Q4 2024 Archrock Inc Earnings Call
Jason: Good morning. Welcome to the ARTRAC fourth quarter and full year 2024 conference call. Your host for today's call is Megan Repine.
Vice President of Investor Relations at ARTRAC
Jason: All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you.
Jason: In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted net income adjusted EBITDA and adjusted EPS.
Jason: Reconciliations of these non-GAAP financial measures to our GAAP financial results. Please see yesterday's press release, and our form 8-K furnished to the S. E T O.
Jason: I'll now turn the call over to Brad to discuss our trucks fourth quarter and full year results and to provide an update for Vista.
Brad: Thank you Megan and good morning, everyone.
Brad: Across the board Archrock delivered excellence in 2024.
Brad: Excellence in safety.
Brad: Customer service and operational performance and financial results.
Brad: We achieved this during one of the busiest compression markets we've ever experienced a walking currently completing a transformative acquisition that established Archrock is the leader in electric compression.
Brad: Before turning the page to 2025 I wanted to take a moment to thank and congratulate our dedicated employees on an extensive list of 'twenty 'twenty four accomplishments, which included records for almost every operational and financial metrics.
Brad: Among the highlights we reported record adjusted EPS and adjusted EBITDA.
Brad: Compared to 2023, we increased our adjusted EPS by 69% and adjusted EBITDA by more than 30%.
Brad: Our teams worked tirelessly to meet our customers' robust demands.
Brad: We increased our contract compression operating fleet by 716000 horsepower, excluding sales of nonstrategic assets.
Brad: This growth reflects organic investments in new build horsepower as well as the acquisition of clubs.
Brad: We maintained an all time high equipment utilization ending the year at 96%.
Brad: As we met this demand we recorded over four and a half million man hours and drove 24 million miles.
Brad: And it's exceptionally busy environment and despite dynamic labor market, we continue to deliver industry, leading safety performance.
Brad: Our contract operations and aftermarket services segments delivered record setting adjusted gross margins due to continued pricing improvement enhanced efficiency and a continued focus on managing costs.
Brad: This step change in our earnings power enabled us to return $124 million in capital to our shareholders through dividends and share buybacks.
Brad: We also concurrently delivered outstanding dividend coverage of three one times for the full year 2024, and drove our year end leverage ratio to an impressive three three times.
Brad: And we're even more excited about what we are positioned to deliver in 2025.
Brad: Our investment in high quality assets exceptional customer service.
Brad: Implementation of innovative technology is translating into repeatable results and driving value for our customers and our shareholders.
Brad: We kicked off 2025, and an enviable position and I expect archrock to continue to raise the bar for the compression industry.
Brad: In 2025, we're focused on the following three business objectives.
First capturing opportunities presented by this robust market.
Brad: We believe the increases in natural gas production and demand for compression as part of a structural change requiring significant investment in additional natural gas production infrastructure, and which compression and Archrock will play a critical part.
Brad: Our investment returns remain strong and support our ability to generate stable and growing cash flows today.
Brad: And over time.
Brad: Second maximizing the reliability of our service for our customers.
Brad: In addition to the supportive macro environment, we're remaining proactive in our focus on innovation efficiency and improvement.
We believe this is critical to our success and ongoing position as the premier compression provider.
Brad: We will continue to prioritize the standardization of our field operating model and the enhanced adoption of the technology that we've implemented over the past couple of years.
Brad: Third helping answer the call on all businesses to reduce carbon emissions.
Brad: We are the leader in electric motor drive compression and expertise.
Brad: The planned expansion of our electric Motor drive fleet, not only provides environmental benefits, but should also augment customer uptime and archrock operational efficiency.
Brad: In addition, our new ventures team is advancing opportunities to bring methane emissions detection measurements and capture solutions to market.
Brad: These opportunities are adjacent and complementary to our core contract compression services.
Brad: As these offerings move out of the pilot phase we're working to bring these early stage products to market in order to help our customers and the industry identify quantify and reduce emissions.
Brad: Now, let me dive deeper into the fantastic market, we see for compression.
Brad: The primary driver of our business as natural gas demand and production, which we see ramping up in 2025 and well into the future.
Brad: Natural gas remains a reliable affordable and cleaner sources of energy domestically in the U S continues to be a significant player in the global market for natural gas.
Brad: First on 2025.
Brad: The EIA is forecasting 2% to 3% annual growth in production of both oil and natural gas this year.
Brad: Natural gas production growth continues to be led by key archrock oil producing markets that have associated gas like the Permian.
Brad: And growth in crude oil production is expected to continue driving demand for compression for gas lift applications.
Looking beyond this year, we expect LNG demand exports to Mexico power.
Brad: Our generation and the emerging opportunity presented by the onshoring of AI data centers to require a significant call on U S natural gas production.
Brad: To support this production the U S will need to make substantial investments to expand the natural gas transportation infrastructure in the U S. This includes gathering systems processing plants pipelines and compression.
Brad: Our customers need our equipment, our service and our people.
We intend to support them in what we believe will be a durable and rewarding investment cycle for natural gas production and natural gas infrastructure, including compression.
Brad: With this continuing strong market for compression to support the transportation of natural gas and the production of oil.
Brad: We have a substantial contracted backlog for 2025, we are booking units for 2026 delivery and we believe we will continue to see strong customer demand for new equipment well into next year.
Brad: Moving to our segments, we posted record results in contract operations during Q4 and 2024.
Brad: Revenue and profitability outperformed in our pre acquisition business and we were able to capture the full impact of the accretive tops transaction, which came through in our fourth quarter performance.
Brad: Our fleet remains fully utilized during the quarter with utilization exiting the quarter at a rate of 96%.
Brad: Looking at period end operating horsepower in the fourth quarter compared to the third we delivered approximately 93000 in the active horsepower growth, excluding approximately 45000 horsepower and noncore asset sales.
Brad: Average operating horsepower during the fourth quarter of $4 2 million horsepower was up from $3 8 million in the third quarter and $3 6 million a year ago.
Brad: It reflected the acquisition of the tops fleet, which closed in August 2024, as well as organic growth.
Brad: Okay.
Brad: Monthly revenue per horsepower also moves higher in 2025, we expect to benefit from a full year's impact of rate increases from 2024, and we also expect additional increments throughout the year.
Brad: I'm proud to say that we delivered 2024 adjusted gross margin dollars of $657 million, which was up $155 million from 2023.
Brad: This translated into a 500 basis point increase in our gross margin percentage for the year.
Brad: Notably we achieved a quarterly high for 2024 of 70% during the fourth quarter.
Brad: Going forward, our efforts to standardize digitize and automate should position us to continue delivering outstanding profitability.
Brad: Moving to our aftermarket services segment, despite some seasonal softness during the fourth quarter full year 2024 activity stayed strong while profitability remains substantially higher compared to historical levels as we focus on higher quality and higher margin work.
Brad: This level of performance and consistency in our results is the best we have seen in a long time.
Brad: Great leadership and customer service by our <unk> team is driving repeat business with key customers and key.
Brad: Keeps us us optimistic about 2025.
Brad: Shifting to our capital allocation framework for 2025.
Brad: Our approach continues to be rooted in a returns based approach that balances our leverage position.
Brad: Investment in high quality opportunities presented by the market and returns to shareholders.
Brad: Yesterday, we announced our 2025 capital plan, which includes between 330 and $370 million of growth investment in our fleet. The vast majority of which is already under contract.
Brad: The IRR is at which we expect to invest Newbuild capital are strong and we will continue to meet the needs of our customer base through new build investments that support the sustainable growth in U S oil and gas production that we see ahead.
Brad: These 2025 Newbuild investments are focused on large midstream electric motor and electric motor drive compression units.
Brad: Natural gas and oil production in key growth plays like the Permian.
Brad: The acquisition of tops and its book of business is a meaningful contributor to the increases in the absolute level of 2025 growth capital compared to 2024.
Brad: As we invest in these compelling opportunities.
Brad: We are committed to maintaining an industry, leading balance sheet and plan to maintain a leverage ratio of between three to three five times.
Brad: This underpins our ability to execute on our plans and opportunistically adapt to market conditions.
Brad: Finally, as shareholders ourselves management and the board are focused on maintaining a well covered dividend that grows along with the profitability increases and our underlying business.
Brad: Given our confidence in the outlook for compression as well as archrock sector, leading financial flexibility, we recently announced a 15% year over year increase in our quarterly dividends.
Brad: Archrock continues to perform at an exceptional level, reflecting consistent operational execution and the successful progression of our strategic initiatives.
Brad: We carry significant momentum into 2025.
Brad: In addition to capturing market opportunities, we will be expanding the implementation of technology and processes to improve our operations to drive efficiency and profitability.
Brad: I am confident in our ability to generate stable and growing cash flows today and overtime.
Brad: And I'm confident the best is yet to come.
Brad: With that I'd like to turn the call over to Doug for a review of our fourth quarter and full year performance and to provide additional color on our 2025 guidance.
Thanks, Brad Good morning, and thanks again to all of you for joining US, let's look at a summary of our fourth quarter and full year results and then cover our financial outlook for 2025.
Brad: Net income for the fourth quarter of 2024 was $60 million.
Brad: Excluding transaction related costs and adjusting for the associated tax impact we have delivered adjusted net income of $62 million or <unk> 35 per share.
Brad: We reported adjusted EBITDA of $184 million for the fourth quarter 2024.
Brad: Underlying business performance was strong in the fourth quarter as we delivered higher total adjusted gross margin dollars for contract operations on a sequential basis.
Brad: Results further benefited from $13 million in net asset sale gains related to nonstrategic horsepower sales.
Brad: Included in our quarterly results was an $8 million sequential increase in SG&A expenses.
Brad: This level of expense was largely related to the increase in stock price throughout the year, which drove higher long term incentive compensation as well as other increases in performance based short term and long term incentive compensation expense given the outperformance relative to earlier expectations in 2024.
Turning to our business segments contract operations revenue came in at $286 million in the fourth quarter up 17% compared to the third quarter the.
Brad: The sizable increase reflects a full quarter's contribution from the <unk> acquisition organic horsepower growth and higher pricing.
Brad: Compared to the third quarter, we grew our adjusted gross margin dollars by $35 million.
Brad: This resulted in a record adjusted gross margin percentage of 70%.
Brad: In our Ams segment, we reported fourth quarter 2020 for revenue of $40 million down compared to the third quarter and a year ago. The decline reflects seasonal softness and a delay in service work that we expect to complete in the first half of 2025.
Brad: Fourth quarter Ams adjusted gross margin percentage was 23% compared to the third quarter of 26% in the prior year period of 22%.
Brad: We exited the year with total debt of $2 2 billion and a strong available liquidity of nearly $700 million.
Brad: Our leverage ratio at year end was three three times calculated as year end 2024 total debt divided by our trailing 12 months EBITDA.
This was down compared to three five times in the fourth quarter of 2023 and reflects our strong operating performance and prudent financing of the tops acquisition.
Brad: As Brad mentioned, we are focused on maintaining a consistent leverage ratio of three to three five times through cycles.
Speaker Change: The strong financial flexibility I. Just described continues to support increased capital returns to our shareholders.
Speaker Change: We recently declared an increased fourth quarter dividend of <unk> 19 cents per share or <unk> 70 on an annualized basis. This is up approximately 9% from the third quarter dividend level and 15% versus the year ago period.
Speaker Change: Cash available for dividend for the fourth quarter of 2024 totaled $118 million, leading to our impressive quarterly dividend coverage on the increased dividend of three five times.
Speaker Change: Archrock introduced 2025 annual guidance with our earnings release yesterday, all of the customary detail can be found in the materials published last night and for the purposes of this call I will keep my comments high level.
Speaker Change: We announced a 2025 adjusted EBITDA guidance range of $750 to $790 million.
Speaker Change: At the midpoint. This represents an increase of $175 million compared to the $595 million in 2024 or nearly 30%.
Speaker Change: In contract operations, we expect full year revenue to increase 24% at the midpoint compared to 2024, driven by horsepower growth continued tight utilization and higher pricing.
Speaker Change: We expect 2025 contract operations' adjusted gross margin percentage to be in a range between 68 and 71% for the year up from 67% in 2024.
Speaker Change: This reflects not only top line growth, but also our high graded fleet and continued efforts to maximize our profitability by leveraging technology and focusing on controlling expenses even during this up cycle.
Speaker Change: In our Ams business, we we forecast full year revenue of $190 million to $210 million and a continuation of the healthy service activity, we experienced in 2024.
Speaker Change: We also expect to defend the profitability gains we've worked hard to achieve with an expectation for adjusted for adjusted gross margin percentage between 22% and 24%.
Speaker Change: Turning to capital on a full year basis, we expect total 25 2025 capital expenditures to be approximately $470 million to $535 million.
Speaker Change: Of that we expect growth Capex to total between 330 and $370 million to support investment in Newbuild horsepower and repackage Capex to meet continued customer demand.
Speaker Change: This compares to growth capex of $251 million in 2024.
Speaker Change: The increase reflects continued strong demand from key customers and Premier plays and is supported by multiyear contracts in.
Speaker Change: In addition, the increase also reflects growth capex underspin and carry forward from 2024 due to supplier equipment delays.
Speaker Change: Totaling.
Speaker Change: Well.
Speaker Change: Yes.
Speaker Change: Sorry.
Speaker Change: Yes.
Speaker Change: You might have a page.
Speaker Change: We expect growth Capex to total between 330.
Speaker Change: $370 million to support.
Speaker Change: Newbuild horsepower and repackaged Capex. This compares to growth Capex of 251.
Speaker Change: Okay.
Speaker Change: I'm just missing.
Speaker Change: A piece after the total.
Speaker Change: Okay.
Speaker Change: Okay, well, we're going to have to come back to you that on that.
Speaker Change: We also anticipate $35 million to $50 million in other and other capex, primarily for new vehicles total capital total capital expenditures are expected to be primarily funded by operations with the potential for additional support from non strategic asset asset sale proceeds as we continue to high grade our fleet.
Speaker Change: Before we open the line for questions I want to conclude by emphasizing that on the heels of a very rewarding 2024, we have an exciting outlook ahead of us for 2025 and beyond and.
Speaker Change: Industry fundamentals for oil and gas production and compression demand are strong we are focused on continuous improvement and maintaining our position at archrock.
Speaker Change: Premier compression company in America for our employees, our customers and our investors.
Speaker Change: With that Sylvain, we are now ready to open the line for questions.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad. Please go ahead and join the queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Speaker Change: If you are called upon to ask a question in a listening via loud speakers Android device.
Pick up your handset and ensure that your phone is not on mute when asking your question. We do request for today's session that you. Please keep to one question and one follow up.
Speaker Change: First question comes from the line of TBA Raleigh said.
Raymond James: Raymond James Please go ahead.
Speaker Change: Hey, good morning, guys and solid work again on the quarter and the year.
Speaker Change: Brad last quarter I remember talking about the strong margin post you did in compression and kind of asking around the sustainability of it and I remember you commenting.
Speaker Change: Do you think it's sustainable and perhaps expandable through some of the things you're doing internally that obviously came through this quarter and in your margin guidance.
Speaker Change: As you look out of things Youre doing.
Speaker Change: And the fact that pricing on average is still rolling higher where can that go and what's the ceiling on margins based on on kind of things that are going on internally.
Speaker Change: Thanks, Jim.
Speaker Change: As we approach 100%.
Speaker Change: Thus the curve is definitely going to be less steep.
Speaker Change: We're really proud of the gains we've made the team has worked extremely hard to both focus on leveraging the pricing position that we have in the market today, given the extremely high utilization at 96%.
Speaker Change: But also too.
Speaker Change: Continue to manage cost and efficiencies through the investments in technology that we've made.
Speaker Change: So never say never we're really pleased with this margin performance and the returns that we can drive to our investors and but at this level of profitability. The main thing we're kind of focus on now is growing a very profitable business by investing in high return assets under long term contracts to support the infrastructure build.
Speaker Change: Out going forward. So we are still going to continue to work on the profitability of this business, but at the level. We've achieved now we think its a green light to grow the business support our customers growth and provide the infrastructure needed to power America.
Speaker Change: Understood and as a follow up maybe around the growth Capex may be you can provide us a few stats kind of how much total horsepower you will add in 2025 with that figure in.
Speaker Change: Maybe a little bit of color on the mix between your traditional large horsepower capacity and the gas lift opportunities you have now, especially with the tops transaction and even maybe how youre thinking about growth Capex beyond 25, just given the step up from year to year, which I think Doug was trying to explore.
Speaker Change: And a little bit about on some of that was a little bit of catch up in there too, but just maybe that that whole thing if you could.
Speaker Change: Endeavour please.
Speaker Change: Yes, we just released guidance on 2025, Capex yesterday, we're not going to guide 26 on quite yet, but I will.
Speaker Change: It's a great question, let me address a couple of the components.
Speaker Change: With the Capex budget that we're tabling, we'll deliver over 200000, we expect to take delivery of over 200000 horsepower in the year.
Speaker Change: The number is elevated a bit because of the expansion of our overall base fleet with tops as we noted and in the split about 80% of the budget is going to go to a large horsepower midstream gas.
Speaker Change: Gas drive engines, and 20% to 25% of the budget is going to go toward electric motor drives the vast bulk of which is on gas lift. So that's the rough split between these.
Speaker Change: But overall I would say that this capital budget is.
Speaker Change: Just engineered to meet our customers' demand expectations when you step back and look at what we're focusing on the.
Speaker Change: The amount that the.
Speaker Change: The EIA forecasts for growth in the business is totally validated by the commitments, we're getting from our customers to enter into long term contracts and bookings.
Speaker Change: <unk> five is booked and now we're moving into 2026, and we're going to maintain our focus on the two most profitable segments of the space and that is large horsepower gas drive and electric motor drive equipment.
Jim Whittaker: Jim Whittaker.
Speaker Change: I would just add that now that the secrets out that perhaps we script some of our prepared remarks.
Speaker Change: The page that was missing here for me was that about $15 million of this year's Capex is is carryover from 2024, so apologies for that.
Speaker Change: Yes, no worries. Thanks, guys appreciate it thanks guys.
Speaker Change: Your next thanks, gentlemen comes from the line of.
Speaker Change: Doug.
Speaker Change: Please go ahead.
Speaker Change: Hey, Thanks for the question.
Speaker Change: Just wanted to start with 2025 guidance.
Speaker Change: I'm wondering if you could provide a bit more detail on some of the assumptions you're baking into the high end for small island at the range here.
Speaker Change: You already gave some.
Speaker Change: Detail around the fleet additions, which is helpful. But just specifically I'm curious how much of that ranges is driven by pricing tailwind first maybe the timing of fleet additions throughout the year.
Speaker Change: So the guidance is.
Speaker Change: Number one on the profitability and we will talk with the horsepower.
Speaker Change: Guidance throughout the year is definitely going to be influenced on the pricing side on the gross margin side by our level of success on the one hand and implementing price increases throughout the year and on the other side our ability to continue to manage costs in a in a in.
Speaker Change: In a very aggressively growing market, so that really those drivers what really bookends.
Speaker Change: The profitability that we gave in guidance in the in the.
Speaker Change: Margin range and when we think about the overall guidance for contract operations in particular.
Speaker Change: Some of it is absolutely whether or not we can get our customers can get all the horsepower started that we're trying to set throughout the year and so that said those are the two main drivers around the contract operations side of the business on a M. S. It's just a notoriously difficult business to forecast and the guidance range that we gave just brief.
Speaker Change: <unk> overall.
Speaker Change: Inability to really snap the chalk line closer in our forecasting ability on the E&S business, but we're really pleased with the level of activity and profitability that we're achieving right now which is at record levels in that business as well.
Speaker Change: And I, maybe would just add I know you may not be new to compression, but newer to the archrock coverage side.
Speaker Change: It's a pretty tight range, we think given that it's February and we.
Speaker Change: We feel good about that range and as Brad highlighted there are a few things that can lead us to either end of that spectrum is there still a solid 10 months left in the year, but.
Speaker Change: Also understanding that we try to give you as tight of a range as we feel comfortable at that at the beginning of the year.
Speaker Change: Yeah understood I appreciate all that detail.
Speaker Change: And as a follow up just wondering if you could talk about where you might be seeing demand opportunities outside of the Permian you talked about a lot of the.
Growing demand drivers around LNG and data center demand in your prepared remarks, just curious if youre seeing increased opportunities in other basins honor for yourself, just largely focused on the Permian here for the next few years.
Speaker Change: The Permian is consuming $60 to 70% of our Newbuild capital going forward, but we do see growth opportunities, albeit smaller in scale.
Speaker Change: In other plays and we saw growth for example in the fourth quarter of 2024 and incrementally in the Haynesville.
Speaker Change: And in the Bakken and in.
And in the northeast so much more incremental but we see it there, but I'm going to highlight the other quality we have in our operation today is incredible stability in some of the plays that are not attracting new capital and growing but still providing a high level of profitability, including for example, the Eagle Ford.
Speaker Change: Your next question comes from the line of Jeremy Tonet with JP Morgan. Please go ahead.
Speaker Change: Hey, this is Ely on for Jeremy.
I wanted to start I think one of your competitors mentioned some of this elevated customer demand is resulting in higher pricing and opportunities for longer term contracts. So how is the team Wang.
Speaker Change: Month to month mix versus opportunities for longer term deals.
Speaker Change: We recognize this there may be an opportunity for both but just thoughts there.
Speaker Change: Yes, I'm going to be limited in the comments I'm willing to share on a point that compares contract terms across the industry.
Speaker Change: But what I would describe as we see the opportunity as you've seen in our performance to date to both maintain record utilization.
Speaker Change: Drive.
Speaker Change: Very good pricing when you look at Q4, 'twenty three versus Q4 'twenty four our revenue per horsepower is up approximately 15%.
As well as to extend the terms of our contracts with customers, where the midstream application is going to be a long term application.
Speaker Change: So we do think that in this robust market, where our fleet is more valuable our services are seriously valuable utilization is tight and we are delivering excellent service to our customers and we see the opportunity to maximize on both.
Speaker Change: Got it Thats helpful.
Speaker Change: And you touched a little bit on other basin plays so can we just help frame some of the dry gas basin activity and the implications for the business. If there is somewhat of a ramp in some of those other basins.
What are the implications for Archrock, specifically and how.
Speaker Change: How much of that is contemplated in our 2025 guide.
Speaker Change: Without repeating too much debt.
Speaker Change: Amount of activity and capital that will deploy into the existing into plays other than the Permian is roughly 30%.
Speaker Change: And so that said indication of what we think is going to happen in 2025 in plays outside of the Permian.
Speaker Change: Thinking about the dry gas context longer term however, right now the best indication for US is to look at where the industry is putting their capex and the industry continues to put the capex into the Permian are by and large and that Hasnt changed we don't see that changing immediately but we are.
Speaker Change: Encouraged by the dry gas pricing that we're seeing today and some of the reactivation by our customers from a scale perspective, however, it's not going to compare to the amount of capital and growth that we should expect out of the Permian.
Speaker Change: Over 25 and 26.
Speaker Change: Got it helpful. Thanks.
Speaker Change: Yep.
Speaker Change: Your next question comes from the line.
Speaker Change: So Mike <unk> with Stifel. Please go ahead.
Speaker Change: Thank you for the time good morning.
Speaker Change: Just a couple of quick ones in terms of the.
Speaker Change: The pricing that Youre seeing out there can you make any commentary whether youre seeing a difference between sort of the traditional.
Speaker Change: Guests versus the electric is one of the other having more pricing power than the other.
Speaker Change: I can comment on it we do not see a difference in pricing between the two is demanding a better a more of a premium than the other.
Speaker Change: In fact as those opportunities compete from a returns perspective fairly well head to head I think both for our customers and for US. So no. We don't really see much of a difference the nice thing about the business that we operate today.
Speaker Change: Just to double down on our point is that since we have made the investment in tops. We now have an excellent offering on both the gas for outside.
Speaker Change: As well as the electric motor side, we're relatively agnostic, we can grow in both sites and we see demand as being strong for both electric motor drive as well as gas drive going forward.
Speaker Change: Got it thank you for that.
Speaker Change: And the next one.
Speaker Change: You guys referenced several times talking about.
Speaker Change: Longer contract periods.
Speaker Change: What we're seeing.
Speaker Change: Deploying for longer periods and I'm, just curious when you say that.
Speaker Change: Should we be thinking is unlike you.
Speaker Change: You won't do a contract for like three years or four years everything is going to be sort of five plus years in duration or are you seeing enough demand out there to support that.
Speaker Change: You used a few superlatives, including the word everything.
Speaker Change: So the answer to that is going to be.
Speaker Change: Our business model our business model is we are going to meet our customers, where our customers wish to be met.
Speaker Change: And for various reasons, including approval levels on size of projects and where decisions get made within our customer base, we see contract durations of various terms being a part of the business going forward.
Speaker Change: It's in our portfolio now as part of the business going forward. So that baseline is what I wanted to stay but with that baseline established a couple of thoughts. The first is for us to deploy new build capital, especially large units today, we're seeking longer contract terms.
Speaker Change: And so that's more a part of Newbuild deployment than it is a part of the overall business, especially with existing units in dry gas plays for example.
Speaker Change: The second point I'll make is that with our customer base. We've established 20 year relationships, we are a cornerstone part.
Speaker Change: Their overall operations and in their capital stack.
Speaker Change: We do this under master agreements.
Speaker Change: That are.
Speaker Change: In place and just get renewed periodically that govern the entire relationship including the separate work orders that we take down off those contracts for particular services added locations.
Speaker Change: It's that longer term contract that longer term relationship approach that as the overall overarching way, we do business with our largest customers that gives us a tremendous amount of stability and predictability in our operations overall, it's not just these one.
Speaker Change: 135, plus year work orders.
Speaker Change: Got it thank you so much.
Speaker Change: Your next question comes from the line of Steve <unk> with Citi.
Speaker Change: Please go ahead.
Speaker Change: Good morning, everyone. Appreciate all the detail on the call.
Speaker Change: Wanted to ask couple of questions on some of your guidelines that surprise me.
Speaker Change: The guide for aftermarket revenue growth double digits, maintaining that level of margin coming off of the sort of seasonally slow for Q confidence level on being able to hit that double digit growth is that there is more a lot more third party assets out there now that require work is that just market share gains what gets you to that kind of.
Speaker Change: Kind of confidence level for 2025 on aftermarket.
Speaker Change: As I said earlier, the one thing we have to remind us that this business can be notoriously hard to forecast.
Speaker Change: But we're pretty confident in our forecast for 2025, all things considered customer activity remains high.
Speaker Change: Overall utilization in the market for contract operations is really tight and that indicates that the level of utilization within our customers is also quite high meaning they have to keep their units running they need our services they need our technicians to help them do that and that is providing floor.
Speaker Change: And oversized amount of services activity compared to parts than we've seen in the past and that is a more profitable segment within our overall aftermarket services segment. So.
Speaker Change: It's.
Speaker Change: We're confident in the guidance range that we delivered yes, Steve the only thing I'd add is weak.
Speaker Change: We talked about it in the prepared remarks November and December where we absolutely have line of sight to some jobs that just got postponed and we expect to execute in the first three or four months of this year.
Speaker Change: <unk>.
Speaker Change: And so I think that just with overall demand that Brad described looking good and strong and maintenance upcoming.
Speaker Change: <unk> is where we came with that and admittedly still a relatively small part of our overall business right.
Speaker Change: Okay, Great. That's helpful. The other one was on maintenance and other Capex guide for next year. I mean, we saw first full quarter with tops and your maintenance Capex was about a little over $20 million I'm, a little bit surprised the maintenance capex for next year would be at that higher level could that turn out to be a little bit high and is there anything other than vehicles.
Speaker Change: And that other Capex number, which is which is a lot higher off of 'twenty four.
Speaker Change: I'll speak to the maintenance Capex and Doug will speak to the other capex on the maintenance Capex. There are a few drivers of that the amount of maintenance capex that we're spending but the elevated level that we see next year is required to maintain our equipment knowing that the biggest driver is which units are coming.
Doug: Due for a major maintenance over a calendar period. So when you look back it's the timing of fleet additions.
Doug: That really dictates the timing of the next overhaul and so the the selections for next year or just on more units in larger units that are going to drive a higher level of expense to maintain the equipment coupled that with the addition of tops and the inflation that we've experienced over the last few years.
Doug: That's providing for the building blocks for that maintenance Capex. The important point I want to make however is that.
Doug: We believe we must maintain and invest in maintaining our units at to be very competitive. We've worked really hard to have the youngest fleet. We have had in more than a decade in operation today, competing well in delivering uptime for our customers, making sure we maintain the units with discipline as a critical success factor.
Doug: <unk> for us to continue to do that.
Doug: Yes.
Doug: The other Capex again, the vast majority is for trucks, there are software licensing and some other things buildings.
Doug: Or maintenance that may creep into that but that's all very small by comparison.
Doug: Great.
Speaker Change: Thanks, So much Brad Doug.
Speaker Change: Your next question comes from the line of Josh <unk> with <unk>.
Speaker Change: Please go ahead.
Speaker Change: Thanks, Good morning.
Speaker Change: First question I'm going to sort of roll into two.
Speaker Change: Could you update us on lead times for new equipment today, and then the <unk>.
Speaker Change: I know, it's a moving target with new administration, but when we think about new equipment.
Speaker Change: Is there any thought that tariffs could put any pressure on new equipment and if so how you guys are thinking about that and planning for that.
Speaker Change: Lead times remain in what I would call it very normalized market range right now 42 weeks 44 weeks.
Speaker Change: The range for long lead items.
Speaker Change: That's very close to the historic norm, we do see some risk of that pushing out a bit but not overly concerned about that at this time.
Speaker Change: The tariff question is vaccine I think it's very difficult for anybody to answer with any certainty.
Speaker Change: Point out that we in our major vendors.
Speaker Change: And including the Oems source most of their materials in the U S.
Speaker Change: So the supply base, we will have some time before tariffs could impact it.
Speaker Change: We need to watch it carefully we don't have any certainty on this but there is of course, a risk that longer term that.
Speaker Change: Steel tariffs could impact the business in the same way that some of the supply chain challenges supply chain challenges did back in the 19.
<unk> 2000, 22021 timeframe, but we're not expecting that we're working closely with our key suppliers now to assess that risk and we don't see it as being material at this time.
Speaker Change: Okay. Thank you I'll turn it back.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of need that dose with Texas capital. Please go ahead.
Speaker Change: Good morning, and congrats on the strong quarter going back to the Capex guidance for 2025 for a moment can you provide any color on the shape of that capex spending throughout the year knowing that there was some carried forward from 2024.
Speaker Change: Yes, I mean, I think for the most part it's it's you could think about it as ratable.
Speaker Change: I think it's it's.
Speaker Change: In the first quarter is likely to be the largest again, we've got some of that carryover coming.
Speaker Change: Plus some early on or.
Speaker Change: That $15 million of carryforward, plus strong demand for Q1, but after Q1, I think sort of starts to get ratable for the year.
Speaker Change: And while I'm on the topic of that Capex spend and having seen a few of the early notes I do think it is also important.
Speaker Change: While it's really hard for us to forecast and we don't give guidance on it.
Speaker Change: We have over the last few years seeing non strategic asset sales and cash flow.
Speaker Change: Two to the bottom line for us and help keep us in a free cash flow positive situation.
Speaker Change: So that would be something that while nothing yet anticipated for the year.
I think about and doing your modeling.
Got it great color. Thanks, as my follow up how.
Speaker Change: How are you thinking about share repurchases now as part of the capital allocation given your bullish outlook on the sector and the rising dividend.
Speaker Change: Okay.
Speaker Change: I think we think about it the same way, we always have which is I'd say its a tool in the toolbox for us and.
Speaker Change: We have at least historically use that a bit more opportunistically.
Speaker Change: When we see some weakness in the share price.
Speaker Change: We will continue to be a tool in the toolbox for us.
Speaker Change: We would like to have some presence there.
Speaker Change: Buying stock back if.
Speaker Change: If theres an opportunity to do so.
Speaker Change: I think like the dividend and like our growth Capex is something that the board will discuss.
Speaker Change: With management quarterly.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Jeremy Tonet with J P. Morgan. Please go ahead.
Jeremy Tonet: Hey, Thanks for squeezing me back in just had one more.
Speaker Change: I guess thinking about.
Speaker Change: U S crude production and.
Speaker Change: Recognize things look pretty good in the Permian, but.
Speaker Change: In the scenario, where things maybe started to slow.
Speaker Change: Sure.
Speaker Change: And I know gas demand looks really good and you touched on that in your opening remarks, but.
Speaker Change: Just can you talk a little bit about what the oil macro like a weakening of that would do to archrock.
Speaker Change: If there were any slowdown in Permian production, maybe beyond 25, if you can give comments there. Thanks.
Speaker Change: With a slowdown in growth of oil production. It would definitely we would definitely see a bit of.
Speaker Change: Slowdown in the growth of our business.
Speaker Change: The nice thing about the business that we operate however is that we're very leveraged to production and production does not typically decline. It's just that the growth slows or grows depending upon what's going on in the market and so with the amount of robust capital that we're deploying the amount of infrastructure that we see needs to be.
Speaker Change: <unk>.
Speaker Change: It would.
Speaker Change: Reduced potentially in the 26 timeframe, maybe some of the growth that we're seeing but it would definitely not we don't think it would have much risk of impacting the business negatively other than ship slowing the growth overall.
Just again because of the leverage we have against production for both oil and natural gas.
Speaker Change: There are no more questions.
Childers: Now that the the call over to Mr. Childers for final remarks.
Thank you everyone for participating in our Q4 review call on almost all accounts 2024 was a record year for Archrock.
Mr. Childers: And I'm optimistic that 2025 is shaping up to be an even better year as we benefit from the strong dynamics that are driving oil and gas production growth in the U S and reap the benefits of our investments to build a first rate compression business I look forward to updating you on our progress next quarter.
Childers: Thank you.
Childers: Okay.
Childers: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Childers: [music].