Decarbonization And Electrification Will Drive Compression Equipment Upgrades

Key Takeaways

• Expansion into long-term contracts, digital services, and eco-friendly fleet upgrades is enhancing revenue stability, margin growth, and recurring income.
  
• Rising natural gas demand, higher fleet utilization, and monetization of non-core assets are boosting capital efficiency and positioning the company for sustained organic growth.
  
• Heavy customer concentration, industry decarbonization, shifting energy trends, underutilized assets, and sector consolidation threaten NGS’s growth, margins, and long-term competitiveness.

Catalysts

Provides natural gas compression equipment, technology, and services to the energy industry in the United States.

• Anticipated growth in LNG exports and new pipeline projects is likely to increase natural gas demand, translating into strong demand visibility for Natural Gas Services Group’s compression fleet and potentially creating upside for small, medium, and large horsepower units. This dynamic is expected to drive sustained revenue growth well into 2026 and beyond.
  
• Ongoing customer focus on reducing carbon emissions and stricter regulatory requirements around methane emissions are encouraging upgrades to low-emission and electric-driven compressor units. As Natural Gas Services Group continues fleet modernization and provides technology solutions, the company is positioned to benefit from premium pricing and margin expansion, supporting higher EBITDA and net margins.
  
• The company’s strategic expansion into long-term, multi-year rental contracts with major customers (including contracts already secured for 2026) is increasing revenue stability and reducing exposure to short-term market volatility, which provides greater visibility into forward earnings and cash flows.
  
• Acceleration of fleet utilization, continued reduction of idle assets, and monetization strategies for real estate and tax receivables will likely free up additional capital for organic growth or opportunistic acquisitions, further enhancing return on capital and supporting potential EPS growth.
  
• Industry-wide movement toward outsourced compression services and asset-light, rental-based models combined with Natural Gas Services Group’s high service levels and digitalization initiatives is resulting in increased customer stickiness and recurring revenue, which should further improve gross margins, earnings quality, and long-term shareholder value.

Natural Gas Services Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Natural Gas Services Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Natural Gas Services Group's revenue will grow by 9.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.5% today to 12.9% in 3 years time.
• The bullish analysts expect earnings to reach $27.1 million (and earnings per share of $2.13) by about May 2028, up from $17.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.0x on those 2028 earnings, up from 18.3x today. This future PE is greater than the current PE for the US Energy Services industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Natural Gas Services Group Future Earnings Per Share Growth

Risks

• The company relies heavily on a small number of large customers, with one customer contributing 46 percent of revenue in the most recent quarter, exposing NGS to significant revenue volatility and risk if this or other major clients reduce their business with the company.
  
• Secular trends toward decarbonization and stricter global ESG mandates threaten to erode the long-term market for natural gas infrastructure, which could systematically contract demand for NGS’s compression and processing equipment and negatively impact both revenue and long-term investor appetite.
  
• Sustained improvements and falling costs in renewable energy technologies such as solar, wind, and battery storage may undermine natural gas’s position as a “bridge fuel,” leading to long-term pressure on compression equipment demand and reducing NGS’s growth opportunities across both revenue and future earnings.
  
• The company’s compression fleet includes a sizable idle portion concentrated in small and medium units, and while there are ongoing efforts for technology upgrades and electric conversions, slow progress or insufficient reinvestment in new technology could increase maintenance expenses and erode net margins over time.
  
• The oil and gas services sector continues to undergo consolidation, favoring larger and more diversified players at the expense of smaller specialists like NGS, which could squeeze margins, diminish pricing power, and result in revenue and profit erosion if NGS fails to keep pace or loses competitive bids, especially as digital and automated solutions become more prevalent among its peers.

Valuation

• The assumed bullish price target for Natural Gas Services Group is $45.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Natural Gas Services Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $210.0 million, earnings will come to $27.1 million, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $24.87, the bullish analyst price target of $45.0 is 44.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.