Q4 2023 Kodiak Gas Services Inc Earnings Call
Greetings and welcome to the Kodiak gas services fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
What should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
Now I'd like to turn the conference over to Graham Jones Investor Relations. Thank you you may begin.
Good morning, we appreciate you joining us for the Kodiak gas services conference call and webcast to review fourth quarter and full year 2000 <unk> results.
Dissipating from the company today are making Mckee, President and Chief Executive Officer, and John <unk>, Chief Financial Officer.
Following my remarks, Mickey and John will provide high level commentary on the company fourth quarter and full year financial results and our 2024 outlook before opening the call for Q&A.
Before I turn the call over to Mickey I have a few housekeeping items to cover.
There will be a replay of today's call available via webcast and also by phone until March 14 2024.
[noise] formation on how to access this replay can be found on the investors tab of our website at Kodiak gas Dot com.
Please note that information reported on this call speaks only as of today March seven 2024 and.
And therefore, you're advised such information may no longer be accurate at the time of any replay or transcript reading.
In addition, the comments made by management. During this call may contain forward looking statements within the meaning of United States Federal Securities laws.
These forward looking statements reflect the current views beliefs and assumptions of <unk> management based on information currently available.
Although we believe the expectations referenced in these forward looking statements are reasonable various risks uncertainties and contingencies could cause the company's actual results performance or achievements to differ materially from those expressed in the statements made by management and management can give no assurance that such statements are expectations will prove to be correct.
Nursery cursory codecs prospectus quarterly reports on Form 10-Q, our annual report on Form 10-K that we expect to file later today all of which can be found on our website or at SEC Gov to understand those risks uncertainties and contingencies.
Comments today will also include certain non-GAAP financial measures additional details and reconciliations to the most comparable GAAP measures are included in the quarterly press release, which can be found on our website.
Now I'd like to turn the call over to Kodiak CEO, Mr. Mickey Mickey Mickey Thanks Grant and thank you all for joining us today.
Kick things off by highlighting several monumental event from 2023 before recapping our record financial results then I'll provide some commentary on our outlook as well as the compression industry as a whole before turning it over to John to provide additional details about our financial results as well as discuss our financial guidance for 2020.
Four.
Every year, when we start with thanking Jodi acts amazing employees their hard work operational proficiency dedication to detail and focus on safety is what enables Kodiak continued operational and financial success.
In June of 2023, we took <unk> public and became listed on the New York Stock Exchange.
I'm extremely proud of our team because as you all know it is a huge feat to complete a successful IPO and to transition to being a public company.
Since that time, we've delivered multiple sequential quarters of record results.
We've maintained our industry, leading 99, 9% utilization rate.
We initiated a meaningful quarterly dividend.
And we announced a definitive agreement to acquire CSI compressco.
Transaction that will make kodiak, the largest contract compression provider in the industry with $4 3 million revenue generating horsepower.
Throughout this incredibly eventful year, we stay true to who we are what we do and the goals we set for ourselves as a public company.
I am extremely proud of that.
An important priority for Kodiak as a public company. It was to establish a capital allocation framework that allows us to grow our core contract compression business and return capital to shareholders through a well covered dividend.
All while strengthening our balance sheet.
I'm happy to report we accomplished all of these priorities in 2023.
We organically increased our compression fleet by almost a 130000 horsepower.
Primarily adding capacity to our industry, leading position in the Permian basin.
We executed on our shareholder return plan by initiating a <unk> 38 per share quarterly dividend with our second dividend being paid last months.
In our opinion this dividend represents an attractive yield and offers a compelling total return potential for Kodiak shareholders.
Finally, we achieved a milestone debt to EBITDA leverage ratio of under four times at the end of 2023.
The lowest in the history of our company and a mark we expect to continue to be able to push down.
Now turning to yesterday's earnings release, we are very pleased with our fourth quarter and full year results, which.
Which reflect the continued execution of our strategy.
During the quarter, we increased our revenue generating horsepower by nearly 50000 as we delivered new compression units predominantly to the Permian basin.
The compression market remains tight as strong demand has absorbed idle capacity and pushed utilization rates across the industry to all time highs.
Delivery times for large horsepower caterpillar engines.
Engines have improved slightly since our last earnings call, but remain elongated at 40 to 45 weeks.
2020 for new unit deliveries are fully contracted with known delivery dates known customers no.
Phone revenue rates and we will once again be focused on the Permian basin further strengthening our position in the most important basin in the U S.
We are currently in discussion with our customers related to new equipment orders into the second quarter of 2025 and.
In pricing and returns on new horsepower additions remain attractive.
Next I want to touch on a few highlights from the quarter.
Our focus on customer service and the fact that we have the youngest most emissions friendly fleet specifically built to operate in liquids rich environments like the Permian basin allows us to maintain our industry leading utilization rates.
New compression additions and superior utilization led to compression operations revenues of $190 million and.
Holidayed adjusted EBITDA of $114 million, both are the highest in Kodiak history.
We ended the fourth quarter was about 7% of our horsepower on month to month contracts driving predictability in our revenues and illustrating the confidence customers have in kodiak to deliver reliable compression services.
As we have discussed many times, the methodical and intentional deployment strategy of our equipment and contracts generates highly visible steady cash flows.
We remain excited about the pending CSI transaction for all of the reasons discussed when we announced the deal.
The assets fit nicely into our portfolio and will meaningfully enhance our discretionary cash flow.
Giving us optionality within our capital allocation framework to enhance our shareholder returns.
Now I would like to discuss some of the recent macro trends in the energy sector.
First there has been and continues to be a tremendous amount of consolidation in the upstream space. This has several positive for Korea.
It leads to financially stronger customers and increased large scale sophisticated infrastructure developments that tend to favor centralized gas lift applications.
This in turn creates more visibility and certainty for companies like Kodiak that specialize in large horsepower compression.
Next is the recent decision by multiple leading natural gas producers in the U S to curtail natural gas production out of the Marcellus and the Haynesville shales in response to low natural gas prices.
This once again reinforces why our strategy of focusing our compression footprint on liquids rich associated gas basins like the Permian and the Eagle Ford has been so successful.
As you know producer economics in the Permian Basin are driven by oil and Ngls with the lowest production cost per barrel in the U S.
For this reason, we believe the Permian will be the primary supplier of incremental gas volumes to Gulf Coast LNG projects coming online in the next 24 months.
Okay.
U S. LNG feed gas demand is expected to more than double by the end of 2013, requiring a significant expansion of compression infrastructure.
Every incremental cubic foot of gas produced out of liquids rich basins like the Permian will need to be compressed multiple times over.
In fact, using the historical relationship between gas production and compression horsepower, we estimate the industry will need to add roughly the combined horsepower of the top four contract compression providers by 2030.
Hold was the ongoing capital discipline that is being shown by Kodiak and its peers. The compression market looks to have many years of tightness ahead of it with very little relief in sight.
So I would like to point out that the recent politically motivated moratorium on LNG permitting is not expected to have any impact on the natural gas demand growth through the rest rest of the decade.
Longer term the <unk>.
World needs the U S to further increase LNG capacity.
Europe has been the largest beneficiary of U S. LNG as it as it used U S sourced natural gas to help meet its environmental goals and reduce its dependence on Russia.
The next wave of U S. LNG projects is likely to supply Asian markets, many of which are largely dependent on coal and are struggling with energy security and reliability.
Without a doubt the fastest and most cost effective way to reduce ongoing worldwide emissions is to unleash low cost U S. LNG exports to allow Asian economies to displace their use of coal fired coal fired power to fuel their growth and increase the quality of life for their people.
Supplying the world with affordable reliable and clean natural gas is not only good for the U S economy, but it will also help the environment and humanity.
Now I will hand, the call over to John to discuss our financial results for the fourth quarter and full year in 2024 outlook John.
Thanks, Nikki it was truly a historic year for Kodiak, and we look to continue to building on our positive momentum in 'twenty four.
In my remarks, I will review, our fourth quarter and full year results and then I'll turn to our outlook for the year.
Total revenues for the fourth quarter were approximately $226 million up about 26% when compared to last year revenues for the full year increased 20% to approximately $850 million and 23 <unk>.
Adjusted EBITDA for the quarter was $114 million up 4% from Q3 and up over 10% versus the same quarter of last year.
Our fourth quarter, adjusted EBITDA excludes $2 5 million of noncash stock comp expense and $4 $3 million related to nonrecurring items, such as transaction related fees.
I'd be remiss to not point out that included in the quarters and years adjusted EBITDA, specifically with an SG&A was about $5 million and $7 million, respectively and reserves for bad debts associated with the challenged customer.
We've talked about this before record low gas prices and put them in a tough spot.
Clear reminder of why we are strategically positioned 95% plus of our assets and revenues and liquids rich associated gas basins.
In line with our expectations adjusted EBITDA for the full year increased nearly 10% over $438 million in 2023.
Looking at our segments compression operations revenues for the quarter with nearly $190 million.
Up about 11% when compared to the same quarter a year ago.
Compression operations revenues for the full year 'twenty three totaled approximately $736 million.
An increase of 12% over 22.
Revenue generating horsepower increased by over 48000 sequentially and 127000 for the year.
Consistent with prior periods revenue growth in this segment was a function of mid single digit percentage growth in revenue generating horsepower alongside higher overall fleet pricing.
In our other services segment fourth quarter revenues were approximately $36 million up substantially compared to approximately $9 million in last year's fourth quarter, but down nearly 8 million sequentially.
This segment's revenues and margins positively impacted by the award and accelerated progress of two large projects in the second half of 'twenty three finishing the year well in excess of what we had originally forecast.
From an overall adjusted gross margin perspective, our operations team continues to focus on the smarter application of people processes and systems in order to contain costs and offset inflationary pressures we.
We saw the benefits of that in Q4 as evidenced by compression operations costs declining sequentially by $1 6 million, while revenues group the.
The focus on costs and efficiency allowed our compression operation segment to generate a 66% plus margin a nice bump from the prior quarter on.
On a dollar basis for the quarter, our adjusted gross margin and the other services segment was approximately $8 5 million.
Up substantially sequentially and over the fourth quarter of last year on a percentage basis the quarter came in at 23%.
As we've highlighted previously our fourth quarter reflects what we believe to be an abnormally strong realizing above average margins as we completed an advance on a few meaningful projects at better than expected margins.
The other services segment is lumpy, but valuable segment station construction projects are synergistic with our compression business and require no capital.
Every dollar of incremental cash flow adds to both our overall return on capital employed and discretionary cash flow.
Which in turn allows us to pay more dividends and invest in high return growth capital projects over.
Over the medium term, we continue to expect to realize gross margins for this segment between 15% to 20%.
In terms of Capex for the quarter, our maintenance Capex was about $9 million for.
For the full year maintenance Capex was $37 million, which was approximately $11 million less than what we had spent in 'twenty two.
As a reminder, our maintenance is a function of the hours and age of our equipment and will vary by year, depending upon when units were added to the fleet.
Growth Capex was $60 million for the quarter and $15 million of that was non new unit Capex. We mentioned in Q3 that we had some opportunistic real estate purchases and those closed in Q4.
Going forward, we expect more normalized levels of non unit growth capex or.
Overall growth Capex for 'twenty, three totaled approximately $184 million.
As we previously mentioned Capex was expected to be backend loaded and you saw that in the fourth quarter.
Moving to the balance sheet.
As of year end, we had debt of $1 8 billion consisting entirely of borrowings on our ABL facility.
Our credit agreement leverage ratio was just shy of four times and we exited the year with approximately $355 million of.
The availability on the facility.
As most of you know last month, we issued $750 million of 7.25% senior unsecured notes due 2029.
As a debut issuer, we were very pleased with both the credit ratings, we achieved and the pricing.
It's clear that the ratings agencies and debt investors wholly subscribe to the current strength and future outlook in the U S compression market as well as the durability and quality of Kodiak cash flows.
We issued the notes in advance of the CSI closed in order to capitalize on the strength in the credit markets and de risk. The transaction, we used the proceeds to pay down our ABL and pay debt fees at the time. The CSI deal closes we will re draw on our ABL to pay off csi's debt as well as transaction expenses.
When it's all said and done will run will wind up with roughly $60 million plus of incremental liquidity on the ABL by virtue of issuing more notes and we needed to close the transaction.
With our IPO, the recent financing related activities and the benefits of an accretive and leverage neutral CSI transaction, we remain on track to achieve our long term leverage target of three five times or less by year end 2025.
Moving to our 2020 for outlook for.
For the year on a standalone basis, we estimate total Kodiak revenue will range between $855 and $905 million, we estimate that adjusted EBITDA will range between 460 and $490 million.
I'll now break that down by segment.
In our core compression operations segment, we are forecasting full year revenue of 795% to $825 million and segment adjusted gross margins between 64 and 66%.
Given constructive market dynamics, the attributes of our contracts and our solid execution, we're confident in our segment outlook and a laser focus on growing long term high quality cash flows.
In our other services segment, we are forecasting full year revenue of $60 million to $80 million and segment adjusted gross margins between 15% to 20%.
We view 23 results for this segment as being an outlier to the high side.
24 guidance reflects more normalized revenue and margin levels.
Turning to Capex.
The timing and customer demand, our 24 capital spending program is front half loaded with approximately 60% of spending happening in the first six months of the year.
We expect maintenance capex to come in between $40 million to $50 million for the year on.
On the gross side, we're forecasting net capex of between 165 and $185 million for the year.
<unk> and our forecast is approximately $12 5 million and non new unit related capex at the midpoint of that guidance will grow our fleet horsepower in the low to mid single digit percentage range.
For modeling purposes and to give you something to look forward to CSI provided its 24 outlook and its fourth quarter earnings release on March one.
Shortly after transaction close we plan to issue updated guidance for the combined companies as well as our refined view on transaction synergies and any modifications to our capital allocation framework.
Wrap things up as Micky noted earlier this year, our board declared our second quarterly dividend payment of 38 per share, which was paid last month. This equates to an annualized dividend of $1 52 per share yielding about five 5% to 6% at recent prices dividends are at.
Key aspect of our overall capital allocation framework, which I'll remind you encompasses measured growth alongside attracted return of and return on capital while living within cash flow and deleveraging.
Operator, we're now ready to take questions.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Jim Rollyson with Raymond James. Please proceed with your questions.
Hey, good morning, Mickey Jon Graham.
Nice nice quarter, obviously nice.
That continues to press on but just.
Just one thing just to clear something up here just based on the stock price reaction.
So your guidance for $4 $60 million to $490 million of EBITDA that is just for Kodiak, and obviously CSI Compressco out I think it was last Friday I gave guidance of $135 million to $145 million of EBITDA. So when you guys put these together assuming it happens around the beginning of the second quarter, it's going to be taking the guidance, we're giving today.
Plus roughly three quarters of that guidance to get to a number right I'm, assuming maybe the stock's off just because people are looking at some of the street numbers that already have this combined but just wanted 100% confirm that.
Yeah, No hey, Jim that's a that is a important question. It's one that's kind of trips folks up this is John by the way.
So if you just looked at guidance today and I looked this morning, because the question has come up like the mean guidance for Kodiak is for two for 2024 is $523 million, but obviously that includes some analysts that have updated their models and turn them in and we don't really control.
When they're counting the CSI transaction is closed so to come back to your question. Our guidance is on a standalone basis, but if you did assume the transaction closed say for example April 1st then you would take in that math, 75% of the guidance that CSI had put out summit with ours at in synergy.
<unk> and Kenny or after the races, but it has created some confusion so I'm glad that you've kind of asked that question.
Perfect, that's what I thought, but I just was making sure just given the reaction at all.
And then as a follow up Mickey you talked about the.
The fact that you're already sold out for 'twenty for you.
We're actually already working into 'twenty second quarter of 2005 with known customers known contract pricing, maybe a little color.
I'll look at this or the revenue per horsepower per month basis on the compression operation side and you guys were kind of in the 19 and a half.
And that ratio this quarter.
Maybe some sense or some color just how much higher when you look at where those new contract rates are we above what the average realized is for the entire fleet is it 5% or are we talking 2030% or or is that even bigger than that.
Yes, I think kind of where.
Jim This is mackie.
Talking to you this morning.
I think that I don't want to put out too sensitive information here, but I think spot pricing that is related to the fleet is probably in that 20% to 25% premium range.
Based on kind of where existing fleet pricing ranges today.
And Thats, obviously based on higher operating expenses and higher capital costs that were paid to <unk>. So really it's a.
Along the same lines from a return on capital standpoint, and that's how we price our equipment demands with a higher capital cost commands a higher rate to get the same amount of return on that capital.
But gradually over time to the equipment that cost you less that you delivered two years ago or three years ago. Eventually re prices up there assuming that the macro at all continues to work like we said.
We don't think it does.
Yes, I think thats right.
I think that you.
You heard on the call, we're pretty bullish on the macro environment around LNG and natural gas right now.
Despite.
Low gas prices today.
Notice that great well, thanks, guys I'll turn it over to lift one else ask questions.
Thanks, Jeff.
Thank you. Our next question is come from the line of John <unk> with Goldman Sachs. Please proceed with your questions Hey, guys. Good morning. Thanks for the time, maybe let's say on the compression market overall in pricing.
Could you just give us a sense you talked about the lead times of Caterpillar coming in from you know a year ash to 40 to 45 weeks has that had any impact on your conversations with customers around your I guess youre working on second quarter 25, right now.
And maybe if you could.
Ty and their caterpillar's talked about adding some capacity on some other engine lines and maybe just an update on what you're hearing there. Thanks.
Yes, John good to talk to you. This morning I appreciate the question.
So look just to address the caterpillar issue.
Right upfront they pulled in their delivery times on large horsepower gas compression engines to 40% to 45 weeks.
Notably the reason for that is kind of from hearing from Caterpillar is alleviating some of their supply chain constraints. They are experiencing it is not.
Fairly and increasing capacity on that engine line.
When you heard on their last earnings call.
Some some investments, they're making and the increased engine capacity.
From our understanding that's mostly in their power Gen.
Line of engines, which are going to support kind of data centers in AI, which is a tremendous amount of.
Demand for power today, all fueled obviously by natural gas so.
That's a.
Interesting point there.
Okay.
Yes.
Oh no.
Was the second part of your question there.
You were talking about pricing is that right.
It was really if you've come into 40 to 45 weeks I guess it sounds more on their supply chains alleviating versus new capacity coming to the market.
Does that 10 week or so better lead time has that had any impact on pricing when youre talking to your customers.
No not at all I mean.
Quite frankly to our customers at this point that we've been we've been taking care of our existing customer base for the last two.
Two years out and not going out and soliciting new business per se.
All the customers that we're talking about about first quarter first and second quarter type business of 2025, they understand that capital is precious and they need to get in line to.
Get their allocation of that capital going forward So I.
I think the long type of backlog that we're seeing here.
Probably is more related to.
The precious allocation of capital rather than directly involved with caterpillar lead times.
Alright, that's very clear thanks for clearing that up maybe just as a follow up.
F.
If we're not seeing a ton of new capacity from caterpillar others coming into this when do we have to start worrying about.
The amount of engines, we can bring into this market and how we get the market overall lined up for how much gas is going to be flowing in.
Thousand 25.
It's a good question, John and I don't have a great answer for it I think that we're going to be a pretty significant shortage of compression capacity whether these customers.
As E&ps decided to buy it on their own or decide to outsource it to people like us I think everybody is capped.
Capital discipline right now.
There is a.
There is more gas to be compressed than I think anybody realizes as a function of the compression intensity of that gas thats coming out of the Permian basin requiring.
Four to five times more compression.
Then a standard kind of conventional type of a well for dry gas natural gas production.
Compression required for gas lift in the Permian, which switch.
As required for basically all of the oil production coming out of the Permian Basin.
And then a couple on top of that.
Relatively no additional idle capacity amongst kodiak or our peers I think that.
For the last several years, it's been a great market and compression.
That idle capacity Hasnt gone back to work now it's probably relatively.
Sure.
Difficult to reapply in the situation right now so with with no idle capacity at spare capacity in the market, it's going to be very very tight.
See additional.
Sources of equipment coming through to be able to take that.
Take that capacity on.
And I think that.
We're the beneficiary of it because we're sitting here in the in the in the seat of being able to drive pricing and drive utilization in that kind of thing and so.
I don't foresee anything changing in this market for at least.
The foreseeable future.
Alright, as kind of an interesting thanks for all that I appreciate it.
Okay.
Thank you. Our next question is coming from the line of Neel Mitra with Bank of America. Please proceed with your questions.
Hi, Thanks for taking my question Mickey I was wondering if you could maybe discuss.
The advantage you have versus a E&P and midstream company in terms of Citi.
Securing compression and being able to.
Have that and time for field operations versus.
On E&P and midstream company going out and trying to secure that on their own what gives you that pricing power versus going.
Going out and.
Getting the equipment themselves.
Yes.
Yes, no problem.
Talk to you this morning Neel.
Yes.
At the forefront of it is the fact that we are a caterpillar basically a caterpillar distributor.
And so we have a special.
Special contractual relationship with Caterpillar.
That allows us to and requires us basically to purchase certain amount of engines percentage of our engines from caterpillar every year.
Our preferred pricing on that on that equipment. So we have basically the deepest discounts that you can achieve.
In the industry from both Caterpillar and Ariel that makes our.
Compressor frames the couple up with the engine. So the fact that we have.
Distributor ship arrangements with them, we've been a very large purchaser of caterpillar engines, obviously for years and years now grown up.
Almost a $3 5 million horsepower fleet here.
Almost exclusively caterpillar engine. So we've got.
Got a long history with cat and <unk>.
And the packaging facilities that are required to build this equipment fabrication facilities.
So with all those relationships in the history of doing business with those companies for years and years and been a big part of their businesses.
We're obviously incentivize to.
Continue to do business with us and so it makes it kind of allows us to take a spot at the head of the line in.
Allows us to continue to.
Manage our supply chain and make sure that we're thinking with our customers a year plus out on deliveries.
Got it and then I'm assuming that.
Some of these cuts.
Companies.
Don't exactly anticipate what field pressure will be in the.
That type of compression they'll need do you have.
Somewhat.
Alright, I guess I would describe it as a spare backlog that you can.
Deploy too.
And any constraints that.
Some of these companies are facing that.
Otherwise.
Normally anticipate.
Now, we really don't need 100% of our capital allocation that is going towards new horsepower growth is for <unk>.
Is contracted with customers that are.
Required basically throughout 2024 and into 2025 now so we don't have excess capacity at 99 plus percent utilization.
There is there is now and then some churn within the fleet that we can.
Things happen pretty.
A little faster than a 40% to 45 week lead time requires but.
There's really not a lot of that going on either when you had talked about production in the Permian basin, where the majority of our assets are allocated so.
Historically in this industry people kind of.
Manage that excess capacity that they needed for <unk>.
Changes in pressures and flows in that kind of thing changes in drilling programs with the idle capacity that sits in the industry that just doesn't exist today. So.
I think that the.
The winners and throughout this cycle are going to be the ones that really can plan ahead and look into the crystal ball and be the accurate with what their production profiles are going to look like a year out hey, Neil This is John I'm going to put a finer point on that too so the headline figures throughout the public companies in the industry around utilization.
Eye-popping ours has always been pretty good archrock hit record use X reporting great numbers. If you were to take the horsepower thats in the highest demand the large horsepower.
That's going to be even higher right.
This is it goes back to Mickey's answer to the last question, but we think this is a fundamental industry challenge that we're going to be wrestling with in terms of where the.
Horsepower is going to come from to move the oil and the gas in this country for the foreseeable future.
Got it I appreciate it thank you.
Okay.
Thank you our next questions come from the line of Jeremy Tonet with J P. Morgan. Please proceed with your question.
Hi, good morning.
Hey, Jeremy.
Just wanted to start off with the base business in the EBIT guidance I was wondering if you might be able to talk a bit more as far as what the drivers could be for the high end versus the low end of the guidance range there.
Yes, I'll take it so Jeremy great talking to you.
It's always going to come down to the utilization kind of where it is right you're not going to see that come from utilization.
24 from a growth Capex perspective, and new unit, we said it earlier since we went public it's effectively sold out right. So I guess you could see some acceleration of when we would be delivered equipment. We don't expect that but I guess, you could and that would kind of drive revenues up more than margins up more it could go the other way.
Well to be delayed, but we think knock on wood the worst so that's behind us. So it really comes down to just the fundamentals of price versus cost in our biggest businesses right. The compression operation segment. So suffice it to say, we're very focused on.
Kind of making sure that we are.
Charging appropriately for the value that we deliver to our customers and we've always talked in my remarks, I said earlier, we've always been focused on cost control and in light of kind of how costs ran over the last couple of years.
Industry wide beverage post COVID-19 type activities, that's something where we're doing what we can with I'll call. It automation with our form of artificial intelligence to better understand how to take care of our units.
Software to help us with labor productivity, I mean, anything and everything and I don't think we're unique in that can't we're just putting a full focus on it. So those are the two big levers I guess I need to include the other services segment, because if you think about 'twenty three we had a whopper year and other services.
We have guided towards an average year and other services. That's the station construction work that we do guide 60 to 80 with normalized margins of 15% to 20%. So if 23 was to repeat itself in 'twenty, four which namely we had a couple of large contracts come in late and we performed very well on them.
Great margins.
You could see some upside there as well so I think I've covered all of the different pieces that could drive the business.
Got it that's very helpful and just wanted to pivot gears a bit here and just wondering how I guess com.
Conversations with customers are going with regards to emissions and just.
Overall trends between moving towards more electrification and how you see that trend kind of playing out over time and what impact that would have on kgs.
Yes, Jeremy I think that.
Obviously emissions and B E.
A better steward of compression.
<unk> overall is at the top of everybody's mind, and that's why Kodiak very successful in what we do with the youngest cleanest split out there.
And emission friendly fleet out there.
The customers are talking about it all the time and I think that.
In a perfect world, we'd love to.
Our customers would love to electrify everything, but the reality is that that's just not doable from a grid standpoint.
So there'll always be a balance of gas versus electric driven compression in this industry.
There is some some drive for electric and demand for electric driven compression looking out into 2025 and I told you earlier that we are effectively fully sold out for Q1 of 25 and there's a good portion of that is electric motor driven compression for that first quarter.
So <unk>.
2024 is majority gas engine, driven with our growth capital that we're spending because.
<unk>.
These customers are trying to get ahead of it get get in line to get grid access and that kind of thing so theres going to be some electric motor driven compression, but I kind of look at it and I've said this before I look at the kind of the same way as renewable.
Energy sources.
There is a market for those and they're going to gain some market share, but I think that the overall growth of the market is going to be maybe.
Maybe it's the.
Gas engines might have.
A lower percentage of overall, but.
On our.
On a total basis, there is going to be a continued to be a growing market there. So.
There'll be some portion of our fleet that goes electric and we're going to be paying attention to what the right allocation is between gas and electric.
And as we do with anything we do we are going to be the best out of that if we were going to get into it. So we want to be.
Our offer the best service to our customers and be their first provider of choice and they decide they want to go to electric compression.
Got it that's very helpful I'll leave it there thanks.
Yes, I can talk to you Jeremy.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Neal Dingmann with <unk> Securities. Please proceed with your questions.
Good morning, guys. My first question guys is on the compression contract specifically, maybe your utilization continues to be no question I think better than anybody out there given the continued demand I'm. Just wondering do you all anticipate any change in contract length because of this and I'm. Just wondering is the length of about the same in various areas.
Like the Permian Eagle Ford powder, I'm, just wondering how it how it sort of compares regionally.
It does I mean, it's relatively the same if we deploy assets into the Eagle Ford or some somewhere that is at the Permian. We are going to tend to command that we want to have the same kind of return on capital over the course of that contract that primary contracts.
To kind of de risked the spend that capital spend.
So.
But all in all it's pretty similar no matter what basically go into.
Basically 100% of our capital for 2020 floor, though is going to the Permian basin.
Because thats, where the most significant demand is in the highest growth areas with our kind of core customer base.
But I will say that.
Those that we have seen a little bit of contract tenure extension over this past cycle, but it's really not something that we're pushing tremendously because neil if you recall some of the things that we've said in the past is look I'm going to have a three year contract on a 36% or six engine.
And if it's sitting on top of 25 year life production and I feel like that unit is going to generate cash flows for 25 years as we go through multiple renewal cycles. So.
Because of the quality of the production that we're looking at that we're putting this equipment not to feel good about.
Contract tenor and our ability to re contract with them.
At the end of those cycles.
Yes, it really seems like you all are in the driver's seat there and then and then my second is kind of a little bit more on regional demand I'm just trying to something you had said your earlier today seems like specifically outside the Permian, where we though demand is high.
What are you seeing I mean, you mentioned about LNG and my comment is I would think a lot of those larger LNG players would be knocking hard at your door to try to make sure something lined up as some of these things come on.
Specifically next year and into 2006, so I'm just wondering.
How much what.
What kind of conversations and how how many conversations are you continue to have these days outside the Permian.
Hum.
A few.
The typical LNG supply.
Type conversation isn't the conversation that those facilities are having with us they're having those conversations with our customers and then those our customers are dealing with us to make sure that they have the ability.
To move the gas as it's needed. So we're really more of a where needed to make sure that the gas gets to those LNG facilities, but we're not negotiating are dealing directly with those those LNG terminals.
Terminals to make sure that they have gas on location. So.
You see it a little bit of it I think a lot of this is going to be driven by natural gas prices.
With what we've seen with sub $2 gas driven by the LNG moratorium from from this administration that I think the longer gas prices stay depressed where they are at the longer and more significant requirement for feed gas is going to come out of the Permian basin versus the haynesville or other other outside areas.
Thanks, Vicki will set.
Thank you. Our next question is coming from the line of Zachman effort with TP H. Please proceed with your questions.
Hey, guys. Thanks for taking my question.
Just one on.
We age I know you guys. Its core fleet is relatively new I think some of the newest out of all your competitors could you give a average age of the CSI fleet once that comes into you guys as well.
Yes, I mean look I think.
Our fleet ages in that five to six year range on an average basis for our fleet.
CSI when they bring their equipment to that to the table. They have grown a lot of horsepower with new equipment in the large horsepower basis over the last several years and they've done a lot of work to kind of churn some of the older stuff out of their fleet. So I think that you look at the kind of an average fleet age they would roll it was about <unk>.
Nine to 10 years.
On their fleet basis right.
Ours being sick. So the average in between is the average is going to be somewhere in between but.
We don't put a lot of stock in that in that fleet age.
Because if you adhere to strict overhaul type of.
Our regimen.
That basically zero hour and overall this equipment every eight to 10 years anyways. So an eight to 10 year old piece of equipment that has a brand new engine on it is going to.
And our maintenance cycle is going to look and act and perform just like a brand new piece of equipment.
Okay got it so a lot of areas have already been rebuilt at the age of their sitting at right now.
Yes.
Perfect and then one last quick one you mentioned rates are still coming in well above kind of the base rate or a full fleet.
Can you remind us maybe how many of those legacy two to three year old contracts are rolling off in 2024 and 2025.
Yes, absolutely.
We have at the end of the year, we had about 7% of our fleet was on month to month contracts and you can expect kind of with our fleets.
We'll roll over about 30% of our contracts.
Every year, so because we have such a heavily contracted fleet and we have so few month to month contracts in that fleet, our fleet kind of turnover for contracts is a little slower than some of the other guys.
So so you won't see the spikes in revenues that you see in other places but.
Like you said.
We should be able to reprice price kind of 30% of the fleet as those contracts roll over this year.
Got it perfect. Thanks, guys.
Yes, Thanks Ed.
Thank you. Our next question is coming from the line of Selman <unk> with Stifel. Please proceed with your questions.
Thank you.
Good morning first of all just.
The high level, we have seen some capacity additions in the storage market and I'm. Just wondering is that a market for you guys at all that you could play in.
Is that an opportunity.
Yes, good morning, gentlemen.
That's another thing it's kind of like the LNG terminals right, we don't really control where the gas goes when we after we compress it and put it in a pipe for our.
<unk>, especially on the midstream side after.
Post <unk>.
Processing and gas lift and that kind of thing so.
Hum.
That obviously increased capacity for storage and cycling gas in storage is definitely a a demand driver for our industry and it is definitely something that requires additional compression on the on the front end so again.
That's something.
Our customers are determining whether theyre going to take their gas whether it be duo.
Two to residential use or LNG terminals or to storage as.
As negotiations that they have in place, but they require.
Companies like Kodiak to provide compression for all of those all of those demand drivers.
Understood and then.
Just a smaller question and in your guidance you talked about $12 5 million for non unit compression.
For capital and I'm, just kind of curious to what that was or what that will be.
Yes, that's kind of rope soap and dope Selman This is John it's.
Trucks, that's crane trucks.
Software that's capitalized.
Lease hold improvements things of that nature, and we're always going to have it every single year just cannot take care of older equipment, thats kind of aging out or else just keep up the growth in the business.
Got it and then the last one for me just on the other services you talked about how 23 was skewed by a couple of large contracts is there any thoughts or guidance around just sort of the cadence as we should think about our modeling going forward on that.
Great question.
No. It's I would say divided in four I mean, that's probably the best way to approach at this point the nature of those contracts. Some you may be awarded a contract call. It 910 months in advance of when you actually complete it but.
E chunky in terms of how the revenues kind of unfold in that Youll have some stuff happening at the front end and in the field work might be four weeks at the very end and that's when the main chunk will come in and then other contracts might be just more.
This field related stuff can be shorter, so thats, where it becomes difficult to predict because you might be awarded a contract in the third quarter and finish it by the end of the fourth quarter. So that's really what happened in 'twenty three.
Got it thank you so much.
Okay.
Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to management for closing remarks.
Thanks, operator in summary, I could not be more pleased with our record setting results in 2023.
We believe the Kodiak brightest days are in front of us and we look forward to continued profitable growth in 2024 and beyond.
But we look forward to speaking with everybody again on our next earnings call. Thank you.
Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.
Okay.
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