NGS represented roughly 3% of the horsepower among the four publicly traded pure-play compression companies. Despite that relatively small starting position, we have represented approximately 12% of the organic growth capital deployed by those companies in that period. Our large competitors have grown organically in the low to mid-single digits on an annual basis. We are growing organically at a significantly faster rate. That difference is important. We've consistently deployed growth capital at a rate materially above our relative size, and the result has been continued organic market share gains. Importantly, our objective is not growth for growth's sake. We deploy capital where we believe the expected return justifies the investment, generally supported by long-term customer commitments. The combination of attractive unit economics and growth well above our relative market share is what makes organic growth such an important value driver for NGS.

Looking ahead, we believe that can continue. The long-term growth in LNG exports, increasing natural gas production, and rapidly growing electricity demand, including behind-the-meter power, should require substantially more compression infrastructure. Our objective is not simply to grow with the industry. We intend to continue growing faster than the industry and taking market share.

Our fourth growth and value driver is accretive M&A. With the acquisition of Flat Rock in June, we activated the fourth and final value creation lever that we have discussed with investors. Importantly, we did so after several years of significant organic improvement in the underlying NGS business. We acquired Flat Rock for approximately $120 million, representing approximately 6.2x last quarter annualized adjusted EBITDA before synergies, a material discount to NGS's multiple. Even before considering potential synergies, we acquired a highly complementary business at a multiple below our own. Flat Rock added approximately 87,000 rented horsepower and materially accelerated our electric motor-drive strategy. Approximately 20% of Flat Rock horsepower is electric, compared with 7% for legacy NGS prior to the acquisition.

Strategically, the transaction also increases our horsepower density in the Midland Basin, establishes critical mass in the Eagle Ford, diversifies our customer mix, and adds two large publicly traded E&P customers in the Midland Basin. Looking ahead, importantly, we retain substantial financial flexibility. Even after completing the transaction, quarter-end leverage was 2.77x with $172 million of unused commitments in our facility. That gives us meaningful capacity to continue investing organically and to evaluate additional inorganic opportunities where the strategic fit and returns are compelling.

Taken together, our progress across these four drivers has materially increased the earnings power, utilization, scale, and quality of NGS while preserving balance sheet flexibility. And that stronger platform is particularly valuable because we believe the market opportunity in front of us remains highly attractive. Let me turn to the market outlook. Demand for compression remains strong across our operating footprint, particularly in the Permian Basin, which currently represents approximately 80% of our rental revenue. There continues to be commodity price and geopolitical volatility, but compression demand is ultimately driven by production volumes, throughput, and reliability, and the utilization levels across our fleet demonstrate that the customer environment remains constructive. On the oil side, prices in the mid-70s are supporting improving activity. Rig counts have been moving higher, Permian production remains at record levels, and gas-to-oil ratios continue to increase. That last point is particularly important for compression. As gas-to-oil ratios increase, more natural gas is produced for every barrel of oil. That gas must be gathered, processed, and transported. In each stage, there's a need for compression.

On natural gas, the longer-term outlook remains exceptionally strong. Growing LNG exports, increased power generation demand, data center load growth, and behind-the-meter power generation should require substantially more natural gas infrastructure over the coming years. The United States also occupies an advantaged position as the world's largest LNG exporter and a secure source of supply without some of the geographic choke points affecting other major energy exporting regions. So whether we look at associated gas production in the Permian or longer-term growth in natural gas demand, both point toward a greater need for compression.

At the same time, the supply of new compression equipment remains constrained. Engine and fabrication lead times have extended significantly. For existing compression providers, that combination of growing demand and constrained equipment supply supports high utilization and disciplined pricing, particularly for large horsepower equipment. We're also operating in an inflationary environment. Labor and parts costs increased during the quarter and we expect continued pressure. Lubricants are a relatively small portion of our cost base, but refinery constraints combined with higher crude prices are likely to drive materially higher lubricant costs. Our increased scale, procurement capabilities, and smart-enabled operating platform should help mitigate some of those pressures, but we are not immune to inflation and will remain disciplined on both price and cost.

Overall, our review remains highly positive. Industry fundamentals are strong, equipment supply is constrained, pricing remains constructive, and compression is a mission-critical service for our customers. NGS enters that environment with a larger and better fleet, broader customer relationships, increased basin density, technology-enabled service capabilities, and significant financial flexibility. With that context, I'll turn the call over to [ Ian Eckert ] to discuss what that stronger NGS platform delivered during the second quarter.

Thank you, Justin, and good morning to those joining us today. We ended June with approximately 759,000 available horsepower and approximately 670,000 rented horsepower. Rented horsepower increased 34.3% year-over-year, reflecting the combination of continued organic deployments and the addition of approximately 87,000 rented horsepower through the acquisition of Flat Rock. Organically, we added approximately 5,000 horsepower during the second quarter and approximately 22,000 horsepower during the first half, with electric motor-drive equipment representing well over half of those additions. Based on our contracted deployment schedule and current customer demand, we now expect to deploy at least 55,000 horsepower organically during 2026, up from our previous expectation of 50,000 horsepower.

Horsepower utilization reached a record 88.3%, a significant improvement from the sub-80% utilization levels we reported just 3 years ago, which primarily reflects our investment in large horsepower and electric motor-drive equipment. That combination of greater scale, higher utilization, and improved fleet mix translates into record second quarter financial performance. Turning to the income statement, rental revenue was a record $49.4 million in the second quarter, up $9.9 million, or approximately 25% from the prior year quarter, and up $2.3 million, or approximately 5% sequentially. Importantly, that growth was driven by both increased horsepower and continued pricing execution. However, Flat Rock contributed only approximately half a month of financial performance during the second quarter, including $1.9 million of rental revenue. As a result, the vast majority of the acquisition's financial contribution will first be reflected in our third quarter results.

On a pro forma basis, assuming a full quarter contribution from Flat Rock, rental revenue per horsepower per month was approximately $28.06, an increase of more than 5% year-over-year. That performance reflects the quality of our fleet, the value of our service offering, and our ability to capture price in a constructive market. We also converted that revenue growth into higher profitability despite a challenging inflationary environment. Rental adjusted gross margin increased $6.2 million, or 25.6%, year-over-year, to $30.2 million. Rental adjusted gross margin percentage was 61.1%, up approximately 36 basis points from the prior year quarter. I think that margin performance is particularly notable given continued cost pressure across labor, lubricants, parts, and other operating inputs. It reflects the combined benefit of pricing discipline, improved fleet mix, higher utilization, and strong field service level execution.

Reported SG&A was $9.9 million during the quarter, which included approximately $3.3 million of transaction costs associated with Flat Rock. Excluding those transaction costs and non-cash SG&A, underlying SG&A was approximately $5.8 million, or 11.3% of revenue, compared with 11.6% in the second quarter of 2025. As the business continues to scale, we remain focused on creating additional fixed cost leverage while making the investments necessary to support a larger platform. Adjusted EBITDA reached a record $25.1 million, increasing $5.4 million, or 27.4% year-over-year, and 3.3% sequentially. Importantly, adjusted EBITDA growth year-over-year exceeded revenue growth, demonstrating the operating leverage inherent in the larger platform. Reported net income was $3.8 million, or $0.30 per diluted share, compared with $5.2 million, or $0.41 per diluted share in the prior year quarter. The year-over-year comparison was impacted by the approximately $3.3 million of transaction costs with the Flat Rock acquisition. Excluding those transaction costs, adjusted net income was $6.1 million or $0.47 per diluted share, providing a much better view of the underlying earnings performance of the business.

But I want to make clear for modeling purposes, our second quarter effective tax rate was 30.9%, above the approximately 25% to 26% rate we expect for the full year. The higher quarterly rate was primarily driven by a discrete state tax item following a change in Texas franchise tax depreciation rules, which required a one-time remeasurement of certain deferred tax liabilities associated with property and equipment. We do not view the second quarter tax rate as a run rate. For the full year, we still expect approximately 25% to 26% remains the appropriate range.

Turning to cash flow in the balance sheet, cash provided by operating activities was approximately $25.4 million during the second quarter and $48.5 million for the first half, an increase of roughly 50% compared to the first half of 2025, and we expect a contribution from Flat Rock to further strengthen our cash generation profile. Accounts receivable ended the quarter at approximately $22 million. Reported DSO improved by approximately 4 days sequentially to approximately 39 days. Because the Flat Rock receivables are fully included at quarter-end, while only 19 days of Flat Rock revenue are included in the quarter, reported DSO is not the best run rate measure. Pro forma, for a full quarter of Flat Rock revenue, DSO was approximately 33 days, which is more representative of the performance of the combined business.

Second quarter capital expenditures totaled approximately $18.8 million, including approximately $15.3 million of growth capital and $3.4 million of maintenance capital. First half growth capital expenditures totaled approximately $27.6 million. We expect growth capital spending to increase materially during the second half, as we execute against our contracted deployment schedule. Turning to the Flat Rock transaction, purchase consideration consisted of approximately $108.9 million of cash and $10 million of NGS common stock.

In conjunction with the acquisition, we increased our committed credit facility from $400 million to $500 million while retaining a $100 million accordion. The preliminary purchase price allocation also reinforces the tangible nature of what we acquired. Approximately $100.6 million, or roughly 85% of the purchase price, was allocated to the rental fleet, with less than $1 million recorded as goodwill. In other words, the transaction was overwhelmingly an investment in productive, cash-generating equipment. We ended the quarter with approximately $328 million outstanding under the credit facility, approximately $135 million of available borrowing capacity under the borrowing base, and over $170 million of unused facilities. Quarter-end bank covenant leverage was approximately 2.77x, with substantial headroom relative to our 3.5x leverage covenant, even after funding the acquisitions.

Finally, we returned approximately $1.9 million to shareholders through our second quarter dividend of $0.15 per share and subsequently announced another $0.15 per share dividend for the third quarter. That quarterly dividend is 50% above the $0.10 per share with which we initiated the program 1 year ago. In summary, the second quarter was another record operating and financial quarter for NGS. The combined platform is larger, more productive, and more diversified. We have preserved the liquidity and covenant capacity to continue executing our growth and value levers while still returning capital to shareholders. With that, I'll turn the call back to Justin to discuss our updated 2026 guidance and closing comments.

Thank you, [ Ian Eckert ]. Based on our second quarter performance, the Flat Rock acquisition, contracted organic fleet additions, and our current visibility into the remainder of the year, we are increasing full-year 2026 adjusted EBITDA guidance to $103 million to $108 million from our previous range of $92.5 million to $97.5 million. The increase reflects roughly a half month from Flat Rock in the second quarter, as well as a full second half contribution. To provide some color, we view this as effectively maintaining existing guidance from NGS and layering in the 6.5 months of contribution from the acquisition of Flat Rock. We look forward to reporting our third quarter results where we will have a full quarter of contribution from the Flat Rock acquisition along with the existing NGS results, and we can adjust our guidance as appropriate.

We are also increasing full-year growth capital expenditures guidance to $60 million to $80 million from our previous range of $55 million to $70 million. For clarification, this excludes acquisition consideration. The increase reflects incremental large horsepower and electric motor-drive additions, as well as growth commitments that came to NGS with Flat Rock. Maintenance capital expenditure guidance is now $15 million to $19 million. The modest increase reflects the larger combined fleet. Importantly, the Flat Rock fleet came to us in very good condition and without a meaningful backlog of deferred maintenance.

Our quarterly dividend remains $0.15 per share, reflecting our continued confidence in the durability of the cash flow generated by the business. Before I close, I want to briefly note one additional corporate development. Effective July 20, NGS completed its redomestication from Colorado to Texas and now is a Texas corporation. The primary driver for this change was corporate governance. Our legacy Colorado governing documents included a classified or staggered board and unusually high voting thresholds that made those provisions difficult to change. Redomesticating to Texas provided the most efficient path to adopt new governing documents that better reflect how we believe a public company should be governed. Most importantly, our new governing documents eliminate the staggered board beginning with our annual meeting next year. Every director will stand for election every year. We made this change proactively because we believe it is more shareholder friendly and in the best interest of NGS and our shareholders.

I will close where I started. Over the last 3 years, we have demonstrated our ability to create value across each of our four growth and value drivers. What excites us today is that we continue to see meaningful opportunity across all four. We can generate more earnings from the fleet we already own. We can make underutilized assets and capital more productive. We believe we can continue to grow organically faster than the industry and take market share, and our balance sheet gives us the capacity to pursue additional accretive acquisitions when we find the right opportunities. At the same time, the market backdrop remains very supportive. Compression demand is strong, equipment availability is constrained, and the long-term outlook for natural gas continues to improve. We believe the combination of a stronger platform and significant remaining opportunity across each of our four growth and value drivers positions NGS to continue increasing earnings, cash flow, and long-term value for our shareholders. Luke, we're now ready to open the call for questions.

[Operator Instructions] Our first question comes from Jim Rollyson with Raymond James. Go ahead, please.

Hey, good morning, guys. Great results, and you covered a whole lot of ground this morning. I guess, Justin, you talked about outpacing growth relative to the market, which you guys have been on this trend for a period of time now. If you kind of listen to some of the peers that have kind of talked about the long-term outlook, which continues to be very, very bullish. I've seen some interesting longer-term commitments by others. And my recollection is your growth has been driven in large part by some specific customer opportunities. I'd love to just get an update on how you think about the opportunity set in front of you and what, over time, what you think a sustainable growth CapEx outlook might look like.

Morning, Jim. Thank you. Thanks for joining and the question. You know, as I look at the forward, you know, obviously talked extensively here about the market and the growth that we see going forward and obviously the growth that we've achieved over the last several years. I think that over time, and the Flat Rock acquisition is certainly helpful in this particular point, that growth is going to come from a broader set of customers over time. Our several large disclosed customers will continue to grow with, but we have more opportunities with existing customers to increase the amount of equipment we have with them and substantially so. And there are new opportunity sets in terms of customers that we think we're going to be able to capture some equipment with going forward.

So I think it is continued growth with existing customers, bringing both large and small, and new customer wins out there with, you know, I think we'll be able to hit or be able to capture growth with them. I'm not going to set longer-term targets at this point, really going to point to our track record of materially outpacing the industry. And with what I see and what I've seen people disclose, quite comfortable in saying we'll continue to do that in the future.

Got it. I appreciate that. And just as a follow-up, I think it's pretty related. You talked about fleet optimization and kind of unlocking value there. Maybe just your thoughts on what inning you are around optimizing your current fleet and especially with the added customer list of Flat Rock, maybe how you think about that over time.

I think when it comes to, I break that into a couple of components. And I think we're in different innings on those components. On the pricing side, the numbers I stated earlier, obviously there's been pretty significant price increases. And so I think that will continue, may not continue at the same rates because there has been substantial price increases over the last several years. But I think that will continue. And the second part I would look at is the operational optimization opportunity we have. And I think that is centered around data capture, analysis, and execution or kind of implementation from the learning of that data and then analysis. Not just financial, I think that is across a range of different opportunity types or sets of data, whether financial, operating, unit performance. And in that particular area, I think we are much earlier in the game or in the earlier innings. It's not an opportunity we're going to quantify at this point, but I do think that in terms of execution and delivering for our customers and ultimately for our financial performance, I think it is a material opportunity.

Sounds exciting. I'll turn it back. Thank you, sir.

Thank you, Jim.

Thank you very much. Our next question comes from Nate Pendleton with Texas Capital.

Good morning and congrats on the great update. I wanted to start on the integration of Flat Rock. In the release, you mentioned meaningful opportunities on growth, operating efficiency, and fixed cost leverage. Can you unpack those a bit for us and give us a sense as to how you think about the size of those opportunities?

Yes, good morning, Nate. In terms of the Flat Rock integration, I think the integration is going very well thus far. As it relates to the integration opportunities mentioned on the call, you know, there's clearly some opportunities in terms of route density, procurement scale, commonality in terms of equipment or parts and technician productivity, as well as fixed cost leverage opportunities. We're not going to give a formal synergy target right now. The current guidance that we've provided does not assume material [ labor application ] synergies. So those represent potential upside rather than something required to make the deal work. You know, we viewed this deal as an opportunity to acquire very attractive assets and a strong field service organization. And it certainly wasn't reliant on any synergies that we expect to deliver over the course of the next year.

Got it. Thanks, [ Ian Eckert ]. And as my follow-up, with lead times continuing to extend for new large equipment and the benefits of scale in this industry, can you talk a bit about how you're looking at the M&A landscape post-Flat Rock? Have conversations changed as lead times have extended recently?

I don't know that I would say I've seen any real difference in the M&A opportunities as a result of lead times extending. You know, in terms of how we're looking at the M&A landscape, it's really through the exact same kind of framework that we were using previously and have used consistently applied in the Flat Rock acquisition, will apply going forward. You know, what are the quality of the assets? What are the customers? What are the basins? And ultimately, what's the value? We will look at and have looked at and continue to look at whole company acquisitions, partial acquisitions of competitors or customers' equipment. And so really that framework has been consistent and will remain consistent. And I haven't seen, at least at this point, any real material change or any change that I can think of as it relates directly to the lead timing expansions or extensions.

All right. Thanks for taking my questions.

Appreciate it, Nate. Thank you.

Thank you very much. And next is Rob Brown with Lake Street Capital. Go ahead, please.

Good morning. Just following up a little bit on the constrained kind of lead times and supply environment, where are you seeing kind of the constraints and how are lead times, I guess, extending in those areas?

Yes, I think the, morning, Rob, thanks for joining us. I think it's a consistent story in terms of the drivers of the lead times, long lead times. The engines are typically, this depends on the size of the particular engine, but engines are typically the longest and it's the largest engines that have the longest lead times. And certainly the fabrication is still a constrained area, although less than the largest engines are, and then the compressors are behind that. So, we're seeing for the equipment that we are ordering, we're seeing long lead times, but pretty consistent from 3 months ago, generally. And so that's something that we've been planning for. We feel like our ability to source engines from multiple OEMs provides an advantage for us in terms of procuring equipment to meet our customers' needs in shorter time periods.

Great, thank you. And then, kind of in your comments on gross margin, or question on gross margin, you've had some inflationary pressures, but you also have some scale benefits helping you. Just what's sort of your sense on the gross margin impact overall given the current cross currents?

Yes, Rob. When I take a look at the margins for the second half of the year, you know, we certainly don't expect the first quarter margin of 63.7% to be permanent, as you saw in the second quarter, but we do expect that the underlying fleet economics will remain strong. You know, we do see some second half pressure as it relates to lubricants and other inputs. But lubricants are a relatively small part of the overall cost base. And offsetting that are pricing on new sets and renewals of existing contracts, and a larger mix of high return, large horsepower and electric units, as well as some procurement scale and some synergies from the Flat Rock acquisition. As those things start to catch up with inflation, I think it sets up a reasonably stable second half of the year from a margin perspective in comparison with what we recognized in the second quarter.

Okay, thank you. I'll turn it over.

Thanks, Rob.

Thank you very much. Our next question comes from Josh Jayne with Daniel Energy Partners. Go ahead, please.

Thanks, good morning. I just wanted to follow up on your answer to the last question. So, in talking about offsetting inflationary pressures, you talked about the ability to, I guess, reprice some of your equipment. Could you talk about how much of your fleet will reprice in the remainder of '26 and into '27, or maybe how much of your fleet is priced below where leading edge pricing is today?

Good morning, Josh. Thanks for joining us. I think the way I would answer that question is to point to what we have disclosed publicly. And in our investor presentation, we cite the amount of our, I believe it's done on rental revenue, that is under a term other than month-to-month. That number is 78%. And so we have 22% that's on month-to-month. And so there's opportunity there. And the weighted average tenor of that under term is 2.2 years. And so that can give you a little bit of sense. And it's obviously not exactly pro rata over that time period.

But it gives you a reasonable sense of the fleet that will be coming up off of term and creates repricing opportunities. With the price increases you've seen over the last several years, we've been, I think, appropriate in going to our customers and saying, listen, the price is really across the board, our costs across the board, those are up and we have to be able to capture an appropriate price for the great service that we're providing. And we've been, I think, relatively at good results related to that, both from a ultimately service level for our customers, but also delivering value for our shareholders and getting the appropriate return. And so it's something that we're constantly looking at in terms of, you know, what price increases we can reasonably capture while still delivering a strong customer relationship. Obviously, that's always a balance, but it's something we're constantly looking at and looking across the different cost buckets and what we expect in terms of inflation. And those are items that our customers are seeing as well, you know, whether it's labor or parts or lubricants, everyone is seeing that, so it's not a surprise to anybody.

And maybe a follow-up to that, are you seeing any change, I guess, over the last 90 and 180 days in contracting terms of customers willing to extend contracts out further? Maybe you could just discuss that a little bit, just given the tightness in the market, the limited equipment availability that's sort of being capped by the engines, just how people are thinking about contracting terms today.

Yes, I think it is. It's always customer specific and can be even unit specific. I think that is an opportunity that is out there. The trade-off that invariably occurs with term is less price increase, and so that is a consideration when thinking about extending term of how long do you actually want term extended on equipment.

And actually, one more if I could squeeze it in. Sale-leasebacks today, just given where we are in the cycle with engine availability from a large supplier, is something like that when you think about growing your business becoming a more attractive option to grow moving forward? Thanks.

When you say, just to clarify, when you say sale-leaseback, are you talking about customers selling and leasing back from us?

Yes.

I think it is an opportunity. I think it should be an opportunity really in any market environment, just for thinking about from a capital allocation and ultimately the valuation or multiple that different companies get. It is something that we've had conversations with customers about in the past. We will continue to have those. It's difficult to predict if that will occur or to what extent the size of the opportunity specifically for us. But it is a conversation that we have with customers that we would absolutely entertain doing that, including a potential size, but just very difficult to predict.

Thanks, I'll turn it back.

Appreciate it, Josh. Thank you.

Thank you very much. [Operator Instructions]

We don't have any other questions. Thank you, Luke. Thank you, everyone, for your time and your questions today. We are proud of what the NGS team has accomplished, but as I said earlier, we believe there is still substantial opportunity ahead of us across each of our four growth and value drivers. We look forward to continuing to execute and updating you on our progress next quarter. Thank you.

Thank you, everyone. This concludes today's conference call. Thank you for attending.

Good morning, ladies and gentlemen, and welcome to the conference call. Natural Gas Services Group to acquire Flatrock Compression Holdings. [Operator Instructions]. I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws.

These statements may include, among other things, the anticipated benefits of Flatrock acquisition, the expected financial and operational impact of the transaction, anticipated accretion integration plans, future growth opportunities and our expectations regarding leverage, liquidity and shareholder value creation. Investors are cautioned that forward-looking statements are not guarantees of future performance and that the actual results or developments may differ materially from those projected.

These statements are subject to risks and uncertainties, including our ability to successfully integrate Flatrock and realize the anticipated benefits of the acquisition as well as other risks described in today's press release and investor presentation and our filings with the SEC, including our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026, and our Form 8-K.

These documents can be found in the Investors Relations section of our website at www.ngsgi.com. Natural Gas Services Group undertakes no obligation to update or revise any forward-looking statements, except as required by law. Accordingly, you should not place undue reliance on these statements.

In addition, our discussion today will reference non-GAAP financial measures, including adjusted EBITDA and related leverage metrics. For definitions of these measures to the most directly comparable measures under GAAP, please see today's Form 8-K filing. I will now turn the call over to Justin Jacobs, Chief Executive Officer. Justin?

Thank you, Anna. Good morning, everyone. Thank you for joining us. Today is an exciting day for NGS and an important milestone in our company's evolution. This morning, we announced the acquisition of Flatrock Compression, a leading rental compression business operating across the Permian and Eagle Ford basins.

This transaction immediately strengthens NGS in several important ways and further solidifies our position as one of the leading compression companies in the industry. Most importantly, it aligns with the strategy we have been discussing with investors for the last several years.

Over that time, we have focused on building a larger, stronger, more capable company through disciplined organic growth, operational excellence and thoughtful capital allocation. This acquisition builds directly upon that foundation and improves positioning for the opportunities we see ahead. Before discussing the transaction, I want to thank all the employees of NGS.

We would not be in a position to pursue opportunities like this without their hard work, dedication and commitment. Every day, our employees earn the trust of our customers through field safety, strong execution and exceptional service. This acquisition reflects the strength of the platform they have helped build.

I would also like to welcome the entire Flatrock team to NGS. Over the past several months, we have had the opportunity to spend significant time getting to know the company, its leadership team and many of its employees.

The reputation they have built throughout the industry is well earned, and we are excited to have them join our organization. As we evaluated acquisition opportunities, we were fortunate to find a company that already shared our commitment to operational excellence, customer service and disciplined growth.

We purchased Flatrock because they were already doing many of those things we value. Simply put, we believe Flatrock is a great business. Founded in 2001, Flatrock provides rental compression services to customers throughout the Permian Basin and Eagle Ford.

The company currently operates approximately 86,000 rented horsepower with a utilization of approximately 95%. Flatrock has grown organically at comparable rates to NGS over the last several years. The fleet is significantly weighted towards large horsepower compression, includes a meaningful electric compression platform.

They have assembled an impressive roster of customers, built a highly experienced field organization and established a reputation for execution that is widely respected throughout the industry. Now let me spend a few minutes discussing why we believe this transaction is such a compelling fit for NGS.

Many of you have heard me discuss our approach to acquisitions over the last 2 years. While every opportunity is unique, our acquisition framework has remained consistent.

When we evaluate acquisitions, we focus on four things: customer mix, basin position, fleet characteristics and valuation. Put simply, we are looking for opportunities that strengthen our customer portfolio, improve our position in key operating basins, enhance our fleet and can be acquired at an attractive valuation.

That framework has not changed, and those same criteria have been outlined in our investor presentations for years. What makes this acquisition particularly exciting is that Flatrock checks every one of those boxes and does so at a very high level. It strengthens our customer portfolio, it improves our basin position, it enhances our fleet, and it was completed at an attractive valuation.

Let me briefly discuss each. First, Customer mix. One of the most attractive aspects of this acquisition is the quality of the customer relationships that Flatrock has built over more than 2 decades. The company has assembled an impressive roster of customers throughout the Permian Basin and Eagle Ford, including several large publicly traded E&P operators.

Prior to the acquisition, Occidental Petroleum and Devon Energy represented approximately 64% of our revenue. Following the transaction, that concentration declines to approximately 54%. At the same time, we have added two new large publicly traded E&P customers and become our third and fourth largest customer relationships.

Importantly, there is relatively modest overlap between the two customer bases. This is not simply a combination of existing relationships. It expands our reach, broadens our customer portfolio and creates meaningful opportunities to grow with new customers in the years ahead, particularly considering our access to capital and demonstrated ability to deploy large horsepower.

Second, Basin position. The acquisition significantly strengthens our footprint in two of the most attractive compression markets in North America, the Permian Basin and the Eagle Ford. Approximately 80% of Flatrock's horsepower is located in the Permian Basin with a particularly strong position in the Midland Basin. This complements our existing footprint extremely well, creating a stronger position across the Permian and meaningful additional scale in the Eagle Ford.

Operational density matters in our business, greater concentration of equipment personnel and customer activity within a basin improves operational efficiency, enhances customer responsiveness and strengthens competitive positioning. This transaction increases our density in two of our key growth areas and strengthens our ability to serve our customers in those markets.

Third, Fleet characteristics. Flatrock has assembled a highly complementary fleet that adds approximately 86,000 rented horsepower and brings our combined fleet to approximately 661,000 rented horsepower. The fleet is significantly weighted towards large horsepower compression equipment. It is also primarily a Caterpillar engine, an aerial compressor fleet. We have significant overlap in unit model types, which will provide leverage for parts and maintenance.

The Flatrock fleet also meaningfully expands our electric compression platform, approximately 20% of Flatrock horsepower is electric motor driven compared to approximately 7% of NGS' existing fleet. We continue to believe electric compression represents an attractive long-term growth opportunity, and this transaction meaningfully advances our position in that segment of the market.

And finally, Valuation. While this transaction is first and foremost about strategic fit, it is also a highly attractive financial acquisition. We acquired Flatrock at approximately 6.2x annualized first quarter 2026 EBITDA, which is pre-synergies.

This represents a meaningful discount to NGS's current trading multiple. The transaction is immediately accretive to earnings, cash flow and EBITDA while maintaining a prudent leverage profile.

As shareholders ourselves, we remain highly focused on disciplined capital allocation, and we believe this transaction reflects that discipline. When we step back and look at the transaction as a whole, we believe it represents exactly the type of acquisition opportunity we have discussed with investors for years.

It strengthens our customer portfolio, it improves our basin position, it enhances our fleet, and it was completed at an attractive valuation. Most importantly, it represents another step in executing the strategy we have constantly communicated to shareholders.

With that, I'll turn the call over to Ian to discuss the financial impact of the transaction.

Thank you, Justin. We acquired Flatrock Compression for a total purchase price of $120 million, consisting of approximately $110 million in cash and $10 million of NGS common stock issued at a price based on the 30-day volume-weighted average share price. The transaction was financed through our expanded credit facility and available liquidity.

In conjunction with the acquisition, we amended our credit facility and increased total commitments from $400 million to $500 million while maintaining the existing $100 million accordion feature.

Following the transaction, we expect pro forma leverage of approximately 3x adjusted EBITDA, which we view as a comfortable and prudent level. Importantly, we continue to maintain substantial liquidity with more than $130 million of available borrowing capacity following closing.

This provides ample flexibility to fund future growth, invest in our fleet, pursue additional strategic opportunities when appropriate and continue executing our capital allocation priorities. From a financial perspective, the acquisition is immediately accretive to adjusted EBITDA, earnings, cash flow before considering any potential synergies. We are not providing a separate synergy target. The transaction is compelling on a stand-alone basis before synergies.

The principal opportunities for synergies are operating density, route efficiency, procurement, parts and inventory utilization, insurance and administrative overlap, technology deployment and commercial growth with a broader customer base.

We expect these benefits to build as integration progresses, and to meaningfully enhance the earnings contribution of the acquired business, while remaining modest relative to the scale of the combined company.

While we are not providing updated guidance today, you can expect the impact of the transaction to be reflected in guidance provided during our second quarter earnings call in August. Overall, we believe the transaction enhances our earnings power while maintaining financial flexibility and balance sheet strength.

With that, I'll turn the call back to Justin.

Thank you, Ian. Before opening the call for questions, I would encourage everyone to look at the final slide in the investor presentation we released this morning. Many of you have seen that slide before. It has remained the same for several years. We have consistently discussed four primary drivers of value creation at NGS, fleet optimization, asset utilization, fleet expansion, accretive M&A.

Today, we are able to put a checkmark next to each of those drivers. Under accretive M&A, we have always discussed four key factors that matter most to us when valuing opportunities, customer mix, basin position, fleet characteristics and valuation. As I discussed earlier, Flatrock checks every one of those boxes and does so at a very high level. It is exactly the type of acquisition we've been discussing with investors for years.

It strengthens our customer portfolio, improves our position in key operating basins enhances our fleet and was completed at an attractive valuation. We believe this transaction enhances our ability to create long-term value for shareholders. This is an exciting time for NGS. The compression market remains healthy, demand for large horsepower compression continues to be strong, and we remain optimistic about the opportunities ahead of us. Today's announcement reinforces that outlook.

With that, Luke, please open the line for questions.

[Operator Instructions] Our first question comes from Rob Brown with the Lake Street Capital.

Congratulations on the acquisition. Just wanted to get a sense of kind of the fleet makeup. You talked a little bit about some of the characteristics, but maybe further color in terms of fleet age and kind of their kind of growth plans and where they were seeing growth relative to NGS?

Sure. If you look in the investor presentation, Slide 7, we've broken out the mix, at least from a size perspective. And you see it's very similar to NGS with a significant weighting towards the large horsepower. What I will say is similar to NGS, Flatrock has seen their growth in the large horsepower over the last several years.

And as I noted in the release, and the call, they have -- they have grown at rates that are comparable to how we've grown organically over the last several years.

In terms of the quality of the equipment and -- or maybe you go to makeup first, very similar model types as we look through really all of the different sizes, aligns quite well with where our fleet is in terms of model types, engine types, compressors.

And then when it comes to the quality of the equipment itself, we did the extensive diligence in looking at the equipment out in the field. And this is a fleet that has been well maintained and it is operating at a very high level from a performance perspective for their customers. Once again, a very attractive characteristic from our perspective.

And we don't expect any amount of maintenance or catch-up maintenance capital on this equipment. It's running very well in the field.

Okay. Great. And then you mentioned some of the categories of synergy opportunities, but I think one of them was new customer kind of growth areas, but could you elaborate further on kind of the opportunities you see in the new customer base to maybe accelerate growth or continue growth?

Sure. So the -- we mentioned specifically, there are two large publicly traded E&P customers of Flatrock. We do not or NGS did not have any business with those customers, prior to the acquisition.

And as a smaller private company, Flatrock did not have the access to capital that we are fortunate to have, and so as we look at the opportunities going forward with those customers, in particular, and then the broader Flatrock customer base, we think there are some exciting opportunities for continued rates of high organic growth for us as we're looking to expand with some of those new customers.

Our next question comes from Selman Akyol with Stifel.

Congratulations. Just a couple of quick ones. First of all, could you discuss contract tenor?

Sure. As we look at the percentage that is of their fleet by horsepower base, percentage of the fleet that is under term, it's a very similar percentage and we're not going to see a material movement on the pro forma side.

So really pretty similar amount of horsepower that's under contract with generally similar rates and tenor or so not material changes there on a pro forma basis.

Got it. And then as you think about sort of '27 and you were in the sale process. Did they have any orders out there for new equipment coming in?

Meaning looking at Flatrock?

Yes.

The quick answer is, they do. We'll give more color on forward as we get to the -- our second quarter call.

Got it. And then just kind of going back to the synergies and not asking for a number or anything like that. Are you keeping everyone that's at Flatrock? Are you going to keep all the senior management, et cetera?

We are certainly keeping all of the team that has generated really quite impressive growth over the last several years. It was really one of the attractive characteristics of the acquisitions. This is a business that is running quite well, and we want to integrate in all of that operational talent.

So that as a combined entity, we can continue growing at higher rates. And so we've repeated a couple of times on the call, this really isn't a -- this is not an acquisition driven by cost synergies. This is an acquisition driven by capabilities and enhancing our competitive position. And so we're excited to integrate the Flatrock members into the team.

And our next question comes from Connor Jensen with Raymond James.

Congrats on the deal. Was just wondering how Flatrock's margin profile compared to NGS and if there's work to do there in pricing or if that should be accretive going forward?

Sure. So I would say that this goes in -- really in conjunction with the quality of the fleet, we see attractive pricing on a unit basis. And when looking at margins, they are at least down to the -- we'll give specifics, but they are generally similar margin characteristics to NGS.

Got it. And then post transaction, you had 3x leverage expectation. Just how are you thinking about the right leverage target for the business? And how should this trend over time?

In terms of a target, we haven't really talked about a public target for leverage with too specific of a granularity. But I would say that we're very comfortable with that leverage and expect as we're proceeding forward through the course of the year.

There's obviously a significant cash flow coming off of the business. We'll have more than ample liquidity and capital availability to continue our growth plans.

Our next question comes from Kyle Krueger with Apollo Capital.

I echo everybody else's congratulations. Quick question for you, Justin. Why was Flatrock for sale? And was it an auction process, or a negotiated transaction? And in broad strokes, can you tell us what the ownership profile is, was and if it had -- if the business had traded hands in the recent past?

Sure. I appreciate the interest Kyle. Thanks for joining the call. We're not going to go into the background of kind of the transaction process itself. What I will say is that I've known the Flatrock team actually since prior to becoming CEO of the company.

And so there's been a long-standing relationship there between the kind of senior management of the teams. And I would say that it is a very attractive acquisition for NGS, and I think it's a good result for the shareholders of Flatrock who are going to now become or are now shareholders in NGS as well.

In terms of the ownership, it is a private company. And what I would say is that it is -- there are a reasonable number of shareholders there. So there's no concentration in terms of the receipt of the $10 million -- no material concentration is a better way to put it in terms of the $10 million of NGS common stock.

[Operator Instructions] Our next question comes from Nate Pendleton with Texas Capital.

Congrats on the acquisition. I wanted to -- I wanted to build on a prior question. Your leverage remains quite modest. And on Slide 8, you highlighted the potential for growth opportunities and the ability to return capital to shareholders. I know it's early, but can you talk about how you view those competing uses of capital based on what you're seeing in the market following the acquisition?

Sure. We've talked on prior calls as we had material increase in our dividend this past quarter and increased it several times since we've initiated that. We've been able to start off at a modest level in terms of return of capital and that, that would be steadily increasing over time without giving specific guidance.

And I would reiterate that message to a reasonable degree and said, still not giving specific guidance in terms of how that will increase over time. But I would note that it is still a small percentage, certainly relative to our larger public competitors in terms of the percentage kind of available cash flow that we can deploy into growth areas.

As we look at the leverage pro forma, we are still -- have great ability to grow organically. We still have a great ability to look at kind of nonorganic opportunities, which we will continue to do. And so we think this acquisition actually strengthens our ability to continue to grow both organically and inorganically while over time, increasing that return of capital to shareholder kind of portion of the capital allocation.

Got it. And then in the past, we've talked about the difficulty in finding and retaining skilled labor in the field. Can you talk for a moment about the Flatrock team and what adding their expertise provides the combined company more on a forward-looking basis with the potential for growth in compression?

Sure. So when it comes to the field team, you've hit it, Nate, I mean it's one of the most challenging parts of the business is attracting and retaining talented field service professionals. And Flatrock has done -- Flatrock team has done a great job there in building up great capabilities in their field service and in providing great service to their customers.

And obviously, we want to keep all of that, all of those people and integrate them in and we think one of the attractive parts of the Flatrock team joining NGS is I think it's going to open up the opportunities they have, both personally and professionally in terms of growth. And so we are excited to have them join in to the NGS team and look forward to working with them for years to come.

And we don't have any other questions.

Well, thank you, everyone, for joining this morning on short notice. Once again, it's truly an exciting day for us, and we're thrilled to be able to make this announcement and look forward to providing more details and a forward look as we get into the second quarter earnings call. And with that, we are finished with our prepared remarks, and I appreciate your time today.

Thank you, everyone. And this concludes today's conference call. Thank you for attending.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group, Inc. Quarter 1 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and that the actual results or developments may differ materially from those projected in the forward-looking statements.

Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's earnings press release and in our filings with the SEC, including our Form 10-Q for the period ended March 31, 2026, and our Form 8-Ks.

These documents can be found in the Investors section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted gross margin, among others.

For reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release. I will now turn the call over to Justin Jacobs, Chief Executive Officer.

Thank you, Anna, and good morning, everyone. Joining me today is Ian Eckert, our Chief Financial Officer. To begin, I want to thank the entire NGS team for another outstanding quarter.

The results we are reporting today are a direct reflection of the commitment and execution of our employees across the organization. I especially want to thank to recognize our field personnel whose focus on reliability, responsiveness and customer service continues to differentiate NGS in the market. NGS delivered an exceptional start to 2026, highlighted by record performance for a number of key metrics, including quarterly rental revenue, adjusted gross margin, adjusted EBITDA and horsepower utilization.

In addition, subsequent to quarter end, we announced an increase to our dividend payable in the second quarter from $0.11 to $0.15 per share, representing a 36% increase. The increase in our dividend, combined with the increase to our full year 2026 adjusted EBITDA guidance reflects both the strong start to the year and our favorable outlook for the balance of 2026.

Importantly, we continue to execute operationally, expand and optimize our fleet and return capital to shareholders while maintaining substantial flexibility to continue funding growth opportunities.

Turning to first quarter operating performance. Rented horsepower ended the quarter at approximately 575,000 horsepower, representing growth of 17% compared to the prior year quarter. Horsepower utilization reached 86.9%, establishing another company record. Rental revenue totaled $47.1 million during the quarter, increasing 21% year-over-year and representing another quarterly record for NGS. Adjusted EBITDA totaled $24.3 million compared to $19.3 million in the first quarter of 2025, also establishing a new quarterly record.

Our strong performance continues to be driven by several factors, including large horsepower fleet additions, high utilization levels, pricing discipline and the ongoing mix shift towards larger horsepower compression assets.

Turning to the broader market environment. Our view of industry fundamentals remains constructive. Recent customer commentary and activity levels indicate improving sentiment around oil production growth, while ongoing midstream infrastructure build-out to support increasing natural gas production should continue driving incremental compression demand.

At the same time, lead times for new compression equipment continue to constrain available industry supply. These conditions support high utilization levels for existing fleets, continued pricing discipline and longer duration customer commitments. Additionally, the current geopolitical environment continues to reinforce the strategic importance of U.S. energy production and infrastructure, which we believe creates a favorable backdrop for domestic compression providers.

While the ultimate impact of commodity prices and geopolitical developments on customer activity remains uncertain, compression demand fundamentally remains tied to production volumes, reliability requirements and throughput needs across the energy value chain. We are also beginning to see more meaningful inflationary pressure emerge across portions of the supply chain, driven in part by geopolitical developments and broader supply chain dynamics.

Labor markets across the oilfield services industry remain tight, and we continue to expect wage pressure as overall U.S. oil and gas activity remains strong. We expect these inflationary pressures to continue and potentially accelerate during the balance of the year. Even with those considerations, our overall view is positive. Industry fundamentals remain strong, compression supply remains tight and the pricing environment continues to be constructive.

Within this environment, we believe NGS remains very well positioned given the quality of our fleet, our service performance, customer relationships and balance sheet flexibility. I'll move next to the specific growth and value drivers supporting the performance of NGS. First, fleet optimization. Rental revenue per horsepower per month increased to $27.51 during the quarter, improving 2.5% sequentially and 2% compared to the prior year quarter. Horsepower utilization reached 86.9%, reflecting both strong market demand and the quality and reliability of our fleet.

Second is asset utilization. During the first quarter, the company received $12.3 million associated with our long-standing tax refund claims and related interest. Considering this is approximately $1 per share of cash, we are pleased to collect this and look forward to receiving a small amount remaining in the near future. We also continue to pursue monetization opportunities associated with noncore real estate assets. At quarter end, 2 real estate assets were classified as held for sale on the balance sheet. These are the Midland office building and the Midland fabrication facility. Monetizing these non-cash assets is consistent with our continued efforts to optimize capital allocation.

Third, fleet expansion. During the first quarter, we added approximately 17,000 horsepower to the fleet. All of those additions are large horsepower units under long-term contract, and the majority were electric motor drive equipment. These deployments reinforce our continued focus on higher return, longer-duration compression applications, and we remain committed to deploying at least 50,000 horsepower during 2026.

Finally, strategic and accretive M&A remains an area of focus. Our balance sheet and liquidity position continue to provide substantial flexibility to act opportunistically where attractive opportunities arise. As always, our approach remains disciplined. We are focused on transactions where we believe NGS can create value through operating synergies, fleet optimization opportunities and customer relationship expansion. With that, I'll turn the call over to Ian to walk through our financial results and balance sheet in more detail.

Thank you, Justin, and good morning, everyone. As Justin highlighted, the first quarter reflected strong execution across the business.

Our financial results were driven by recently deployed large horsepower units, strong utilization and continued pricing discipline. Rental revenue was a record $47.1 million, up $8.2 million or 21.1% in the first quarter of 2025. Total revenue was $48.5 million, up $7.1 million or approximately 17% from the prior year quarter. The difference between rental revenue and total revenue growth reflects parts sales and services, which are not core to our operating model.

In addition, the first quarter of 2025 included elevated parts sales associated with the liquidation of inventory as we wound down our Midland fabrication operations. We continue to view rental revenue growth as the primary indicator of the underlying performance and scalability of the business.

Similarly, we delivered another record in adjusted gross margin as the business benefited from a larger contracted fleet, favorable mix shift toward large horsepower equipment and operating leverage. Rental adjusted gross margin was $30 million, up $6 million or 24.7% year-over-year. Rental adjusted gross margin percentage was 63.7%, up approximately 180 basis points from the prior year quarter.

Importantly, our first quarter margin performance demonstrates the underlying economics of the fleet following the discrete physical inventory adjustment recorded in the fourth quarter of 2025. That said, we do not necessarily view the first quarter margin percentage as a new run rate for the balance of the year. The first quarter was exceptionally strong operationally with very few setbacks across the business. While that level of execution is a credit to our field service team, it is uncommon to have a quarter where almost every metric went in our favor, and we do not assume that cadence will repeat consistently throughout the year.

In addition, over the last 2 years, the first quarter has been seasonally stronger than subsequent quarters, and we expect inflationary pressure associated with recent geopolitical developments to begin impacting the business in the second quarter. Even with those considerations, we remain confident in strong full year margin performance driven by large horsepower deployments, operating leverage and continued cost discipline.

Moving on to SG&A expense. It was $6.5 million or 13.4% of total revenue. The increase compared to the prior year quarter reflects the continued scaling of the organization to support a large fleet and ongoing investments in people, systems and process improvement. Over time, we target SG&A in the range of 13% to 14% of revenue, which we believe supports our growth while preserving operating leverage. Lastly, for the income statement, net income was $6.8 million or $0.53 per diluted share compared to $4.9 million or $0.38 per diluted share in the first quarter of 2025, representing another record for NGS.

Moving to the balance sheet and cash flow. Accounts receivable increased during the first quarter and DSO was above the level we expect from the business as a result of a few discrete collection and process-related items. Importantly, we identified the issues during the quarter, reinforced internal expectations and have already seen meaningful improvement in April. Cash on hand of $2.3 million and $2.4 million of the prepaid assets were primarily timing related.

The prepaid asset was tied to a prepayment for a fleet asset bid that was refunded in early April, and the cash balances are expected to normalize consistent with our practice of using available cash to reduce revolver borrowings. Assets held for sale increased during the quarter to reflect the former headquarters property and the Midland fabrication facility, consistent with our continued efforts to monetize noncore real estate.

We also retired 17,700 horsepower, representing 134 idle small and medium horsepower units during the first quarter. This action reduced idle assets, improved fleet mix and reinforced our focus on higher return, large horsepower opportunities. First quarter capital expenditures totaled $15.2 million, including $12.3 million of growth capital expenditures and $3 million of maintenance capital expenditures.

Based on our contracted deployment schedule, current and planned build activity and customer demand, we remain confident in our ability to deliver on our full year growth capital guidance and the associated horsepower additions. We ended the quarter with $226 million outstanding on the credit facility and available borrowing capacity of $174 million. Our leverage at quarter end was 2.33x, which remained the lowest of the public comparable set, and we continue to maintain significant flexibility to invest in growth and drive value for shareholders.

During the quarter, we made $1.4 million of dividend payments at $0.11 per share. That will increase materially in the second quarter with the announcement that we will increase the dividend to $0.15 per share, reinforcing our confidence in cash generation and the long-term outlook of the business.

In summary, the first quarter was a strong financial quarter with record rental revenue, record adjusted EBITDA, strong margins and healthy liquidity. Company's balance sheet and liquidity position provide flexibility to fund organic fleet expansion, evaluate strategic and accretive M&A opportunities and continue returning capital to shareholders. With that, I'll turn the call back to Justin to discuss our updated 2026 guidance and closing comments.

Thank you, Ian. Based on our strong first quarter performance, high utilization, contracted fleet additions and current visibility into the remainder of the year, we are increasing our full year 2026 adjusted EBITDA guidance range to $92.5 million to $97.5 million compared to our prior range of $90.5 million to $95.5 million. The updated midpoint represents a meaningful increase, particularly after only 1 quarter of the year.

At the same time, we are maintaining our previously issued full year capital expenditure guidance. Growth CapEx is expected to remain in the range of $55 million to $70 million, reflecting our planned deployment schedule for contracted larger horsepower units and continued customer demand. Maintenance capital expenditures are expected to remain in the range of $15 million to $18 million.

I also want to briefly address our upcoming shareholder meeting, which is scheduled for June 10. Related proxy materials were distributed several weeks ago. There are 2 voting items in particular that I want to highlight. First, we are asking shareholders to approve a proposed reincorporation of the company from Colorado to the great state of Texas. As outlined in the proxy materials, the primary driver of the proposed reincorporation is to implement more shareholder-friendly governance provisions within our governing documents.

Most notably, the proposal would facilitate the destaggering of the Board, which we believe better aligns the company with shareholder interest and broader market expectations. This proactive initiative reflects the Board's commitment to strong governance and alignment with our shareholders.

The second item in the proxy relates to our Board of Directors. As previously communicated, Steve Taylor will retire from the Board at the upcoming shareholder meeting. Steve has served NGS shareholders for more than 2 decades and has played an instrumental role in the growth and success of this company.

On a personal level, Steve is also an invaluable adviser and resource to me during my transition into the CEO role. On behalf of myself, our Board and all NGS shareholders, I want to sincerely thank Steve for his many contributions to the company over the years.

We are also pleased to nominate John Jackson to the Board. John is a highly experienced rental compression operator with a strong track record of operational and industry success. While no one can truly replace Steve, we are excited about the perspective, industry knowledge and experience John will bring to the Board going forward. We appreciate the continued support of our shareholders on these important items.

In closing, the first quarter represented an excellent start to 2026 for NGS. We delivered record rental revenue and record adjusted EBITDA while continuing to improve the quality and mix of our fleet through large horsepower additions and retirement of idle small and medium horsepower assets.

We also increased our quarterly dividend by 36% and increased our full year adjusted EBITDA guidance. Market fundamentals remain constructive, supported by tight equipment supply, high utilization levels and strong customer demand for reliable compression infrastructure. Looking ahead, we remain confident in our ability to continue delivering strong operational performance, growing cash flow and creating long-term value for shareholders. Luke, we're now ready to open the call for questions.

[Operator Instructions]

Our first question comes from Jim Rollyson, Raymond James.

Congrats on the solid set of results. Justin, it seems like maybe I want to start with lead times. Your competitors, that primarily source engines, at least gas engines from Caterpillar have talked about lead times that are now between 150 and 180 weeks, if I add up what's been said so far in the season. Obviously, you're not sourcing engines from CAT. You guys talked about electric motor drive and obviously, Waukesha.

So I'm curious what you're seeing on lead times? And if they're materially shorter, is that an opportunity as you go into '27, '28 to maybe fill some customer demand gaps that can't be filled by Caterpillar?

I think the quick answer... Thanks for joining. The quick answer to your question is, yes, it does provide an opportunity. As we look across sourcing different components for the units and then having them fabricated, lead times have extended out. Some of the long lead times that have been cited publicly are for particular components, particular engine from one of the engine manufacturers, and those are materially longer really than any of the other components that at least we're seeing.

It's not to say that the lead times have not extended over the past several quarters, they have, but nothing to the degree that has for that particular engine. And as we look across our fleet and our growth opportunities, that is a much smaller percentage of our growth and existing fleet. And so I think we do have some opportunities there even in the current environment to pull in growth earlier.

Got it. That's very helpful. And then just kind of circling around to margins and cost inflation. There's been a lot of discussion around higher oil prices driving, as you mentioned, return of activity, which changes the labor component and lube oil and fuel prices.

How do you think about -- given how tight the market is, how do you think about your ability to eventually pass on higher costs? And what's the lag time? Just trying to think about how margins progress through the quarter or through the rest of the year, recognizing what Ian said that 63.7% is not necessarily the new benchmark to start with. So I'd just love some thoughts there.

Sure. And so as you look at our fleet, I mean, we have units that are coming off of term really on a rolling basis throughout the year. And so, as you look at where our pricing has been from the public, you've seen there have been modest increases certainly relative to prior years where there was pretty significant pricing inflation. Going forward, I think it's a little hard to predict exactly the magnitude of it.

But I think everyone is feeling to some extent already and will probably -- or may is maybe a better word, may see even a higher level. And that's something that we're actively going to have discussions with customers in a way that is appropriate for our shareholders but also understanding our customer relationships. And so, I think there's still, as what I've said in past quarters, an upward bias to pricing. And depending on where inflation comes out over the coming quarters, there may be slightly higher than an upward bias.

Our next question comes from Nate Pendleton with the Texas Capital.

Congrats on a great quarter. With regard to the sizable increase in the dividend you've just announced, can you talk about how you view the uses of cash from here between increasing shareholder returns, investing more in organic opportunities and potentially improving the balance sheet further for M&A opportunities down the line?

Well, I think when we started the dividend off several quarters ago, we were intentional in telling our shareholders that this was a modest first step that we would look to increase overtime without commitments about exactly what that rate would be.

This increase of 36% from $0.11 a share quarterly to $0.15 is a material increase on a quarterly basis as we look at the -- and a modest increase as we think about it from really a capital allocation perspective, meaning kind of percentage of EBITDA.

From that perspective, it's a relatively modest increase and doesn't, in any way, change our ability to fund any of the particular growth initiatives, whether acquisition of new units or M&A opportunities. And so, it's really kind of starting to move more towards that capital allocation model that I would think of as self-sustaining.

Obviously, we've grown at pretty significant rates over the past several years. And over time, we'll start to move to that more framework of a certain percentage of capital is going to the different elements, whether growth, M&A or return of capital to shareholders. So, it's really a step in that direction.

Got it. And then if I may, kind of thinking about the fleet retirements and some of the opportunity that remains within your underutilized fleet today. Can you quantify the potential opportunity that you see in upgrading some of the underutilized assets today that could then be put to work?

I don't think we're going to quantify that at this point. You can look at the unutilized fleet and say that with what we've done over the past several quarters, there certainly is incremental opportunity there in the different portions of the fleet, which are almost entirely in the small and the medium horsepower. And we think there are opportunities to increase the utilization of the existing idle fleet. It's not a number we're going to put a target on at this point.

Our next question comes from Josh Jain with Daniel Energy Partners.

Obviously, some significant commodity price changes since your last call. Maybe you could just walk around the different basins, what you're seeing and how conversations have changed over the last couple of months. Obviously, you're heavily concentrated in the Permian, but maybe just talk through what you're seeing across the Lower 48 would be helpful to start.

Sure. The -- as you mentioned, we are heavily weighted to the Permian, so I'll start there. And if you went back to previous quarters, we've described this, I think even with lower oil prices at that point, we were still seeing significant new quote activity, and we were contracting a significant number of new units in terms of horsepower. And the rise in oil prices, I would say, have only accelerated and increased that amount of activity on the upstream side.

As we look at other basins where we've been growing and these are lower percent or lower dollars, although still high percentages, -- we're seeing strong interest for our equipment in what I call generally kind of South Texas Eagle Ford basin. And then another area for us is up in the Marcellus, Utica, where we've seen very nice growth over the last several years. And then on the midstream side, just a lot in kind of Texas generally with, for us, kind of a focus at this point in the Permian, where we're seeing a lot of activity.

And then what are you seeing today with respect to contract terms being extended? I think in your deck, it highlights average term is around 2.4 years. I would think there's a greater sense of urgency from the customer base today. So, as you think about where you sit today and what's your outlook throughout this year?

You cut out for a second there. So, I'll just -- on terms, kind of, the length of term and the 2.4 years to be clear, that's just the weighted average of the existing fleet. On the -- if we're looking to put new equipment out, those are depending on the model, kind of size of the equipment, but you're typically in the 3- to 5-year range.

And then in terms of recontracting or putting on term existing fleet that's out there, that's typically started at the low end kind of a year up to several years, and we're seeing that get pushed out, at least some requests from customers looking to push that out and then just becomes a little bit of a question for us of how do we view price versus term, and that really comes down to customer by customer and unit-by-unit kind of decision.

Our next question comes from Selman Akyol with Stifel.

I think when you guys were making your comments around working capital, you mentioned a refund for a fleet bid. And I'm curious, did another large public player get that? And then are you seeing other opportunities to, I presume, sale-leasebacks?

So, we are looking to acquire new equipment in a variety of different ways. That was one of those that we did not get. There are others that we have, and we're obviously contracting a lot of new equipment. And I'm sorry, Selman, what was your second question -- second part of your question?

Well, I mean -- so yes, are you engaged in other, I guess, sort of sale-leasebacks? I presume it was a sale leaseback transaction. And then did we see another large player get that?

No, no, no. It wasn't actually related to a sale leaseback.

Okay. Okay. Okay. So just going back to gross margins. I don't quite think you said gross margins peaked for the year in so many words, but I think you said that. So, can you just talk about where you're seeing the most pressures and in particular, thinking about lube oil and just how that's filtering through and how you're going to get that back over time?

Yes, Selman, -- so when we think about cost pressures, as we mentioned in the prepared remarks, we're very much focused on parts, lubes and oils and labor. Given the geopolitical environment today, we expect to see inflationary increases in lube oil, especially heading into the second quarter, and that's what's really going to be driving inflation over the next few quarters in comparison to the performance that we saw in the first quarter.

Just remind me, you have some inflation built in that over time you get it back?

The quick answer, it depends on the contract, but we are increasingly adding those in and have been over the last several years. And just to hit on part of your question there, Selman, of saying that they peak, it's really more -- one, I didn't really say that, but I understand what your question is asking.

We had a series of -- as we look across the different primary drivers of cost in the first quarter, we had a really good margin. And we think over some period of time, we will hit margins that look like that. But certainly, as we look at the operational metrics, say, that was one where everything went the right direction. That happens occasionally. It doesn't happen every quarter. And we don't expect it to happen every quarter.

But it does show, as you look kind of a trend over several years, where the margins in this business are going and kind of sets a new high bar for us to strive for on a quarterly basis with the kind of view of we think there's going to be more inflation in the second half of the year. Let's see what happens.

[Operator Instructions]

Our next question comes from Rob Brown with Lake Street Capital Markets.

Just wanted to sort of follow up on the competitive environment and some of the dynamics with higher oil ability to gain share. I guess, when do you sort of reevaluate your CapEx needs? And what will it kind of take to increase the growth rate there?

So, I would say the -- going to the competitive landscape, I've talked in -- certainly, there are a number of very strong competitors out there. Several of them are public. There are a couple of strong private competitors as well. But the competitive landscape -- I look at it generally -- is relatively stable.

And if we look at what our performance has been, at least judging versus what's publicly available, we've been taking market share for the 3 years we're going to have full results being '23 to '25. We are going to do that again in 2026. And based on the amount of customer activity and performance that we've had, I expect that we'll do that -- continue to do that in the future.

The CapEx side is -- what will drive that is looking at what we're able to do in terms of securing new business at above what we're targeting from a return on invested capital perspective and then looking at the balance sheet to make sure that we retain flexibility to grow beyond just the organic side, and that's something that we're looking at on a consistent basis. So I think we will continue to grow at rates that are outsized relative to our competitors, and we want to make sure we're flexible to act opportunistically on the M&A side.

Okay. Got it. And then on the kind of the margin discussion, I know this quarter was elevated, but could you give us a sense of where the kind of the sustainable margin level is with the high horsepower shift? I know it's gone up over the last few years, but is it sort of plateauing on a kind of normalized basis? Or should it continue to expand?

Rob, we're not going to give any forward guidance on margin. But what you should expect as our mix continues to skew toward larger horsepower over the course of time, that margin will gradually creep up.

And I don't see any other questions.

Thank you, Rob. Excuse me, -- thank you, Luke, and thank you all for your questions and continued interest in NGS. We sincerely appreciate your support and look forward to updating you on our progress next quarter.

Thank you, everyone. And this concludes today's conference call. Thank you for attending.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group, Inc. Quarter 4 Earnings Call. [Operator Instructions].

I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and that the actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct.

Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's earnings press release and our filings with the SEC, including our Form 10-K for the period ended December 31, 2025, and our Form 8-Ks. These documents can be found in the Investors section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially.

In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted gross margin, among others. For a reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release.

I will now turn the call over to Justin Jacobs, Chief Executive Officer. Justin?

Thank you, Anna, and good morning, everyone. Joining me today is Ian Eckert, our Chief Financial Officer. To start, I want to once again thank the entire NGS team for their continued dedication and hard work. Our results this year reflect the efforts of the entire organization. I especially want to recognize our field team. Their commitment to delivering exceptional uptime and reliability for our customers continues to be a defining strength of this company.

As a result of our team's strong execution, NGS delivered another great quarter and record full year results in 2025. This performance also marks the third consecutive year in which we have taken market share in the rental compression industry. Our continued growth reinforces NGS' position as one of the fastest-growing rental compression companies. And as we enter 2026, we feel confident in our ability to drive further improvements and continue to increase shareholder value.

Moving to our operating and financial performance in the fourth quarter and full year. We reached record levels of rented horsepower and utilization in 2025. Rented horsepower increased to approximately 563,000 by year-end '25, a 14% increase over the prior year. Fleet utilization reached 84.9%, another high watermark for the company. In the fourth quarter, rental revenue totaled $44.3 million, up roughly 16% year-over-year, reflecting continued fleet expansion and strong demand for large horsepower compression units. Adjusted EBITDA was $21.2 million for the quarter and $81 million for the full year, both are records for NGS and the full year number was at the high end of our guidance range, and I would note that we increased guidance 3x during the course of the year.

We also started our return of capital program in 2025. During the second half of the year, we initiated our inaugural dividend and subsequently increased it by 10% with the fourth quarter issuance. In total, approximately $2.6 million was returned to shareholders in the second half of the year. This reflects our confidence in the durability of our cash generation and our disciplined capital allocation strategy.

Overall, our strong performance continues to be driven by fleet expansion, operational execution, pricing improvements and the continued mix shift towards large horsepower compression units. Our strong year-over-year performance demonstrates the continued growth underway at NGS. During 2025, we added approximately 70,000 horsepower with more than half deployed in the fourth quarter. Large horsepower electric units represented approximately 30% of those additions.

Looking ahead to 2026, we expect this continued momentum. We are currently contracted to deploy approximately 50,000 horsepower of new large horsepower compression units distributed relatively evenly throughout the year. Electric motor drive units are again expected to represent a similar percentage of the total horsepower additions as 2025. As we have consistently communicated, our growth investments remain focused on large horsepower and electric units, which generate higher returns and typically carry longer contract durations.

At the same time, we remain committed to a capital allocation framework that combines organic growth, shareholder return of capital through dividends and share repurchases and disciplined evaluation of strategic M&A opportunities. Importantly, NGS continues to maintain leverage on the low end of our public compression peers, which provides us the flexibility to be offensive regardless of market conditions while also returning capital to shareholders.

Turning to the broader market environment. Demand for natural gas compression remains very strong, primarily driven by domestic oil production, particularly in liquid-rich basins such as the Permian. Looking forward, we see the benefit of several tailwinds, including increasing LNG export capacity and growing electricity consumption from data centers and AI-related infrastructure. We expect these structural changes should drive growth for at least the next several years.

We are also monitoring geopolitical developments, including evolving policy and supply dynamics in Venezuela and Iran. While the ultimate impact on global oil markets and U.S. production activity remains uncertain, we continue to evaluate these developments closely. Additionally, lead times for new large horsepower compression equipment remains long. The lead time for certain components on certain models are stretching well beyond 1 year. These conditions support continued pricing strength, high utilization levels and attractive long-term growth opportunities for compression providers. Within this environment, NGS continues to win market share due to our high reliability equipment, industry-leading service quality, strong customer relationships and balance sheet flexibility.

I'll move next to the specific growth and value drivers that continue to support the strong performance of NGS. First, fleet optimization. We continue to see strong performance in rental revenue per horsepower, which increased approximately 3% in the fourth quarter compared to the prior year. This improvement reflects new unit deployments, contract renewals with increased rates and the ongoing mix shift towards large horsepower units. Our record horsepower utilization of 84.9% demonstrates the strong demand environment for our fleet. In addition, we are investing significant time to improve the collection and use of data in all aspects of our business. For our units, in particular, these investments will further improve uptime, optimize gas flow and will support predictive maintenance across our installed base.

Second, asset utilization. In the fourth quarter, we received confirmation of $12.3 million of the income tax refund and associated interest, which was received in the first quarter of 2026. This represents the successful monetization of another material nonoperating asset. We were very pleased to finally receive the bulk of this receivable, which represents approximately $1 per share. We also continue to pursue the monetization of real estate assets, including the listing of our Midland office property.

Third point is fleet expansion. 2025 represented a significant year of fleet growth, and we enter 2026 with substantial contracted deployments already in place. All new units being deployed are large horsepower compression equipment, including electric motor drive units. Finally, we continue to evaluate strategic and accretive acquisition opportunities. NGS remains well positioned to pursue disciplined M&A where it complements our existing operations and enhances shareholder value.

With that, I'll turn the call over to Ian to review our financial results and balance sheet in more detail.

Thank you, Justin, and good morning to everyone joining us today. As Justin emphasized, the NGS team delivered a very strong year for our shareholders, reflective of significant fleet expansion and strong operational performance.

To recap the full year 2025, rental revenue totaled $164.3 million, representing an increase of $20.1 million or 14% year-over-year. Total revenue reached $172.3 million, increasing $15.6 million or approximately 10% compared to 2024. Total revenue growth was lower than rental revenue growth due to our exit from the Midland fabrication operations and our broader strategy to migrate away from noncore, low-margin fabrication activities. Adjusted rental gross margin totaled $99.6 million, an increase of $12.3 million or 14% year-over-year. reflecting continued growth of our rental fleet and improved pricing.

Fourth quarter adjusted rental gross margin improved 1.6% sequentially or $25.9 million. During the fourth quarter, our adjusted rental gross margin percentage was 58.5%, which declined roughly 300 basis points compared to the third quarter and was well below our expectations. All of this decline relates to a physical inventory adjustment recorded during the fourth quarter. Importantly, it does not reflect the ongoing economics of our business. In fact, as we move into 2026, we expect continued adjusted rental gross margin percentage expansion beyond the 2025 figure of 60.6%. This is driven by new large horsepower unit deployments, operating leverage from our growing horsepower base and ongoing cost discipline.

For the year, adjusted total gross margin was $100.5 million, representing a 14% increase year-over-year. Net income totaled $19.9 million or $1.57 per diluted share, representing record performance for the company.

I would like to point out a few discrete items included within our 2025 results. First, we recorded a $2.6 million noncash impairment charge related to our Midland headquarters property as we prepare the building for sale and began transitioning to an alternative leased office space. Second, we recognized $2.4 million in interest income during the fourth quarter, a result of the IRS confirming refund and interest amounts associated with our income tax receivable. And finally, our effective tax rate for 2025 was 24.9% compared to 20.5% in 2024. This increase is primarily attributable to higher state taxes resulting from changes in state apportionment. Looking ahead to '26, assuming our operational footprint remains generally consistent, we expect our effective tax rate to be approximately 25%.

Turning to the balance sheet. Our income tax receivable increased $14.1 million -- increased to $14.1 million during the fourth quarter, reflecting the IRS confirmation of the refund and interest amounts owed to the company. Of this amount, $12.3 million was received during the first quarter of '26, leaving approximately $1.8 million outstanding, which relates to the 2019 tax year. As mentioned earlier, we recorded an impairment associated with our Midland office facility. While the building remained in use at year-end, we expect it to be reclassified as assets held for sale during the first quarter of 2026 once the applicable accounting criteria are met.

From a capital spending perspective, full year capital expenditures totaled $121.5 million, of which approximately $109.8 million is associated with growth capital expenditures for new large horsepower compression units. This placed our growth capital spending at the high end of our guidance range and reflects the continued expansion of our fleet to support strong customer demand.

As Justin mentioned earlier, 2025 also marked the initiation of our dividend program with $2.6 million returned to shareholders during the second half of the year. We ended the year with strong liquidity and ample borrowing capacity, and our leverage remains at the low end of our public peer group, positioning the company well to support continued fleet expansion, shareholder returns and acquisitions.

In summary, our operating performance continues to translate into growth in adjusted EBITDA, strong operating cash flows and increasing scale across the business. At the same time, we remain disciplined in our capital allocation approach, investing in high-return fleet expansion while maintaining a strong balance sheet and returning capital to shareholders.

With that, I'll turn the call back to Justin for '26 guidance and closing remarks.

Thank you, Ian. We entered 2026 with record fleet utilization, significant contracted horsepower deployments and a very active quoting pipeline. Based on this visibility, we are providing adjusted EBITDA guidance for 2026 of $90.5 million to $95.5 million. We expect continued organic growth in '26, driven by large horsepower deployments, expanding customer relationships and sustained industry demand for compression services.

For 2026, we expect growth capital expenditures in the range of $55 million to $70 million, which represents an increase of approximately $5 million at the low end of our prior expectations. This comes on top of hitting the high end of our range for growth CapEx in '25. The '26 increase, combined with the '25 actual performance shows that we continue to win new contracts to drive organic growth.

Based on the forward growth capital guidance now provided by our public peers, 2026 will mark the fourth consecutive year that NGS has captured market share organically. The streak is a testament to the strong competitive position we have in the market. Maintenance capital expenditures are expected to be in the range between $15 million and $18 million in 2026. Our ' 25 maintenance capital came in at the low end of the guidance range, so we expect a little spillover into '26, coupled with the capital requirements of a growing fleet.

In closing, NGS delivered record results in '25. We achieved record rented horsepower, record fleet utilization and record adjusted EBITDA. Looking forward, we believe the company is well positioned for continued growth and market share expansion. Structural tailwinds for the compression industry remain strong, including LNG export growth, increasing natural gas power demand and rising electricity consumption, driven by data centers. and AI infrastructure. Combined with our strong balance sheet and operational execution, these factors position NGS to continue investing in growth, increasing EBITDA and earnings, returning capital to shareholders and pursuing strategic opportunities.

Luke, we are now ready to open the call for questions.

[Operator Instructions] Our first question comes from Jim Rollyson with Raymond James.

Nice job and great finish to a pretty strong year here. Justin, in the press release, and I think Ian mentioned this, you mentioned large horsepower and electric motor drive assets are expected to expand rental gross margins. Maybe a little context relative to the 60.6% number you printed in 2025. What's the kind of guidance range embedded as far as margins go?

We haven't given historically nor we going to this point, give specific guidance on the rental adjusted gross margin or gross margins overall. I think as we look at that 60.6%, we will certainly see uplift from that. Generally, in past quarters, we've given kind of in the low 60s, and that's our expectation going forward. So I would expect to see some modest uplift from that and then beyond mix shift looking further out into the future, we'd like to see that number keep ticking up further.

I appreciate that. And then as a follow-up, a bunch of your peers have talked about extended lead times, especially for CAT talking 110 to 120 weeks, which is more like 2 years instead of 1. I know you guys have historically released recently on the large horsepower side been a big fan and customer of Waukesha. But maybe you could talk about what you're seeing in lead times with them. And generally, what's the current bottleneck across engines, compressors, fabrication, et cetera, just kind of how that sets up for you specifically?

What we're seeing in the lead times is particularly at the high end of the large horsepower from our perspective of what we offer in the fleet, that's where you're seeing those 100-plus weeks. As we look in horsepower below that, but still well in large horsepower, we haven't seen significant changes over the past 3 to 6 months and certainly nothing like what we've seen specifically from Caterpillar at that high end of the range of our fleet. As we look at the other major components and fabrication space, generally, I would say there's not a lot of change since 3, 6 months ago. It's probably creeping out a little bit. But the 100-plus week, that is -- that's tied to engines at the high end of the range.

Our next question comes from Nate Pendleton, Texas Capital.

Congrats on the strong quarter. Can you share your thoughts on how the competitive environment evolves with the new large horsepower units being so delayed as you just talked about? And maybe how that can manifest for you guys as far as pricing and the potential M&A market due to that tightness?

It is a -- thanks for joining, Nate. It's a rapidly evolving landscape, particularly at the high end of the horsepower. If you look back to the -- not just our call, but our competitors, our public competitors' calls in the third quarter, the lead times at that high end was up around half the number that's at today. So there are a number of different ways that we're able to address that. One is as a percentage of our fleet overall, that longest lead time item, we certainly have a good quantity of those units, but it's not a -- far from a majority of our large horsepower. And so in some of those still significant sized equipment, but less than the high end, the lead times are significantly less than 100 weeks, and that provides us an ability to continue our growth and meet customer needs.

In terms of the impact in M&A and, I think it's too early to really look at that. This is a relatively recent and pretty material change in the competitive landscape.

Understood. And then perhaps for Ian, I know you've been really involved in some of the blocking and tackling that goes on behind the scenes to deliver the improving results we've seen quarter after quarter. Can you talk about maybe some of the areas of opportunity that your team has been working on from your perspective and maybe how that might manifest in the financials going forward?

Yes. Sure, Nate. Thanks for joining the call today. So I'm going to start with that physical inventory adjustment in the fourth quarter. As part of that process, we identified a number of capability and process gaps within our warehouse operations. Importantly, we've already taken decisive actions to address those areas. And that includes targeted personnel changes, implementations of best practices across our inventory management processes. And while that's a onetime impact in the fourth quarter, I think those actions that were taken ultimately help us as we move into 2026. As those warehouse operations continue to mature, we expect to realize improved efficiencies, some degree of cost savings, which should ultimately help to support margin expansion going forward.

Our next question comes from Selman Akyol with Stifel.

A couple of quick ones for me. So as you think about the environment and the competition, and you noted sort of the longer lead times for the extremely high horsepower. Is that giving you an opening at all to move beyond gas lifts more into midstream? Are you seeing any opportunities for that?

Thanks for joining. I've spoken on a number of the recent calls that when you look at our larger horsepower that's in centralized gas lift and you look at our large horsepower overall, we don't have any material applications in the midstream at this point. And that has been a targeted area for us to focus on to add to our existing business. And I can say that it is still early for us, but that we are seeing at least quoting activity in that area and it's up to us from an execution perspective to be able to go out and win that business. So it's been a focus area, not just because of recent lead times because we think and have thought for a number of quarters that that's an opportunity for us because of the similarity of the equipment.

Is that just a matter of pricing? Or is it -- you need to get your first customer and then sort of prove you can do it in the reliability and then you think more comes pretty rapidly?

It does make sense. I think it is -- if you look at the evolution of our business, not over the last couple of quarters, but going back several years, we are reasonably new entrants into the 1,000-plus horsepower package market. Our first 35, 16s are north of 1,000 horsepower units are kind of 2018, 2019 time frame. And so we first got into that business with Occidental Petroleum. Obviously, they're now our largest customer. We now have a material number of customers, including Devon Energy, where we're servicing with north of 1,000 horsepower units.

And I think it is a similar evolution there of midstream is a logical next place for us to have looked to penetrate. We have not done that yet. But I think getting that first customer is going to demonstrate that our equipment from a technology perspective and the service we provide, we should have a competitive advantage there as well. That's how we approach it.

Got it. Okay. And then next, just sort of thinking about EBITDA growth, very robust in '26. Clearly, you've got some monetization going on and your CapEx is coming down. So your free cash flow is accelerating. And I know you highlighted your inaugural dividend and then you increased it once already, and you've got this strong free cash flow coming. How should we be thinking about return of capital and dividend in particular as we go through '26 and beyond?

There, I would repeat comments that we've made on prior calls. I think on the initial call, we -- or the call after we initiated the dividend that we have a good understanding of shareholders' desire for a consistent and increasing dividend. And we were not going to provide specific guidance other than to make it clear, we understood that. And that's how I would think about how we and the Board will approach return of capital overall, but the dividend specifically in 2026.

Our next question comes from Tim O’Toole, Tetra Capital Management.

I had a couple of comments because in the wake of Steve's retirement, I wanted to just make on the way in and wanted to just acknowledge him for a couple of things, one being building a balance sheet through some very tough years and then also seeing the growth opportunity sort of '19, '20, which also became interesting, obviously, signing up with OXY and actually pivoting towards growth in large horsepower, which has obviously been a very good move. And then also kind of later on, but not that much later than 2020, obviously, working with Justin to replace himself, and that has proven so far to be a very good choice. And so I wanted to kind of congratulate him on the way out.

And then one other comment that I wanted to make before I get into a couple of questions is I would still love to see some more detail around discretionary cash flow and discretionary cash flow per share and growth in that metric. A few of your competitors focus on that. I think it's appropriate. It's more indicative of economic earnings for the company and would love to encourage more focus on that and a little bit more information around that. let me talk there.

Yes, Tim, maybe I'd just add to -- one, I appreciate -- thank you for joining, and I appreciate your comments. And just to echo on the first point for Steve and particularly the last part you put there, I think of Steve as a -- really as a quasi founder of this business. And having worked with him through the transition, he did an outstanding job. It was absolutely amazing for me and I think for the company and a lot of credit is due to him there. So I just wanted to echo your comments on that.

Yes. Well, thanks for that, Justin. And I think Steve, hopefully, he's listening from home or can go listen to it at some point. And anyway, we appreciate it. And it's a very good run for a very good result. To a question that was just asked and just kind of peeling you out in terms of how you're looking at things going forward in terms of the growth space. Midstream, obviously, you would be well suited to fill some of that bill. There are some competitors out there that you're going to be aware of and a few also that are not necessarily directly in the compression space, but in related spaces that have been looking at actually power generation. So you have the reciprocating engine on the front end driven by natural gas to actually create pad power or maybe beyond pad power.

And I'm wondering how you look at those 2 trade-offs if you're even considering the electric generation space given kind of the wall of demand that's coming at us. And also related to that, I do wonder, this is maybe more of a question for your customers, but you're in that discussion, how the space looks at the fact that electric power will be tight, will be in demand, maybe short supply at times and pricing on the power to drive the compression may also become an interesting topic. Could you talk to that for a minute?

Sure, happy to. So on the power gen space, it is -- that's an area that we have looked at from an acquisition perspective and looked at a couple of specific opportunities. And the -- some of the similarities are relatively straightforward in terms of the service model, the equipment, the rental nature of the equipment at least in certain applications. And so we understand that is a similar market. I think the -- what we've seen from one of our public competitors shows that.

The -- as we look at it, some of our questions really relate to, are we going to see the same long-term applications as compression. And we have not seen a business at least that we've looked at yet in the power gen space that have a similar application length that we do, particularly with our large horsepower. And so we're going to continue to look at it very closely and I'm sure look at additional opportunities. And as with kind of all M&A, you never know exactly will happen. It's kind of a sun the moon star. So it's certainly on our radar, but those are kind of how we look at it.

Okay. Great. And actually, I kind of expected something along those lines, but I wanted to feel you out a little bit on that because we haven't discussed that point. Another question I have, and this might be a little bit more for Ian than you, Justin. The -- you mentioned OXY and Steve kind of engaged with them and started to support a lot of capital for that particular customer in the kind of '19, '20, '21 space in terms of some of the going online.

And one of the things I'm noticing on the maintenance CapEx level is that that's creeping up. I'm wondering if -- maybe you could talk to this a little bit. I'm wondering if some of that maintenance CapEx is kind of associated with that -- the initial bolus of that significant allocation of capital to the OXY footprint. And whether that -- whether we should expect that to level out for a few years until the next big bolus comes -- reaches, let's say, 5 years? Or if that's on a trajectory that is likely to build as we go forward kind of more or less ratably or steadily with the trailing the growth that you've put up the last couple of years.

Tim, thanks for joining us. And I think you hit on a key point here. We've seen significant fleet horsepower growth over the last half a decade. And your assumption is correct. The initial tranche of those large horsepower units are coming up on some key maintenance events that require maintenance capital, hence, the increase that we see year-on-year from '25 to '26. I believe you can expect that to continue gradually ticking upward given the significant horsepower we put in place over the last 5 years.

Tim, I know you know this well. But as we kind of talk to our broader public shareholder base just to make sure they understand the maintenance cycle here, specifically for the engines, you're looking at a major maintenance every 3.5 years, thereabouts. And 3.5 years, you have a good size one at 7 years, you have a little bit bigger in terms of cost. And then the other components are roughly around that. And so our expectation with the growing fleet size that it will gradually drift up in proportion with our growth in fleet.

Right. And that makes perfect sense. But obviously, it's taking a bit of a step up and that it probably helps to actually set the table for that as we go forward. Also, that kind of circles back to my comment on discretionary cash flow and discretionary cash flow per share growth as we go forward. And then I'm also -- this is another question kind of for Ian, is physical inventory adjustment that you took in the fourth quarter, is there more of that to come as we go into the front end of '26 to kind of set the table for growth in adjusted gross margin again? Or is that really basically behind us? And going forward, it's just actually tuning up operations more than anything else?

Yes, that's very much behind us at this point in time. That was a onetime impact in the fourth quarter. Moving forward, I don't expect continued physical inventory adjustments of that scale.

Great. I think that's all I have right now another good quarter setting up for another interesting and fruitful year.

Our next question comes from Rob Brown with Lake Street Capital Markets.

I wanted to follow up on your comments about increased quoting activity. Can you give a sense of what areas are the most active and maybe the ability to expand, I think you said 50,000 horsepower this year. How early do you have to get the quotes in to expand that 50,000? And what could it be?

When I look at the quoting activity overall, at least from a geographic perspective, it's certainly dominated by Permian Basin as our existing business is. And so really no difference there from where we operate today. In terms of applications, and this was said earlier in the call, one of the questions, we are seeing opportunities in the midstream, but we haven't won one of those yet. On the 50,000, just to confirm though, that is contracted growth that we are expected to set in 2026.

So we're seeing a mix of existing customers, larger existing customers in terms of quoting some customers that are very large companies, but relatively small customers for us where the quoting activity is far, far in excess of the amount of business that we have with them today. And then some new customers in there, a number of whom we've already won some units with. So it's -- I would generally describe it as broad-based.

Great. Okay. And then just on the comments around the natural gas demand, some of the demand drivers there. I guess, do you foresee a better utilization in your smaller horsepower fleet from that? Or how does that impact kind of your business...

I would say that we have not modeled that really into our forward guidance. I think it's a reasonable expectation that we will see it. We just haven't -- we haven't included that in. And as our business is increasingly becoming dominated by large horsepower units, the impact to the business will be -- it could be a reasonable amount, but I wouldn't describe it as particularly significant in -- relative to the overall size of the business.

[Operator Instructions] I don't see any other questions.

Thank you, Luke. And thank you all for your questions and for your continued interest in NGS. We sincerely appreciate your support and look forward to updating you on our progress next quarter. Thank you.

Thank you, everyone. This concludes today's conference call. Thank you for attending.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Inc. Quarter 3 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone.

Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in forward-looking statements.

Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements.

These and other risks are described in yesterday's earnings press release and in our filings with the SEC, including our Form 10-Q for the period ended September 30, 2025, and our Form 8-K. These documents can be found in the Investors section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially.

In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted gross margin, among others. For reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release.

I will now turn the call over to Justin Jacobs, Chief Executive Officer. Justin?

Thank you, Anna, and good morning, everyone. Thank you for joining our Q3 earnings call. Joining me today is Ian Eckert, our Chief Financial Officer.

NGS delivered record results again in the third quarter, extending our momentum and reinforcing the value we provide our customers through high unit run time and great service. These results were achieved through the dedication of our people, I want to start by thanking the entire NGS team. Once again, I want to pay special thanks to our exceptional field service technicians who are the backbone of NGS. Ultimately, they are the reason that customers, both existing and new are increasingly looking to Natural Gas Services to provide their compression needs.

Starting with third quarter performance, we delivered a record quarter across several key metrics, including total rented horsepower, horsepower utilization, adjusted EBITDA and earnings per share. This performance was driven by strong field service execution and excellent technology-enabled uptime. We continue to take market share in large horsepower compression, reflected by the 27,000 horsepower increase in the quarter. All new sets were large horsepower under long-term contract and roughly half were large horsepower electric units.

I'd also like to call out the disclosure in our 10-Q regarding Devon Energy, which now represents more than 10% of year-to-date revenue. Devon is a long-time customer that we have had significant amount of horsepower sets over the past year. We are proud to partner with them and look forward to delivering on their needs for years to come.

We delivered third quarter adjusted EBITDA of $20.8 million, up approximately 15% year-over-year and 6% sequentially. These results allow us to raise full year 2025 adjusted EBITDA guidance to $78 million to $81 million from the prior $76 million to $80 million range. Additionally, we paid out NGS' inaugural quarterly dividend of $0.10 per share, another important step in enhancing shareholder returns.

Our compelling performance, durable operating cash flows and confidence in the 2026 outlook make it possible to increase our fourth quarter dividend by 10% to $0.11 per share or an annualized $0.44 per share. While investors should not expect a dividend increase every quarter, the Board wanted to communicate its clear understanding of the importance of a continuous and growing dividend. These shareholder distributions do not preclude continued high levels of growth.

NGS maintains the best leverage position among its public compression peers, giving us the flexibility to fund both growth and shareholder returns. Our competitive position continues to improve through technology leadership and service excellence.

As we discussed on previous calls, when comparing to year-end 2024 horsepower, we expected to add approximately 90,000 horsepower over the course of 2025 and early 2026. The significant addition of new electric and gas units in the third quarter keep us on track for that number.

Looking at 2026, we already have a significant number of new large horsepower units on the contract. This is a mix of both gas and electric units. Additionally, our opportunity pipeline remains quite active for 2026 sets driven by both existing and new customers. This indicates strong continued demand for compression.

While it is still early, based on visibility we have today, we would provide an initial expectation for 2026 growth CapEx of $50 million to $70 million. I'll provide more color in the guidance section of this call.

Turning to the broader market, we have delivered strong and sustainable results through September year-to-date, despite persistent volatility and global macroeconomic uncertainty. Regardless of whether these conditions persist, we remain confident in our ability to deliver improved performance because our business is tied to existing production where demand for compression continues to grow.

Our customers in oil production currently have a heavy focus on production efficiency, reliability and emissions performance. These are all areas where NGS is advantaged. Furthermore, rising electricity demand and LNG infrastructure build-out create durable compression intensive growth opportunities. AI and data center expansion, both domestically and internationally, further drive natural gas production and compression needs.

Overall, we are optimistic. Compression is essential to delivering production throughput and our fleet, technology and service position NGS to deliver value to both customers and shareholders.

I'll move next to our growth and value drivers. First, fleet optimization. We continue to optimize our fleet assets as reflected in continued improvement in rental revenue per horsepower performance. We finished the quarter at $27.08 per horsepower per month, a 1.7% sequential increase driven by new unit sets and price capture through contract renewals.

Beyond price and mix, the next leg of optimization comes from data. We are more deeply integrating operational performance from our units and broader operations directly into our enterprise systems, so that commercial and operational decisions are made faster and with more precision. Customers increasingly recognize this as a differentiator.

The ability to drive uptime and gas flow through data analytics has become a real competitive advantage for NGS. These investments have tangible payoffs, lower maintenance cost per unit hour higher customer retention and improved fleet performance. On asset utilization, we have consistently improved working capital efficiency and continue to pursue targeted optimization initiatives.

The income tax receivable has been approved by the Joint Committee on Taxation, and we are awaiting payment processing once the federal government shutdown ends. Prior to the beginning of the shutdown, my expectation was that we were going to announce receipt of this receivable on this call.

Regarding real estate monetization, we will provide greater transparency on these efforts in the coming quarters. As I've said before, we are not real estate investors. Our goal is to convert nonproductive assets into productive horsepower in the field.

These noncash asset monetization efforts provide additional capital to support fleet expansion as reflected in this quarter's additions and our commitment to add significantly more horsepower.

Momentum is building with both existing and prospective customers. As I now repeat on these calls, we are clearly taking market share organically. One simple way to quantify this is to look at our growth capital to EBITDA ratio. For NGS, our growth CapEx is for new units under long-term contracts.

When you compare our growth CapEx to EBITDA, we were materially higher than each of our publicly traded competitors in 2023, 2024 and now again in 2025. I'm highly confident this trend will continue in 2026. I believe our market share gains are driven by our service, our unit technology and our lower leverage.

With that, I'll turn the call over to Ian to review detailed financial and operating results before returning for closing comments on guidance.

Thank you, Justin, and good morning to those joining us. As Justin emphasized, we delivered a very strong quarter, reflecting significant new fleet additions that position NGS well to continue delivering shareholder value.

To recap the third quarter, total rental revenue grew 11.1% year-over-year and 4.9% sequentially to $41.5 million. This growth reflects the 27,000 rented horsepower increase during the quarter. Rental adjusted gross margin was $25.5 million, up $2.6 million year-over-year and $1.5 million sequentially. The rental adjusted gross margin percentage was 61.5%, an improvement of 19 basis points year-over-year and 75 basis points sequentially, reflecting sustained pricing discipline, large horsepower fleet additions and lower maintenance parts consumption.

Adjusted EBITDA for the quarter was $20.8 million, up $2.7 million year-over-year, and $1.2 million sequentially. Net income was $5.8 million or $0.46 per diluted share, up $800,000 year-over-year and $600,000 sequentially.

Rented horsepower ended the quarter at approximately $526,000 compared to $475,000 a year ago and $499,000 in the second quarter of 2025. That's an 11% increase year-over-year and 5% sequentially. Fleet utilization reached a record 84.1%, up 204 basis points year-over-year and 45 basis points sequentially, with essentially all large horsepower equipment fully utilized.

Operating cash flow for the quarter was $16.8 million, supported by continued improvement in accounts receivable with quarter-end DSO of 28 days. Capital expenditures totaled $41.9 million, including $39.1 million of growth CapEx and $2.8 million maintenance. Sequentially, growth CapEx increased $17 million as fabrication ramped up to deliver new unit sets.

We ended the quarter with $208 million outstanding on our upsized revolver and $163 million in available liquidity. Our leverage ratio was 2.5x, up modestly from 2.31x in the second quarter and remains the lowest among our public compression peers by a significant margin.

Regarding capital returns, our approach remains disciplined and balanced. Focused on delivering a growing dividend over time, while investors should not expect dividend increases every quarter, the decision to raise the fourth quarter dividend by 10% to $0.11 per share underscores confidence in the durability of our operating cash flow.

Speaking of outlook, I'll now hand it back to Justin to discuss guidance.

Thank you, Ian. Looking ahead, based on our year-to-date performance and a strong second half deployment schedule, we are raising full year 2025 adjusted EBITDA guidance to $78 million to $81 million. This is a 2% increase at the midpoint from our previous guidance. We expect 2025 growth CapEx of $95 million to $110 million. a modest tightening of the range due to improved visibility on payment timing with no impact on total horsepower additions.

Looking beyond this year, our preliminary expectation is that 2026 growth CapEx will be $50 million to $70 million. While it is still early, we wanted to communicate to our investors that 2026 will be another year of organic growth for NGS. I have a very high degree of confidence in the low end of that range. How far we go in or above that range will be determined as much by timing as customer needs.

As I noted earlier on the call, new unit quote activity for 2026 remains significant for both existing and new customers. I would also comment that regardless of where we are in the range, we expect to materially outpace our publicly traded competitors when comparing growth CapEx to EBITDA.

Further, we are starting to see 2027 RFPs and the amount of horsepower indicates continued growth into the future. Our 2025 maintenance CapEx remains $11 million to $14 million, and our ROIC target is unchanged.

In closing, we delivered multiple company records in the third quarter. This momentum reflects technology and service enabled share gains with our customers along with operational and capital efficiency. NGS has set up for strong performance for the remainder of this year, next year and beyond.

We are materially increasing the size of our fleet through strategic investments in large horsepower compression, including electric motor drives, with what we believe is industry-leading technology and service.

Luke, we're now ready to open the call for questions.

[Operator Instructions] And our first question comes from Selman Akyol with Stifel.

Congratulations on the nice results. I just want to start off, I guess, in on '26 and sort of the outlook there. Can you just talk about how those conversations are going with customers? Do they seem to be more hesitant in this environment? Are they waiting longer?

And then also, we've heard or seen that getting new units is approaching 60 weeks, and I'm curious if you're seeing that the same thing in the supply chain. And then if you are, then how do you get additional units from here for 26?

Sure. Thanks for joining, Selman. So on -- so 2 parts there. First, just I'll just address generally kind of customer activity. And -- from the RFPs -- or I should say, from the units that we have contracted already from the activity we're seeing in '26 and '27, we're not seeing hesitancy. So I think generally, as we look at that, we're -- we take that as encouraging that in -- certainly with lower oil prices, I think there was some concern around that.

But we're seeing a broad range of interest in what we've already signed and in potential. It's a little difficult for me to judge how much of that might be to some of the market share gains versus just stronger activity than I think some people may have expected. So it's a little difficult for me to necessarily differentiate between those 2. I suspect it's a mix of both. But we are -- we're encouraged what we're seeing in terms of demand, including for gas lift in the Permian.

On the new unit fabrication lead times, there are a range of different lead times for different units, what I would say is we look at 2026 and particularly the back half of the year for some of the different types of potential new contract wins we get, we will be able to fill some of those.

Now there will be some timing concerns if it's new units in the first half of the year, that's going to be challenging, not necessarily impossible, but challenging. But it's really kind of the second half of the year where we think there are certain types of units where we'll be able to meet customer demand.

Got it. And then just one other quick one for me. Opportunities for margin improvement from here?

I think in the near term, the kind of low 60s number that we have hit for the last number of quarters now, is still consistent with what we see in the near term over the more -- going further -- a little further out, mix shift to large horsepower will certainly continue to pull margins up, and then in terms of optimization of our business, I think it's still too early for us to give any specific guidance around that.

Our next question comes from Tate Sullivan with Maxim Group.

In terms of the end market, uses for the larger natural gas compressors. Is it still the majority of the demand for gas lift in the Permian? And can you reconcile that with your comments about growing demand for data center natural gas fluids?

Sure. Thanks for joining Tate. So the -- while not all of our new unit demand is gas lift in the Permian. It's certainly the significant majority of it. And as I said, we're still seeing good amount of activity around that in terms of existing contracts and potential new sets.

On the compression needs for data centers, AI, LNG, that really creates incremental opportunity for us as we are primarily in gas lift applications today. same basic equipment, so it keeps tightness in the market for the large horsepower and is an area where we hope to be able to grow in the future.

Are your compressors now large enough to be placed on pipeline for example, for pipeline extensions in dedicated natural gas plants?

Yes. Yes, they are. Those are typically north of 1,000 horsepower, 1,600 horsepower units, 2,500 horsepower units, and that's where a lot of our new unit sets are.

So do you already have existing units placed for natural gas pipeline compression purposes?

We do not have midstream applications today.

But that's an opportunity. Okay, understood.

Our next question comes from Rob Brown with Lake Street Capital Markets.

On your '26 outlook or CapEx outlook, you said confidence in the low end of the range, but sort of what's the ins and outs on getting that or growing that number? Is it really just timing of contract win or just a sense of what can move that around?

I think it's that. I mean it's still early. We're in November now. And as I said in response to one of the earlier questions, we certainly still have some opportunities in the second half of the year for new unit sets. And so that's something that we'll be able to give, I think, better clarity around on the next quarter call.

But we just wanted to indicate to our investors that we're going to have significant growth again next year and a very large portion of that is already contracted and as we engage with customers over the coming couple of months to finalize 2026, our hope is to push that number up.

Okay. Great. And then you've had good market share gains, I guess, what's your sense on that? How can that -- what's the sense on whether that can continue? And do you need to continue to penetrate new customers? Or is it really a share gain at your existing base?

I think it's a mix of both. I have been -- obviously, we had the disclosure, as we mentioned earlier, is in the queue of a new 10% customer. We've been setting a lot of equipment with Devon have been very pleased with that relationship and look forward to performing on even larger amounts of horsepower of them going forward.

As I look at 2026 and then even beyond that, I think we have an expectation we're going to continue to grow with our existing customers, and we're certainly seeing opportunities with some new customers that could be potentially quite large, but still early there, we have to go out and get some of those wins.

[Operator Instructions] Our next question comes from Nate Penton with the Texas Capital.

Can you talk about your decision to course, can you talk about your decision to increase the dividend here, given the strong outlook you're messaging for future growth potential? And maybe how you balance that increasing return of capital goal with the growth opportunities ahead of you?

Sure. I think it is a balance as we look out to the -- further out into the future of eventually getting to a defined capital allocation framework where we've got a certain amount of EBITDA and whatever term you only use getting down distributable cash flow and how we allocate that out.

The -- obviously, we had the initial or inaugural dividend last quarter. And just to reiterate, we do not want to create the expectation that there will be an increase every quarter. With that being said, considering the performance of the business and our outlook, we did want to signal to investors that we hear the message loud and clear of a continuous and growing dividend.

As we said in our prepared remarks, this is not going to impact in any way our ability to continue to grow from just a dollar perspective. It's not going to impact that, but we thought it was a good way of showing that we're going to be increasing dividend and return of capital to shareholders, while still growing the business at a materially higher rate than our public competitors.

Got it. And then maybe going back to Devon, specifically, how is NGS able to make inroads there? And how did that relationship develop?

It's been a longtime relationship. If you go back, I'm not sure how many years, but quite a few years ago, they were a disclosed customer, so they've been a long-time customer. And it was, I think, a great example for us of what some of the technology that we have on our units that are proprietary to us led to a significant expansion of a relationship with an existing customer.

And as they understood some of the capabilities of our units and some of the data that they would be able to get off of that, that was the primary driver on top of a reputation from a service perspective to deliver their needs and what is a mission-critical service for them.

And so it really -- it boiled down to the 2 simple things or maybe 3 simple things of long-time existing customer gets an understanding of some of the current capabilities we have and the run time that we've delivered for our customers, including for Devon, that allowed the significant expansion of that relationship.

Great. Congrats again.

Thanks, Nate.

And last question so far comes from Jin Rollyson, Raymond James.

Again, congrats on another solid quarter. Justin, just kind of following up on that. So you mentioned how Devon expanded from a customer into there -- maybe just a little bit of color on new customer opportunities as we're kind of spreading about what's your technology and service quality is doing for OXY and Devon to drive new potential customers to the door? Or how are you setting up to get new customers? I'm curious.

I think it's an ongoing effort. I think I believe that we are seeing success there in terms of public quantification, Devon is that's something we're able to point to. In terms of conversations with both existing customers that maybe are much smaller customers where we have -- it's just a smaller customer. It is really having multiple conversations and then doing demonstrations and showing in the field of this is how the technology works. These are the benefits that our customers get out of that and really getting into the operational engineering teams at these customers, both existing and then looking to do with new customers as well. And it's certainly a process.

But I'm encouraged by the reaction that we get from these customers when they really start to see the benefits that they will get from a service performance perspective and data perspective. And so I think it's ongoing and there are a couple of positive indicators, but something we have to keep working at.

Sure. Appreciate that. And maybe just back up on the CapEx. If I go back 2023, you guys had a very heavy CapEx year, delivered a lot of new units, and you kind of took '24 to maybe absorb some of that, get it all, make sure operations are running the way you want it to, and then you lean back in this year.

And so I guess, as I think about the 50 to 70 kind of starting point for CapEx, do we think about '26 maybe as kind of a '24 type of year and then things continue to build for '27 potentially ramping back up if the macro still kind of cooperates? Is that a good way to think about it?

I think generally, we looked at 2026 and say it's in -- it looks like it will be generally in line with 2024. I mean as you go back to 2023, it's a bit of an outlier year in terms of the numbers, it's quite a huge number. But 2025, looking midpoint kind of the low hundreds, some of that is driven by particularly large customer wins, which may not repeat year-to-year, although we're still setting activity.

And so we're encouraged by 2026, the opportunities that we see. And then -- and then 2027, starting to see the RFPs for that customers that are, I think, kind of ahead of the curve or maybe on the curve where they should be from an ordering perspective. And those are significant potential horsepower wins.

And so we're encouraged as we look forward that we're going to continue to grow at a significant rate organically. And as I kind of look at the market broadly, see that we're capturing market share.

Awesome. Look forward to that growth.

Thank you very much, Jim. Appreciate it.

And with that, we have no other questions.

Excellent. Well, thank you, Luke. Thank you to everyone for joining the call this morning. I appreciate the time and the interest and we look forward to continuing to report strong results for our investors. And so we will see you again on the next quarter's call. Thank you for your time.

Thank you, everyone. And this concludes today's conference call. Thank you for attending.