Q4 2023 Natural Gas Services Group Inc Earnings Call

Participants

Anna Delgado; IR; Natural Gas Services Group Inc

Justin Jacobs; Chief Executive Officer; Natural Gas Services Group Inc

Steve Taylor; Chairman; Natural Gas Services Group Inc

John Bittner; Interim Chief Financial Officer; Natural Gas Services Group Inc

Selman Akyol; Analyst; Stifel

Rob Brown; Analyst; Lake Street Capital Markets

Tim O'Toole; Analyst; TETRA Capital

Tate Sullivan; Analyst; Maxim Group

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group, Inc., quarter-four earnings call.
(Operator Instructions) I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Anna Delgado

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 law. Investors are cautioned that forward-looking statements are not guarantees of future performance, and 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. There's been other risks are described in yesterday's press release and in our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2023 . These documents can be found in the Investors section of our website located at www.ngsci.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 reflect certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted gross margin among others. For reconciliations of these non-GAAP financial measures, most directly comparable measures under GAAP, please see yesterday's earnings release.
I will now turn the call over to Justin Jacobs, our Chief Executive Officer officer. Justin?

Justin Jacobs

Thank you, Anna, and good morning, everyone. Welcome to our fourth-quarter 2023 earnings conference call. Thank you for joining us this morning. We appreciate your interest in Natural Gas Services Group.
I'll start by introducing the team. Joining me on the call this morning is Brian Tucker, our President and Chief Operating Officer; Jim Hazlett, our Chief Technical Officer; John Bittner, our Interim Chief Financial Officer; and Steve Taylor, Chairman of our Board of Directors.
Steve's was our longtime CEO and Interim CEO last year. I asked Steve to start us off with some thoughts on the quarter and the year. After that, John will review the quarter and year end detail, and then I will finish our prepared remarks with thoughts on the current state of the business, our updated guidance, and our growth strategy going forward. We will conclude with a question-and-answer session.
Before turning it to Steve, I wanted to take a second to share with all shareholders my appreciation for the first rate approach Steve has taken during this transition. He has been an invaluable resource for me and the team and I welcome presence in the office as one of our largest shareholders. He is well aligned to continue to drive significant value for all shareholders. And from my perspective, he is, as the saying goes, walking the walk.
Thank you, Steve, and the floor is yours.

Steve Taylor

Thanks, Justin. And I appreciate the kind words and want to assure everyone listening that my feeling is mutual . We have great management team in place, it has been my pleasure to work with them. I won't take longer because I think the results speak for themselves.
2023 was a record year for revenue and EBITDA among other items. As we look at this year, particularly this quarter, we are happy with almost every aspect of our performance. But as we talked about our successful by commanding throughout the year, our ability to obtain pre-contracted work of long duration at excellent rates, or the operational and environmental technology, we are increasingly incorporating into our equipment.
There are many areas could be happy with. What we are especially proud of those items that we have accomplished that we can continue to build on in the future. Among them are the continued successful execution of our high horsepower strategy that is well established us in the 1,500 horsepower market had moved us into 2,500 horsepower realm . Our ability to secure additional blue-chip customers, they'll contribute to our growth in the future. And our safety performance. The result have been zero workplace incidents among our employees in 2023.
Visa's legacy initiatives that we can continue to build on into the future. So if you look at the regional fourth quarter or the full year, the company exhibited an exceptional growth results in 2023, and we're going to recite road numbers. John will go through those, but I will note that any time you have a year that exhibits 40% to 50% year-over-year growth in rental revenue, rental adjusted gross margins, and total EBITDA, it's a hell of a year.
Although still all this into the company's ability to produce opportunities and execute on them. We have many opportunities ahead in our management team, led by Justin Jacobs CEO is well-positioned. As Chairman and as a significant shareholder, may have great confidence in our employees and our management team to continue our success.
I'll leave you with one final comment, which is the title of a song from 1986, the future so bright, I got to wear shades. Now I'll turn it over to John Bittner to review the quarter and year in detail. John?

John Bittner

Thank you, Steve, and good morning, everyone. To echo your comments, we had a successful fourth quarter just finished a strong year. So let me jump first and to review of the fourth quarter first, and then I will get to the full year 2023 results.
Total revenue for the three months ended December 31, 2023, increased to $36.2 million, which was up $13.7 million or 61% from $22.5 million in Q4 2022. Our revenue was up 15.5% from $31.4 million for the three months ended September 30, 2023.
Rental revenue for Q4 2023 was up $31.6 million, up from $20.6 million in Q4 2022 for 54% increase year over year and up $3.9 million from $27.7 million in Q3 2023 of 14% increase. Our sales revenue for Q4 2023 was $2.9 million , up $1.6 million or 125% from $1.3 million in Q4 2022, and up $1.5 million from Q3 2023 from 107% increase.
Aftermarket services, our AMS revenue was $1.7 million for Q4 2023, which was up $1 million or 153% for the same quarter in 2022 and down by approximately $600,000 sequentially, a 26% decrease . Our adjusted total gross margin of $20.3 million in the fourth quarter of 2023 increased approximately 89% when compared to $10.7 million in the same period in 2022.
Sequentially, adjusted total gross margin dollars increased 39% from 14.6% last quarter. Adjusted gross margin as a percent of sales for Q4 2023 was 55.9% versus 47.6% for Q4 2022 and 46.4% in Q3 2023. Material increase in our margin percent was driven primarily by rental adjusted gross margins. Our rental adjusted gross margin dollars increased year over year to $19.2 million in Q4 2023 from $11.3 million in Q4 2022, representing a 70% increase sequentially.
Rental adjusted gross margin dollars increased from $14.2 million or a 35% increase. Our rental adjusted gross margin as a percent of sales for Q4 2023 was 60.7% versus 54.8% for Q4 2022 and 51.4% in Q3 2023. Our rental adjusted gross margin was higher than we expected in Q4, primarily due to lower expected labor parts in oil expense.
Our expectation is that rental adjusted gross margins going forward will be somewhere between what we experienced in Q3 and Q4. As we indicated, but our expectation for Q4 on the third quarter earnings call. Adjusted gross margin dollars for our sales revenue increased year over year by $1.6 million to $2.9 million in Q4, an increase of 125% and increased by 107% sequentially.
Adjusted gross margin as a percent of revenue per sales was 21.2% in Q4 2023 versus a negative 65% in Q4 2022 and a negative 7% in Q3 2023. RAMS, adjusted gross margin for Q4 2023 of $440,000 represented $152,000 increase from the prior year or 53% and an increase of $35,000 or 9% from Q3 2023 AMS adjusted gross margin as a percent of revenue was 26.3% in Q4 2023 versus 45% in Q4 2022 and 18% in Q3 2023.
As mentioned on last quarter's call, we've seen a significant increase in AMS revenue from historical levels beginning in Q2 2023. This increase is price primarily due to pass through services that we provide to our range for our customers when installing our large horsepower units. These revenues will fluctuate with the and very low pass through margins since the decline in gross margin percentage from the prior year period. The volume of new units set saw the highest level of activity in Q2 and Q3 of 2023 decreased somewhat in Q4 2023.
Our fourth quarter 2023 adjusted EBITDA was $16.3 million compared to $7.8 million in Q4 2022 or 110% increase year over year in a 38% sequential increase from $11.8 million in Q3. Our Q4 2023 adjusted EBITDA benefited from our unexpected high rental adjusted gross margin and positive contribution from our sales adjusted gross margin.
Pretax operating earnings were $4.4 million for Q4 2023, which improved from an operating loss of approximately $300,000 in Q4 2022. Our Q4 2023 operating income was down approximately $500,000 sequentially from Q3. However, it's important to note, we did take one time charges of approximately $4 million to increase our inventory reserve as a result of the cessation of fabrication operations at our Middletown facility, and additionally, a charge of approximately $500,000 part of the retirement of idle units, both of which as disclosed in our 10-K filed yesterday.
Without these charges, our pro forma operating income would have been $8.9 million for Q4, our sequential increase of $4 million from $4.9 million in Q3 2023. Net income in Q4 2023 was $1.7 million compared to a net loss of approximately $800,000 in Q4 2022, but down from net income of $2.2 million in Q3. Again, the Q4 net income results include the impact of the one-time items discussed above.
Earnings per share for Q4 2023 were $0.14 and $0.13 on a basic and fully diluted basis, respectively, respectively, compared to a loss of $0.05 per share for Q4 2022 and earnings of $0.18 per share in Q3 2023. On a full-year basis, the total revenue for the company increased by 43% to $121.2 million in 2023 from $84.8 million in 2022.
Our rental revenue was also up 43% to $106.1 million in 2023 from $74.5 million in 2022. Our sales revenue was up approximately $353,000 or 4% to $8.9 million in 2023 from $8.6 million in 2022. Our AMS revenue was up 240% to $6.1 million in 2023 from $1.8 million in 2022 .
Our adjusted gross margin dollars increased by 53% year over year to $58.7 million in 2023 from $38.5 million. Our adjusted gross margin for rental was $57.3 million, which was up $20.6 million or 56% from 2022. Our adjusted rental gross margin as a percent of sales for 2023 was 54% compared to 49.3% in 2022.
Adjusted gross margin dollars per sales for [zero] in 2023 compared to a positive $918,000 in 2022, which was approximately 10.7% of sales business compared to its margin was 25% for the full year 2023 compared to 46.6% of revenue in 2022. And a decline in gross margin percentage was driven primarily by the increase in loan pass through billings, low-margin pass-through billings associated with the Canadian assets in 2023.
Our adjusted EBITDA for 2023 was $45.8 million as compared to $29.2 million in 2022 or 57% increase in 2023. Our operating income for 2023 was $10.5 million as compared to approximately $400,000 for 2022. Our SG&A expense was $2.8 million higher in 2023 as compared to 2022 at $16.5 million in '23 versus $13.6 million in 2022. However, our second-half '23 run rate was less than our first half '23 due to some non-recurring items experienced in the first half of the year.
Also deducting from our operating income in 2023. We did have a non-cash non-recurring charge of $779,000 for an asset impairment in the second quarter and the one-time charges of $4 million for the inventory reserve of $500,000 or retirement of idle units disk, just above both of which two were taken in Q4.
Our net income for 2023 was $4.7 million compared to a net loss of approximately $600,000 for the full year 2022. Our basic EPS for 2023 was $0.39 and $0.38 on a fully diluted basis compared to a net loss of $0.05 per share in 20 22 for both measures.
As of December 31, we had 1,247 utilized rental units, representing just over 420,000 horsepower compared to 1,221 rented units, representing just over 318,000 horsepower as of December 31, 2022, we have added approximately 95,000 net horsepower to our fleet over the course in the last year, representing approximately a 22% increase in total fleet horsepower.
Our total fleet size just passed over 500,000 horsepower in September, and we ended the year at a total of 520,365. Personnel is up from approximately 425,000 horsepower fleet size at the end of last year. During the same period, our rigid horsepower grew by over 102,000 horsepower.
We ended the fourth quarter with 66.5% on a per unit utilization on a per-unit basis and 80.8% utilization by horsepower basis. Our revenue per horsepower increased 17% over the year, demonstrating the impact of the growth in high horsepower units and also the price increases we've been able to implement over the past year.
Our total fleet as of December 31, 2023, consisted of 876 units and roughly 520,000 horsepower for 277 horsepower per unit. Our average horsepower per unit has grown by 22% over the past year. And notably, approximately 98% of our high horsepower fleet is utilized in drawing currently.
Turning to the balance sheet, we ended the year with $2.7 million in cash and $164 million outstanding on our amended and restated revolving credit facility. And looking at our two financial covenants contained in our credit agreement, our leverage ratio at the end of Q4 was 2.53 times, which was down from 2.71 times at the end of Q3.
Our fixed charge coverage ratio for Q4 was 3.8 times, up from 2.78 times in Q3. So we were comfortably in compliance with both of our financial covenants as of December 31, 2023.
Our accounts receivable balance as of December 31, 2023, was in excess of $39 million, which is elevated from normal and expected levels due primarily to a significant increase in rental activity in certain process related billing delays, which we expect to address during 2012.
For the net book value of our rental fleet at year end was approximately $374 million. We generated cash flow from operations of $18 million compared to $27.8 million for 2022. The decrease is primarily related to the slower collections in our accounts receivable, as discussed in the paragraph above. We had capital expenditures of approximately $154 million during 2023, and we increased the balance on our amended and restated credit facility by. With that, I will turn it back over to Justin for a discussion of the current operating environment.

Justin Jacobs

Thank you, John. Overall, we continue to see solid demand for both our rental services and new equipment with generally attractive pricing, we see a favorable environment for potential growth over the near to medium term, and we are well positioned to expand our market share while continuing to perform at high levels for our customers.
Approximately 75% of our active fleet is located in oil and liquids oriented basins, where activity is primarily driven by crude oil prices. As such, I'll turn first oil on a macro level, oil prices appear to be relatively steady, which should continue to drive activity. We have reasonable confidence in the oil markets for the near term activity and forecasts generally show stable to increasing production levels for the near to medium term.
Natural gas markets are different story. Pricing is weak and gas oriented rigs are relatively low level. The current moratorium on future LNG facilities has likely negatively impacted sentiment about gas production at least temporarily. Overall, I would describe as natural gas production marketed unsteady.
From the company perspective, we do not currently see natural gas production as a growth story, but our people are doing a good job maintaining our presence in the gas oriented areas, and we continue to profitably rent equipment in these spaces. While the overall environment can be described as favorable, we will remain in a constant state of awareness, the commodity markets can change to the negative in a hurry. As such, we will consistently plan our growth with with an appropriate margin of safety to withstand any potential downturn.
I'll turn to 2024 outlook with an update. The guidance provided on our third quarter earnings call. For a written summary of our outlook, I would point you to our earnings release filed after the market closed yesterday, and I would also remind you of the disclaimer provided at the beginning of this call, which addresses forward-looking guidance.
Our current outlook for 2024 adjusted EBITDA of $58 million to $65 million. That is a material increase in the guidance provided on our third quarter call. As noted in the earnings release, we believe the low end of the range represents our current view of the annualized amount of fourth quarter of 2023 adjusted EBITDA that is run rate or recurring.
As it relates to the fourth quarter of 2023 , there are two items to which I would draw your attention. First, we had sales adjusted gross margin of $0.6 millio n in the fourth quarter, but for the first three quarters of the year, we had negative $0.6 million. We believe the first three quarters of the are much, much better forward indicator than the fourth quarter.
Second, as John noted earlier in the call, the fourth quarter 2023 rental and adjusted gross margin up 61% exceeded our expectations. I would describe margins at that level as everything went right, taking both of these points into account leads us to believe the low end of the range is a good approximation of the run rate.
Adjusted EBITDA of the fourth quarter of 2023. I would further note that we believe there are some areas of investment required in 2024. While we have not yet quantified these investments, they are focused on improving the scalability and efficiency of our operations, both in the field and corporate offices to drive material future growth.
Along those lines, I'm pleased to announce that our new website went live yesterday, although a relatively small investment that is indicative of our intent to make sure all aspects of our business are in line with the technologically innovative equipment we provide to our customers. I'd like to thank our team who made this happen.
I'll move next to new unit capital expenditures for 2024, our new unit capital expenditures expected range is $40 million to $50 million. Of that, approximately $15 million of capital to build new units from the 2023 plan that will be completed and installed in 2024. The balance is 2024 capital planned expenditures that are currently expected to be completed and installed in late 2024 and or early 2025.
In terms of return on invested capital, we are targeting at least 20%. This applies to any growth capital expenditures, which I would define as new units, unit upgrades and unit conversions. This target is an average rate across our growth capital expenditures. I'd also like to discuss our forward growth strategy. While each of these items will help us meet or hopefully exceed our 2024 outlook, they also reflect our long-term intention to grow our revenue and cash flow.
There are four parts to our growth strategy. Number one, optimize the existing utilized fleet number to improve our asset utilization. Number three, expand the rental fleet and number four, execute accretive mergers and acquisitions.
Let me describe each of these points in a little detail. First, optimize the existing utilized fleet. We believe there are opportunities to modestly improve the profit, the profitability of our existing utilized rental fleet through targeted price increases, particularly in geographic areas that have experienced high rates of cost inflation, along with operational efficiency. He is by using improved data collection and analysis to optimize our costs and labor parts and maintenance.
Second, improve our asset utilization, we believe we can improve the overall cash flow, the business by increasing utilization of the fleet as well as creating investable cash for non-cash currently allies units. Any unutilized fleet on the books as of year end 2023 has more than 600 unutilized units, consisting mostly of medium and small horsepower units. We will review these unutilized units, Germany where investment can improve the marketability and cash flow potential of the units.
We also have a significant amount of capital tied up in noncash asset. Notable examples of this include the income tax receivable and the higher accounts receivable, which John discussed earlier. We believe these non-cash assets can be monetized and invested back in the fleet at or above our target levels of return on invested capital.
Third, expand the rental fleet. We intend to prudently increase the size of our rental fleet, mainly through recontracted agreements with our customers. We believe our future growth in this part of our strategy will be primarily driven through our placement of larger horsepower, centralized station natural gas compressor compressors for unconventional oil production, with selective increases in medium horsepower units to meet customer demand beyond our existing fleet, fourth, identify and execute accretive mergers and acquisitions, we believe there may be opportunities and burgers with or acquisitions of rental compression companies or related businesses providing similar services.
While there is no certainty of the probability of any particular deal, we will continue to evaluate potential acquisitions, joint ventures and other our opportunities that could integrate enhanced value for our shareholders. At this point, we will not provide overall growth goals for the medium to long term, nor will we provide a breakout for each of the components of the growth strategy in terms of contribution.
However, it is the framework for how we intend to drive material growth over the next three to five years, and we will look to provide further detail in the future. I remain optimistic as to our growth potential and look forward to delivering against that potential to drive value for our shareholders.
This concludes our prepared remarks, so I will ask the operator to queue up for question-and-answer portion of our call.

Question and Answer Session

Operator

(Operator Instructions)
We do have some questions in queue. Mr. Akyol, please go ahead.

Selman Akyol

Thank you. Good morning. Maybe you could just talk a little bit about what takes you to the high end of your guidance of $65 million?

Justin Jacobs

I think it's as we look at the -- going through the growth strategy, those items really towards the first point, which is optimization of the fleet and seeing what we're able to do in terms of on targeted price increases, some potential improvements in operational efficiencies. And then as we look to the third point expanding the fleet, it's really the timing of when some of the units, which were in the '23 plan and that of spillover into 2024, the timing of when those when I mean those are installed.

Selman Akyol

Understood. Then in terms of your CapEx, in terms of just sort of the new units, can you talk about how much horsepower you're planning on adding, I guess, between the '23 carryover and into '24?

Justin Jacobs

I will give those numbers really just in aggregate, which is if you look at the amount of capital that we spent in 2023 and the horsepower that was added, the ratio as you look at that for 2024 will be roughly the same.

Selman Akyol

Got it . And then you talked about gross margin and sort of guided to sort of three between 3Q and 4Q. If I got that correct, if everything went right in Q4. Understood. But can you talk about which specific risks parts you're seeing maybe go higher, therefore, reducing your gross margin?

Justin Jacobs

It was was really as we looked at that performance in the fourth quarter, as we said, it surpassed our expectations and there's really no particular line item that stood out. It was really across the board with the major line items we highlighted, which are labor parts and consumable expenses, largely oil. And so as we looked at those and looked at the performance of the machinery and just the timing, we would say that it really it's kind of across the board, our expectations with those will come down. So there's no particular line item that we would point to is really a everything went exceptionally well.

Selman Akyol

Got it. And then just last one for me and then I'll turn it over. I mean, you talked about natural gas prices. Can you really see that as being a growth story? Can you just say how much of your compression is located in those bases short path?

Justin Jacobs

So we look at the breakout our rough numbers, 75% in Poland, software, 25% and natural gas.

Selman Akyol

Great. I'll take the rest off-line.

Operator

[Mr. Seuss]

Hello there. Yes, my name is Frank Hughes, 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. And I think this is and this whole transition has been handled expertly.
And my question is for you, and it's more of a personal level. Could you discuss here for a minute to your personal journey going from managing director at Mill Road to board member at NGST CEO? I'd appreciate understanding a little bit about that transition for you.

Justin Jacobs

Sure. First, thank you for the for the comments. I'll speak for Steve here for a second, but we appreciate that the shareholder perception is is as it actually has, which I think a very constructive partnership. So appreciate the positive comments there and noting that.
From a personal perspective, prior to the load, I've worked in really a combination of operational role and investor, particularly in turnaround situations. And so for me, this is a little bit of going back to earlier in my career, I've looked at the opportunity with natural gas services, having been on the Board and and a shareholder through a Mill Road for several years.
Prior to that, I see what I believe is really some some great potential. Certainly as you look at the results of last year, the business has grown significantly. And I think there's an opportunity to continue growth in the future for for several years. And so that was a very attractive opportunity. My relationship with Steve and having a bit on the Board gave me confidence that would be able to step in and really hit the ground running with a great transition.
And so overall, it was just a an exciting opportunity for me. And in speaking with all my my team and our former team at Mill Road who were long times and colleagues, they were just incredibly supportive in that opportunity and really joining of one of their larger investments. And so all around it was a great opportunity that I'm excited being able to pick.

Selman Akyol

Well, again, I thank you very much for those comments. I've been involved with Natural Gas Services for 25 years. And it was initially an investor whenever skill, a private company based climb. Very glad to say that this management managed to work out on behalf of the company and yourself. So again, thank you.

Operator

Rob Brown.

Rob Brown

Hi, it's Rob Brown with Lake Street Capital Markets. And congratulations on all the progress.

Justin Jacobs

Thank you. Rob, we lose you there.

Rob Brown

Hi. Thank you. And congratulations and all the progress. Rob Brown, Lake Street. First question on the kind of the pricing environment. I think you alluded to some opportunities with here on some of your fleet, but how is the overall pricing environment? The prices still continued to increase on the unit placements? And I guess how's the the opportunity for pricing, I guess in the market?

Justin Jacobs

I would hit that first at the high level. And I think our comments are early or is that we're 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 metric you want to look at. But I think the general feeling that level of inflation has 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 that labor inflation, particularly if we look at the that the Permian Basin, where it is still very difficult to to attract people in the field. And so we are going through our existing fleet and looking at new new units were certainly taking a close look at pricing to say are we able to maintain and trying to improve our margin over time.

Rob Brown

Okay, great. And on the CapEx spending outlook, you've talked about sort of, I guess, some potential upside to that, I think or I guess what drives that upside to the CapEx? Are you seeing kind of customer quotes that could -- customer interest that could drive upside to the CapEx? Or does that look pretty stable for the '24 period?

Justin Jacobs

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 and 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 the two pre-contract with some great customers for new units at quite attractive prices.
So nothing 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.

Operator

Tim O'Toole.

Tim O'Toole

Great. And yes, as I said in the past, and I'm so first of all, welcome, Justin, and congratulations to Steve for finally retiring after a couple of drives us. And you know, we'll catch up with you offline at some points on the balance sheet, the debt level coming out of the fourth quarter at $164 million on 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 where would you target that to go in terms of some of the various ratios? Let's just say if you're $68 million to $65 million of EBITDA this year coming out of the year, absent, let's say, M&A, where would you like what would you target that, that ratio to be coming out? And then kind of also related, I think that you have that on your debt facility that you have on depending on leverage ratios of varying by a grid or a matrix on the spread to SOFR on where where can that go?
We can't really control what the Fed does in terms of shorts term rates and what sulfur winds up being. But that spread will relate to the bid, the the coverage ratios. So could you talk about that and the deleverage a little bit?

Justin Jacobs

Sure. And maybe I'll ask John Bittner to address the second question first and then as it relates to the pricing on the interest rate.

John Bittner

So the pricing on the interest rate increase increases by 25 basis points when our leverage goes north of 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 Q4 2023, Q1 of 2024.

Justin Jacobs

And to address them your question of target levels, there isn't a specific target level that that 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 no availability and modeling different scenarios into the future, whether positive or potentially negative, just in terms of overall market environment.
People are comfortable with the current level, and I'm not going to, I guess, go through any projections into the future. I think you'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 -- and I think the sentiment of some of our shareholders that they 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. So 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 with a blip, the dials you can turn here. The AR, 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, in fact, I'm wondering about the I guess specifically, but maybe you can broaden the discussion as well on the fab facilities, have they been monetized our that is at a process that you're your own 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 looked 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 won't 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 be 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 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 that's a process that is ongoing.

Tim O'Toole

Okay, great. Thank you for tha t. Another quick question. Balance sheet question is on is the tax receivable has been out there for quite a long time. Obviously on any of any quick update on that immunity, any visibility in terms of that, but the government moving on that?

Justin Jacobs

So nothing incremental that I would give other than what we've put in our disclosure in terms of forward looking, I certainly will say it is at at or near the top of our list of something that we would turn from a current non-cash asset into a cash asset to be able to invest back in the fleet. So it's something that is right.

Tim O'Toole

Yes, I'm sure I'm sure it is the extent you can actually control it. And then the final area, maybe you could talk a little bit about capital allocation. Actually, I think all of your peers actually resolve not just on EBITDA, but also on discretionary cash flow, which you went back through. And I do . But I think everyone kind of are 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 of media strategy, if you will?

Justin Jacobs

Sure. So I think you're right. I look back in previous quarters, and they've asked the question around discretionary cash flow . I think it's entirely reasonable topic for us to consider of how we over time provide better understanding of our shareholders about how we're thinking about capital allocation. For that particular topic, given some incremental guidance in this quarter relative to what we've done.
And of course, Steve gave guidance for the first time on the on the prior quarter call. So on general, capital allocation is a good question of which were going to consider how live better color our investors over time. That's something that we'll 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 tightening on potential timing or any more detail than 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 tha t. And the Board is mindful of.

Tim O'Toole

Okay, great. Thanks for all the discussion and congratulations to you both in the whole team there to keep up the good work, guys.

Justin Jacobs

Thanks for your questions.

Operator

Tate Sullivan.

Tate Sullivan

Great. Thank you all. Take Sullivan from Maxim Group and Steve, great working with you and look forward to staying in touch. And I heard you mention that I mean good progress in moving into that 1,500 horsepower market and continue to go to 2,500 your website, your new website shows how large these units are. Can you talk about how the length of the rental contracts on some of the larger units going out the doors? I mean, are we talking two to three years up to five years? Or can you get some context that?

Justin Jacobs

Sure. For the large horsepower units, we're going to be at the high end of the range . And I think in the public disclosure, our 10-K we've listed those are up to 60 months in terms of contracting.

Tate Sullivan

Right. Okay. And then for can you talk about the customer mix and just your dialogue with customers so far? I mean, have you -- I mean, Oxy, it has turned into quite continues to be very important customer. Just demand keeps up, continued for them. Are you looking to diversify a little more? And can you talk about your conversations with customers to date.

Justin Jacobs

Sure, we are -- I won't get into specific customer names. Obviously you can see that Oxy, they are large customer in a very important customer . We are continuing to see demand from the problem really across our customer base and even with new customers we're mindful of on diversifying our customer base really in terms of dollars so that it's not just data cleanup going to take some time to do.
And certainly, we don't want to want to continue to increase our business with Oxy . And so we think we have some opportunities to have a couple of additional large customers. They don't get to the size of, obviously, certainly over the short to medium term, but we're seeing opportunities there . And that's part of the decision-making around on the capital plan.

Tate Sullivan

And last for me to sales growth, adjusted gross profit margin shifted the positive after a streak, I guess you have more sales projects or can you comment in your backlog? And might this be a new trend going forward in terms of total positive margin for sale of equipment?

Justin Jacobs

Yes, I'd go back to our prepared remarks. We certainly were happy with the positive contribution in the fourth quarter . But as we think about what our run rate is at the fourth quarter, to apply to our 2024 outlook on the sales, the adjusted margin, we'd really look more towards the first three quarters of the year as as the go forward as opposed to the fourth quarter.

Tate Sullivan

Great. Thank you very much.

Operator

Thank you. Mr. Sullivan. There are no more questions in queue.

Justin Jacobs

Great. Thank you. And thanks for all to your questions and participation on the call. We sincerely appreciate your support. And I want to thank all of our employees, the real work to deliver these numbers for shareholders. This is sometimes a thankless job. But this is our opportunity to thank you for a job well done.
I believe we are in an enviable position. Our markets are generally strong and we have customers who value our equipment and services and would like more of them. We look forward to updating you on our progress in the next quarter. Thank you.

Operator

This concludes today's conference call. Thank you so much for attending.