Q1 2025 Kodiak Gas Services Inc Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by.

Operator: Good morning, ladies and gentlemen, and thank you for standing by.

Operator: Welcome to the Kodiak Gas Services first quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Welcome to the Kodiak gas services first quarter 2025 earnings conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation should you require operator assistance during the conference. Please press star zero to signal an operator.

Operator: Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded.

Please note this conference is being recorded.

Graham Sones: I will now turn the conference over to your host, Graham Sones, Vice President, Investor Relations for Kodiak Gas Services. Thank you. You may begin. Good morning.

Grandson's: Now I'll turn the conference over to your host Grandson's, Vice President Investor Relations for Kodiak gas services. Thank you you may begin.

Grandson's: Good morning, and thank you for joining us for the Kodiak gas services conference call and webcast to review first quarter 2025 results.

Graham Sones: Thank you for joining us for the Kodiak Gas Services conference call and webcast to review first quarter 2025 results.

Graham Sones: Participating from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will discuss our financial and operating results and review our updated 2025 guidance, and we'll open the call for Q&A.

Micki Mcgee: <unk> spending for the company today are Micki Mcgee, President and Chief Executive Officer, and John <unk>, Executive Vice President and Chief Financial Officer.

Micki Mcgee: Following my remarks, Mickey and John will discuss our financial and operating results and a review of our updated 2025 guidance and we will open the call for Q&A.

Graham Sones: There will be a replay of today's call available via webcast and also by phone until May 22, 2025. Information on how to access the replay can be found on the investors tab of our website at kodiakgas.com.

Micki Mcgee: There'll be a replay of today's call available via webcast and also by phone until May 22025 <unk>.

Micki Mcgee: Information on how to access the replay can be found on the investors tab of our website at Kodiak gas Dot com.

Graham Sones: Please note that information reported on this call speaks only as of today, May 8, 2025, and therefore you are advised that such information may no longer be accurate as of the time of any replay listing or transcript.

Micki Mcgee: Please note that information reported on this call speaks only as of today may eight 2025, and therefore, you're advised that such information may no longer be accurate as of the time of any replay listening or transcript reading.

Graham Sones: The comments made by management during this call may contain forward-looking statements within the meaning of United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available.

Micki Mcgee: The comments made by management. During this call may contain forward looking statements within the meaning of United States Federal Securities laws.

Micki Mcgee: These forward looking statements reflect the current views beliefs and assumptions of <unk> management based on information currently available.

Graham Sones: Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties, and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations for the most comparable gap measures are included in yesterday's earnings release, which can be found on our website.

Micki Mcgee: Though we believe the expectations referenced in these forward looking statements are reasonable various risks uncertainties and contingencies could cause the company's actual results performance or achievements to differ materially from those expressed in the statements made by management and management can give no assurance that such statements or expectations will prove to be correct.

Micki Mcgee: The comments today will also include certain non-GAAP financial measures details.

Micki Mcgee: Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website.

Mickey McKee: And now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Thanks, Graham. Thank you all for joining us.

Mickey Mickey: And now I'd like to turn the call over to Kodak's, President and CEO, Mr. Mickey Mickey Thank you.

Micki Mcgee: Sure.

Micki Mcgee: Thanks, Brian.

Micki Mcgee: Thank you all for joining us today.

Mickey McKee: We begin all meetings at Kodiak with the safety. And I want to thank the women and men of Kodiak for their continued focus on serving our customers with a safety first mindset. Kodiak's dedication to returning all of our people home safely every night is truly a differentiator in the industry and something we take very seriously.

Speaker Change: To begin I'll meetings at Kodiak with the safety moment.

Speaker Change: And I want to thank the women and men of Kodiak for their continued focus on serving our customers with a safety first mindset.

Dedication to returning all of our people home safely every night is truly a differentiator in the industry and something we take very seriously.

Speaker Change: Before discussing our outstanding first quarter financial results, our increased guidance for 2025, the increase to our quarterly dividend and our all time low leverage level I'd like to discuss a few macro topics that have been in the news lately.

Mickey McKee: Before discussing our outstanding first quarter financial results, our increased guidance for 2025, the increase to our quarterly dividend, and our all-time low leverage level, I'd like to discuss a few macro topics that have been in the news lately. Given the recent volatility in oil prices, tariff uncertainty, and concerns about a potential slowdown in economic growth, I thought I'd start by highlighting the strength and resiliency of our U.S.-focused, large-horsepower business model, and why we remain bullish on the outlook for U.S. natural gas growth and the associated demand for Kodiak's compression services. First, large horsepower compression is a critical component of the production, processing, and transportation infrastructure of oil and natural gas.

Speaker Change: Given the recent volatility in oil prices tariff uncertainty and concerns about a potential slowdown in economic growth I thought I'd start by highlighting the strength and resiliency of our U S focused large horsepower business model and why we remain bullish on the outlook for U S natural gas growth and the associated.

Speaker Change: The demand for Kodiak compression services.

Speaker Change: First large horsepower compression is a critical component of the protection.

Speaker Change: Processing and transportation infrastructure oil and natural gas or.

Mickey McKee: Our business isn't tied to commodity prices or rate Compression is required to maintain ongoing production volumes and we're seeing producers and midstream companies add compression for increased volumes and enhanced throughput on systems where capital investments have already been made. As you know, Kodiak is the industry leader in contract compression in the Permian Basin. where gas to oil ratios have been steadily increasing. In 2024, Permian oil production grew by about 2%, while marketed natural gas production grew by 12%. 2025, the EIA continues to project a meaningful increase in Permian natural gas production. And even if Permian Basin oil production just stays flat, natural gas volumes would continue to grow and require additional compression infrastructure build out.

Speaker Change: Our business isn't tied to commodity prices or rig counts.

Speaker Change: Compression is required to maintain ongoing production volumes and we're seeing producers and midstream companies add compression for increased volumes and enhanced throughput on systems, where capital investments have already been made.

Speaker Change: As you know <unk> is the industry leader in contract compression in the Permian basin, where gas to oil ratios have been steadily increase.

Speaker Change: In 2020 for Permian oil production grew by about 2% while market as natural gas production grew by 12%.

Speaker Change: In 2025.

Speaker Change: <unk> continues to project a meaningful increase in Permian natural gas production.

Speaker Change: And even if Permian basin oil production just stays flat natural gas volumes will continue to grow and require additional compression infrastructure build out.

Mickey McKee: With additional takeaway capacity already in the works, the Permian Basin will continue to play an outsized role in U.S. gas supply growth in the coming years.

Speaker Change: With additional takeaway capacity already in the works the Permian Basin will continue to play an outsized role in U S gas supply growth in the coming years.

Mickey McKee: You may have seen our recent announcement of the groundbreaking on two new state-of-the-art facilities to support our Permian operations. Second, Our fixed revenue, multi-year term contract structures and premier customer base provide stable and predictable revenues and cash flow. In fact, almost 90% of our fleet currently has remaining term on its contracts, which is back to the high water mark we set prior to the CSI acquisition. Consolidation and capital discipline by our customers has resulted in healthier balance sheets and greater flexibility to endure short-term commodity price fluctuations without significantly altering their long-term plans. and we may see a greater preference to outsource compression should our customers seek to reduce capital spending while maintaining production.

Speaker Change: You may have seen our recent announcement of the groundbreaking on two new state of the art facilities to support our Permian operations.

Speaker Change: Second.

Speaker Change: Our fixed revenue multiyear term contract structures and premier customer base provides stable and predictable revenues and cash flows.

Speaker Change: In fact, almost 90% of our fleet currently has remaining term on its contracts, which is back to the high watermark, we set prior to the CSI acquisition acquisition.

Speaker Change: Consolidation and capital discipline by our customers has resulted in healthier balance sheets and greater flexibility to endure short term commodity price fluctuations without significantly altering their long term plans.

Speaker Change: And we may see a greater preference to outsource compression should our customers seek to reduce capital spending while maintaining production.

Mickey McKee: Contract compression fleets remain highly utilized, with Kodiak leading the way at 97% fleet utilization, including 99% utilization of our large horsepower equipment. And on top of that, we don't order any new equipment on speculation without contractual commitments from our customers.

Speaker Change: Contract compression fleets remain highly utilized with Kodiak, leading the way at 97% fleet utilization, including 99% utilization of our large horsepower equipment.

Speaker Change: And on top of that we don't order any new equipment on speculation without contractual commitments from our customers.

Mickey McKee: Finally, despite some near-term fluctuations, we're strong believers in the long-term growth outlook for U.S. natural gas to meet LNG export and power demand. LNG exports are projected to double by the end of the decade from projects already under construction or post FID. And these plants are effectively fully contracted for worldwide distribution. Within its first 100 days, the Trump administration has approved two new LNG facilities. And it's been reported that LNG is playing an increased role in tariff negotiations as a way for our trading partners around the world to narrow trade imbalances while securing reliable supplies of US natural gas to fuel their growing economy.

Speaker Change: Finally, despite some near term fluctuations we're strong believers in the long term growth outlook for U S natural gas to meet LNG export and power demand.

Speaker Change: LNG exports are projected to double by the end of the decade from projects already under construction or post FY.

Speaker Change: And these plants are effectively fully contracted for worldwide distribution.

Speaker Change: Within its first 100 days the Trump administration has approved two new LNG facilities.

Speaker Change: And it's been reported that LNG is playing an increased role in tariff negotiations as a way for our trading partners around the world to narrow trade imbalances, while securing reliable supplies of U S natural gas to fuel their growing economies.

On the power side industry experts are forecasting six bcf per day of demand increase by the end of the decade from new gas turbine generator capacity that has been ordered or will be ordered by the end of this year.

Mickey McKee: On the power side, industry experts are forecasting 6 BCF per day of demand increase by the end of the decade from new gas turbine generator capacity that has been ordered or will be ordered by the end of this year. The new power generation is needed to handle the massive energy needs of the build-out of domestic data centers, many of which are already fully commissioned.

Speaker Change: The new power generation is needed to handle the massive energy needs of the build out of domestic data centers, many of which are already fully committed.

Speaker Change: Secretary of energy, Chris Wright recently like in the rates for AI dominant to the Manhattan project and we are encouraged by the public and private resources being committed to ensure the U S remains a leader.

Mickey McKee: Secretary of Energy Chris Wright recently likened the race for AI dominance to the Manhattan Project. And we're encouraged by the public and private resources being committed to ensure the U.S. remains a leader.

Mickey McKee: All of these factors give us confidence in our strategy and the increased full year 2025 guidance we gave in last night's earnings press John will cover our guidance and more.

Speaker Change: All of these factors give us confidence in our strategy and the increased full year 2025 guidance. We gave in last Night's earnings press release, John will cover our guidance in more detail.

Speaker Change: Now turning to our first quarter 2025 results Kodiak.

Mickey McKee: Now turning to our first quarter 2025 results. Kodiak set new records in total revenue. adjusted EBITDA. Discretionary Cash Flow, and the new all-time low leverage of 3.7 times in Q1 2025. This was driven by outstanding execution to recontract our fleets. Cost Management, Operational Efficiency, New Unit Growth. and a seasonal increase in revenue in our other services sector.

Speaker Change: Kodiak set new records in total revenue adjust.

Speaker Change: Adjusted EBITDA.

Speaker Change: Discretionary cash flow and the new all time low leverage of three seven times in Q1 2025.

Speaker Change: This was driven by outstanding execution to re contract our fleet.

Speaker Change: Cost management.

Speaker Change: Operational efficiency new unit growth.

Speaker Change: And the seasonal increase in revenue in our other services segment.

Mickey McKee: We bought back approximately $10 million in stock in Q1 2025 and recently announced a quarterly dividend of $0.45 per share. 10% increase over the prior quarter. During the quarter, we added approximately 49,000 horsepower in new unit horsepower. while successfully redeploying some previously idle assets to working status and divested some non-core small horsepower, much of which was idle. This drove a sequential increase in fleet utilization and overall average horsepower per unit. Our core large horsepower assets remain effectively fully utilized. reflecting the continued strong demand for large horsepower compression.

Speaker Change: We bought back approximately $10 million in stock in Q1, 2025, and recently announced a quarterly dividend of <unk> 45 per share.

Speaker Change: A 10% increase over the prior quarter.

Speaker Change: During the quarter, we added approximately 49000 horsepower of new unit horsepower.

Speaker Change: While successfully redeploying some previously idle assets to working status and divested some non core small horsepower much of which was oil.

Speaker Change: This drove a sequential increase in fleet utilization and overall average horsepower per unit.

Our core large horsepower assets remain effectively fully utilized reflecting the continued strong demand for large horsepower compression.

Speaker Change: Now, let's discuss our re contracting efforts and the first quarter is historically, our busiest quarter for re contracting and in Q1 2025, we re contracted a significant amount of horsepower at market market rates that are above our current fleet average.

Mickey McKee: Now let's discuss our recontracting. The first quarter is historically our busiest quarter for recontracting. And in Q1 2025, we recontracted a significant amount of horsepower at market rates that are above our current fleet average. This helped drive a sequential increase in revenue and adjusted gross margin percentage in our contract services segment. Adapting to tariffs, like every other company in the U.S., we continue to analyze our supply chain to ensure that we can react swiftly to whatever path the administration takes. That said, the U.S. oil and gas industry is largely domestic, and the contract compression business is no different.

Speaker Change: This helped drive the sequential increase in revenue and adjusted gross margin percentage in our contract services segment.

Speaker Change: Shifting to tariffs like every other company in the U S. We continue to analyze our supply chain to ensure that we can react swiftly to whatever path. The administration takes that said the U S oil and gas industry is largely domestic in the contract compression business is no different with.

Mickey McKee: We source all the main components of our compression units from U.S. companies with facilities that are located in North America. We're monitoring the potential for price increases should tariffs remain in place on inputs like steel, which comprise about 30% of the value of a new package. Bear in mind that our contracts include inflationary adjustments that help offset these cost increases, and we expect to see lower lube oil prices later in the year, given the drop in crude oil, reducing operating Overall, we do not expect our OPEX or our CAPEX to be impacted by tariffs by more than a low single-digit percentage in any given year.

Speaker Change: We source all the main components of our compression units from U S companies with facilities that are located in North America.

Speaker Change: We're monitoring the potential for price increases should tariffs remain in place on inputs like steel, which comprise about 30% of the value of a new package bear.

Speaker Change: Bear in mind that our contracts include inflationary adjustments that helped offset these cost increases and we expect to see lower lube oil prices later in the year given the drop in crude oil crude oil reducing operating expense.

Speaker Change: Overall, we would not expect our opex or our capex to be impacted by tariffs by more than a low single digit percentage in any given year.

Mickey McKee: That's consistent with historical inflation rates and reflected in our revised guidance.

Speaker Change: That's consistent with historical inflation rates and reflected in our revised guidance.

Mickey McKee: As a reminder, our 2025 new unit capital program is fully contracted. securing our margins and cash. We continue to have discussions with our customers about our 2026 program and have secured signed contracts into the second quarter, further demonstrating the ongoing strength of the compression industry.

Speaker Change: As a reminder, our 2025 new unit capital program is fully contracted securing.

Speaker Change: Our margins and cash flow.

Speaker Change: We continue to have discussions with our customers about our 2026 program and have secured signed contracts in the second quarter further demonstrating the ongoing strength of the compression industry.

Speaker Change: So to summarize we're off to a great start in 2025.

Mickey McKee: So to summarize, we're off to a great start in 2025. We've achieved tremendous success in our recontracting efforts and remain on pace with our new unit growth targets for the year. Our progress in these areas drove new company records and revenue, adjusted EBITDA, and discretionary cash flow. grew our large horsepower fleet and continue to increase our fleet utilization. And we returned over $46 million to shareholders in the first quarter through dividends and share repurchases while generating free cash flow and reducing our leverage to its lowest level in history. Despite the recent uncertainty in the economic outlook, the fundamentals for natural gas compression remain extremely strong.

Speaker Change: We have achieved tremendous success in our re contracting efforts and remain on pace with our new unit growth targets for the year.

Speaker Change: Our progress in these areas drove new company records in revenue adjusted EBITDA and discretionary cash flow.

Speaker Change: We grew our large horsepower fleet and continue to increase our fleet utilization.

Speaker Change: And we returned over $46 million to shareholders in the first quarter through dividends and share repurchases, while generating free cash flow and reducing our leverage to its lowest level in history.

Speaker Change: Despite the recent uncertainty in the economic outlook.

Speaker Change: Fundamentals for natural gas compression remains extremely strong.

Mickey McKee: The ramp-up of natural gas demand remains highly visible and the industry continues to make long-term commitments to support the growth. The increase in gas production is going to require significant compression infrastructure development. and Contract Compression provides investors a great way to participate in the growth of U.S. energy while staying insulated from the volatility of commodity price fluctuation.

Speaker Change: <unk> of natural gas demand remains highly visible.

Speaker Change: And the industry continues to make long term commitments to support the growth.

Speaker Change: The increase in gas production is going to require significant compression infrastructure development.

Speaker Change: And contract compression provides investors a great way to participate in the growth of U S energy, while staying insulated from the volatility of commodity price fluctuations.

John Griggs: And now I'll pass the call to John Griggs to further discuss our financial results and our updated guidance for the year. Thanks, Mickey. A lot's happened in the short time since our last call, but the team's array focused on what we can control and delivered another quarter of outstanding financial performance. For the first quarter, total revenues were $330 million, up approximately 7% sequentially. We realized revenue growth in both of our segments. We saw a nice uptick in our contract services monthly dollar per revenue generating horsepower from $21.97 last quarter to $22.48 this quarter, a good indicator of the underlying strength of our core large horsepower market.

Speaker Change: And now I'll pass the call to John <unk> to further discuss our financial results and our updated guidance for the year John.

John: Thanks, Nikki a lot's happened in the short time since our last call, but the teams remain focused on what we can control and delivered another quarter of outstanding financial performance for the first quarter total revenues were $330 million up approximately 7% sequentially, we realized revenue growth in both of our segments.

John: So a nice uptick in our contract services monthly dollar per revenue generating horsepower from $21 97 since last quarter to $22 48 this quarter.

John: Good indicator of the underlying strength of our core large horsepower market.

John Griggs: Our contract services adjusted gross margin percentage increased to approximately 68%. up a full percentage point from last quarter and nearly 2% from the same quarter last year, reflecting the success we've realized in achieving higher average prices on our core fleet, reorganizing our operations to capture efficiencies, and the financial impact of exiting lower margin assets and geographies late last year. During the first quarter, we continued to high-grade the fleet. We divested more non-core units, and we set 49,000 new unit horsepower. It averaged 1,600 horsepower per unit, resulting in a Q1 ending average horsepower per working unit of 943, which is the highest in the industry.

John: Our contract services adjusted gross margin percentage increased to approximately 68%.

John: Up a full percentage point from last quarter, and nearly 2% from the same quarter last year, reflecting the success, we've realized in achieving higher average prices in our core fleet reorganizing our operations to capture efficiencies in the financial impact of exiting lower margin assets and geographies late last year.

John: During the first quarter, we continue to high grade the fleet, we divested more noncore units and we set 49000, new unit horsepower. It averaged 1600 horsepower per unit, resulting in a Q1 ending average horsepower per working unit of 943, which is the highest in the industry.

John Griggs: The horsepower per unit metric matters a lot, because large horsepower compression is central to our strategy. It's what's being demanded most by our customers, and it's stickier and generates meaningfully higher cash flows and margins than its small horsepower brothers. In our other services segment, we realized a sizable revenue increase from the seasonally slow Q4. Revenues for the first quarter were $40.7 million, a 39% sequential increase. Revenues were supported by the completion of a large revamp of a gas storage project as well as several station construction projects. For the quarter, our adjusted gross margin for other services came in at 13.4%.

John: The horsepower per unit metric matters, a lot because large horsepower compression is central to our strategy. Its whats being demanded most by our customers and it's stickier and generates meaningfully higher cash flows and margins than small horsepower breath.

John: In our other services segment, we realized a sizeable revenue increase from the seasonally slow Q4 revenues.

John: Revenues for the first quarter were $40 7, million% to 39% sequential increase.

John: Revenues were supported by the completion of a large revamp of the gas storage project as well as several station construction projects.

John: For the quarter, our adjusted gross margin for other services came in at 13, 4%.

John Griggs: Adjusted EBITDA for the quarter was just under $178 million, up 5% from Q4 based on the higher revenues, the aforementioned sequential increase in contract services margin, and a lower than expected increase in SG&A. The results were great, frankly better than even we were expecting. And though we attribute that to great execution by the team, we did have a handful of individually immaterial items in revenues, cost of goods sold, and SG&A, all seem to go our way this quarter. in that we've summed up Boosted Adjusted EBITDA by about $1.5 million to the good. But even after factoring that in, we had another outstanding quarter.

John: Adjusted EBITDA for the quarter was just under $178 million up 5% from Q4 based on the higher revenues the aforementioned sequential increase in contract services margin in a lower than expected increase in SG&A.

John: Results were great frankly.

John: Frankly, better than even we were expecting.

John: And though we attribute that to great execution by the team. We did have a handful of individually immaterial items and revenues cost of goods sold and SG&A all seem to go away this quarter.

John: And that when summed up boosted adjusted EBITDA by about $1 5 million to the good.

John: But even after factoring that in we had another outstanding quarter.

John Griggs: In terms of capital expenditures, we've provided additional transparency this quarter by separating what we previously disclosed as growth capex into two buckets that we'll now refer to as growth capital expenditures and other capital expenditures. We broke out historical growth capex similarly, and we'll continue to do so going forward. Let me take you through what's in each of these. Growth capital expenditures consist of CapEx that we expect will have a direct impact on revenues and margins. Things like new compression units, unit upgrades, and the investments we're making in industrial artificial intelligence. Other capital expenditures consist of capital items that are not directly tied to growing revenue, like facility upgrades, rolling stock, capitalized IT spending, and some safety-related There's no change to the categorization of maintenance CapEx, which captures spending that extends the useful life of our compression.

John: In terms of capital expenditures, we provided additional transparency this quarter by separating what we previously disclosed as growth capex into two buckets that will now refer to as growth capital expenditures and other capital expenditures.

John: We broke out historical growth Capex, Similarly, and we'll continue to do so going forward let.

John: Let me take you through what's in each of these.

John: Growth capital expenditures consist of Capex that we expect will have a direct impact on revenues or margins things like new compression units unit upgrades and the investments, we're making in industrial artificial intelligence.

Other capital expenditures consist of capital items that are not directly tied to growing revenue.

John: Facility upgrades rolling stock capitalized spending some safety related items.

John: There is no change to the category as categorization of maintenance Capex, which capture spending that extends the useful life of our compression fleet.

John: For the first quarter growth capital expenditures were approximately $56 million.

John Griggs: For the first quarter, growth capital expenditures were approximately $56 million, consisting primarily of new unit capex associated with the 49,000 horsepower added during the quarter. Other capital expenditures were $22 million and consisted of some safety-related items stemming from the CSI acquisition that we expect to be completed in July, capitalized costs for our new ERP system, and other non-unit spending. Growth and other CapEx outflows in the quarter were partially offset by about $9.4 million in proceeds related to the divestiture of 29,000 horsepower, as well as the sale-leaseback of field location. Maintenance got backs for the quarter came in at just over 16 million right on track with where we expected to be at this point of the year.

John: <unk>, primarily of new unit Capex associated with the 49000 horsepower added during the quarter.

John: Other capital expenditures were $22 million and consisted of some safety related items stemming from the CSI acquisition that we expect to be completed in July.

John: Capitalized costs for our new ERP system and other non unit spending.

John: Growth in other Capex outflows in the quarter were partially offset by about $9 $9 4 million in proceeds related to the divestiture of 29000 horsepower as well as the sale leaseback of field locations.

John: Maintenance Capex for the quarter came in at just over $16 million right on track with where we expected to be at this point of the year.

John Griggs: With regard to the balance sheet, at quarter end, we had a total debt of just over $2.6 billion, comprised of the $750 million principal amount of our 2029 Senior Insecured Notes and the rest borrowings under our ABL facility. With regard to the ABL, at quarter end, we had fixed about 73% of our floating rate exposure, a level that's consistent with how we have approached interest rate hedging since our IPO. When you include the total of the senior notes plus the ABO, approximately 81% of our interest expense was fixed. As Mickey highlighted earlier, we exited the quarter at 3.7 times credit agreement leverage and remain on track to achieve our target of 3.5 times by the end of the year.

John: With regard to the balance sheet at quarter end, we had total debt of just over $2 6 billion comprised of the $750 million principal amount of our 2029 senior unsecured notes and the rest borrowings under our ABL facility.

John: With regard to the ABL at quarter end, we had fixed about 70, 73% of our floating rate exposure the level, that's consistent with how we have approached interest rate hedging since our IPO.

John: When you include the total of the senior notes plus the ABL approximately 81% of our interest expense was fixed.

John: As making highlighted earlier, we exited the quarter at three seven times credit agreement leverage and remain on track to achieve our target of three five times by the end of the year.

John Griggs: All in all, despite economic and oil price uncertainty, we're quite comfortable with our balance sheet and our ability to weather capably through any potential storm.

John: All in all despite economic and oil price uncertainty, we're quite comfortable with our balance sheet and our ability to weather capably through any potential storm.

John Griggs: Let's turn to God. I'll remind everyone that our new compression units in 2025 are fully contracted, which, combined with the contracted nature of our existing compression fleet, leads to very stable and predictable cash flow. Based on the fleet pricing and operational efficiency we achieved in Q1 and our outlook for the balance of the year, we raised our contract services adjusted gross margin percentage to 66.5% to 68.5%. and increase the midpoint of our Adjusted EBIT Dial and Discretionary Cash Flow Guide. For capital spending, our maintenance capex guidance remains unchanged, $75 to $85 million. As I mentioned earlier, we're separating what we previously got it for growth capex into two buckets, growth and other.

John: Let's turn to guidance.

John: I'll remind everyone that our new compression units in 2025 fully contracted which combined with the contracted nature of our existing compression fleet leads to very stable and predictable cash flow.

Based on the fleet pricing and operational efficiency, we achieved in Q1 and our outlook for the balance of the year, we raised our contract services adjusted gross margin percentage to 66 five to 68, 5%.

John: And increased the midpoint of our adjusted EBITDA and discretionary cash flow guidance.

John: For capital spending our maintenance Capex guidance remains unchanged, 75% to $85 million.

John: As I mentioned earlier, we're separating what we previously guided for growth capex into two buckets growth and other for the year, we expect to spend between 180 and $205 million on growth Capex and we expect to set about 150000 new horsepower.

John Griggs: For the year, we expect to spend between $180 and $205 million on growth capex, and we expect to set about $150,000 new horsepower. Other capital expenditures for the full year are estimated to be between $60 and $65 million. We expect other capital expenditures to be first half-weighted in 2025 and to decline next year as some one-time items are completed, mainly the CSI fleet safety upgrades that we've highlighted previously, as well as the launch of our new ERPC.

John: Other capital expenditures for the full year estimated to be between 60 and $65 million.

John: Other capital expenditures to be first half weighted in 2025 into decline next year is some one time items are completed mainly the CSI fleet safety upgrades that we've highlighted previously as well as the launch of our new ERP system.

John Griggs: I'll note that the sum of our growth and other capital expenditure guidance reflects a $10 million reduction to the high end of our previous growth capital So we're increasing the midpoint of a four-year adjusted EBITDA guidance while reducing our outlook for capital spending and living within cash flow.

John: Note that the some of our growth and other capital expenditure guidance reflects a $10 million reduction to the high end of our previous growth capital guidance.

John: So we're increasing the midpoint of our full year, adjusted EBITDA guidance, while reducing our outlook for capital spending and living within cash flow.

John Griggs: Wrap it up, we're off to a great start for the year. Kodiak's business model, U.S.-focused, large horsepower contract compression-related services, remains highly resilient. As our historical financial results reflect, even during difficult industry cycles like what we experienced during COVID, the leadership team at Kodiak has been able to deliver on financial goals and objectives and to emerge sharper and stronger than before. We fully expect that to be the case going forward. Our value proposition for investors is simple, grow adjusted EBITDA, increase the dividend alongside that growth, reduce share count through repurchases, and de-leverage. We think that's a winning formula.

John: Wrap it up we're off to a great start for the year Kodiak business model U S focused large horsepower contract compression and related services remains highly resilient as.

John: As our historical financial results reflect even during difficult industry cycles like what we experienced during COVID-19.

John: <unk> team at Kodiak has been able to deliver on financial goals and objectives and to emerge sharper and stronger than before we fully expect that to be the case going forward.

John: Our value proposition for investors is simple.

Speaker Change: <unk> adjusted EBITDA increased the dividend alongside that growth reduced share count through repurchases and de lever. We think that's a winning formula with that I'll hand, it back to Mickey.

Mickey McKee: With that, I'll hand it back to Mickey. Thanks, John. We've had a great start to the year. Our recontracting efforts are ahead of schedule, and we continue to add new large horsepower units and divest non-core underutilized small horsepower units. These achievements helped us set new financial records and several key metrics, allowing us to once again expand markets.

Speaker Change: Thanks, John.

Speaker Change: We've had a great start to the year. Our re contracting efforts are ahead of schedule and we continue to add new large horsepower units and divest divest noncore underutilized small horsepower units.

Speaker Change: These achievements helped us set new financial records in several key metrics, allowing us to once again expand margins.

Mickey McKee: and position us. continue to reward our shareholders for their investment in Kodiak. Our increased 2025 guidance reflects our outlook for continued strength in the contract compression market and the resilience of our business model.

And position us to continue to reward our shareholders for their investment in Kodiak.

Speaker Change: Our increased 2025 guidance reflects our outlook for continued strength in the contract compression market and the resilience of our business model.

Mickey McKee: We remain excited about the opportunities in front of us and are prepared to navigate the ever-changing environment to deliver even better things in the future.

Speaker Change: We remain excited about the opportunities in front of us and are prepared to navigate the ever changing environment to deliver even better things in the future.

Operator: Thanks for your participation today, and now we're happy to open up the line for questions. Operator? Thank you.

Speaker Change: Thank you for your participation today and now we're happy to open up the line for questions operator.

Speaker Change: Thank you at this time, we will be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If, at any time, you wish to remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Speaker Change: A confirmation tone will indicate your line is in the question queue.

Speaker Change: And at any time, you wish to remove your question from the queue. Please press star two participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Doug Irwin: Our first question is from Doug Irwin with Citigroup. Please go with your question.

Doug: Our first question is from Doug <unk> with Citigroup.

Speaker Change: Please go ahead with your question.

Hey, guys.

Mickey McKee: Hey guys, maybe to start with one on 2025 before looking more long term. It's a pretty narrow guidance range at this point, which isn't all that unusual for you. Just wondering if you could maybe talk about some of the remaining unknowns for 25 that might push results to one end of the range or the other and maybe how the current macro environment might influence some of these drivers, if at all.

Doug: Yeah.

Doug: With one on <unk>.

Doug: 2025, or four looking more long term.

Speaker Change: It's a pretty narrow guidance range at this point, which isn't all that unusual for you I'm. Just wondering if you could maybe talk about some of the remaining unknowns for 'twenty five that might cost.

Speaker Change: <unk> one under the range to the other and maybe how the current macro environment might inch lots. Some of these drivers if at all.

Mickey McKee: Hey, Doug, this is Mickey. Yeah, I mean, I think that some of the things we're looking to through the year is just that recontracting strategy and our ability to recontract existing contracts that come up for renewals into the future here. And what's going to happen as far as expenses and that kind of thing go. We've built in some inflationary aspects to our guidance for tariff impact and that kind of thing. So, it really is just we feel really good about the guidance where it's at. It's pretty narrow, but that's again, it's pretty highly visible business.

Micky: Hey, Doug this is micky.

Speaker Change: Yes, I mean, I think that some of the things we're looking to through the year is just that re contracting strategy and our ability to re contract existing contracts that come up for renewals.

Micky: Into the future here.

Micky: And.

Micky: What what the.

Micky: What's going to happen as far as expenses in that kind of guy.

Micky: We built in some some inflationary aspects to our guidance for <unk>.

Micky: Tariff impact and that kind of thing so.

Micky: It really is just we feel really good about the guidance, where it is that it's pretty narrow, but that's again, that's pretty highly visible business and theres just a I think that.

Mickey McKee: And there's just I think that if you look into the future of what we've got this year, just some of the unknowns is just that recontracting and renewal strategy that we've got and our ability to execute on that.

Micky: If you look into the future of what we got this year.

Micky: Just some of the unknowns is just not re contracting renewal strategy that we've got and our ability to execute on that.

Micky: Okay.

Micky: Okay.

Doug Irwin: Great.

Micky: Great.

Mickey McKee: And then, Mickey, maybe just wanted to follow up on one of your opening comments around potentially seeing a shift in demand for more outsourced horsepower from customers in this environment. I guess just as far as the appetite for outsourcing versus insourcing goes, have you seen or do you maybe expect to see any differences between demand from midstream customers versus upstream customers who might be looking to cut costs more rapidly in this environment while still maintaining production? Yeah, I mean, I think that it's only natural to think that in an environment like we're in today, that some customers, be it producers or midstream companies, are going to want to shift some CapEx to OpEx and would rather outsource probably than spend their precious capital on compression.

Speaker Change: And then Nicky maybe just wanted to follow up on one of your opening comments around potentially seeing a shift in demand.

Micky: More or outsourced horsepower for from customers in this environment.

Speaker Change: I guess, just as far as the appetite for outsourcing versus in sourcing.

Speaker Change: Have you seen or do you think you expect to see any differences between demand from midstream customers versions upstream customers, who might be looking to cut costs more rapidly in this environment also maintaining production.

Speaker Change: Yes, I mean, I think that it's only natural to think that in an environment like we're in today that some some customers via producers or midstream companies, they're going to want to shift some capex to opex and.

Speaker Change: I would rather outsource probably been spend their precious capital on on compression. So.

Mickey McKee: So I wouldn't say that we've seen a drastic shift yet, but I think that that could come as people begin to execute on their 2026 budgets. Understood.

Speaker Change: I wouldn't say that we've seen a drastic shift yet, but I think that that could come as people begin to execute on the 2026 budgets.

Speaker Change: Understood. That's all for me thanks for the time.

Doug Irwin: That's all for me. Thanks for the time. Thanks Doug.

Speaker Change: Thanks, Doug. Our next question is from John <unk> with Goldman Sachs.

Operator: Our next question is from John Mackay with Goldman Sachs. Hey guys, thanks for your time. I want to pick up on a couple of these things, but you guys have framed up a kind of upper single digit growth outlook going forward next couple years. You just kind of frame up for us kind of what kind of macro backdrop is assumed in there, and if we're in a flatter oil price environment, you know, how comfortable you are with that level. Thanks. I, you know, I think it's still a pretty comfortable level to be at, you know, as I, as we said in the prepared comments, John, you know, even in a flat.

John: Hey, guys. Thanks for the time.

Speaker Change: I want to pick up on a couple of other things, but do you guys have framed up kind of upper single digit growth outlook going forward next couple of years.

Speaker Change: You just kind of frame up for us kind of what kind of macro backdrop is an assumed in there and if we are in a flatter oil price environment, how comfortable you are with.

Speaker Change: What's that level. Thanks.

Speaker Change: I think it's still a pretty comfortable level to be at.

Speaker Change: As we said in the prepared comments John.

Speaker Change: Even in a flat.

John Mackay: oil environment in a mid $50 oil environment. We think that there's still going to be gas production growth out of the Permian Basin, and we still think that there's going to be a need as downhole pressures fall and that kind of thing, and people are in kind of maintenance mode here.

Speaker Change: Oil environment.

Speaker Change: In the $50 mid $50 oil environment, we think that there is still going to be gas production growth out of the Permian basin.

Bill: Bill Thanks.

Bill: There's going to be a need as pressures.

Bill: Downhole pressures fall in that kind of thing and people are in kind of a maintenance mode here.

Mickey McKee: You're going to need to add compression to maintain production levels, and so we feel really good about our growth targets and our ability to continue to execute some of the things that we've got going on with our AI development and in technologies, our ability to continue to push margins up to help that EBITDA growth rate, and so we think that we feel really good about the future of the business here. Appreciate that. Thanks. And in that context, you guys have mentioned the buybacks a couple times. Just maybe frame up for us how you're thinking about using that, whether or not you're willing to be a little more aggressive, and maybe how you balance that against the leverage target.

Bill: Youre going to need to add compression to maintain production production levels.

Bill: So we feel really good about our growth targets and <unk>.

Bill: Our ability to continue to execute some of the things that we've got going on with our AI development and technologies, our ability to continue to push margins up to help the EBITDA growth rate and.

Bill: And so we think that we.

Bill: We feel really good about the future of the business here.

Bill: I appreciate that thanks. So in that context, you guys had mentioned the buyback a couple of times, just maybe frame up for us how youre thinking about using that whether or not you.

Bill: Willing to be a little more aggressive and maybe how you balance that against the leverage target. Thanks.

John Griggs: Thanks. Yeah, thanks. Thanks, John.

Bill: Yes. Thanks, John This is John too so the big picture is we definitely are driving towards our leverage target of three five times by the end of this year, we're going to get there. So that's got to be a governor in this whole discussion.

John Griggs: This is John too. So the big picture is we definitely are driving towards our leverage target of three and a half times by the end of this year. We know we're going to get there.

John Griggs: So that's got to be a governor in this whole discussion. You know, you saw that we did reverse some shares in the first quarter. We did that opportunistically underneath our board approved share buyback program. We think there's great value there. We think our stock kind of got to a level that made it attractive for us. We have the ability to continue to do that going forward. The other thing we have to bear in mind is EQT, which has been an active seller over the last several months or so. We anticipate, no surprise to anybody on this call, that they'll continue to be a seller going forward.

Bill: You saw that we did repurchase some shares in the first quarter, we did that opportunistically underneath our board approved share buyback program, we think theres great value there with your stock kind of got to a level that made it attractive for us.

Bill: We have the ability to continue to do that going forward.

Bill: The other thing we have to bear in mind as EQT, which has been active seller over the last several months or so we anticipate no surprise to anybody on this call that they'll continue to be a seller going forward and we want to be there when they do that.

John Mackay: And we want to be there when they do. So we would expect to support them, whether you call it the first order or the last order in the book when they do that, but we'll also take advantage of any weakness in the share price, because we're that confident in the future. I appreciate that. Thanks, guys.

Bill: So we would expect to support them, whether you call. It the first order for the last order in the book.

Bill: When they do that but we'll also take advantage of any weakness in the share price because we're that confident in the future.

I appreciate that thanks, guys.

Bill: Alright, Thank you guys.

Operator: I don't know, it's just...

Connor Jensen: All right, our next question comes from Connor Jensen with Raymond James. Hey guys, thanks for taking my call and really strong quarter here. Another strong quarter for compression margins.

Speaker Change: Alright. Our next question comes from Connor Jansen with Raymond James.

Connor Jansen: Hey, guys. Thanks for taking my call and really strong quarter here.

Connor Jansen: Another strong quarter for compression margin, obviously the increase in price has helped US a lot as you guys were saying, but what have you guys been doing on the cost side that have really helped those margins drive higher.

Mickey McKee: Obviously, the increase in price has helped us a lot, as you guys were saying, but what have you guys been doing on the cost side that have really helped those margins drive higher? Yeah, I mean, appreciate you being on today, Connor. One of the things that we're doing on the cost side is really implementing some of our machine learning and technology advancements through AI to implement some conditions-based maintenances that are giving us the ability to extend our maintenance cycles a little bit based on data that we're getting from the machines, kind of like I'll liken it to, you know, you go buy a new car today in 2025 and it'll tell you when the oil needs to be changed.

Speaker Change: Yes, I mean, I appreciate you being on today.

Speaker Change: One of the things that we're doing on the cost side is really implemented in some of our machine learning and technology advancements through AI too.

Speaker Change: Implement some condition based maintenance is that.

Speaker Change: <unk> given us the ability to.

Speaker Change: Extend our maintenance cycles, a little bit based on data that we're getting from from the machines kind of like.

Speaker Change: All liking it to go buy out and buy a new car today than in 2025, and it will tell you when the oil needs to be changed you don't have to say hey, I got to do it every 3000 miles. So we're kind of implementing some stuff like that on the on the equipment and its flowing through to our operating expenses and we're really excited about it.

Mickey McKee: You don't have to say, hey, I got to do it every 3,000 miles.

John Griggs: So we're kind of implementing some stuff like that on the equipment and it's flowing through to our operating expenses and we're really excited about it.

John Griggs: Yeah, and I was going to jump in, too, and say another big picture thing that we've done is reposition the fleet. You know, last year, at the end of the year, we exited the gas check business and several of the international businesses and sold off some non-core horsepower. That has an impact on our ability kind of to continue to generate nice margins going forward. You saw the average horsepower per unit tick back up to 943. We called that out. That's a great metric that we kind of think about all the time because larger horsepower is more profitable for us as well, too.

Speaker Change: Yes, I was going to jump into and say another big picture thing that we've done is reposition the fleet last year. The end of the year, we exited the gas Jack business and several of the international businesses and sold off some noncore horsepower that has an impact on our ability to continue to generate nice margins going forward you saw the average horsepower per unit tick back up to 94.

Speaker Change: Three we called that out that's a great metric that we kind of think about all the time because larger horsepower is more profitable for us as well too.

John Griggs: The third thing I'll say, it's a bit of a double-edged sword as it relates to like near-term margins and long-term margins, but it's all the investments we make in our team. You know, this is, at its core, we're governed by a horsepower per field tech metric, and we want to do more with the same. That's the technology that Mickey mentioned that we think will have a payoff in the years to come, but it's also all the investments we're making in training, attracting and training and developing and retaining our workforce. So, all those are going to have a better impact or a bigger impact on margins going forward as well, too.

Speaker Change: Third thing I will say, it's a bit of a double edged sword as it relates to like near term margins and long term margins, but it's all of the investments we make in our team. This is at its core we're governed by our horsepower per field Tech metric and we want to do more with the same that's the technology that Micky mentioned that we think will have a pay off in the years to come but it's also all the investments were.

Speaker Change: Making in training, attracting and training and developing and retaining our workforce. So all of those are going to have a better impact on the or a bigger impact on margins going forward as well too.

Speaker Change: Okay.

Speaker Change: Got it that's helpful. And then I guess just quickly in that same same vein followed the training center was opened in the press release, just wondering how you think that'll alleviate some of the <unk>.

Connor Jensen: Got it. That's helpful.

Connor Jensen: And I guess just quickly in that same same vein, saw that the training center was opened and in the press release, you know, just wondering how you think this will alleviate some of the the problems in the labor market that a lot of, you know, the industry has seen in the Permian. Yeah, I mean, labor is the biggest challenge that we've got, especially in the Permian Basin. And so we think that the more we can do to bring along a workforce and the better trained they are, the more we can do to help make that training and development faster and accelerate that timeline, the better off we're going to be.

Speaker Change: And then the labor market that a lot of.

Speaker Change: Industry has seen in the Permian.

Speaker Change: Yes, I mean labor is the biggest challenge that we've got especially in the Permian basin and so we think that the more we can do to to bring along a workforce in the better trained they are and the more we can do to help make that make that training and development faster and accelerates that timeline the better off we're going to be.

Connor Jensen: So we're really leaning into that and focusing on the training and development of our people, and we're very serious about it. And we think that that too will flow through to the margin and it will flow through to the overall success of the business. Great. Thanks, guys. I'll turn it back.

Speaker Change: So we're really leaning in leaning into that and focusing on the training and development of our people and we're very serious about it and we think that.

Speaker Change: That too will flow through to the margin and that will flow through to the overall success of the business.

Speaker Change: Alright, Thanks, guys I'll turn it back.

Operator: Hey, thanks, Hunter.

Connor Jansen: Thanks Hunter.

Sebastian Erskine: Our next question comes from Sebastian Erskine with Redbird Atlanta. Yeah, hi, good morning guys.

Speaker Change: Our next question comes from Sebastian Erskine with Redburn Atlantic.

Sebastian Erskine: Yes, hi, good morning, guys. Thanks for taking my questions. Just the first one I guess in in kind of a light of the current environment. How do you see leading edge kind of compression pricing evolving from here.

Mickey McKee: first one, I guess, in kind of the light of the current environment, how do you see leading edge kind of compression pricing evolving from here? And following up a bit on Doug's question, just how are your conversations differing between midstream and upstream customers? Kind of given the different intensities of their operations, any color would be would be great.

Sebastian Erskine: And following up a bit on Doug's question, just how your conversations differing between midstream and upstream customers kind of giving given the different intensities of their operations any color would be would be great.

Mickey McKee: Yeah, hey, Sebastian. Good morning. Thanks for being on today. You know, as far as leading edge pricing, we are Really not seeing much of a change in the shift right now. We're talking to our customers and that'll kind of get into the second part of your questions is different. The difference between the upstream and the midstream guys here, we're really not seeing a ton of difference yet in activity or anything like that. Pricing on equipment, but you can tell that this customer base is keeping a keen eye on what's going on around us. So, like I said, we've seen some customers dial back capital budgets in that 5 to 10% range, but they're still planning on growth this year, albeit maybe a little more tempered growth, but continued growth and calculated growth throughout there with these capital points that they have are beginning to deploy this year.

Speaker Change: Yeah, Hey, Sebastian good morning, Thanks for being on today.

Sebastian Erskine: Far as leading edge pricing.

Sebastian Erskine: We are.

Sebastian Erskine: Really not seeing much of a change in the shift right now we're talking to our customers and that will kind of get into the second part of your your questions is different.

Sebastian Erskine: The difference between the upstream and the midstream guys here.

Sebastian Erskine: We're really not seeing a ton of difference.

Sebastian Erskine: Yet in activity or or anything like that pricing on equipment, but you can tell that this customer base is keeping a keen eye on what's going on around us. So.

Sebastian Erskine: Like I said, we've seen some customers dialed back capital budgets by in that 5% to 10% range, but.

Sebastian Erskine: But theres still planning on.

Sebastian Erskine: Growth this year.

Sebastian Erskine: Maybe a little more tempered growth, but continued growth.

Sebastian Erskine: And calculated growth throughout there.

Sebastian Erskine: With these capital plans that they have are beginning to deploy this year and next.

Sebastian Erskine: I appreciate that Mickey and just I mean, just on the on the basic side of your business has grown up in the Permian. It's been a key differentiator for you I mean, I guess in this potential weakness in some of the liquids rich basins and clearly demand for U S. Natural gas remains very robust driven by LNG ramp up how do you think about kind of potential redeployments of equipment to other basins or is it.

Sebastian Erskine: Just noting the frame that given the trend you mentioned in the prepared remarks, and kind of gas to oil ratios in that kind of secular theme that.

Sebastian Erskine: Yes, I mean, we still really believe in the Permian basin, we have the ability to shift to other basins if need be.

Mickey McKee: Yeah, I mean, we still really believe in the Permian Basin. We have the ability to shift to other basins if need be. We have a presence in every major basin in the United States, both operationally and commercially. So, if we need to make that shift, we absolutely can. But we, like I said, we still really believe in the Permian Basin and what it is. So, we think that, you know, there's a lot to happen there, and we believe that the world, the outlook looks pretty good. We were joking yesterday that saying that the Permian might change to become a gas basin with associated oil.

Sebastian Erskine: We have a presence in every major basin in the United States, both operationally and commercially so if we need to make that shift we absolutely can but we like I said, we still really believe in the Permian basin and in what it what it is.

Sebastian Erskine: So we think that there is a lot to happen there and we believe.

Sebastian Erskine: The world the outlook looks pretty good.

Sebastian Erskine: We were joking yesterday that saying that the Permian might change to become a.

Sebastian Erskine: Our gas basin with associated oil.

Sebastian Erskine: So, appreciate it guys. Thanks very much and congrats on the on the quarter.

Sebastian Erskine: Sure.

Speaker Change: Perfect I appreciate it guys. Thanks, very much and congrats on the quarter. Thank you.

Operator: Thank you.

Speaker Change: Our next question comes from Jeremy Tonet with J P. Morgan.

Eli: Our next question comes from Jeremy Tonay with J.P. Morgan. Hey guys, this is Eli on for Jeremy. I know in the past, you've kind of talked about focusing on integrating the CSI acquisition and not kind of having an appetite for M&A. But, you know, if we were to see asset valuations come down a little bit, you know, do you guys think there might be opportunities to take on some smaller bolt-ons or, you know, go out and buy some, some other asset packages?

Speaker Change: Hey, guys. This is Ely on for Jeremy I know in the past.

Speaker Change: Kind of talked about focusing on integrating the CSI acquisition and not kind of having an appetite for M&A, but if we were to see asset valuations come down a little bit.

Speaker Change: Do you guys think there might be opportunities to <unk>.

Speaker Change: On some smaller bolt ons or go out and buy Schmidt some other asset packages.

Mickey McKee: Hey Eli, good morning. Yeah, absolutely. We're certainly in the market for potential bolt-ons that we'd look at opportunistically right now, and especially if some of our customers wanted to monetize some compression in different areas where it made sense to us. We think that'd be an interesting opportunity right now.

Speaker Change: Hey, good morning, yes.

Speaker Change: Yes, absolutely.

Speaker Change: Sure.

Speaker Change: Certainly in the market for potential up.

Speaker Change: Bolt ons and.

Speaker Change: We'd look at Opportunistically, right, now and especially with some of our customers wanted to monetize some compression in.

Speaker Change: In different areas, where it made sense to us we think that would be it.

Speaker Change: Interesting opportunity right now so.

Mickey McKee: So we have substantially completed the CSI acquisition. We feel good about where that is, where that's at and that integration. We feel good about where we're going to be over the next several, multiple quarters with our ERP implementation and getting that behind us, and that's going well. So certainly looking forward into the future, additional M&A opportunities we're certainly going to be looking at all the time.

Speaker Change: We have substantially completed the CSI acquisition, we feel good about where that is.

Speaker Change: Where that's at and that integration.

Speaker Change: We feel good about where we're going to be over the next several multiple quarters with our ERP implementation and getting that behind us and that's that's going well so.

Speaker Change: Certainly looking forward into the future.

Speaker Change: Additional M&A opportunities, we're certainly we certainly going to be looking at all the time.

Speaker Change: Awesome I'll leave it there thanks.

Eli: Awesome, I'll leave it there. Thanks. Thank you.

Sheila: Thanks Sheila.

Speaker Change: Our next question is from Derrick Whitfield with Texas capital.

Derek Whitfield: Our next question is from Derek Whitfield with Texas Capital. Good morning and great quarter and update all together. Thanks, Derek.

Derrick Whitfield: Good morning.

Speaker Change: Great quarter and update altogether.

Derrick Whitfield: Yes.

Derrick Whitfield: Thanks Derek.

Derek Whitfield: Historically, your contract compression model has been quite resilient in past down cycles. While you've touched on this in previous remarks, could you perhaps speak to how customer behavior has evolved in today's environment versus prior cycles? Yeah, I mean, look, I think that, you know, I think we touched on it a little bit in the prepared remarks, right? I mean, the customer base today is a more consolidated customer base with better balance sheets and, to me, is really financially more prepared to weather the storm of a potential down cycle than they've ever been. And that being said, you know, it also, from the other side, from the compression industry side, this industry's never been more highly utilized than it is today.

Derrick Whitfield: Historically your <unk>.

Derrick Whitfield: Contract compression model has been quite resilient in past down cycles.

Derrick Whitfield: You've touched on this in previous remarks could you perhaps speak to how customer behavior has evolved in today's environment versus prior cycles.

Derrick Whitfield: Yes.

Derrick Whitfield: Look I think that.

Derrick Whitfield: I think we touched on it a little bit in the prepared remarks, right I mean.

Derrick Whitfield: The customer base today is a more consolidated customer base with better balance sheets and to me is really.

Derrick Whitfield: Financially more prepared to weather the storm of a potential downcycle than they've ever been.

Derrick Whitfield: That being said.

Derrick Whitfield: It also from the from the other side from the compression industry side. This industry has never been more highly utilized than it is today there just isn't any <unk>.

Mickey McKee: There just isn't any excess equipment sitting around on anybody's shelf that needs to be deployed right now, especially in the large horsepower market. So, there's not going to be, we don't foresee anybody that will end up being a bad actor in the time of a potential softness in the market, right? So, you know, I think from the customer side and the supplier side here, both sides are in a better position to weather the storm, quite frankly.

Derrick Whitfield: Excess equipment sitting around on anybody shelf that needs to be deployed right now, especially in the large horsepower market. So there's not going to be.

Derrick Whitfield: We don't foresee anybody that will end up being a bad actor in the time of a.

Derrick Whitfield: A potential softness in the market right. So.

Derrick Whitfield: I think from the customer side and the supplier side here both sides are in a better position to weather the storm quite frankly.

Derrick Whitfield: Okay.

Mickey McKee: It makes sense and with the potential for a more sustained slowdown in permeate activity. At what point does the industry broadly lose or start to lose some pricing power and is there a difference between operators using compression for gas lift versus midstream? Really no difference in operators using compression for gas versus midstream. Both are required to produce oil and both are necessary to maintain ongoing production. So both are just as integral as pieces of the infrastructure development. So that being said, you know, I think that The ultimate issue that you'd face that would cause some pricing softness would be really a significant reduction in utilization amongst the players in the industry.

Derrick Whitfield: It makes sense and with the potential for a more sustained slowdown in Permian activity.

Derrick Whitfield: At what point does the industry broadly lose or start to lose some pricing power and is there a difference between operators using compression for gas lift versus midstream.

Derrick Whitfield: Really no no difference in the in the.

Operators using compression for gas lift versus midstream both are required to produce oil in both or both are necessary.

Derrick Whitfield: To maintain ongoing production so.

Derrick Whitfield: Both are just as integral.

Derrick Whitfield: As pieces of the infrastructure development so.

Derrick Whitfield: That being said.

Derrick Whitfield: I think the.

Derrick Whitfield: The ultimate issue that you would face that would cause some pricing softness would be really significant.

Derrick Whitfield: A reduction in.

Derrick Whitfield: In utilization amongst the amongst the players in the industry and that's when kind of pricing get softer because there is.

Mickey McKee: And that's when kind of pricing gets softer because there's, like I said, some bad actors in there that try to... kind of secure contracts at all costs and trade price for utilization. So like I said, I think that where the utilization rate is as an industry right now makes me feel really good about kind of where the industry is, how we're positioned to weather the storm going into this. And like I said, Flat oil production in the Permian Basin means gas growth in the Permian Basin. So keep that in mind. And also, as pressures fall, you need more compression.

Derrick Whitfield: Like you said, some bad actors and they're trying to trying to.

Derrick Whitfield: Kind of secure contracts at all cost and trade price for utilization so.

Derrick Whitfield: Like I said, I think that where the utilization rate is as an industry right. Now makes me feel feel really good about.

Derrick Whitfield: Kind of where where the industry is how we are positioned to weather the storm going into this and like I said.

Derrick Whitfield: Flat oil production in the Permian basin means gas growth in the Permian basin. So.

Derrick Whitfield: Keep that in mind and also as part of as pressures fall you need more compression. So it's a little bit counterintuitive there.

Mickey McKee: So it's a little bit counterintuitive there.

John Griggs: Yeah, I was going to chime in too and say, you know, you've seen all of our public peers report utilization metrics, and that's a combination of their entire fleet. But if you were to bifurcate the fleets into large horsepower and small horsepower, which we tend to say a lot, the large horsepower is probably 99% utilized. I mean, there's literally not a single asset out there. And that's what continues to be in high demand in the Permian. So we would think you've got a long ways to go, you'd have to have one heck of a downturn to see the utilization get to the levels that Mickey just described before you'd see that kind of pricing weakness persist.

Speaker Change: Yes, I was going to chime in too and say you've seen all of our public peers report utilization metrics and that's a combination of their entire fleet, but if you were to bifurcate the fleets into large horsepower than small horsepower, which we tend to stay a lot. The large horsepower is probably 99% utilized and there is literally not a single asset out there and that's what continues to be in high demand in the Permian.

Speaker Change: So we would think you've got a long ways to go to net debt one heck of a downturn to see the utilization get to the levels that make you just described before you'd see that kind of pricing weakness persist and then I do want to say to the silver lining in all of this is for the last couple of years at every energy conference you or we would go to the big discuss.

John Griggs: And then I do want to say too, the silver lining in all of this is for the last couple of years, at every energy conference, you know, you or we would go to, the big discussion topic was always about OPEC overhang and what are they going to do? And that caused investors to be reluctant to make big investments in energy. Well, they're doing it. And it's going to basically eliminate that overhang. And that's going to set us up for a really nice upcycle in the future. So that's something that we're really excited about coming out of this downturn, ready to basically continue to go on offense and be ready for this next upcycle.

Speaker Change: Topic was always about OPEC overhang and what are they going to do and that caused investors to be reluctant to make big investments in energy well. They are doing it and it's going to basically eliminate the overhang and thats going to set us up for really nice upcycle in the future. So that's something that we're really excited about coming out of this downturn ready to basically continue.

Speaker Change: To go on offense and be ready for this next up cycle.

Speaker Change: And with you guys all great points I'll turn it back to the operator.

John Griggs: All great points.

Operator: I'll turn it back to the operator. Thank you. As a reminder, to ask a question, please press star 1.

Speaker Change: Thanks Peter.

Speaker Change: As a reminder to ask a question. Please press star one our next question is from Brian <unk> with Baird.

Brian DiRubio: Our next question is from Brian DiRubio with Baird. Good morning, gentlemen. Just a couple of questions for you.

Brian: Good morning, gentlemen, just a couple of questions for you first off on Capex.

Mickey McKee: First off, on CapEx. You know, there's been a clear bifurcation on those who have the capital flexibilities buying down CapEx and those who don't. Just, are you seeing better availability of, particularly on the packager side, the ability to get new equipment? Just love to get any sense of, you know, lead times for the new horsepower today. We're really not seeing, Brian, too much of a change of where it's been over the last year. Lead times are still a year out, you know, kind of that 45 to 50 week time frame from Caterpillar, depending on the size of the engines.

Brian: There has been a clear bifurcation on those who have the capital flexibility is buttoned up Capex and those who don't just are you seeing.

Brian: At our availability.

Brian: Particularly on the packages side, the ability to get new equipment, just wanted to get any sense of.

Brian: Lead times for that horsepower today.

Brian: Okay.

Brian: We're really not seeing Brian too too much of a change of where it's been over the last year.

Brian: Lead times are still a year out.

Brian: 45 to 50 week timeframe from caterpillar on depending on the size of the engines.

Mickey McKee: You might be able to beat that lead time a little bit with some other engine providers, but at the end of the day, the shop space and capacity to build that equipment, package it into a compressor, a fully functional compressor package is also a bottleneck that we have today, too, and that's that kind of Shop Space and that kind of thing is still a year out as well for the most part so Not we're not seeing any softness in that supply side It's still a really tight tight game out there and and having to manage that supply chain piece pretty pretty actively Got it.

Brian: Might be able to beat that lead time, a little bit with some other engine providers, but at the end of the day, the shop space and capacity to build that equipment package it into a compressor.

Brian: Fully functional compressor packages is also a bottleneck that we have today two in and Thats.

Brian: That kind of.

Brian: <unk>.

Brian: Shelf space and that kind of thing is still a year out as well for the most part so.

Brian: Not we're not seeing any softness in that supply side.

Brian: Still a really tight tight game out there and having to manage that supply chain piece pretty.

Brian: Pretty actively.

Brian: Got it well I guess that helps the golden age of compression as I've been calling it so.

Brian DiRubio: Well, I guess it helps the golden age of compression as I've been calling it. So no complaints there.

Brian: No complaints there.

Brian: Just.

Mickey McKee: Just a follow up, just we think about sort of the improvements you had on the contract compression side this quarter. Any sense you can help us understand, you know, how much that was organic pricing, how much that was just makeshift within the fleet, given that you're still managing through the CSI assets? Yeah, I mean, we've got about a 1% or 2% kind of churn rate that we follow. And so we're, anytime some equipment comes back to us and we send it back out the door and recontract it, that comes back and goes back out under a new contract right now at kind of 15% to 20% of premium contracts, right?

Brian: Follow up just we think about sort of the improvements you had on the.

Brian: Contract compression side this quarter.

Brian: Any sense you can help us understand how much of that was organic pricing how much of that was just mix shift within the fleet given that youre still matter.

Managing through the CSI assets.

Brian: Yes, I mean, we've got about one or 2% kind of churn rate that we've that we follow and so we are anytime some equipment comes back to us and we send it back out the door and re contract it.

Brian: That comes back and goes back out.

Brian: Under our new contract right now it kind of 15% to 20%.

Mickey McKee: So that churn is a good thing for us. We feel like we can turn it around and recontract it with another customer or potentially a new customer or an existing customer at rates that are more, that are closer to spot. But like I said, that's about a 1% to 2% churn rate that we see. And then obviously that new horsepower growth of that 49,000 horsepower, that's going out at new spot pricing as well. So, and then we have a pretty active quarter early on in Q1 recontracting big bulk renewals that we had coming through the system and had a lot of success there, which kind of got that 10% to 15% kind of uplift in pricing along with those recontracts also.

Brian: Premium contracts right like so that churn is a good thing for us we feel like we can turn it around and re contracted with another customer or.

Brian: Potentially.

Brian: A new customer or an existing customer at rates that are more that are closer to spot, but like I said, that's about a 1% to 2% churn rate that we see and then obviously that new horsepower growth of that 49000 horsepower thats going out at new spot pricing as well so.

Brian: And then we have.

Brian: Pretty active quarter early on in Q1 re contracting.

Brian: Big bulk renewals that we had coming through the.

Brian: Coming through the system and had a lot of.

Brian: A lot of success there.

Brian: Which which kind of got that 10% to 15% kind of.

Brian: Uplift in pricing along with those re contracts also so it really is the mix of all of it and all of it is we're having the ability to lift pricing across the board and continue to do so.

Mickey McKee: So, it really is the mix of all of it and all of it is, we're having the ability to lift pricing across the board and continue to do so.

Speaker Change: Great that sounds excellent that's all for me. Thank you so much.

Brian DiRubio: Great. That sounds excellent.

Operator: That's all for me. Thank you so much. All right, thanks, Brad.

Speaker Change: Thanks, Brian.

Speaker Change: Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mickey Mckee for closing remarks.

Mickey McKee: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mickey McKee for closing remarks. Thank you, operator, and thanks to everyone participating in today's call. We look forward to speaking with you again after we report our results for the second quarter.

Speaker Change: Thank you operator, and thanks to everyone participating in today's call. We look forward to speaking with you again after we report our results for the second quarter.

Operator: Bye. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. [music] © BF-WATCH TV 2021

Speaker Change: Yes.

Speaker Change: This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.

Speaker Change: Okay.

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Speaker Change: [music].

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Speaker Change: Okay.

Speaker Change: Yes.