NATURAL GAS SERVICES GROUP INC (NGS) stock intrinsic value fair value estimate & owner earnings analysis

Natural Gas Services Group rents natural gas compressors to oil and gas producers. About 78% of its rental revenue comes from the Permian Basin of West Texas and southeastern New Mexico, and roughly 90% of rental revenue supports oil production through "gas lift", where compressed gas is injected into wells to keep oil flowing. The rest comes from other basins in Texas, New Mexico, Ohio, Oklahoma and Michigan. It is an asset-heavy business: the company buys large compressor units, rents them out for years, and has to keep replacing and rebuilding the fleet. From 2022 to 2025 the company more than doubled its fleet of large-horsepower units, paid for largely with borrowed money. Rented horsepower rose from about 420,000 at the end of 2023 to 562,676 at the end of 2025, and revenue grew from $85 million in 2022 to $172 million in 2025. On June 12, 2026 it bought Flatrock Compression, a Permian and Eagle Ford compression fleet of about 87,000 rented horsepower at roughly 95% utilization, for about $109 million in cash plus $10 million in new shares. At June 30, 2026 the company had 669,919 horsepower on rent (88.3% utilization), and $328 million drawn on its bank credit line, up from $230 million at the end of 2025. How we measured earnings. We start from operating cash flow and remove working-capital swings and stock-based pay. Because the company spends far more on new units than it needs to keep the existing fleet running, we treat depreciation as the ongoing cost of maintaining the fleet and exclude the rest of the spending as growth investment. On that basis, the cash the business produced before paying its lenders was about $43 million in 2024 and $47 million in 2025. We made one more adjustment that the earlier analysis did not: the company has paid almost no cash income tax in recent years because tax law lets it write off new equipment immediately. That deferral only lasts while the fleet keeps growing quickly. In cases where we give no credit for future growth spending, we also give no credit for the tax deferral it creates, so we charge tax at the full book rate. That puts the business's earning power at about $79 to $85 per rented horsepower per year (2025 and 2024), and the first two quarters of 2026 ran close to the 2025 level. The growth we credit, and the growth we don't. The business's cash flow before interest grew 7.2% per share in 2025. Our base case gives no further growth rate on top of that. The step up in our starting level comes from two things already in place: horsepower that was actually on rent at June 30, 2026 (about 14% more than the 2025 average, from units already built and paid for) and the Flatrock fleet the company now owns. We give no credit for the $60 to $80 million of new units the company plans to build in 2026, or for any future acquisitions. Those depend on spending and contracts that have not happened yet, and the new debt that pays for them is not in our debt figure either. Base case. The 669,919 rented horsepower earns about $80 per horsepower a year, or about $54 million a year before interest. That level holds for 25 years, supported by the company's record since the late 1990s of keeping a rental fleet at work through the 2015-2016 and 2020 downturns. It then fades to zero over the following 15 years as the oil fields it serves mature. The business is worth about $754 million, or $57.77 per share. It owes about $336 million: the $328 million credit line, plus about $8.5 million for the credit line costing roughly three-quarters of a point more than 6% for several years. That leaves $31.99 per share for shareholders. Bear case. Occidental and Devon together made up about 64% of revenue before the Flatrock deal and about 54% after. About 98,500 horsepower rents month to month, and the rest sits on contracts that expire between 2026 and 2030. In the bear case, one of the two big customers hands back a large block of units as its contracts expire in 2027-2029, and weaker oil drilling pushes rented horsepower down about 20%, to roughly 535,000, with re-rented units earning less. The business then produces about $37.5 million a year before interest from the third year. That holds for 15 years and fades to zero by year 25. On that path, debt would be close to four times the earnings measure its bank uses, above the 3.5 times limit in the bank agreement, just as the credit line comes due on February 28, 2028. So we charge about $34.5 million for five years of borrowing at roughly 2.5 points above 6%, in the form of amendment fees and higher margins. The business would be worth about $449 million ($34.37 per share) against about $362 million owed ($27.77 per share), leaving only $6.60 per share. The business still covers its interest in this case, but lenders would take most of the value. Bull case. Rented-fleet earnings return to the 2024 level of about $85 per horsepower, and units already paid for in the first half of 2026 add about 17,000 horsepower. That gives about $58 million a year before interest, held for 30 years and then faded over 15. The business would be worth about $860 million ($65.88 per share) against about $333 million owed ($25.51 per share), leaving $40.37 per share. What changed from our previous view. We previously estimated about $55 per share. The biggest change is how we treat the debt. The earlier figure valued earnings after interest as though today's borrowing would roll over forever on today's terms, and weighed the debt only loosely in the downside. We now value the whole business first and then subtract everything it owes: about $26 per share, and more now that Flatrock has been bought with borrowed money. We also no longer assume the business grows slowly forever, and we now charge full taxes. Working the other way, the business is larger than before: more horsepower is on rent, Flatrock is included, and customer concentration is lower. The net effect is a lower value per share. What could make this wrong. Oil prices and Permian drilling drive demand, and the two largest customers still make up more than half of revenue. The credit line matures in February 2028, although the lenders raised it to $500 million in June 2026, which suggests refinancing is available today. If new units keep coming onto rent at the returns of 2024, value would build above our base case. If utilization slips back toward earlier levels, the debt absorbs most of the loss. We added no value for the former headquarters and Midland fabrication buildings the company is trying to sell, because the filings give no sale price. At about $32 per share in the base case and under $7 in the bear case, borrowed money magnifies both outcomes. The estimate calls for a wide margin of safety, and the margin-of-safety price is about $17 per share.