Q4 2024 Kodiak Gas Services Inc Earnings Call

Greetings.

Speaker Change: Welcome to Kodiak Gas Services, Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone who require operator assistance, please press door zero on your telephone keypad.

Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce Grant Sones, both President and Minister of Relations. Thank you so you may begin.

Speaker Change: Good morning and thank you for joining us for the Kodiak Gas Services Conference Colin Webcast to review fourth quarter and four year 2024 results.

Mickey McKee: Participating from the company today are Mickey McKee, President and Chief Executive Officer and John Griggs, Executive Vice President and Chief Financial Officer.

Speaker Change: Following my remarks, Mickey and John will review recent developments, discuss our financial results in 2025 outlook, and then we'll open up the call for Q&A.

Speaker Change: There will be a replay of today's call available via webcast and also by phone until March 20th, 2025.

Speaker Change: Information on how to access the replay can be found on the investors to have our website at kodiakgas.com

Speaker Change: We note that information reported on this call speaks only us today, March 6, 2025, and therefore you advised that such information may no longer be accurate as the time of any replay listing

Speaker Change: The comments made by management during this call may contain forward-looking statements within the meaning of United States Federal Security's laws.

Speaker Change: These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available.

Speaker Change: Although we believe the expectations referenced in these four-looking statements are reasonable, various risks and certainties and contingencies could cause the company's actual results, performance or achievements to differ materially from those expressed, the statements made by management, and management could give no assurance that such statements or expectations will prove to be correct.

Speaker Change: The comments today will also include certain non-GAAP financial measures. Details and reconciliation, the most comparable GAAP measures , included in yesterday's earnings release, which can be found on our website.

Speaker Change: And now I'd like to turn the call over to Kodiak's president, CEO , Mr. Mickey McKee.

Thanks, Graham.

and thank you for joining us today.

Last quarter, we published our third annual sustainability report.

Speaker Change: If you've not had a chance to read it, I would highly recommend it.

Speaker Change: The report highlights our commitment to making the difference in our communities by donating our time and resources through programs like Kodiak Carey Foundation and KVATs and employee resource group for veterans who have proudly served in our military.

The report also details our relentless focus on safety.

Speaker Change: We set a high bar for safety with a goal to make certain that every employee goes home safe and sound to their families every night.

Speaker Change: Even one incident is too many, so we continue to invest in our industry-leading training program to ensure that our employees are equipped to doing their job safely.

Speaker Change: 2024 has been an amazing and transformative year for the dedicated women and men of Kodiak.

Speaker Change: In addition to the significant acquisition we made and its integration

Made our debut issuance into the high yield bond market.

Speaker Change: Returns significant capital to shareholders and executed upon our strategic plan, including the organic growth of our fleet, development of our cutting-edge training facilities and the initial deployment of AI technology into our business.

Speaker Change: Since closing the CSI acquisition on April 1st of last year, we've been focused on delivering the strategic value creation of the combination.

Speaker Change: This included, realizing synergies through the merger to increase margins and free cash flow.

Speaker Change: Streamlining our operations to focus on our core, US, large horsepower strategy.

Speaker Change: Continuing to invest in new large horsepower units focused on the Permian Basin and increasing shareholder returns through an increased dividend that share buybacks.

I'd like to touch on each of these briefly.

Speaker Change: As you know, we vastly exceeded our initial acquisition synergy estimate.

Realizing over 50% more cost savings than originally expected.

Speaker Change: These synergies, plus our streamlined asset footprint, allowed us to simplify the business and steadily increase margins in our contract services segment.

Speaker Change: We told you during the CSI acquisition that our course strategy would remain unchanged, focusing on large horsepower compression in oil-directed bases.

Speaker Change: With that in mind, we have been actively divesting assets that don't fit with our long-term plans. During the fourth quarter, we divested non-core units, totaling approximately 33,000 horsepower, and in total, we divested approximately 129,000 horsepower of non-core low margin units.

Speaker Change: Through these transactions, we have increased the average horsepower size of our fleet, reduced the average age of our fleet, and geographically focused our operations, producing overall better margins and far more stable cash flow.

Speaker Change: When we close the CSI acquisition less than a year ago, Tonet had operations in six countries.

Speaker Change: Today we have exited four of those countries with all of our existing operations located in the U.S. and Mexico and greater than 80% of our fleet capacity located either the Permian or the Eagle Front.

Speaker Change: As we divested the assets that did not fit our long-term strategy, we reinvested in new large horse power units.

Speaker Change: During the fourth quarter, we added approximately 23,000 new horsepower to our fleet. On average, the units were greater than 2,000 horsepower and primarily put to work in the Permian Basin.

Lastly, we return to significant capital to our shareholders.

Speaker Change: Kodiak paid $139 million in dividends and distributions in 2024, about 37% of our discretionary cash flow, and bought back over 1.4 million shares of our stock at a weighted average price below $28.

Speaker Change: This return of capital contributed to the 115% total shareholder work term that Kodiak stock delivered in 2024.

Speaker Change: I'm very proud of the work that has been done over the last 12 months to execute on our strategic plan and the commitments we made to our shareholders.

Speaker Change: Yesterday we released our fourth quarter and fourth year 2024 financial results. I'll hit the highlights and let John provide more details.

John: For the year, Kodiak set new records in total revenue, adjusted EBITDA, discretionary cash flow, and free cash flow.

John: Total revenue grew by 36% to 1.2 billion dollars and adjusted even the grew by 39% to 610 million dollars.

John: The growth was driven by outstanding execution of our core strategy by Kodiak personnel.

John: the CSI acquisition and associated synergies and our ongoing investment in organic fleet growth.

John: We generated $122 million of free cash flow in 2024 after investing to grow our large horse of power fleet in a high-grading portion of the CSI fleet we acquired.

John: Our leverage ended the year at 3.9 times and we are well positioned to achieve our target a great leverage of 3.5 times by the end of 2025.

John: We ended 2024 with 4.25 million revenue generating horsepower and a fleet that's nearly fully utilized at 97%.

John: Our core, large-horsepower assets remain effectively fully utilized in excess of 99%.

Reflecting the continued strong demand for large horsepower compression [inaudible]

John: Next, I'd like to discuss the evolving natural gas market. Since our last call, we've seen front-month natural gas prices increase from the mid-$2 range to the $4 range.

John: Due to the seasonal increase in demand and the startup of two LNG export terminals along the Gulf Coast, with additional capacity of up to 3.7 BCF a day, expected to come online in the next 12-18 months.

John: Thinking more long-term, we've witnessed a fundamental shift in the outlook for electricity demand.

John: The combination of societies drive to electrify, as well as the forecasted step change in demand from data centers and AI, has fundamentally altered the power demand output.

John: As a result, companies across several industries are now focusing on securing reliable and affordable

John: Due to its abundance and affordability, it is evident that domestically produced natural gas is going to play a vital role in providing energy solutions in the US and around the world.

John: The combination of highly visible demand drivers and the new administration's support for US oil and gas development, providing affordable, secure, worldwide energy gives us confidence We'll see strong natural gas production growth in the coming years.

John: The Permian Basin is expected to lead that growth as oil-directed drilling delivers increasing amounts of its associated gas and as operators develop new and deeper formations, gas to oil ratios in the Permian continue to steadily increase.

John: On average, Permian producers are generating 10% more gas per barrel of oil production today compared to 2020.

A trend that the industry expects to continue [inaudible]

Given the industry's confidence in future natural gas production growth,

John: 4.5 BCF a day of Permian Gas Takeaway Pipelines reached FID in the second half of 2024. These projects have strong commercial support and are expected to be online and likely fall by the end of 2026.

John: We're making significant investments to support this growth, both in our fleet and our people.

Last year, we established Bears Academy.

John: A state-of-the-art compression training program offering hands-on learning opportunities to both new and experienced personnel to advance their knowledge and skills.

John: Nearly 200 of our employees have already attended this program and we're currently constructing a new dedicated facility in Midland where we'll develop the next generation of leaders in the contract compression industry.

John: We've also deployed AI machine learning through telemetry analysis that is identifying and predicting failures and other mechanical issues before they occur.

John: This assists our field personnel in troubleshooting and repairs, enhancing our overall uptime and service capabilities for our customers. These are some of the many investments we're making in training and technology to deliver great service to our customers.

Now, turning to our Outlook for 2025.

John: John will cover the numbers in more detail, but I would sum up our guidance in last night's press release as more of what you've come to expect from Kodiak.

John: The strategic actions we took in 2024 positioned us for continued success.

John: We will invest in our fleet to support our customers demand for large horsepower compression.

John: We will continue to return capital to shareholders and drive towards our leverage target while living within cash flow.

John: That formula has proven itself since our IPO and it's one we will continue to execute on in what is leading to an exciting 2025.

John: Correct things up, 2024 was a phenomenal year for Kodiak.

John: We completed and integrated a transformative and highly accretive acquisition while setting new company records in revenue, adjusted EBITDA, discretionary cash flow, and free cash flow.

John: Through our large horsepower fleet, it took strategic action to divest assets that didn't align with our strategy.

John: We also increased our quarterly dividend by 8% and bought back $40 million dollars of our stock at attractive prices.

The Fundamentals for Natural Gas Compression remains extremely strong.

The ramp up of natural gas demand remains highly visible.

John: We've already seen natural gas prices respond, signaling the need to increase production and invest in additional pipeline infrastructure.

John: The increasing gas production is going to require significant compression infrastructure development and we continue to believe that Kodiak is well positioned to be the compression provider of choice.

John: and now I'll pass the call to John Griggs to review the financial highlights and our guidance. John ?

John Griggs: Thanks, Mickey. Since the details are included in our release, I'll be brief and focus on the key points.

John Griggs: Simply stated, we had another solid quarter in an outstanding year. We accomplished a lot during 24. We successfully integrated a major acquisition, completed several debt and equity capital market transactions and closed on multiple strategic detestitures.

John Griggs: It was a big lift, and one not possible without the relentless efforts of our dedicated Kodiak workforce.

Or quickly hit the financial highlights.

John Griggs: For the year, we reported total revenue of approximately $1.2 billion by 36% increase over 2023.

John Griggs: The outsized growth was primarily driven by the acquisition of CSI, but also by solid execution in all aspects of our business.

John Griggs: We reported net income attributable to common shareholders of nearly 50 million, an adjusted EBITDA of approximately 610 million, up 149% and 39% respectively from the prior year.

John Griggs: With regard to the fourth quarter, total revenues were approximately 310,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 of multiple packages of low-margin, non-quital force power, and expected seasonal slowdowns in our other services segment.

John Griggs: Importantly, however, our contract services adjusted gross margin percentage increased to a bar of at least 67 percent.

John Griggs: Up sequentially, and direct evidence of the success we've had in raising the average price on our core in new units, capturing synergies related to CSI in exiting lower margin assets and geographies.

John Griggs: Those asset sales are the main reason our average horsepower per unit increased from 734 and the first quarter post CSI to 926 at year end.

John Griggs: As we start 25, we're more than halfway back to our high water average horsepower per unit mark of 1772.

John Griggs: That particular metric matters a lot because large horsepower compression is sinful to our strategy.

It's what's being demanded most by our customers.

John Griggs: In its stickier, it generates meaningfully higher margins and cash flows than its small horsepower brethren, reducing our exposure to non-core horsepower and foreign markets is something we said we would do, and we've wasted no time doing it.

John Griggs: And as a result, our business is much better positioned to serve the most important and fastest-growing customer markets.

John Griggs: In our other services segment, revenues were just over 29 million in Q4, with an adjusted gross larger percentage of 15%

John Griggs: We typically realize the season will slow down on our other services business as customers exhaust their capital budgets and defer projects until the new year.

John Griggs: Just at EBITDAF for the quarter, we're slightly more than 169 million. Up from Q3, with the higher contract services margins, more than compensating for the loss of low quality revenues is attributable to the divestitures.

John Griggs: In terms of capital expenditures, maintenance cap-axe came in just under 15 million for the quarter and slightly more than 66 million for the full year, both right on track with what we expected.

John Griggs: Our growth capital expenditures will approximately 71 million for the fourth quarter and 286 million for the year.

John Griggs: Included in the annual total was a roughly $20 million non-cash of cruel for potential sales and use taxes relating to our ongoing compression tax ability on it with the state of Texas.

John Griggs: As well as approximately 30 million related to getting the CSI fleet up to Kodiak's safety and operating standards.

John Griggs: Two items that we had called out in prior quarters and excluded from prior guns.

John Griggs: Not including what we acquired through the CSI acquisition. During the year, we added almost 162,000 new horsepower.

John Griggs: All of its large and nearly all that headed to the Permian.

John Griggs: Growth CapEx, related to new fleet units, represented about two-thirds of our total growth

John Griggs: With most of the balance going towards the aforementioned CSI fleet upgrades and tax accruals, as well as the expansion of a rolling stock and support infrastructure.

John Griggs: With regard to the balance sheet, at year end, we had totaled that of just over 2.6 billion, comprised of the 750 million principal amount of our 2029 senior unsecured notes.

John Griggs: and the rest borrowings under our AVL facility. We exited a year at 3.9 times credit agreement leverage. Coming out of the gates, post IPO, we were at 4.2 times leverage and we remained focused on getting that down to 3.5 times by year in 2025.

John Griggs: Let's turn to our 25 guidance. We'll be provided our customary metrics in the yesterday's release.

John Griggs: We expect overall revenue to range between 1.31 and 1.38 billion, with the contract services to segment, resuming its growth following our second half, 2024 non-court of

John Griggs: We expect the adjusted gross margin percentage within the contract services segment to range between 66 and 68 percent, driven by the combination of new horsepower sets of leading edge prices.

John Griggs: Ongoing repricing of the existing fleet on the roughly 30% of a horsepower that renews during the year and then operating leverage.

Mickey McKee: As Mickey mentioned, we're making meaningful investments in a clutch of bespoke, industrial, artificial intelligence and machine learning projects, as well as the expansion of our industry leading training and development programs.

Mickey McKee: These are highly strategic and important initiatives that we believe will drive scalable, higher margin growth over the medium and longer term and further differentiates the market competitors in the superior levels of the service we strive to provide our customers.

Mickey McKee: R-adjusted EBIT dot guidance range, but 685 to 725 million represents a higher midpoint than the early outlook we provided in our Q3 earnings release.

Mickey McKee: Evidence of the confidence we have in our ability to execute on our objectives

Mickey McKee: Reexpect Maintenance CapEX to be in a range of 75 to 85 million.

Mickey McKee: Maintenance Cap Exist Kodiak is driven more than anything by engine and compressor hours, and increasingly by predictive analytics.

Mickey McKee: It is critical in allowing us to provide the extremely high levels of mechanical availability and uptime to which our customers have grown accustomed.

Mickey McKee: We see growth capital spending landing between 240 and 280 million. About two-thirds of which, at the midpoint, will be spent on approximately 150 to 155,000 new horsepower.

Mickey McKee: As we mentioned in prior calls, about 40% of the 25 new horsepower is electric and nearly all of it will be set in the Plumian.

Mickey McKee: The balance of our growth captex will go towards a variety of items.

Mickey McKee: including Fleet Upgrades, a mission-related projects, capitalized aspects of the aforementioned AI and Bears Academy projects, a new ERP system, and facility and support equipment expansion to support future growth.

Mickey McKee: In terms of capital allocation, expect more of the same. We'll put as much capital of the work as we can in high-returning contracted large horsepower, which will allow us to deliver long-term annual growth and adjusted EBITDA in the upper single digit percentage range.

Mickey McKee: In 2025, the expected return about 35% of the more of our discretionary cash flow to shareholders.

Mainly through dividends, but also through opportunistic share re-virtuces.

Mickey McKee: and will continue to deliver with a direct line of sight to three and a half times leverage by the end of this year.

Mickey McKee: To wrap it up, 2024 was a fantastic transformative year at Kodiak. We're super proud of all of we accomplished in our financial results.

Mickey McKee: The markets for what we do best, namely U.S. focused large horsepower contract compression and related services.

Mickey McKee: are stronger than ever, and by every indication, it looks like they will remain that way for a while.

Mickey McKee: and we're leaning into a variety of people process and technology initiatives and investments. During 2025, that we think will set us up for even better operating and financial success in the future. With that, I'll hand it back to Nikki.

Thanks, John .

Mickey McKee: To wrap up, during 2024, we set new records in several key growth metrics.

Mickey McKee: and we did it while maintaining our focus on profitable growth and expanding margins.

Mickey McKee: To stay true to our word and make progress on all of our strategic objectives and continue to reward our shareholders for their investment in Kodiak.

Mickey McKee: And we're not done. Our 2025 guidance reflects our outlook for continued strength in the contract repression market. And we remain excited about the opportunities in front of us and believe the steps we took in 2024 prepared us to deliver even better things in the future.

Mickey McKee: Lastly, I want to thank the women and men of Kodiak for their focus on serving our customers safely which allowed us to deliver such great results.

Speaker Change: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker Change: You may remove your question from the queue by pressing star 2 for a participant using speaker equipment and maybe necessary to pick up your handset before pressing the star keys. One moment while we pull for questions.

Speaker Change: Our first question is from Jim Rollyson with Raymond James. Please proceed.

Hey, good morning, guys.

John McKee and John , I guess.

Speaker Change: We've been on this upward pricing trend for compression for a while driven by the tightness, driven by the cost of equipment, etc.

and John , you're just the minute to go reference.

Obviously setting new units at higher pricing.

and things are still catching up. [inaudible]

Mathematically, this quarter...

Speaker Change: Your average revenue per horsepower per month actually came down slightly and I'm just kind of curious I'm sure there's some noise in there given what you've been doing with some of the CSI fleet but maybe just a little color around that and kind of an update on where leading edge is relative to kind of what your fleet average looks like.

Perfect. Yeah, thanks a bunch, Jim.

Mickey McKee: So at some we've thought about, I'll tackle the first part of that and then I'll hand it back to Mickey about the leading edge pricing

Mickey McKee: So, as the numbers you're looking at are going to be our contract services revenue for average or for ending horsepower, and if you go back to Q3, it was $22.25, and if you see in Q4, it comes out to $21.97.

Mickey McKee: So a small step down if you look back at our many years of public.

Thank you

Mickey McKee: We call it out, right? In Q3 and Q4, we saw roughly 125,000 horsepower, it's a number like that, about say 75,000 of that was actually working at the time of sale.

Mickey McKee: So if you, we did a crude analysis, it said let's act as if that horsepower that we sold didn't exist

so we can remove that.

Mickey McKee: The impact that it had in the Q3 or the Q4 kind of dollar per horsepower sale.

Mickey McKee: And the answer is, if you remove all the revenues and horsepower associated with those sales from Q4 and Q3

You would have seen a modest step-up.

Mickey McKee: from Q3 to Q4, completely in line with our historical trajectory over multiple quarters.

Mickey McKee: So that's the evidence that we needed to see for ourselves. It doesn't come out in the numbers because we don't disclose that. So I just told you the answer that indicates continued reprising of the fleet upwards as well as setting new horsepower. So that's the answer.

Mickey McKee: The last thing I will say is the fourth quarter is traditionally one of our smallest quarters in terms of repricing and you know how much horsepower that we set in the quarter and it was the smallest quarter of the year.

Mickey McKee: So, even though it was up quarter over quarter, you'd expect to see, in say, first quarter quarter we had more repricing, was an even bigger step up.

Mickey McKee: So I'll finish and then head back to Mickey by saying it's completely in line with our expectations and we think we do a reset and then from here we continue to go our typical Kodiak up into the right quarter after quarter.

Mickey McKee: Yeah, Jim, and this is Mickey just to talk a little bit about leading edge pricing. I'm not going to probably tell the world what our pricing book looks like. But I will tell you that we're still seeing and have confidence in the same kind of leading edge pricing that we've seen over the last several quarters.

Speaker Change: Which is probably in that 15 to 20% premium over average pricing of the fleet today. So we still see that going strong and don't see any change there. Got it. Appreciate that and maybe as a follow-up.

Speaker Change: Obviously, margins have improved. You guys had a really strong quarter or the guidance kind of indicates that kind of continues going forward. We obviously can get the pricing impact as we think about what we just talked about.

Maybe just spend a second on-

Speaker Change: Machine Learning, and the different things you're doing between training and predictive maintenance and all that. When you roll that up into a margin impact for the investment you're making, maybe you can spend a little time just talking about how that should unfold margins over time.

Speaker Change: Yeah, I think that's a great question. I think a little bit of it is projection. I'm not 100% sure where margins can go yet. I think that...

Speaker Change: We see a clear path forward towards that upper 60% range on the margins. One of the things that we're doing right now that we're testing out that we're getting ready to roll out is looking at a condition-based PM cycles on some of our units.

Speaker Change: You know, if we have a strict, in this industry before, we've had a strict maintenance kind of cycle of 90 days and we do a...

Speaker Change: A maintenance cycle, no different than every 3,000 miles, you know, 10 years ago every 3,000 miles you'd have gotten the whole change in your car. And now your car kind of tells you every 5 to 7,000 miles today.

Speaker Change: You need to go get your all changed based on the conditions of telemetry and that kind of thing that are going on within your vehicle. We're testing the same kind of thing on these compressors that are saying...

Speaker Change: Hey, you may not need different maintenance at 90 days. We might be able to push that out to 100 or 110, or 120 days, and cut some of our maintenance.

Speaker Change: Erickston, some of our maintenance intervals, which which overall over the course of three or four maintenance cycles per year really saves a tremendous amount of money when you when you look at the overall impact so. Thank you.

Speaker Change: We're just in some of those kind of things, and we think that that is a really quality objective for us, and it will have.

Speaker Change: Tangible Real Margin Expansion Impact to the P&L. Is it one percent? Is it three percent? I really don't. I can't tell you yet, but you will see it.

Got it. Appreciate that. I'll turn it back. Thanks

Thank you.

Speaker Change: Our next question is from Derek Whitfield with Texas Capitol, please proceed.

Good morning all, and thanks for your time.

We're going to do one of them.

Speaker Change: With the recent macro volatility from tariff and OPEC announcements, one to ask if you could offer some color on how these developments are impacting your customer conversations in the rent versus buy-the-suit.

Thank you. Thank you. Thank you.

Speaker Change: It's a good question. I mean, really it's to be determined, right? I mean, a lot of this stuff, we've seen a lot of movement in the last 24 hours and really haven't talked to a lot of the customers about overall impact.

Speaker Change: You know, I think to start out with looking at the tariff impact, again, that's to be determined whether that's a long-term impact or if it's a shorter-term kind of negotiation tactic.

Speaker Change: and I think that there will be some inflationary pressure on our capital costs, but it's cool.

Speaker Change: kind of within the realms of what we were expecting in that two and a half to three percent range.

Speaker Change: on an annual basis. I don't think this gets back to COVID levels of 10% or 15% inflationary pressure.

Speaker Change: So, just because, you know, the biggest impact we'd see is on Roth Steel cost that go into the cost of our packages. So...

Speaker Change: We are expecting that some of that costs will go up, but it's not a tremendous amount of pressure on capital costs. See, it's really 25 to 30% of the overall package.

Speaker Change: As far as OPEC and some of the pressure on commodity prices and oil, that's an interesting conversation too.

Speaker Change: When you think about it from the context of lease versus buy from our customers perspective, I think customers with last cash and their pocket are going to be more up to outsourced compression versus buy their own. So, I think that that could...

Speaker Change: in an interesting way, benefit us and have our customers want to want to outsource and spend precious capital on drilling wells and putting pipes on the ground.

Speaker Change: Hey Indira, I just wanted to come in as well and just remind everybody that we're really blessed with our business model and with the strategy that we set forth in a market like this.

And like, why do we say that?

Speaker Change: Just to remind everyone, we're production focused. We're not tied to drilling or completion. We've got fixed revenue contracts.

Speaker Change: We're concentrated in world-class highly-economic basins like the Permian and the Eagleford. We've got large horsepower. We've talked a ton about how it's sticky and it sits.

Speaker Change: and we work with mostly blue ship customers that aren't the fickle customers that are going to stop start based on short-term commodity prices. So it gives us great confidence in the 25 outload and great confidence in the strategy that we set forth from the long-term.

Speaker Change: That's great, and this is my follow-up. Maybe just touching on some of your prepared remarks just on the fundamental shift in natural gas demand. Has that changed if at all your view on the producing region you'd like to target for contract compression exposure?

Speaker Change: Not really. I mean, I think that I think the right places for us to be are in, in...

Speaker Change: Basins that have oil exposure and natural gas exposure. That's why I think the permeant is the right is the the biggest area of focus for us, but also other areas.

Speaker Change: that we're higher on in South Texas in the Rocky Mountains and in the Northeast as well. So I don't think that shifts are our thought process there and I think those the Permian, the Eagleford are going to have.

Speaker Change: Big roles to play and supply of LNG facilities and I think we're in the right place at the right time.

That's great. Thanks for your time.

Thanks, Derek.

Speaker Change: Our next question is from John McKay with Goldman Sachs, please proceed.

John McKee: Hey, good morning. Thanks for the time. Maybe we'll start in the macro with touching a couple different things here, but I'd love to hear your latest, just kind of on the ground view of what you guys are seeing for GORs in the Permian. We've seen pretty impressive gas numbers.

John McKee: Coming out of fourth quarter, you guys have a pretty good on the ground read of what's going on. So just curious, the latest story there. Thanks.

Hey John , good morning, thanks.

John McKee: You know, I think that we're seeing the same thing that everybody's seeing. I think we said that in the prepared remarks that you're about 10% more gas to oil ratio in today compared to 2020 in the Permian Basin.

John McKee: I think that that's a little bit of a function of the core premium inventory has largely been drilled by a lot of these only guest producers there.

John McKee: But we're not really privy to how many barrels of oil per MCF and gas are being produced out of the wells that we're sitting next to.

John McKee: We are seeing, you know, the macro numbers that you are and we are seeing those numbers go up, but, you know, as far as kind of here to the grindstone, it's...

John McKee: It is the demand for compression as much as it's ever been and we believe that that demand continues to go up because as pressures fall, you need more compression as GORs go up, you need more

John McKee: as well as age. You need more compression. So, all those things combined sets up even in an even in an environment where where

John McKee: Come on any price of crude might be falling a little bit. I think it still votes really well for our business with with with

John McKee: Standard flat rate contracts to be needed to continue to service as well, so I don't think that...

These producers are going to shut in $20 million.

John McKee: Three-mile lateral, Permian Wells, because we're pressing six, you know, we get down to, you know, lower-from-money price, oh well, so, oh price. So, I think that we're in a good spot and we're going to continue to need a ton of compression going forward.

Appreciate them. Maybe just a follow-up for me, you guys.

Speaker Change: Johnny pointed a little bit to the details on the CAPEX budget for this year. Am I just fleshing out a little bit more of the one third that is for non-unit CAPEX? Maybe just, you know, how to talk about that? Maybe having longer term margin impacts, how to think about 25 relative to maybe what a run rate needs to be, I think you'd maybe frame those two for us. [inaudible]

Speaker Change: Yeah, it's a great question. So guys, they said in the prepared remarks about two-thirds or so the 25 gap ex we've got allocated towards what we would call like adding new units to the fleet. So if you took the midpoint of that range, that would leave you would call it plus or minus $85 million left over for other things, not including maintenance gap ex.

Speaker Change: In there's a variety of items that we're spending money on in the first half of the year maybe a little bit call it the first like six or seven months or so.

Speaker Change: Some of the telemetry machine learning and industrial artificial intelligence investments that we're making.

Speaker Change: All of which are designed to allow us to do more with the same.

as we go forward.

So, I think...

Speaker Change: Those items, if you're to answer that to kind of finish up that question, I'd say if you looked at the exit quarters.

for this and what would that imply for the future?

Again, I'd say it's about maybe... [inaudible]

Speaker Change: Two-thirds, front-half loaded, leaving one-third of that 85 million in the back after the year and that's kind of what I think about as a normal run rate kind of going forward when you're not making a lot of these significant investments.

All right, that's Claire, appreciate it, John . Thanks, team.

Thanks John .

Speaker Change: How our next question is from Doug Irwin with City, please proceed to the next question.

Speaker Change: Thanks for the question. Maybe a quick follow-up on John's question on Cataxe there and the run rate going forward, I guess.

Speaker Change: As you see some of that more one time other Catholics roll over, do you potentially see an opportunity to kind of step up the run rate of fleet additions you've seen here over the last couple of years, just as you're thinking about the

Speaker Change: The balance sheet getting in better shape and yet increasing free cash flow here, moving forward, just curious how you're thinking about adoptionality.

Speaker Change: Yeah, I think that that is probably likely going into 2026 to 2025's pretty well baked.

Speaker Change: with where we're going to land there and pretty well planned out. We've got all of our new unit growth capital which is basically contracted for the year. But looking into 2026, we're not going to have those kind of...

Speaker Change: Acquisition-related types of capital requirements that we've had this year and in the second half of 2024. And I think the balance of, if we're not spending that on non-unit growth stuff, we have it available and the available...

Speaker Change: If the jobs are still there for us to use on unit growth capital, then we certainly will

Speaker Change: Great, thanks for that. And then maybe sticking with gas allotation here.

Speaker Change: You're talking the prepare remarks about kind of the high visibility you have around some of the demand drivers moving forward. Just curious if you view that visibility, moving forward is allowing you to be a bit more opportunistic around FedEx here in potential periods during the night season dislocation, seeing the stock price.

Speaker Change: Yeah, it's certainly top of mind. We're going to be doing some analysis on that here pretty quickly.

Got it. Thanks for your time.

Yeah, thanks. Thanks, Douglas.

Speaker Change: Our next question is from Sebastian Erskine with Redburn Atlantic, please proceed.

Speaker Change: Hi, good morning. Mickey John , Graham and Kevin, good to be with you this morning. I guess I'll start, I mean, if you could talk a bit more about some of the kind of challenges maybe you're facing given labor tightness in the Permian and maybe how that's impacting growth in light of kind of exceptionally strong demand and kind of when you might expect that to a bad... [inaudible]

Speaker Change: Yeah, I mean, we're really leaning in. I think we said in the prepared remarks, we're really leaning into our training facilities and the development of people in the Permian Basin, especially.

Speaker Change: to challenge that growth and human capital challenge that we've got.

Speaker Change: You know, it's something that we're taking very seriously. We're developing some technology to aid younger type of less experienced technicians that we're really excited about and think that that's going to differentiate us through training and technology of our people.

Speaker Change: It's going to really differentiate us in the marketplace and allow us to not only continue to grow the way we've grown but continue to provide the best service in the industry in all basins.

Speaker Change: I appreciate that, and just another one on the 2025 EBITDA outlook, kind of 685 to 725. I guess what would need to go kind of better than expected to see sort of upwards pressure on that range?

Speaker Change: I think probably the thing that you're looking at the most that could affect those numbers up or down is our ability to execute on kind of the renewals and the contracts and the rate increases within those contracts that we're projecting and expecting within within the year.

Speaker Change: And then I think the other piece of it is how what is the cadence of the redeployment of some of the the legacy CSI equipment that we've made ready and

Speaker Change: and spent the capital to get that equipment kind of ready to go. And what's the cadence of getting that deployed and starting to generate additional revenues from that. So...

Speaker Change: It's really timing on the deployment of the capital and to revenue generation and our our successability on the renewals.

Speaker Change: Super, I'll squeeze in one final one if I can. It's a bigger picture question. I guess given consolidation in the contract compression sector, do you see opportunity for Kodiak to take some share from some of the smaller kind of pee back plays that aren't really deploying capital?

Um...

Speaker Change: I think maybe we really don't look at our business from the standpoint of market share.

Speaker Change: We're very, very disciplined on the capital that we spend based on our balance sheet and what we want the goals that we want to accomplish in our strategy.

Speaker Change: Whether that's growing market share or losing market share, it really doesn't drive our decision making and so we think we're in a great spot to grow as fast as we want to grow and spend the capital that we want to spend while we develop our people and strengthen the business and expand margins.

I appreciate it. I'll hand it back now. Thanks very much.

Here, thanks, Sebastian.

Speaker Change: Our next question is from Neal Dingmann with truest securities. Please proceed.

Neil Dingman: I want to get at the best, another great quarter. Mickey, my question is just supply chain management teams.

Neil Dingman: continues to remain pretty tight, continues the timing remains a bit long, giving you guys a nice advantage. You know, is that change much? And, you know, what are you seeing today and what are you expecting maybe by the end of the year? Are you expecting any improvement? You know, I don't know either from the cat side or some of the other equipment.

Neil Dingman: Daniel, you know, I don't think so, I think that—

Neil Dingman: You know, we've seen deliveries come down into that kind of mid-40 week range at the end of last year. The kind of health firm there, I think that actually there's been some orders that have gone on the books that have kind of pushed, put some upward pressure on those delivery times from caterpillar.

Neil Dingman: The other challenge is making sure that you have shop space to build a compressor once you get an engine, so that's at a premium as well, so um

Neil Dingman: You know, for our business, we manage those supply chain bottlenecks that you have right there. We've been doing it for many, many years and we're pretty good at it.

Neil Dingman: And so, we don't see that that's going to cause any destruction in our ability to get equipment on a timely basis or make sure that we have any other issues there. So, we're on top of it and we feel good about where we're at.

Speaker Change: Yeah, no, I don't argue that's a big advantage, y'all have, you guys are great at it, and then...

Speaker Change: Secondly, just, you know, we've seen a lot of M&A, I'm just wondering, but, but interest in that, you know, for me in another area is what it's per private or public, etc.

Speaker Change: But you guys continue to maintain these customers. I guess your thoughts that maybe M&A continues or at least M&A that we've seen.

Speaker Change: You know, your conversations such that, you know, others that Diamondback have bought or Exxon has bought your expectations, you're going to continue to work with that new combined customer.

Speaker Change: Yeah, that's our expectation. I mean, you know, understanding the compression market.

Speaker Change: Even in terms of the M&A, if somebody buys somebody else and they have our compression out there.

Speaker Change: The economics don't justify paying for the swap out costs and the downtime associated with it. And, you know, as I've said many, many times, the Permian Basin is so compression intense, it requires so much compression.

Speaker Change: to produce a barrel of oil out of the Permian basin that even these major oil and gas companies, they need a strategic partner to help them with their compression efforts and what they do and how much compression they need on a daily basis out there, and so...

Speaker Change: It doesn't benefit them to get rid of a good strategic partner like Kodiak on the compression side and that's what it really is. It's a partnership between us and our customers and we work with them on their own compression as well as ours.

Wilson McLeod, thank you.

Thanks, Dan.

Speaker Change: Our next question is from Theresa Chen, with Barclays, please proceed.

Speaker Change: Morning. Zooming out a bit on the supply and demand outlook for compression with the tightness.

Speaker Change: that you're seeing in the subsequent translation into lengthy lead times or rate tailwinds.

Speaker Change: that 15-20% premium over average pricing, how durable is that? And as others are seeing the same tightness with some of your large cap midstream competitors stepping up their compression investments and efforts, what do you make of this? And can you provide some color on the competitive landscape there?

Sure, thanks, Theresa, good to hear from you this morning.

Speaker Change: Look, I think that the new cost, the new pricing kind of environment that we see in the compression industry is not one that is like the OFS business at all where

Speaker Change: It's opportunistic to really drive up returns on a really drastic basis.

Speaker Change: We've got a higher cost of equipment today. Equipment is more expensive than it's ever been. I think probably 50% more expensive than it was.

Speaker Change: just two or three years ago when we saw hyperinflation. So leading edge pricing on new equipment is not because...

Speaker Change: We're trying to generate outsized returns on that equipment, it's more because we're trying to generate the same returns on capital that we did off of equipment that costs 60% of new.

Speaker Change: So, I think that is a durable place to be, right? It's not something that's going to fluctuate tremendously up and down.

Speaker Change: You still got the same kind of labor cost. You still got the same kind of lieu oil cost, parts and pieces for the cost that goes into how we take care of our equipment and how we operate our equipment doesn't change.

Speaker Change: Like I said, it's very different than a day rate on a drilling rig, so...

Speaker Change: I think it's a durable place to be and if we can't command the types of returns on our investment that we're looking for, then we'll pull back on that capital spend and pay down debt and create value in different ways.

Got it.

Neil Dingman: And looking at your asset composition as it stands, Mickey, what inning would you say your ad in terms of right-sighting your portfolio following the recent divestitures of non-core assets, where are you in that portfolio optimization process?

Yeah, thanks. We...

Neil Dingman: To be determined a little bit, I think we're definitely the majority of the way there. There's still some opportunistic investitures that we'd like to do, but probably nothing to the scale of what we saw in Q3 and Q4 of last year.

Thank you so much.

Speaker Change: Yes, thank you, Theresa. Our next question is from Robert Moscow with Mizuhu, please proceed.

Robert Mosca: Hey, thanks everyone, thanks for squeezing me in. Just wondering on other services, it looks like the revenue that you're guiding to is higher than we've seen in the past, and I'm sure some of that is CSI. But, you know, is there a change in the type of opportunities you're pursuing also seems like the guided margin is a bit lower? So just wondering if you could help us get our thumbs around to what you're seeing in other services. Thank you very much.

Speaker Change: Yeah, I'll take that. Thanks for the question. So that other services business pre CSI for us was predominantly our station construction business.

Speaker Change: In, we always call that out, that's a plus or minus 60, I want to say a $60 million kind of top line type business and so what you see now is the combination of that business.

Speaker Change: with the businesses we bought from CSI, which are their AMS field, AMS kind of shock work, and then some of their part sales. So you see a reasonably equivalent mix between those two businesses.

Speaker Change: In the way that it's set up like our station construction business, going back on memory was always kind of that mid-teens type.

Speaker Change: Margin, and when you love it together with the AMS business.

Speaker Change: It just kind of is where it is, like it can have some projects that go really really well and have higher Moreen and some projects that have a lower margin so...

Again, we're still...

Speaker Change: Trying to figure out the right way to grow that and the best way to grow that and we spent most of our time optimizing on the contract services time, contract services business. But I think now is the time we're going to continue to figure out how can we capture the synergies. [inaudible]

Speaker Change: with the customers between those two segments and continue to use our fleet to our advantage to capture more of the AMS and station construction type business.

[inaudible]

Got it. I appreciate it, John . And then, as a follow-up,

Thank you.

Speaker Change: in your ability to maybe outperform and reach the high end of what you laid out, and then also not sure if you could provide maybe a pro-form outlook on what the legacy KGS, for a margin profitability is that? Understand you layered in a lot of CSI there in 24, so maybe just a look on that legacy fleet.

Speaker Change: Yes, so we don't, it's pretty comical at this point, so it'd be difficult to kind of go back and say what was KGS, what was CSI, but...

Speaker Change: He actually tossed me a little bit of the softball, and I'll come back and say that our last quarter is a stand-alone business and our contract compression segment, we posted around a 66% adjusted gross margin in that segment If you go back and look at CSI's last quarter of the first quarter of 2024, they were in the mid-50s And I'll tell you that our last quarter is a stand-alone business and our contract compression segment is a stand-alone business and our contract

Speaker Change: Fast forward, two quarters, and we're back at the 66% last quarter, now we're at the 67% this quarter. So, that's something we're really proud of, and that's a combination of optimization of the fleet, getting rid of some of the smaller horsepower, and then over.

Executing on the synergy figures that we've given everybody before.

Speaker Change: That's point number one, two, like the guidance is the guidance. So we said 66 to 68 for the margin in the future. The things that I'll call out that would say and like something that we think about. So we took a real step back in 2020, back after 2024 and said, how are we going to set this business up to continue to scale continue to serve these wonderful customers and these larger customers in the basis that we operate in and where we want to be in the future and that a lot of that led back to the technology investments. The people in back.

Investments, the Bears Academy Investments. [inaudible]

Speaker Change: So there are a variety of things that a company like us could do to say, hey, let's not spend that money and let's try to really goose that margin today That would be pennywise and pound foolish because we think the investments we're making today are going to be able to unlock those margins in the future and unlock the return on investment and really service quality that we'll be able to have in the future as well

Speaker Change: So we're guiding on 25, but our expectation is we roll into 26 and 27, and we'll be seeing returns on those investments.

Understood, that's helpful. Thanks for the time, everyone. Thank you, everyone.

Speaker Change: Our final question is from Brian DiRobio with Baird, please proceed.

Brian DiRubio: Good morning, gentlemen. Just a couple for me. Mickey, just on the contracts that you're signing today, can you talk about what kind of terms you're getting on 10 Euro versus a couple of years ago?

Um...

Brian DiRubio: Sure, it's roughly the same. How are you doing, Brian ? Thanks for calling. It's roughly the same. You know, we're signing those three to five-year contracts on both new unit deployments as well as on recontracting assets that are in place already. So I haven't seen a real shift in step change there in in term as much as we have in kind of leading edge pricing.

Brian DiRubio: Got it. Okay, that's helpful there. And then just next question is going to combine two into one, just on the electric drives.

Brian DiRubio: Is there a substantial difference in the cost borrower's power on electric drive versus the traditional Mackayash driven, you know, Cat 3600 engine driven, Riggs, and then also on electric drive just we think about maybe two years into those.

Brian DiRubio: You know, units being deployed, it's a difference in the maintenance on those summer saying that the maintenance on the electric drives are a lot lower than on the cat engine ones.

Yeah.

Brian DiRubio: A couple of pieces there on the CapEx cost there. They're roughly the same. They might be marginally cheaper on a dollar per horsepower basis by a couple of percentage points but...

Brian DiRubio: but they're roughly the same. As far as the operating costs go on those, you're on-going topics. They are marginally cheaper there too. They don't usually boil in the engine like a natural gas driven engine does.

Brian DiRubio: for their motors. There's less of a maintenance cycle and that kind of thing, so there is some operating expense benefit on the electric garage.

Brian DiRubio: that we've experienced as well. But I will say that the trade-off there is, the grid is still very unpredictable and is very difficult to get reliable electricity to power these things.

is especially in the Permian Basin.

Brian DiRubio: and so with the natural gas driven unit, you've got a clean burning fuel that is an abundant resource out there that's in every unit that you are compressing gas for.

Speaker Change: So it's a totally self-contained system, so the ability to reapply that kind of equipment if, if, if...

Conditions change or the customer wants to do something differently.

Speaker Change: is a lot easier to reapply and a lot easier to get that second contract on than...

Speaker Change: Any size horsepower of electric drive compression. So, you know, you look at kind of the short-term, maybe it's a little bit higher margin type of equipment and the long-term cash flows, it might be a little riskier.

Understood. Appreciate all that distant color. Thank you so much.

Yes, thanks, Brad.

Mickey McKee: We have reached the end of our question and answer session. I would like to turn the conference back over to Mickey for closing remarks.

Mickey McKee: Yeah, thank you, operator. And thanks to everybody participating in today's call. We look forward to speaking with you again after we report results for the first quarter. Thanks again. Bye.

Mickey McKee: Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

Speaker Change: Greetings... Good morning... Good morning... Good morning... Good morning... Good morning... Oh, and good bow...