Q1 2025 Archrock Inc Earnings Call
Speaker Change: Good morning. Welcome to ArchRock first quarter 2025 conference call. Your host for today's call is Megan Repine, Vice President of Investors Relations at ArchRock. I will now turn the call over to Ms. Repine. You may begin.
Speaker Change: Thank you Hello, everyone and thanks for joining us on today's call with me today are Brad Childers, President and Chief Executive Officer of Archrock, and Doug Aron Chief Financial Officer of Archrock Yesterday, Archrock released its financial and operating results for the first quarter of 2025.
Speaker Change: If you have not received a copy you can find the information on the company's website at www.
Speaker Change: Archrock Dot com during this call we will make forward looking statements within the meaning of section 21 E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrock management team.
Speaker Change: Although management believes that the expectations reflected in such forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the Securities and Exchange Commission for a list of factors that may cause actual results to differ materially from those in the forward looking statements made.
Speaker Change: During this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted net income adjusted EBITDA adjusted EBITDA EPS and cash available for dividend for reconciliations of these non-GAAP financial measures to our GAAP financial results. Please see yesterday's press release and our form <unk>.
Speaker Change: K furnished to the SEC I'll now turn the call over to Brad to discuss our trucks first quarter results and to provide an update of our business.
Speaker Change: Yeah.
Brad Childers: Thank you Megan and good morning, everyone.
Brad Childers: Archrock delivered outstanding and once again record setting performance in the first quarter across key financial metrics operating measures and business segments.
Brad Childers: Despite macroeconomic factors has created uncertainty in other sectors of the economy and the natural gas compression business that we operate the supportive market conditions, we experienced in 'twenty 'twenty four remain in place and the.
Brad Childers: The operational transformation of Archrock business from its prior positioning as well as ongoing investments in our <unk>.
Brad Childers: High quality asset base innovative processes and technology are driving consistent and repeatable success.
Brad Childers: Compared to the first quarter of 'twenty 'twenty four we increased our adjusted EPS by over 60% and adjusted EBITDA by more than 50%.
Brad Childers: Our fleet remains fully utilized at 96% and on a sequential basis, we increased our contract compression operating fleet by more than 70000 horsepower, excluding sales of non strategic assets.
Brad Childers: This growth reflects high return organic investments and Newbuild horsepower.
Brad Childers: We maintained our sector, leading financial position, including a record low quarter end leverage ratio of three two times.
Brad Childers: We continue to increase shareholder returns.
Brad Childers: Our quarterly dividend per share was up 15% compared to a year ago and our dividend coverage on this higher dividend level was a robust three nine times.
Brad Childers: In addition.
Brad Childers: We have been repurchasing shares under our buyback utilization authorization in this time of increased financial market volatility.
Brad Childers: Year to date through May one the company has repurchased approximately $23 million or.
Brad Childers: Or 977000 shares of our common stock at an average price of $23.22 per share.
Brad Childers: In addition, the board has approved a $50 million increase to our existing share repurchase program.
After accounting for the recent purchases that I just mentioned our remaining capacity is up $65 million.
Brad Childers: The increased authorization reflects our confidence in the company's strategy and underscores our commitment to returning capital to shareholders.
Brad Childers: Okay.
Brad Childers: Our excellent underlying business performance and financial strength have positioned us to participate in value creating industry consolidation.
Brad Childers: The integration of total operations and production services or tops is progressing as planned.
Brad Childers: And during the first the first quarter, we also announced the acquisition of en Gcs, which closed on May one.
Brad Childers: These accretive transactions are expected to increase our scale expand our customer relationships and deepen our operations in key regions.
Brad Childers: It has been great to welcome these highly talented teams and I'm excited about what we get to accomplish together as archrock.
Brad Childers: Before turning to the market.
Brad Childers: One emphasize that we've worked diligently over the past decade to create the best compression company, we possibly could.
Brad Childers: From our World class safety and customer service to our fleet standardization and modernization program, so our partnerships with blue chip customers and cutting edge technology.
Brad Childers: We solidified our position as the compression partner of choice for our customers.
Brad Childers: I could not be more proud of the stellar results that we're delivering and will continue to push to maximize our performance in the future.
Brad Childers: Turning to the market fundamentals for compression remains strong during the first quarter, including historically high levels of utilization pricing and profitability.
Brad Childers: We have a substantial contracted backlog for 2025, and we are booking units for 2026 delivery to meet continued strong customer demand.
Brad Childers: Nevertheless, we are closely monitoring market developments.
Brad Childers: I want to share my perspective on short and long term dynamics.
Brad Childers: Beginning with the short term.
Brad Childers: <unk> actions to bring more production into the market more quickly and tariff announcements have driven uncertainty and volatility in <unk> prices.
Brad Childers: We are only weeks into this evolving environment, but to date, our customers both producers and midstream mers have not communicated changes to their development plans for 2025.
Brad Childers: And has not meaningfully changed their capital programs that would impact beyond 2025.
Brad Childers: We are of course, staying close to our customers and are focused on deploying our robust backlog of equipment starts providing excellent customer service.
Brad Childers: And ensuring we stay closely informed on any changes in market dynamics.
Brad Childers: Several factors make me optimistic about how well, we at Archrock and manage our business in any market.
Brad Childers: First.
Brad Childers: We're a late cycle participant in the energy sector.
Brad Childers: As our business is tied primarily to existing production levels for natural gas and secondarily to new production additions. It is not as impacted by commodity price volatilities compared to businesses that are more closely tied to drilling and completion.
Brad Childers: This unique aspect of our business gives us improved visibility and ample time to adjust if necessary.
Brad Childers: And we're prepared to take decisive action should industry activity moderate and production growth decelerate.
Brad Childers: Even under this scenario, we believe our business model should continue to benefit from our comparatively more stable production related and midstream infrastructure position.
Brad Childers: Second.
Brad Childers: Cross the energy sector for capital discipline mandate by investors has resulted in more stable activity levels through both positive and negative commodity price fluctuations.
Brad Childers: We believe there is little if any excess or spare compression equipment in the market.
Brad Childers: Third.
Brad Childers: More specific to Archrock, our seasoned management team has demonstrated success in driving profitability and cash flow improvements through fleet standardization technology implementation.
Brad Childers: An innovative process improvements.
Brad Childers: In addition, we prioritize balance sheet strength and flexibility through prudent capital allocation.
Brad Childers: Today, we have the lowest leverage ratio among our peers and in our company's history since becoming archrock.
Brad Childers: Finally on this topic, a short term perspective.
Brad Childers: To reiterate that as I opened on the call. We continue to see constructive market conditions for our compression business, specifically stop activity year to date has been at historically low levels.
Brad Childers: <unk>.
Brad Childers: Activity in starts remains on schedule with our 2025 business plan.
Brad Childers: And we have not seen our customers delay compression additions.
Brad Childers: And third.
Brad Childers: Booking activity remains robust as we continue to book, primarily large horsepower units into 2026 at a pace consistent with our last four quarters.
Brad Childers: Shifting to the long term, we believe the growth in global natural gas demand continues to support infrastructure investment in the U S for decades to come.
Brad Childers: We expect LNG demand exports to Mexico power generation and the emerging opportunity presented by the onshoring of AI data centers to require a significant call on U S natural gas production to.
Brad Childers: To support this the U S will need to make substantial investments to expand the natural gas transportation infrastructure.
Brad Childers: This includes gathering systems processing plants pipelines and compression.
Brad Childers: Moving on to our segments contract operation's fundamentals and execution remained excellent during the quarter.
Brad Childers: Our fleet was fully utilized with utilization exiting the quarter at a rate of 96%.
Brad Childers: Based on what we see in the market today, we expect to be able to maintain utilization in the mid nineties. This year.
Brad Childers: Looking at period end operating horsepower in the first quarter of 2025 compared to the fourth quarter of 2024, we delivered over 70000 active horsepower growth.
Brad Childers: Excluding approximately 15000 horsepower in noncore asset sales.
Brad Childers: As already mentioned stop activity during the quarter was at record lows.
Brad Childers: As organic horsepower growth continues we closed our acquisition of the gcs on the first.
Brad Childers: Acquiring this portfolio of high quality large horsepower electric compression assets builds on our efforts and drive durable profitable growth for Archrock shareholders.
Brad Childers: Monthly revenue per horsepower also moves higher to $23 and 54 during the first quarter of 2025% a company record.
Brad Childers: And we achieved a quarterly adjusted gross margin percentage of 70% for the second quarter in a row.
Brad Childers: The aftermarket services segment had a solid quarter during what is typically a seasonally slower period.
Brad Childers: Revenues were up 3% year over year due to consistent service work with repeat customers and higher pricing.
Brad Childers: First quarter profitability exceeded our guidance expectations as we continue to focus on higher quality and higher margin work.
Brad Childers: Shifting to our capital allocation framework for 2025, we.
Brad Childers: We are committed to our prudent and returns based approach.
Brad Childers: Yesterday, we reaffirmed our 2025 growth capital plan, which includes between 330 and $370 million of investment in our fleets.
Brad Childers: These investments are underpinned by multi year contracts with blue chip customers.
Brad Childers: <unk> at which we are 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 Childers: As we invest in these compelling opportunities, we're committed to maintaining an industry leading balance sheet.
Brad Childers: We plan to maintain a leverage ratio of between 3% to three five times.
Brad Childers: This underpins our ability to execute on our plans and opportunistically adapt to market conditions.
Brad Childers: Finally, as we invest we are also increasing capital returns to shareholders.
Brad Childers: We expect to continue to grow our dividend over time, along with growth in our profits and.
Brad Childers: And should our stock remains undervalued relative to the strength of our business. We will continue to use buybacks as a tool for value creation.
Brad Childers: We ended the year with excitement about what we are positioned to deliver in 2025 and beyond.
Brad Childers: Our performance is exceeding expectations with one quarter in the books and we look forward to integrating and Gcs has high quality operations and Archrock.
Brad Childers: I'm proud of the performance that our team continues to deliver.
Brad Childers: We are focused on what we can control starting our backlog of committed new compression unit additions providing.
Brad Childers: Providing exceptional customer service to our customers, maintaining a solid balance sheet maximizing our profitability and prudent capital allocation.
Brad Childers: With our production oriented business and best in class operations I am confident that Archrock will do very well in the short term and thrive in the long term.
Brad Childers: With that I'd like to turn the call over to Doug for a review of our first quarter performance and to provide additional color on our updated 2025 guidance.
Doug Aron: Thanks, Brad.
Doug Aron: Let's look at a summary of our first quarter results and then cover our updated financial outlook for 2025.
Doug Aron: Net income for the first quarter of 2025 was $71 million.
Doug Aron: Excluding transaction related and restructuring costs and adjusting for the associated tax impact we delivered adjusted net income of $74 million or <unk> 42 per share.
Doug Aron: We reported adjusted EBITDA of $198 million for the first quarter 2025.
Doug Aron: Underlying business performance was strong in the first quarter as we delivered higher total adjusted gross margin dollars for contract operations and aftermarket services on a sequential basis.
Doug Aron: Results further benefited from $7 million in net asset sale gains related to nonstrategic horsepower sales.
Doug Aron: Turning to our business segments contract operations revenue came in at $300 million in the first quarter up 5% compared to the fourth quarter of 2024, and 35% compared to the prior year period.
Doug Aron: The increase reflects organic horsepower growth and higher pricing.
Doug Aron: Compared to the fourth quarter, we grew our adjusted gross margin dollars by more than $10 million.
Doug Aron: We delivered a record adjusted gross margin percentage of 70% for the second straight quarter.
Doug Aron: In our aftermarket services segment, we reported first quarter 2025 revenue of $47 million up compared to the fourth quarter of 2024 of $40 million.
First quarter 2025, Ams adjusted gross margin percentage was 25% compared to the fourth quarter of last year and prior year period of 23%.
Doug Aron: We exited the quarter with total debt of $2 $3 billion and strong available liquidity of $590 million.
Doug Aron: Our leverage ratio at quarter end was three two times calculated as quarter end total debt divided by our trailing 12 month EBITDA.
Doug Aron: This was down from three three times in the fourth quarter of 2004 and was consistent with prior year period, reflecting our strong operating performance and prudent acquisition financing.
Doug Aron: On May one we closed the gcs transaction.
Doug Aron: Archrock issued 225 million, new Archrock common shares to the sellers and funded the cash portion of the total consideration with available capacity under our ABL credit facility.
Doug Aron: This financing strategy keeps us on track to achieve our financial targets, including our objective of maintaining a consistent leverage ratio of three to three five times.
Doug Aron: Our strong financial flexibility I, just described continue to support increased capital returns to shareholders.
Doug Aron: We recently declared a first quarter dividend of <unk> 19 per share or <unk> 76.
Doug Aron: On an annualized basis. This is consistent with the fourth quarter dividend level and up approximately 15% year over year.
Doug Aron: Cash available for dividend for the first quarter of 2025 totaled $132 million, leading to quarterly dividend coverage of three nine times.
Doug Aron: In addition to increasing the dividend year to date through May one we repurchased approximately 977000 shares for approximately $23 million at an average price of $23 22 per share.
Doug Aron: This leaves $65 million and remaining capacity for additional share repurchases on the replenished authorization.
Doug Aron: Turning to our updated outlook Archrock increased its 2025 annual guidance to reflect first quarter outperformance and to include the <unk> acquisition.
Doug Aron: Our revised guidance reflects eight months of contribution from the transaction.
Doug Aron: We are raising our 2025, adjusted EBITDA range to $790 million to $830 million from the prior range of $750 to $790 million.
Doug Aron: Segment level revenue and adjusted gross margin details can be found in our earnings release issued yesterday afternoon.
Doug Aron: Turning to capital, including in Gcs, we still we still expect growth Capex to total between 330 and $370 million to support investment in our Newbuild horsepower and repackaged capex to meet continued customer demand.
Doug Aron: Our growth Capex is underpinned by multi year contracts.
Doug Aron: Expected to be first half weighted and we expect we will be able to tighten our guidance range as the year progresses.
Doug Aron: Maintenance Capex is now forecasted to be approximately a $110 million to $120 million up slightly compared to our prior range to reflect planned overhaul activity for the newly acquired fleet.
Doug Aron: We also continue to anticipate approximately $35 million to $50 million and other capex primarily for new vehicles.
Doug Aron: Total capital expenditures are expected to be funded by operations and with the potential for additional support from non strategic asset sale proceeds as we continue to high grade our fleet.
Doug Aron: Before we open the line for questions I want to conclude by emphasizing that we believe our production oriented business.
Doug Aron: Grated operation and outstanding financial position provide us with differentiated cash flow stability.
Doug Aron: These factors combined with our robust and committed backlog gives us good visibility into our outlook this coming year.
Doug Aron: Even in the face of macroeconomic uncertainty our strategy Hasnt changed we will drive value and positive impact for our partners by providing excellent customer service and we will maximize value for our shareholders.
Speaker Change: With that van can you. Please open the line for questions.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit your questions to one and one follow up we will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Jim Rollyson from Raymond James. Please go ahead.
Jim Rollyson: Hey, guys, good morning, nice quarter and update with the with the new fleet.
Jim Rollyson: Brad just curious if you kind of look at the negative macro headwinds on oil you referenced and kind of combine that with just the continued positive outlook on the gas side I mean, we've had additional LNG export facility permits approved under under the New administration.
Jim Rollyson: Kind of curious how you think about.
Jim Rollyson: The impact we might see if the Permian growth slows down like we've seen some budget adjustments already and obviously, we need that associated gas I'm curious as you kind of look at the different basins. If we get some kind of a slowing of growth in the oily basins, we're obviously going to need the gas from somewhere maybe.
Jim Rollyson: How you guys think about that and how you feel like you're positioned for that type of scenario.
Jim Rollyson: Thanks, Jim a.
Jim Rollyson: A few thoughts in response to the question first of all what we've seen publicly right now is some of the producers, especially looking at Capex reductions in 2025.
Jim Rollyson: In the 5% range with one coming out more in the 10% range, just yesterday and so thats a fairly modest adjustments to the overall capex spend but really critically the capex spend for 2025 that we have in our backlog and contracts we have in hand with our customers is fully committed through the year and so we.
Jim Rollyson: See very little impact no.
Jim Rollyson: No impact to 2025 deployment of the growth that is in the books.
Jim Rollyson: That's one.
Jim Rollyson: Factors that hit us in the market when we looked at it second I'll remind you that natural gas as you pointed out with LNG projects is very much a demand driven commodity and it has to come from somewhere even if we see some flattening or reduction of the growth cycle on oil in the Permian, we still expect to see.
Jim Rollyson: Natural gas grow.
Jim Rollyson: Measurably out of the same production just based upon the characteristics of the play into the basin.
Jim Rollyson: And then finally I'll point out that for Archrock, we have the benefit of having a footprint in every major oil and gas reducing play. So we have the ability to adjust and go to where the drill bit is going to bring the gas to market.
Jim Rollyson: We already have operations in those locations. So I think that those that combination of factors tells us that the direct impact to our business in 2020 fives.
Jim Rollyson: Is not going to be there.
Jim Rollyson: Beyond 2025, I think in a sustained oil price deterioration, especially that we could see a deceleration of growth.
Jim Rollyson: Well site, but it's hard to see that natural gas.
Jim Rollyson: Understood I appreciate the thoughts and if you kind of follow up.
Jim Rollyson: On the tariff side of things I'm curious what you guys are hearing from your suppliers on.
Jim Rollyson: Potentially equipment pricing just given that over the last few years the tight market plus.
Jim Rollyson: Inflation pretty meaningful inflation and equipment costs have driven up your pricing on new equipment to sustain returns just curious kind of how you guys are seeing that potentially play out.
Jim Rollyson: First I'll respond by even with our vendors there still remains a lot of uncertainty as to the long term impact placement of an impact of tariffs.
Jim Rollyson: And for us, especially when I think about our purchased equipment and backlog of equipment that pricing is locked in for orders that are in the book for 25, and the orders that are going to come in in 2026.
Jim Rollyson: It's substantially totally locked in from a capex expenditure perspective in.
Jim Rollyson: And then finally on parts and materials.
Jim Rollyson: We think that the.
Jim Rollyson: Impact of.
Jim Rollyson: Tariffs on our vendors right now as best we've been able to estimate measure are in the low single digit range as the impact our business and our business plan and our guidance for 2025 reflect what we think could be the increased impact of costs due to due to tariff increases based on that best estimate so far.
Speaker Change: Our next question comes from the lines of Gab Moreen from Mizuho Securities. Please go ahead.
Gab Moreen: Hey, good morning, Brad can I ask a little maybe to expand on sort of the decisive actions that you've kind of talked about today on the call in the press release are.
Speaker Change: Are you mostly thinking about.
Speaker Change: <unk>.
Speaker Change: Capex.
Speaker Change: Getting more defensive on the balance sheet and capital allocation, just curious kind of which markers you're most focused on when you make money when youre talking about defensive actions.
I can address that first before I do the thing I really want to emphasize however is that in the environment. We see today, we need to be aware and stay close to our customers stay close to the market dynamics and make sure that we don't ignore the macro environment that has implications for.
Speaker Change: Primarily beyond 25 impact to the oil and gas sector, but I'm going to emphasize that right now what we see as significant positives in the fundamentals driving our business.
Speaker Change: Historical low level of stop activity.
Speaker Change: Great levels of start activity with our customers not deferring starts in 2025 based on anything that we've seen.
Speaker Change: And bookings that continue a pace consistent with the prior four quarters.
Speaker Change: Should a sustained oil price require moderation of activity in the sector and we see that that could be if that could impact our business we have the benefit.
Speaker Change: Compression business of great visibility is a lag time business.
Speaker Change: We'll get to see it coming quarters before it hits and that gives us ample time to adjust our structure that has great flexibility I'm going to point out that our opex is highly variable. So we have the ability to.
Speaker Change: To reduce our opex very quickly and similarly, our capex is highly variable we have the ability within a couple of quarters to turn down our capex that gives us just a remarkable amount of overall operational flexibility to take out both capex and opex.
Speaker Change: To keep this business generating cash flow and in those funds will generate that cash flow and balance how will we get to direct those cash flows to return it to our investors to repay debt or otherwise. So it's just a business that has some really strong built in levers, including visibility and highly variable cost structure on both opex and capex.
Brad Childers: Thanks, Brad and maybe if I can ask a follow up on kind of pricing conversations.
Speaker Change: With customers and realize a sensitivity, but with the guidance that you updated for LNG.
Speaker Change: I guess any changes in terms of your pricing assumptions around.
Speaker Change: Renewals for your fleet this year discussions and customers and then just one more on guidance if I could it doesn't look like you changed your growth Capex that offer and gcs was that was that always in the plan or is there some shifting going on there.
Speaker Change: So with the acquisition any environment no changing in our overall pricing strategy I will point out that our pricing increases have moderated.
Speaker Change: Over the last couple of quarters.
Speaker Change: As we have substantially cut upfront the inflationary period that drove a lot of the pricing increase in that over the last three years.
Speaker Change: Those price increases have moderated, but with this exceptionally tight compression market, we're at 96% utilization.
Speaker Change: I believe the industry is in the same really tight level of utilization there is no spare equipment on the market and the market.
Speaker Change: That gives us the opportunity to invest at solid returns and Thats. What we continue to do pricing will reflect that returns based approach as well. So it has moderated as I described.
Speaker Change: For our Capex. There is no reason for us to increase our Capex guidance, we can absorb.
Speaker Change: The engie CFS backlog of new equipment into our existing guidance, having to increase it. It's one of the benefits of the transaction that's immediately accretive.
Speaker Change: Earnings per share.
Speaker Change: And the cash flow and it gives us the ability to absorb this acquisition with only positive financial impacts and no additional material investment.
Speaker Change: Acquired outside of upside what can absorb.
Speaker Change: Yeah.
Speaker Change: Your next.
Speaker Change: <unk> comes from the line of Doug Irwin from Citi. Please go ahead.
Speaker Change: Hey, Thanks for the question Brian.
Speaker Change: I wanted to start with the <unk>.
Speaker Change: <unk> deal I was wondering if you can maybe provide a little more detail around the assumptions behind your guidance up seven times multiple does that rely on some of that incremental horsepower being brought on or is that pretty immediate.
Speaker Change: And maybe just any detail around potential synergies or upside that might drive that multiple lower would be helpful as well.
Speaker Change: Yeah. Thanks for the question. So look the revised guidance that we put out last night I think looks at our Q1 hour.
Speaker Change: Outperformance on the base business.
Speaker Change: If you think about midpoint to midpoint, we've raised guidance by $40 million.
Speaker Change: Last night, and you should think of that as about $10 million of first quarter outperformance on the base business and then <unk>.
Speaker Change: Roughly $30 million of in Gcs for eight months.
Speaker Change: If you going back and then trying to tie back to that $7 1 million or seven one times sort of purchase price, which I think we actually might have reflected just inside of seven times.
Speaker Change: There is.
Speaker Change: Still some backlog that will come online when we talked about that we see that as sort of a July run rate annualized.
Speaker Change: For next year so.
Speaker Change: None no synergies were included in that initial estimate.
Speaker Change: We closed that transaction last Thursday, as Brad mentioned really excited to welcome that team on but everything we've seen of them so far.
Speaker Change: Has not given us any indication that it will be different than that and then to the point on synergies. While none were modeled we'll certainly work hard to see if there could be upside there.
Speaker Change: But hopefully that gives you the color to understand how we got from previous guidance to the one we gave last night.
Speaker Change: Yes, that's helpful detail. Thanks.
Speaker Change: And then maybe a follow up on one of the earlier comments around just the broader natural gas demand I was wondering if you could maybe talk a little bit about <unk>.
Speaker Change: <unk> intensity, just in the Permian versus dry gas basins.
Speaker Change: To the extent that we do see a shift in activity towards the haynesville or more dry gas production, what that might mean for just overall tightness in the market moving forward.
Speaker Change: The compression intensity in the Permian is definitely the highest intensity that we see in the marketplace today.
Speaker Change: It's just true of associated gas plays in general that for and they require more compression than certainly some of the dry gas plays like the haynesville or it can be and still remains very very highly pressured if not over pressured.
Speaker Change: So as you see that migration from the Permian into other plays you will see various levels of compression intensity required so you're right in thinking that if theres a major migration away from the Permian and it's going to not have the same level of compressed intensity.
Speaker Change: For us the Haynesville.
Speaker Change: <unk> is over pressured nature is about 2% to 3% of our fleet. It's a very small portion of it today.
Speaker Change: And we would expect that to increase materially, but we also know that when we look around for the eagle to the Eagle Ford to the Marcellus Utica D J.
Speaker Change: And the mid continent that if capital is no longer moving into the Permian The capital will move to those other plays.
Speaker Change: Two to drive some of that gas.
Speaker Change: <unk>, especially that can make it to the Gulf coast and Fortunately for US we have an operating footprint, where we get some mitigate that lack of growth in the Permian is probably going to be a lack of growth non decline by.
Speaker Change: By mitigating that with growth and other players.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the lines of Jeremy Tonet from Jpmorgan. Please go ahead.
Speaker Change: Hey, this is.
Jonathan: Jonathan on for Jeremy.
Speaker Change: Maybe just to think about the deals you guys are signing now into 2026, I know you've been very clear that the market remains tight but.
Jonathan: Are you seeing any changes in terms of month to month.
Jonathan: Shifts are you getting the same amount of term AUR before we saw this increased market volatility.
Jonathan: No and no.
Jonathan: I mean, we're not seeing any shifts and changes in the terms.
Jonathan: Reising.
Jonathan: At all to accommodate the volumes of gas that we or our customers wanting us to bring our service onsite compressed I'm going to point out that the infrastructure investment engine to bring this gas to market. It does not turn on a monthly oil price it doesn't turn even on a quarterly <unk>.
Jonathan: Significant infrastructure is going to be required to meet the demand for natural gas that we see in the marketplace ahead for the factors. We described combination data centers LNG exports exports to Mexico.
Jonathan: That that pipeline of infrastructure work that is required is what we have in our backlog and we're not seeing a change for what we see in booking for 2026, we also have not seen a change.
Jonathan: And.
Jonathan: We are continuing to book and with bookings that look a lot like they did for the past four quarters.
Speaker Change: Got it Thats helpful.
Speaker Change: In your opening remarks, you also talked about.
Speaker Change: Made you mid ninety's utilization rates.
Speaker Change: I know you guys are at 96 now.
Speaker Change: I don't think you guide to a specific utilization rate, but just if we see any shifts.
Speaker Change: Is that something that we should keep an eye on is possibly dipping or I think or do you think that that should be pretty solid where it's at now through the rest of the year and into 2026.
Speaker Change: Whether we're at 95% 97% in that mid range. It's just a solid level of utilization that primarily will be driven and reflect the amount and timing of horsepower adds by way of example.
Speaker Change: Horsepower moves into our fleets that is into the denominator as soon as it's delivered even if we have yet to start it. So if we have yet to start it.
Speaker Change: You have potential impact on utilization until we do which could be a month or two out typically when equipment into the ground. It starts earning revenue within that 30 to 90 day period of time, but thats one of the things that we see in the fluctuation. We're just pointing out that in this mid ninety's level of utilization, it's effectively just.
Speaker Change: A high level, a solid level of utilization that we get.
Speaker Change: We get the leverage to both deliver value to our investors as well as to manage pricing in the market.
Speaker Change: Your next question comes from the line of Selman <unk> from Stifel. Please go ahead.
Speaker Change: Thank you good morning, I appreciate the time I just wanted to follow up on your comments when you talk about the Eagle Ford the Utica, the DJ or the Marcellus.
Speaker Change: In terms of a shift away or are you seeing any pickup in inquiries from the other basins at all.
Speaker Change: Any tone anything changing from that standpoint.
Speaker Change: The answer is yes, but not in contrast to the Permian in the bookings that we have right now remain approximately 70% to 80% in the Permian, but help fully 20%, 30% and the other plays in the DJ has a good breakeven price so that's attracting capital.
Speaker Change: And we are booking horsepower and several other players beyond the Permian, but not at the expense of that we're not seeing a shift away. We're seeing the addition of.
Speaker Change: Got it understood and then just.
Speaker Change: Can you just maybe talk about the demand you're seeing for electric out there is it still what it was thank you.
Speaker Change: Sure.
Speaker Change: About 30% of our Newbuild Capex budget is still dedicated to electrics and we still see demand in that market at about that level.
Speaker Change: The gating item to more bookings on the electric motor drive side will be the availability of power in the marketplace until the power market catches up.
Speaker Change: There I think we will see the electric motor drives at that level stay at that level or potentially decline.
Speaker Change: But to be really clear.
Speaker Change: Whether the customer wants compression with gas drive electric motor drive, we have a fabulous service offering and fleet and capability to operate and offer both.
Speaker Change: Our next question comes from the line of Steve <unk> Zani.
Speaker Change: From Sidoti. Please go ahead.
Speaker Change: Good morning, everyone I appreciate all the detail on the call.
Speaker Change: Doug.
Speaker Change: I want a proud sorry, I wanted to ask you about over the last five to 10 years, you talked about the change over in your fleet it's younger.
Speaker Change: Higher horsepower to much larger your customer base is more tied towards blue chips.
Speaker Change: We have seen previous cycle slowdowns.
Speaker Change: Differently are you position this time.
Speaker Change: I appreciate the question a lot.
Speaker Change: Not going to repeat the whole thing the one thing I'd still pause and just point out is that right now we.
Speaker Change: We are not seeing a slowdown, but we recognize that we need to stay close to the market and in a sustained low oil price environment that we could.
Speaker Change: To answer your question directly this business is completely differentiate differentiated and differently positioned from what it was in the past.
Speaker Change: Number one.
Speaker Change: If you look in the past the mix of customers between producers and midstream or is 10 years ago was heavily weighted toward producers today at the top of our customer concentration and the horsepower spread that we offer it's about 50 50 between mid streamers and producers and even with the <unk>.
Speaker Change: Producers as you pointed out it's much more oriented to the large horsepower gathering portion of that upstream of.
Speaker Change: Streamers producers business.
Speaker Change: That's one factor that just.
Speaker Change: It gives us a different level of stability going forward and it's positioned us to be much more of an infrastructure and transportation.
Speaker Change: As a company.
Speaker Change: That's one factor the second factor, our fleet quality and high levels of utilization, we would be entering in a different market at the highest level of utilization.
Speaker Change: At least five to seven percentage points compared to anything we've seen in the past so that would give us I think a very different position and starting point to endure any change in market conditions.
Speaker Change: Third one item I emphasized on the call is that the entire sector has been benefited by the capital.
Speaker Change: Disciplined mandate that the investment community has put on all of us.
Speaker Change: I think the results of that one result of that is going to be a very different amplitude and range of performance between upside and downside pressures in the industry. We expect that we're going to have a much more stable overall environment and we know that we are a part of that too is we've imposed our own capital discipline, we expect.
Speaker Change: To benefit by both achieving a higher peak upside, which is where we're what we're delivering today as well as a lower downside and utilization and pricing compared to the past. We think these factors are going to play out very favorably for the industry should market conditions.
Speaker Change: Go to a sustained level in a low oil price environment.
Speaker Change: Great. Thanks, Thanks, Brad for.
Speaker Change: For my follow up I, just wanted to ask about.
Speaker Change: In these events and again, if we see it.
Speaker Change: Slower growth.
Speaker Change: How are your customers would typically react and what's in the contracts one with these firm commitments.
Speaker Change: Drilling slows can push some of those deliveries to the right in the event they need to and to NIM.
Speaker Change: In the.
Speaker Change: The event that operators are trying to work within lower cash flow does that provide any optimism that maybe we see more conversion from purchase to contracted.
Speaker Change: Impression.
Speaker Change: On the first point our contracts are firm that are binding the restructuring is take or pay contracts and that said, we do work with our customers. If we can to allow them to push equipment.
Speaker Change: And so the right within some limitations, we would also work hard too.
Speaker Change: They needed to.
Speaker Change: To put that equipment to work with another customer one of the benefits of our business model and one of the primary purposes that the customers like using our business model is we have the ability to to push.
Speaker Change: Our equipment to work across a broader geography, and a broader customer base than the customer count themselves. So we can and will facilitate that cooperatively with our customers, where we can subject to the fact that these are still binding contracts and our customers typically respect the contracts we have not had a period of <unk>.
Speaker Change: With that has not been the case.
Speaker Change: So that was the first part of the first question the second question.
Speaker Change: Remind me.
Speaker Change: I think just around I think this is one of converting more.
Speaker Change: More contracted versus purchase.
Speaker Change: Thank you our cash flow.
Speaker Change: Thanks, I didn't want to lose track of that.
Speaker Change: The answer right now is we're seeing especially in the Permian a higher level of outsourcing than we've experienced in the past.
Speaker Change: I think that that's driven by a combination of factors, including.
Speaker Change: Capital discipline and capital allocation choices, the tight labor market.
Speaker Change: Primarily and so those are the factors that are encouraging the outsourcing today I don't think that a change in the price environment will necessarily change the philosophy of the producers of the mid streamers, especially in light of the fact that historically speaking downturns typically last 18 to 24 months.
Speaker Change: And that doesn't really encourage a philosophical change in capital allocation.
Speaker Change: If people look back at how long these peace periods last and how the cycle endures. So I don't I don't expect a major change in capital allocation based on that alone.
Speaker Change: Yeah.
Speaker Change: Your final question comes from the line of Matt Pendleton from excess capital. Please go ahead.
Matt Pendleton: Good morning, and congrats on the strong quarter. When you look at the tightness in the space that you have alluded to multiple lines. How should we think about the impact on pricing of older compression assets versus new assets, what I'm trying to get at that the market remains tight could the spread between the brand what brand new equipment prices and say assets.
Speaker Change: On your second or third contract compress over time.
Speaker Change: I'll ask the question a lot the short answer is no.
Speaker Change: Fortunately for US one of the benefits of the prior period is that we invested in an outstanding fleet of compression equipment over the last decade, certainly including investments over the last five to seven year period of time and the value of that equipment has gone up considerably based upon the current market.
Speaker Change: Missing it's allowed us to achieve a different a different level of returns on our capital than we could in the past we do not see overall a difference in pricing between new and used equipment within the limitation of generations of equipment, Here's what I mean by that.
Speaker Change: We typically can whether its on its second or a third contract application. If a unit is 10 years or less it's a it's a very current units. It is just as powerful just as emissions efficient and just is able to be managed through a great control system, whether it's one year older five years old.
Speaker Change: When equipment is 10 years old to 20 years old there is a different in both the power of the engine driving the compressor that can be a difference in the emissions profile and there can be a different into control technology that best works on that equipment or at least with which that equipment was originally equipped and for that sometimes we do see some <unk>.
Speaker Change: <unk> differentials.
Speaker Change: But overall the short answer is that we don't see strong differentials within the first or second or third contract application.
Speaker Change: Got it I really appreciate all that color.
Speaker Change: You guys have proven to be an active manager of your fleet horsepower with additional noncore divestments again. This quarter can you provide some color on how much of your horsepower may be viewed as noncore.
Speaker Change: It's very negligible at the level of utilization that we're achieving in the market.
Speaker Change: The transformation of the fleet program that we've had in place now for a number of years, it's really more in the nip and tuck stage strategic and surgical removals than it is in in wholesale or large blocks. So we're at that stage now where great asset.
Speaker Change: <unk> is going to require continued.
Speaker Change: Continued surgical approach to our fleet, we have great systems in place we have great people in place to drive that process and we believe that because of the job. We're doing on that it should keep our fleet in a very highly competitive position for years to come.
Speaker Change: There are no more questions I would like to turn the call back over to Mr. Childers for final remarks.
Speaker Change: Thank you everyone for participating in our Q1 2025 review I'll look forward to updating you on our progress next quarter. Thank you.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.