Natural Gas Services Group, Inc. (AMEX:NGS)
Midland, Texas
http://www.ngsgi.com

52-week low / high: $13.55/ $29.72
Shares Outstanding: 12.09 million
Market Capitalization: $325 million

If they weren’t already aware, the award-winning film “There Will Be Blood” helped hammer home the point to Americans that people make money in the oil business — a lot of it. Demand for oil and gas is greater than supply and — with a rising population and increasing international modernization — the gap is increasing, making the business fundamentals hard to beat.

Texas-based small cap Natural Gas Services (AMEX:NGS) fabricates, makes, rents and sells natural gas compressors and related equipment. Its primary focus is renting natural gas compressors, which are mechanical devices used to increase gas pressure by reducing volume.

The firm usually contracts out compressors for periods between six months and two years. Most of the customers continue renting the compressors on a month-to-month basis after their contract runs out, according to the company.

The biggest factor that determines Natural Gas Services’ success is the worldwide supply and demand for natural gas. According to regulatory filings, the company expects its business activity to mostly track the levels seen in the natural gas industry overall. Changes in domestic natural gas production, consumption and prices affect the firm more than similar changes in crude oil.

The firm also believes the demand for compression services is driven by declining oil reservoir pressure. Oil producers are increasingly focusing on non-conventional natural gas production — coalbed methane, gas shales and tight gas — which usually requires more compression than normal reservoirs. If companies continue to go to the largest publicly traded provider of small- to medium-horsepower gas compressors, Natural Gas Services’ investors will continue to enjoy rising profits.

The company aims to meet rising demand by expanding its rental revenue. During the recently completed first quarter, rental revenue grew 30% to $9 million from $6.9 million a year earlier. It plans to grow in 2008 by adding 300 to 350 compressors to its overall fleet. The firm added 69 compressor units to its fleet during the first quarter. On March 31, the company had 1,422 compressors, up 23% from 1,157 units a year earlier.

“We were able to [add compressor units] in spite of moving into our new facility in the first quarter and lost time of over 1,500 hours due to flue and illness,” Taylor said during a conference call with investors on May 6.

In the recently ended first quarter, Natural Gas Services recorded a 13% boost in revenue to $18.9 million, from $16.7 million a year earlier. Wall Street analysts, on average, anticipated $20.9 million in revenue.

In a press release, Natural Gas Services said it believes market fundamentals for natural gas are favorable. For the three months ended March 31, the Midland, Tex.-based firm’s net income increased 31% to $3.5 million, or $0.29 per share, compared with $2.7 million, or $0.22 per share, a year ago. The consensus estimate on Wall Street was earning $0.28 per share.

Operating costs and expenses during the first quarter jumped to $13.5 million versus $12.5 million during the same period of 2007. Net cash provided by operating activities rose to $8 million from $7.9 million during the prior-year period. The company had $155.2 million in assets at the end of the first quarter, compared with $153.2 million a year earlier.

Note: Natural Gas Services Group, Inc. (AMEX:NGS) is on the "Watch List" of Growth Report, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, Natural Gas Services displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Growth Report portfolio at a later date.

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