Greetings, welcome to the Kodiak Gas Services Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to, Graham Sones, Investor Relations. Thank you. You may begin.

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review fourth quarter and full year 2023 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Chief Financial Officer. Following my remarks, Mickey and John will provide a high-level commentary on the company, fourth quarter and full year financial results and our 2024 outlook before opening the call for Q&A. Before I turn the call over to Mickey, I have a few housekeeping items to cover. There will be a replay of today's call available via webcast and also by phone until March 14, 2024. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, March 7, 2024, and therefore, you're advised that such information may no longer be accurate as of the time of any replay or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the 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. 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. Listeners are encouraged to read Kodiak's prospectus, quarterly reports on Form 10-Q, our Annual Report on Form 10-K, that we expect to file later today. All of which can be found on our website or sec.gov to understand those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most comparable GAAP measures are included in the quarterly press release, which can be found on our website. And now, I'd like to turn the call over to Kodiak's CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham. And thank you all for joining us today. Kick things off by highlighting several monumental events in 2023, before recapping our record financial results, then I'll provide some commentary on our outlook as well as the compression industry as a whole. Before turning it over to John to provide additional details about our financial results, as well as discuss our financial guidance for 2024. For the year, I want to start by thanking Kodiak's amazing employees, their hard work, operational proficiency, dedication to detail and focus on safety is what enables Kodiak's continued operational and financial success. In June of 2023, we took Kodiak public and became listed on the New York Stock Exchange. I'm extremely proud of our team because as you all know, it is a huge feat to complete a successful IPO and to transition to being a public company. Since that time, we have delivered multiple sequential quarters of record results. We've maintained our industry leading 99.9% utilization rate. We initiated a meaningful quarterly dividend and we announced a definitive agreement to acquire CSI Compressco in a transaction that will make Kodiak the largest contract compression provider in the industry, with 4.3 million revenue generating horsepower. Throughout this incredibly eventful year, we stay true to who we are, what we do, and the goals we set for ourselves as a public company. And I am extremely proud of that. An important priority for Kodiak as a public company was to establish a capital allocation framework that allows us to grow our core contract compression business and return capital to shareholders through a well-covered dividend, and while strengthening our balance sheet. I'm happy to report we accomplished all of these priorities in 2023. We organically increased our compression fleet by almost 130,000 horsepower, primarily adding…

Thanks, Mickey. It was truly historic year for Kodiak, and we look to continue to building on our positive momentum in '24. In my remarks, I'll review our fourth quarter and full year results and then I'll turn to our outlook for the year. Total revenues for the fourth quarter were approximately $226 million up about 26% when compared to last year. Revenues for the full year increased 20% to approximately $850 million in '23. Adjusted EBITDA for the quarter was $114 million, up 4% from Q3 and up over 10% versus the same quarter of last year. Our fourth quarter adjusted EBITDA excludes $2.5 million of non-cash stock comp expense and $4.3 million related to non-recurring items, such as transaction related fees. I'd be remiss to not point out that included in the quarters and years adjusted EBITDA specifically within SG&A was about $5 million and $7 million respectively, in reserved for bad debts associated with the challenged customer. We've talked about this before, record low gas prices and put them in a tough spot. And it's a clear reminder of why we have strategically positioned 95% plus of our assets and revenues in liquid rich associated gas basins. In line with our expectations, adjusted EBITDA for the full year increased nearly 10% to over $438 million in 2023. Looking at our segments, compression operations, revenues for the quarter were nearly $190 million, up about 11% when compared to the same quarter a year ago. Compression operations revenues for the full year '23 total approximately $736 million, an increase of 12% over '22. Revenue generating horsepower increased by over 48,000 sequentially, and 127,000 for the year. Consistent with prior periods revenue growth in this segment was a function of mid-single digit percentage growth in revenue generating horsepower alongside higher…

[Operator Instructions] Our first questions come from the line of Jim Rollyson with Raymond James., please proceed with your questions.

Hey, good morning, Mickey, John, Graham. Nice quarter, obviously nice businesses that continues to press on. But just one thing just to clear something up here just based on the stock price reaction. So your guidance for $460 million to $490 million of EBITDA that is just for Kodiak. And obviously CSI Compressco, I think it was last Friday, you gave guidance of $135 million to $145 million of EBITDA. So, when you guys put these together, assuming it happens around the beginning of second quarter, it's going to be taking the guidance you're giving today, plus roughly three quarters of that guidance to get to a number. I'm assuming maybe the stocks off just because people are looking at some of the street numbers that already have this combined but just wanted to 100% confirm that?

Hey, Jim. That's a -- that is an important question. It's one that's going to trip folks up. This is John, by the way. So, if you just looked at guidance today, and I looked this morning, because the question has come up, like the mean guidance for Kodiak is for 2024 is $523 million. But obviously, that includes some analysts that have updated their models and turn them in. And you know, we don't really control when they're counting the CSI transaction is closed. So to come back to your question, our guidance is on a standalone basis. But if you did assume the transaction closed, say, for example, April 1, then you would take that math 75% of the guidance that CSI had put out sum it with ours, add in synergies, you are kind of off to the races, but it has created some confusion. So I'm glad that you've got to ask that question.

Perfect. That's what I thought. But I just was making sure just given the reaction of. And then as a follow up, Mickey, you talked about the fact that you're already sold out for ' ' '24, you're actually already working into second quarter and '25, with known customers, known contract pricing, maybe a little color, you know, when I look at this as a revenue per horsepower per month basis on the compression operation side and you guys were kind of in the 19.5 ratio in that this quarter. Maybe some sense or some color, just how much higher when you look at where those new contract rates are, are we above what the average realized is for the entire fleet, is it 5% 10%? Are we talking 20% 30%, or is that even bigger than that?

Yes, I think kind of where, -- James, this is Mickey, to talk to you this morning. I think that I don't want to put out too sensitive information here. But I think spot pricing as related to the fleet is probably in that 20% to 25% premium range based on kind of where existing fleet pricing ranges today. And that's obviously based on you know, higher operating expenses and higher capital costs that we're paying today, too. So really, it's a along the same lines from a return on capital standpoint, that's how we price our equipment, that commands with a higher capital cost commands a higher rate for -- to get the same amount of return on capital.

Right. But gradually over time, the equipment that costs you less that you delivered two years ago or three years ago, eventually reprice is up there assuming that the macro wall continues to work like it's -- we think we all think it does.

Yes, I think that's right. And I think that you heard on the call, we're pretty bullish on the macro environment around LNG and natural gas right now, even despite low gas prices today.

Yes, notice that. Great. Well, thanks, guys. I'll turn it over, to everyone ask questions.

Thank you. Our next question is come from the line of John Mackay with Goldman Sachs. Please proceed with your questions.

Hey, guys, good morning, and thanks for the time. Maybe let's say on the compression market overall and pricing. Could you just give us a sense, you know, you talked about the lead times, the Caterpillar coming in from, you know, a year-ish to 40 to 45 weeks? Has that had any impact on your conversations with customers around your -- I guess you're working on second quarter '25 right now. And maybe we could tie in their Caterpillars talked about adding some capacity on some of their engine lines, and maybe just an update on what you're hearing there? Thanks.

Yes. John, good to talk to you this morning. Appreciate the question. So let's just address the Caterpillar issue of right up front. They've pulled in their delivery times on large horsepower of gas compression engines to 40 and 45 weeks. Most notably, the reason for that is kind of from hearing from Caterpillar is alleviating some of their supply chain constraints they were experiencing, it's not necessarily an increase in capacity on that engine line. When you heard on their last earnings call about some investments they're making in increased engine capacity, from our understanding, that's mostly in their power engine, line of engines, which are going to support kind of data centers and AI, which is a tremendous amount of demand for power. Today, all fueled obviously, by natural gas. So that's an interesting point there.

That's good. Yes, fair. Go ahead.

What was the second part of your question there? You're talking about pricing? Is that right?

No that was really, so if you've come into, you know, 40 to 45 weeks, I guess it sounds more on their supply chains, alleviating versus new capacity coming to the market. But does that, 10 week or so better lead time has that had any impact on pricing when you're talking to your customers?

No, not at all. I mean, quite frankly, to our customers at this point that we've been taking care of our existing customer base for the last year, two years out and not going out and soliciting new business per se. So all the customers that we're talking about first and second quarter type business of 2025, they understand that capital is precious, and they need to get in line to get their allocation of that capital going forward. So I think the long type of backlog that we're seeing here has probably is more related to the precious allocation of capital rather than directly involved with Caterpillar lead times.

That's very clear. Thanks for clearing that up. Maybe just as a follow up. If we're not seeing a ton of new capacity from Caterpillar others coming into this, when do we have to start worrying about the amount of engines we can bring into this market, and how we get the market overall lined up for how much gas is going to be flowing in 2025?

Good question, John. And I don't have a great answer for it, I think that we're just going to be a pretty significant shortage of compression capacity, whether these customers and the GNPs [ph] decide to buy it on their own or decide to outsource it to people like us, I think everybody is capital discipline right now. I think there's a there's more gas to be compressed than I think anybody realizes as a function of the compression intensity of that gas that's coming out of the Permian Basin requiring four or five times more compression than a standard kind of conventional type of a well for dry gas, natural gas production. Compression required for gas lift in the Permian, which is required for basically all of the oil production coming out of the Permian Basin. And then couple on top of that, relatively no additional idle capacity amongst Kodiak or peers. I think that you know, for the last several years, it's been a great market in compression. And if that idle capacity hasn't gone back to work now it's probably relatively difficult to reapply in this situation right now. So, with no idle capacity and spare capacity in the market, it's going to be very, very tight and I don't see additional sources of equipment coming through to be able to take that capacity on. And I think that, you know, we're the beneficiary of that, because we're sitting here in the in the seat of being able to drive pricing and drive utilization and that kind of thing. And so I don't foresee anything changing in this market for at least the foreseeable future.

It's going to be interesting. Thanks for all that, McKee. Appreciate it.

Thank you. Our next question is coming from the line of Neel Mitra, with Bank of America. Please proceed with your questions.

Hi, thanks for taking my question. McKee, just wondering if you could maybe discuss the advantage you have versus a pure midstream company in terms of securing compression and being able to have that in time for field operations versus an E&P or midstream company going out and trying to secure that on their own. What gives you that pricing power versus them going out and getting the equipment themselves?

Yes, no problem. Good to talk to you this morning, Neel. At the forefront of it is the fact that we are a Caterpillar, basically a Caterpillar distributor. And so we have a special contractual relationship with Caterpillar that allows us to -- and requires us basically to purchase certain amount of engines percentage of our engines from Caterpillar every year for preferred pricing on that equipment. So we have basically the deepest discounts that you can achieve in the industry from both Caterpillar and Ariel that makes our compressor frames that couple up with the engine. So, the fact that we have, you know, distributorship arrangements with them, we've been a very large purchaser of Caterpillar engines, obviously, for years and years now. I mean, we've grown to almost a 3.5 million horsepower fleet here, of almost exclusively Caterpillar engines. So we've got that have got a long history with Cat and in the packaging facilities that are required to build this equipment, fabrication facilities. So with all those relationships in the history of doing business with those companies for years and years and been a big part of their businesses, they are obviously incentivized to continue to do business with us. And so it makes -- it kind of allows us to take a spot at the head of the line and allows us to continue to manage our supply chain and make sure that we're thinking with our customers a year plus out on deliveries.

Got it. And then I'm assuming that some of these companies don't exactly anticipate what field pressure will be in the type of compression they'll need. Do you have somewhat of a -- I guess I would describe it as a spare backlog that you can deploy to alleviate any constraints that some of these companies are facing that otherwise, they wouldn't normally anticipate?

No, we really don't Neel, I mean, 100% of our capital allocation that is going towards new horsepower growth is for, is contracted with customers that are or required basically, throughout 2024 and into 2025 now. So, we don't have excess capacity at 99 plus percent utilization. There's now and then some churn within the fleet that we can make things happen pretty, a little faster than a 40 to 45 week lead time requires. But there's really not a lot of that going on either when you had talked about production in the Permian Basin where the majority of our assets are allocated. So, you know, historically in this industry, people kind of manage that excess capacity and they needed for changes in pressures and flows and that kind of thing changes in drilling programs, with the idle capacity that sits in the industry that just doesn't exist today. So, I think that the winners in throughout this cycle are going to be the ones that really can plan ahead and look into the crystal ball and be accurate with what their production profiles are going to look like a year out.

Hey, Neel, this is John. I'm going put a finer point on that, too. So the headline figures throughout the public companies in the industry around utilization are eye popping, ours has always been pretty good. Our tracks at record use x recording great numbers, if you were to take the horsepower that's in the highest demand the large horsepower, I mean, that's going to be even higher. Right. So that this is if you goes back to Mickey's answer to the last question, like we think this is a fundamental industry challenge that we're going to be wrestling with in terms of where the horsepower is going to come from to move the oil and the gas in this country for the foreseeable future.

Got it. Appreciate it. Thank you.

Thank you. Our next questions come from the line of Jeremy Tonet with JPMorgan. Please proceed with your questions.

Hi, good morning. Just wanted to start off with the base business in the EBITDA guidance there. Just wondering if you might be able to talk a bit more as far as what the drivers could be for the high end versus the low end of the guidance range there?

Yes, I'll take it. So Jeremy, great talking to you. You know, it's always going to come down to -- with the utilization kind of where it is, right. You're not going to see that company utilization. '24 from a growth CapEx perspective and new unit, we said it -- I think since we went public, it's effectively sold out. So I guess you could see some acceleration of when we would be delivered equipment, we don't expect that. But I guess you could, and that would kind of drive revenues up more and margins up more, you could go the other way as well too, and be delayed, but we think not going with the worst that's behind us. So it really comes down to just the fundamentals of price versus costs in our biggest businesses, right. The compression operation segment. So like, suffice it to say we're very focused on kind of making sure that we're charging appropriately for the value that we deliver to our customers. And we've always talked in my remarks I said earlier, we've always been focused on cost control. And in light of kind of how costs ran over the last couple of years, industry wide membership of post COVID type activities. That's something where we're doing what we can with, I'll call it automation, with our form of artificial intelligence to better understand like how to take care of our units, software to help us with labor, productivity, mean anything and everything. And I don't think we're unique in that can't, we're just putting full focus on it. So those are two big levers, I guess I need to include the other services segment. Because if you think about '23, we had a whopper year in other services, we have guided towards an average year in other services. That's the station construction work that we do, to guide 60 to 80, with normalized margins of 15% to 20%. So yes, '23 was to repeat itself, and '24, which, namely, we had a couple of large contracts come in late and we performed very well on them, generated great margins, you can see some upside there as well. So I think I've covered all the different pieces that could drive the business.

Got it? That's very helpful. And just want to pivot gears a bit here. And just wondering how, I guess, conversations with customers are going with regard to emissions and just overall trends between, you know, moving towards more electrification? And how you see that trend kind of playing out over time? And what impact that would have on KGS?

Yes, Jeremy, I think that, obviously, emissions in being in a better steward of compression, emissions overall, is at the top of everybody's mind. And that's why you know, Kodiak is very successful in what we do with the youngest cleanest fleet out there, and emissions friendly fleet out there. The customers are talking about it all the time. And I think that, in a perfect world, we'd love to our customers would love to electrify everything. But the reality is, that's just not doable from a grid standpoint. So there always be a balance of gas versus electric driven compression in this industry. There is some drive for electric in demand for electric driven compression, looking out into 2025. And I told you earlier that works effectively fully sold out for Q1 of '25. And there's a good portion of that, that is electric motor driven compression for that first quarter. So, 2024 is majority gas engine driven with our growth capital that we're spending because these customers are trying to get ahead of and get in line to get grid access and that kind of thing. So there's going be some electric motor driven compression. But I kind of look at it I've said this before. I look at it the kind of the same way as renewable energy sources that there's a market for those and they're going to gain some market share by think that the overall growth of the market is going to be maybe its gas engines might have a lower percentage of overall but on a total basis, there's it's going to be a continued to be a growing market there. So there'll be some portion of our fleet that that goes electric and we're going to be paying attention to what the right allocation is between gas to electric and, and as we do with anything we do, we're going to be the best at that if we're going to get into it. So we want to be well off to the best service to our customers and be their first provider of choice when they decide they want to go to electric compression.

Got it. That's very helpful. I'll leave it there. Thanks.

[Operator Instructions] Our next question comes from the line of Neal Dingmann with Truist Securities. Please proceed with your questions.

Morning, guys. My first question is, is on the compression contract, specifically, making your utilization continues to be no question, I think, better than anybody out there. Given the continued demand, I'm just wondering, do you all anticipate any change in contract length, because of this, and I'm just wondering, is the length about the same and in various areas like the Permian, the Eagle Ford, when and how it can, how it sort of compares regionally?

It does, I mean, it's relatively the same. If we deploy assets into Eagle Ford or some somewhere that isn't the Permian, we're going to kind of command that we want to have the same kind of return on capital over the course of that contract that primary contracts, to kind of de risk the spent that capital spend. So you know, but all in all, it's pretty similar no matter what basin we go into basically 100% of our capital for 2024, that was going to the Permian Basin, because that's where the most significant demand is, and the highest growth areas with our kind of core customer base. I will say, though, that we have seen a little bit of contract tenor extension over this kind of past cycle. But it's really not something that we're pushing tremendously, because now if you kind of recall, some of the things that we've said in the past is, is look, I can have a three-year contract on a 3606 engine. And if it's sitting on top of 25-year like production, then I feel like that unit is going to generate cash flows for 25 years as we go through multiple renewal cycles. So because of the quality and the production that we're looking at, that we're putting this equipment on and feel good about contract tenor and our ability to read contract within at the end of those cycles.

Yeah, it really seems like you're in the driver's seat there. And then my second is kind of a little bit more on regional demand, I am just wanted something you'd said earlier today. Seems like specifically, outside the Permian, where we don't demand is hot. You know, what are you seeing? I mean, you mentioned about LNG. And, you know, my comment, I would think a lot of those larger LNG players would be knocking hard to your door to try to make sure something's lined up, as you know, some of these things come on, late, you know, specifically next year, and then to '26. I'm just wondering, how much -- what kind of conversations and how many conversations are you continue to have these days outside the Permian?

A few, you know, the typical LNG supply, feed gas type conversation, isn't that a conversation that those facilities are having with us, they're having those conversations with our customers. And then our customers are dealing with us to make sure that they have the ability to move the gas as it's needed. So, we're really more of a -- we're needed to make sure that the gas gets to those LNG facilities, but we're not negotiating or dealing directly with those LNG terminals to make sure that they have gas on location. So, still a little bit of it. I think a lot of this is going to be driven by natural gas prices. With what we've seen with sub $2 gas driven by this LNG moratorium from this administration that I think the longer gas prices stay depressed where they're at, the longer and more significant the requirements for feed gas is going to come out of the Permian Basin versus the Haynesville or other outside areas.

Thanks, Mickey. Well said.

Thank you. Our next question is come from the line of Zack Van Everen with TPH. Please proceed with your questions.

Hey, guys, thanks for taking my question. Just one on the fleet age, I know your guys’ core fleet is relatively new, I think some of the newest out of all your competitors. Can you give average I guess age of the CSI fleet once that comes into your guys’ belt?

Yes, I mean, look, I think our fleet age is in that five to six year range on an average basis for our fleet. CSI when they bring their equipment to the table, they've grown a lot of horsepower with new equipment in the large horsepower bases over the last several years, and they've done a lot of work to kind of churn some of the older stuff out of their fleet. So I think that, when you look at a kind of an average fleet age that they would roll in is about 9 to 10 years on their fleet bases, right with ours being six. So, the average in between is -- the average is going to be somewhere in between. But, we don't put a lot of stock in that fleet age. Because if you adhere to strict overhaul type of a regimen that basically you zero hour and overhaul this equipment every eight to 10 years anyways. So an eight to 10-year old piece of equipment that has a brand new engine on it is going to -- we think our maintenance cycle is going to look and act and perform just like a brand new piece of equipment.

Okay, got it. So a lot of theirs have already been rebuilt at the age that they're sitting at right now.

Yes.

Perfect. So then one last quick one, you mentioned rates are still coming in well above kind of the base rate of the full fleet. Can you remind us, maybe how many of those legacy two to three-year-old contracts are rolling off in 2024 and 2025?

Yes, absolutely. We have, at the end of the year, we had about 7% of our fleet was on month to month contracts and you can expect kind of with our fleet will roll over about 30% of our contracts every year. So, because we have such a heavily contracted fleet and we have so few months to month contracts in that fleet, our fleet kind of turnover for contracts is a little slower than some of the other guys. So you won't see kind of the spikes in revenues that you see in other prices. But like I said, we should be able to reprice kind of 30% of the fleet as those contracts roll over this year.

Got it. Perfect. Thanks, guys.

Thank you. Our next question is coming from the line of Selman Akyol, with Stifel. Please proceed with your question.

Thank you. Good morning. First of all, just the high level, we've seen some capacity additions in the storage market. And I'm just wondering, is that a market for you guys at all that you could play in had an opportunity?

Yes, good morning, Selman. You know, that's another word, think, it's kind of like the LNG terminals. We don't really control where the gas goes after we compress it and put it in a pipe for our customers, especially on the midstream side after post processing and gas lift and that kind of thing. So, that obviously, increased capacity for storage and cycling gas in storage is definitely a demand driver for our industry. And it's definitely something that requires additional compression on the front end. So again, that's something as our customers are determining where they're going to take their gas, whether it be due to residential use, or LNG terminals, or just storage is negotiations that they have in place. But they require companies like Kodiak to provide compression for all of those, all of those demand drivers.

Understood. And then just a smaller question. In your guidance, you talked about 12.5 million for non-unit compression for capital. I'm just kind of curious to what that was, or what that will be.

Yes, that’s kind of ropes open dove. Selman, this is John. It's the trucks, it's crane trucks, it's software that's capitalized leasehold improvements, things of that nature. And we're always going to have it every single year just to kind of take care of older equipment that's kind of aging out or else just keep up with the growth in the business.

Go it. And then the last one for me just on the other services. You talked about how '23 was skewed by a couple of large contracts. Is there any thoughts or guidance around just sort of the cadences, we should think about our model and going forward on that?

Great question. No, it's -- I would say, divided in four. I mean, that's probably the best way to approach it at this point. The nature of those contracts, some you may be awarded a contract, call it 9-10 months in advance when you actually complete it. But it'll be chunky in terms of how the revenues kind of unfold and that you'll have some stuff happening at the front end and then the field work might be four weeks at the very end and that's when the main chunk would come in, and then up contracts might be just more the field related stuff be shorter. So that's where it becomes difficult to predict because you might be awarded a contract, you know, in third quarter and finish it by the end of the fourth quarter. So that's what happened in '23.

Got it. Thank you so much.

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to management for closing remarks.

Thanks, operator. In summary, I could not be more pleased with our record setting results in 2023. We believe the Kodiak's brightest days are in front of us and we look forward to continued profitable growth in 2024 and beyond. As we look forward to speaking with every everybody again on our next earnings call. Thank you.

Thank you that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.