Unidentified Analyst: Got it. And then just last 1 for me and then I’ll turn it over. You talked about natural gas prices, and you don’t really see that as being the growth story. Can you just say how much of your compression is located in those basins?
Justin Jacobs: Sure. So as we look at the breakout, where rough numbers, 75% in oil basins the balance, so roughly 25% in natural gas.
Unidentified Analyst: Great. I’ll take the rest offline. Thank you so much.
Justin Jacobs: Thank you.
Operator: Thank you, sir. I’ll go ahead and open up again for Mr. Hughes. Mr. Hughes, please go ahead.
Unidentified Analyst: Hello there. Yes. My name is Frank Hughes, I’m a former Director and shareholder. First, I’d like to say, Justin, congratulations on your appointment as the CEO. And Steve, congratulations on the next phase of your retirement. I think this has been — this whole transition has been handled expertly. Justin, my question is for you, and it’s more of a personal level. Could you discuss for a minute to your personal journey going from Managing Director at Mill Road to a Board member at NGS to CEO. I’d appreciate understanding a little bit about that transition for you.
Justin Jacobs: Sure. First, thank you for the comments. I’ll speak for Steve here for a second, but we appreciate that the shareholder perception is as it actually is, which has been, I think, a very constructive partnership. So I appreciate the positive comments there and noting that. From a personal perspective, prior to Mill Road, I worked really a combination of operational role and investor, particularly in turnaround situations. And so for me, this is a little bit of a going back to earlier in my career. As I looked at the opportunity with natural gas services having been on the Board and a shareholder through Mill Road for several years prior to that, I see what I believe is really some great potential. Certainly, as you look at the results over the past year, the business has grown significantly.
And I think there’s an opportunity to continue growth in the future for several years. So that was a very attractive opportunity of my relationship with Steve and having been on the Board gave me confidence that I’d be able to step in and really hit the ground running with a great transition. And so overall, it was just an exciting opportunity for me. And in speaking with my team, our now former team at Mill Road who were longtime friends and colleagues, they were just incredibly supportive in that opportunity and really joining one of their larger investments. And so all around, it was a great opportunity that I excited been able to take.
Unidentified Analyst: Well, again, thank you very much for those comments. I’ve been involved with Natural Gas Services for 25 years, and is initially an investor when it was still private companies. So I’m very glad to see that this managed to work out on behalf of the company and yourself. So again, thank you, Justin.
Justin Jacobs: Thank you.
Operator: I’m sorry. Our next question comes from Mr. Rob Brown. Go ahead, sir.
Rob Brown: Hi, it’s Rob Brown with Lake Street Capital Markets. And congratulations on all the progress.
Justin Jacobs: Thank you. Ron did we lose you there?
Operator: Let’s try it again. Mr. Brown.
Rob Brown: Congratulations on all the progress. Rob Brown with Lake Street. First question is on the kind of the pricing environment. I think you alluded to some opportunities with your — some of your fleet. But how is the overall pricing environment? Does the prices still continue to increase on new unit placements? And I guess, how is the opportunity for pricing, I guess, in the market?
Justin Jacobs: Yes. I would hit that first at just a high level, and I think our comments are earlier words that were seeing both for existing units and for new unit generally attractive pricing. The pricing was, I think really driven over the past several years by significant cost inflation, depending on what metrics you want to look at. But I think the general feel is that level of inflation has moderated some, although still there. And as we look at the areas where we are largest in terms of our business, we’re still seeing that labor inflation, particularly when we look at the Permian Basin where it is still very difficult to attract people in the field. And so as we are going through our existing fleet and looking at new units, we’re certainly taking a close look at pricing to say are we able to maintain and try and improve our margin over time.
Rob Brown: Okay. Great. Got it. And on the CapEx spending outlook, you talked about sort of, I guess, some potential upside to that, I think. Or I guess what drives the upside to the CapEx? Are you seeing kind of customer quotes that could — or customer interest that could drive upside of the CapEx? Or does that look pretty stable for the ’24 period?
Justin Jacobs: Well, we’re certainly seeing incremental customer demand. We haven’t made any decisions around that, but that is a near-term or relative near-term review for us in looking at the availability and making sure we’re maintaining prudent levels of leverage in the future while also looking to capitalize on the ability to pre-contract with some great customers for new units at quite attractive prices. So not something we’ve made a decision on yet. But it is certainly something that we’re looking at, and we’ll update on the next quarter to the extent that our capital plan increases.
Rob Brown: Okay, great. Thank you. I’ll turn it over.
Justin Jacobs: Thanks, Rob.
Operator: Thank you. Thank you Mr. Brown. Our next question comes from Tim O’Toole. Mr. O’Toole, please go ahead.
Tim O’Toole: Good morning. Can you hear me, alright?
Justin Jacobs: We can hear you, Tim.
Tim O’Toole: Great. And as I’ve done in the past, and I — first of all, welcome, Justin, and congratulations to Steve for finally retiring after a couple of trials. And we’ll catch up with you offline at some point, Steve. A couple of quick questions. One is on the balance sheet, the debt level coming out of the fourth quarter at $164 million. We’re now basically closing the books on the first quarter. So I’m wondering if you could talk about kind of current debt levels? And then also where would you target that to go in terms of some of the various ratios. Let’s just say if you’re $60 million to $65 million of EBITDA this year, coming out of the year, absent, let’s say, M&A, where would you like — where would you target that ratio to be, yes, coming out?
And then kind of also related, I think that you have — that on your debt facility that you have depending on leverage ratios, varying a grid or a matrix on the spread to SOFR. Where can that go? We can’t really control what the Fed does in terms of short-term rates and what SOFR winds up being. But that spread will relate to the coverage ratio. So could you talk about that and the leverage a little bit?
Justin Jacobs: Sure. And maybe I’ll ask John Bittner to address the second question first just as it relates to the pricing on the interest rate.
John Bittner: Great. So the pricing on the interest rate increases by 25 basis points when our leverage goes north up 2.75, which we are now currently below. So we are at kind of the mid-tier of the grid on our pricing for more Qs — Q4 2023 and Q1 of 2024.
Justin Jacobs: And on the — to address Tim, your question of target levels, there isn’t a specific target level that I would look at. I would say that as you look at the Q4 numbers, I think that is a level that we are very comfortable with, as we mentioned in the press release, we have a comfortable cushion on both of our financial covenants. And just in looking at the availability and modeling different scenarios into the future, whether positive or potentially negative just in terms of overall market environment, I feel very comfortable with the current level. And I’m not going to, I guess, go through any projections into the future. I think we’ve given some guidance that you could probably reasonably work through and have a sense of where we are going to be on the debt side.
And it’s a balance for us of taking on some incremental debt to capture some potentially attractive new unit opportunities with existing customers that we could potentially grow to be larger customers for us with, I think, a sentiment of some of our shareholders that they generally like where our leverage levels are, maybe they’re comfortable a little bit higher and kind of balancing that for the future.
Tim O’Toole: Okay. Thanks for that. And then you talked also about — well, I guess, I’m not sure if you said monetizing, but I’m wondering kind of what the — what dials you can turn here. The AR or the accounts receivable days are obviously high. Could you maybe talk about targets on that and how many quarters it takes to kind of normalize towards those targets? And if there are any other assets and in fact, I’m wondering about, I guess, specifically, but maybe you can broaden the discussion as well on the fab facilities. Have they been monetized? Or is that a process that you’re pursuing at this point?
Justin Jacobs: Sure. So let me take — I’ll first go to accounts receivable. As you mentioned, our days receivable is much higher than historical. If you look at our historical, going back several years, without giving a specific number, those levels are really where we’re looking to get back to, and we don’t see any reason at this point, we can’t do that over the course of the year. I will give specific kind of quarterly targets, but we’re comfortable saying over the course of the year, we understand what we need to do to bring it back down to more historical levels. On the fabrication facilities, we’re currently reviewing the capabilities that we need as a business to really drive the rental side. We’ve got some great people and some great capabilities that are necessary for us in terms of what we’ll do on facilities, all of that will be driven by the capabilities that we need. And that’s a process that is ongoing.
Tim O’Toole: Okay. Great, thank you for that. Another quick question, balance sheet question is the tax receivable has been out there for quite a long time, obviously. Any quick update on that? I mean any visibility in terms of the government moving on that?
Justin Jacobs: So nothing incremental that I would view other than what we put in our disclosure in terms of forward-looking. I certainly will say it is at or near the top of our list of something that we would turn from a current noncash asset into a cash asset to be able to invest back in the fleet. So it’s something that is right at the capital one.
Tim O’Toole: Right. Yes, I’m sure it is, you can actually control it. And then final area, maybe you could talk a little bit about capital allocation. Basically, all of your peers actually — I think all of your peers actually resolve not just on EBITDA, but also on discretionary cash flow, which one can back through, and I do. But I think everyone kind of — many people use it in this industry as a valuation metric. And then that relates also to based on a year’s discretionary cash flow, how do you allocate that capital? And is there a consideration of adding at least a modest dividend at some point vis-a-vis that capital allocation strategy, if you will.
Justin Jacobs: Sure. So I think you’re — and I look back in previous quarters and you’ve asked the question around discretionary cash flow, I think it’s an entirely reasonable topic for us to consider how we over time, provide better understanding to our shareholders about how we’re thinking about capital allocation. For that particular topic, we’ve given some incremental guidance in this quarter relative to what we’ve done in the past. And of course, Steve gave guidance for the first time on the prior quarter call. So on general capital allocation, it is a good question of which we’re going to consider how we give better color to our investors over time. And that’s something we look to do without giving a specific timing of what we’re going — when we’re going to do it by and exactly what we’re going to do.
The topic of dividend is one that the Board certainly is considering as part of overall capital allocation, nothing specific that I would give there in terms of potential timing or any more detail on that other than to say it is clear looking at the large players that a dividend is a material part of or is likely a material part of their valuation, and I’m mindful of that and the Board is mindful of.
Tim O’Toole: Okay, great. Thanks for all the discussion and congratulations to you both and the whole team there. Keep up the good work. Thanks.
Justin Jacobs: Thanks for your question, Tim.
Operator: Thank you, Mr. O’Toole. The last question looks like it comes from Tate Sullivan. Mr. Sullivan, please go ahead.
