Greetings, and welcome to the Kodiak Gas Services First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Graham Sones, Investor Relations. Thank you. Please go ahead.

Good morning. We appreciate you joining us for the Kodiak Gas Services Conference Call and Webcast to review first quarter 2024 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 high-level commentary on the company, our first quarter financial results and our updated 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 May 16, 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, May 9, 2024, and therefore, you're advised that such information may no longer be accurate as of the time of any replay listening or transcript reading. The comments made by management during this call may contain forward-looking statements within the meeting 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. 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. Additional details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. Now, I'd like to turn the call to Kodiak CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you for joining us today. Let me get started by welcoming all the talented and dedicated CSI employees to the Kodiak family. By joining our team, each of you are contributing to Kodiak's increased scale and scope of service offerings to our customers and helping further expand our industry-leading footprint in key operating areas like the Permian Basin and Eagle Ford Shale. I would also like to thank all of our Kodiak employees who have worked tirelessly on integration planning and execution while simultaneously staying focused on our ongoing business, which produced record adjusted EBITDA for yet another consecutive quarter, extraordinary execution by an extraordinary workforce. We are now more than a month into the integration process with CSI and are extremely pleased with how the process is going. As I have previously stated, we are very confident in our ability to deliver upon significant synergies provided by this combination, which will drive incremental value for our combined shareholder base. We are updating our guidance for the year and are very excited to announce revised adjusted EBITDA guidance of $580 million to $610 million. This reflects a full year of Kodiak's contribution, 3 quarters of CSI's contribution and anticipated synergies we expect to realize throughout the rest of the year. John will discuss acquisition synergies further in his remarks, along with providing first quarter highlights and reviewing our outlook in more detail. So, let's jump into it. Our first quarter results came in better than expected, while maintaining our industry-leading horsepower utilization at 99.8%. In addition to record-setting adjusted EBITDA contributions of $118 million for the quarter, up 11% versus the prior year period, we continue to strategically grow our large horsepower Permian-focused fleet, increasing revenue-generating horsepower by over 26,000 horsepower in Q1. We also paid…

Thanks, Mickey. Here's the key takeaway. First quarter of Kodiak results came in better than expected, and we're optimistic about steady, profitable growth in '24 and beyond. That said, let me now highlight a few aspects of our first quarter stand-alone results. Total revenues were just under $216 million, up 13% compared to the first quarter of '23. The increase in revenues was driven by year-over-year growth in both of our operating segments. Adjusted EBITDA was $118 million, up over 3% from Q4 and nearly 11% compared to the same quarter of the last year. Looking at our segments. Compression operations revenues for the quarter were $193 million, up 2% and 9% when compared to the fourth quarter and the same quarter a year ago, respectively. The top line growth was driven by a combination of higher pricing on the incumbent fleet as the tight market has allowed us to recontract at higher rates as well as an increase in our overall revenue-generating horsepower from fleet additions. Revenue-generating horsepower increased by over 26,000 sequentially and 116,000 year-over-year. Fresh operations adjusted gross margin percentage was just shy of 66%, which is the high end of our guidance range. In our Other Services segment, revenues were $22 million in the first quarter of '24 compared to $12 million in the first quarter of last year. Other services adjusted gross margin was $4.4 million compared to $3.4 million in the first quarter of '23. As we've discussed in prior calls, our other services segment is lumpy, but strategic. Station construction projects are synergistic with our compression business and require no capital. Every dollar of incremental cash flow adds to both our overall return on capital employed and discretionary cash flow, which in turn allows us to pay more dividends and invest in high-return…

Thanks, John. In summary, I would like to close the call by thanking the extraordinary women and men of Kodiak Gas Services and again, welcoming the CSI employees to the Kodiak family. A company that is stronger than the sum of the parts. Each team members' hard work and dedication to safety and our customers are what makes Kodiak special, and we would not be an industry leader without this commitment to excellence. We are very happy with the start of the year, and we look forward to continuing profitable growth in 2024 and beyond, which we expect will further enhance value for all of our shareholders. At this point, we will open the lineup for questions. Operator?

[Operator Instructions] Our first question is coming from John Mackay of Goldman Sachs.

Definitely appreciate all the comments, and you guys just closed a month ago, and we're kind of probably going to look towards the second quarter call for a more kind of quantitative update. But would just love to hear any initial reads of potential revenue synergies are other pieces now that you've had your hands on these assets just for a little bit now and kind of what we can think about for maybe time frame on rolling those out, I understand it's still going to be a high level.

Yes, John, this is Mickey. Thanks for joining us today. Look, I think we're still trying to get our arms around kind of what the potential revenue synergies are here. Our commercial team has been working diligently trying to align contracts with customers that are on contracts that are both Kodiak and CSI paper coming into the deal. So, I think that there are revenue synergies to be had there. I think that we can bring a lot of business also in the ancillary revenue side of the business as well to CSI's legacy, AMS business, and I think that's going to be pretty impactful for us as well. But I think there's definitely some revenue synergies there. And like you said, we're not quite ready to unpack those yet today.

Maybe just looking at the quarter and kind of, I guess, talking legacy business now, margins are trending really well, kind of top end of your range. I understand that will change a little bit for the 2Q numbers plus bring in the CSI business, but maybe just give us a read on kind of what's happening there, how you're feeling about that kind of underlying margin trajectory looking forward?

Yes. So, I think that I'll let John jump in here too and talk a little bit about that. But I think that what you're seeing here is a combination of both revenue rate increases but also cost control. And I think what you'll see, once we get the 2 businesses put together, you'll see a little bit of a drop in that gross margin just because CSI's contribution is a little bit lower than ours. So, blended, it will come back a little bit. But I think that's where you'll see the synergies start to take place real oil purchasing power parts and pieces and that kind of thing that comes with a transaction like this. So, we'll start to realize those synergies throughout the second half of the year.

Yes. And I was just going to add to a little bit of what Mickey said, we're going to come back in the second quarter and kind of realign how the segments work because they have some different businesses that we have. So, in addition to them, in their contract services, having just a lower margin, they also have different product lines. So, this is the last you'll see of kind of the Kodiak compression operations. But I will leave you with being at the top end of the guidance range of 64% to 66% that we gave to start the year feels good, feels right and it feels sustainable. So, we hope to carry that momentum into the back half of the year.

The next question is coming from Neal Dingmann of Truist Securities.

Guys, my first question is around, I'd love to comment here on the prepared remarks around the prospects for U.S. natural gas demand to support AI. And, of course, a lot of others have talked about that. My question around that is, I know it's further down the line, but do you all envision potential forming partnerships or do you all think there's something different strategically you all might be able to do on this build-out versus what you've done historically?

Potentially, Neal, I mean, we're going to look at opportunities like that nonstop going forward and looking at like kind of that strategic rationale there. There could be things we want to do there. I think that at this point in time, though, we kind of look at that incremental demand is a really strong fundamental base for our growth of the business and supporting our capital allocation strategy that we have in place already. So, opportunities for different kind of lines of work and that kind of thing, I think, is something we'll be constantly evaluating. But at the end of the day, that fundamental base business, which is the contract compression business is really going to be benefited from this incremental demand.

My just follow-up is maybe for you or John, just wondering, your contract volumes continue to be just extremely high, one of the -- obviously, the best in the group. I'm just wondering because of this, would you all or have you all considered potentially running with a bit more debt and boosting the shareholder return? And I only asked because the contract margins look so phenomenal. I'm just wondering if you're able to run a little bit more because of that.

I mean, as a private company, I think you've heard some of my peers talk about it as a private company, we ran with higher leverage than what we are today. But I think that our capital allocation strategy is something that we believe is focused on the right sort of mix between return of capital to shareholders and growth and living within our free cash flow to do so. So, I think that the combination with CSI gives us a good amount of scale that we can kind of ratchet up some growth CapEx in the next couple of years after we get this thing kind of integrated and smoothed out here. But I think that is something that's pretty key is our focus on that 3.5x leverage by the end of 2025. That's a commitment we've made to shareholders, and it's something we're going to stand pretty firm on. And, yes, we do understand that there's an opportunity abounds for great return projects out there, but we're focused on that leverage.

The next question is coming from Jeremy Tonet of JPMorgan Chase.

This is Eli on for Jeremy. Just wanted to maybe start on your views of the compression market overall. I think some of your competitors framed a 9-month lead time on some equipment, which maybe is coming in a bit from previous lead times of a year or more. I appreciate some of the commentary on increased net gas demand you frame, but maybe if you can just speak to what you're seeing in the compression market more in the near term and your expectations.

Absolutely. And, yes, caterpillar has brought in some deliveries on their large horsepower engines from kind of over a year to inside to kind of that 9-month range, still takes an extraordinary amount of planning with our customers to get that equipment ordered out there that far in advance. I'll remind you that we don't spend $1 of CapEx on speculation that all of our CapEx spend a year plus out has a signed contract to back it up and support it. So, we're not spending any speculative CapEx out there and planning with our customers very, very early on there. But I think that the delivery times coming in from caterpillar there is, I wouldn't say is indicative of any softness in the market. Caterpillar's alleviated some supply chain bottlenecks and they are bringing in some deliveries a little bit. But I think what you'll see and what we look at is the amount of capital discipline in the industry that's keeping and continuing in our peers and us and some of our customers and not overspending in flood in the market with equipment, and we like to say it that way.

Yes. And I'll chime in too and remind everybody, we said it in the prepared remarks that we've committed our CapEx all the way through the third quarter of next year on growth CapEx, and that's indicative again of customer demand, not necessarily tied to that lead time on Caterpillar equipment. And when we reference industry structure and the discipline we're seeing, it's obvious to see it in the public guys, you track that. We, of course, monitor the private guys as well. And we really see discipline there as well. Capital is more difficult to access than it was in the past. That's more expensive. So we see the industry structure with the combination of demand and supply staying stronger for longer as a result of this new artificial intelligence-driven boom and power, which ultimately results in more gas demand, too. So we're really excited about the multiyear outlook.

Maybe just pivoting a little bit to the revised guidance. You talked a bit about hitting the higher end of the compression operations gross margin, which is really great. Maybe can you just talk a bit about what might drive you guys to the higher end of that guide and things that we should be watching in the second half of the year?

So, I'll chime in there. I really want to come back to the comment I made earlier in that when we came out in Q2, you're going to see slightly different segment breakups. You're going to see slightly different margin profiles. So, our 64 to 66 that we guided on for Kodiak stand-alone is going to be a different number. It's going to be a lower number by virtue of just doing simple math of combining CSI plus us. So, you need to remember that we're not going to be talking about the same numbers. That said, on a stand-alone basis, as I mentioned earlier, being at the top end of the range in the first quarter feels good, and it feels like it's sustainable. And I think the combination of our stand-alone business plus the synergies will allow us to continue to chip away as we move forward throughout the year at improving that margin, again, too. So expect us to come out in August in our Q2 earnings call with fulsome guidance and a better margin breakdown for you to model.

The next question is coming from Zach [indiscernible] of TPH.

Just one on maybe future Bolt-On Acquisitions. You mentioned that you're focusing on liquids-rich plays, but curious if you would ever look outside your key markets of the Permian, especially with the natural gas demand ramp happening in more of the dry gas regions?

I think we'll be interested in looking at all sorts of M&A going forward. But I think that our philosophy in theory, focusing on liquids-rich associated gas Basins is really proven to take really good care of us going in the past. So, I think we'll kind of stick with that strategy. I don't know if we jump into something that was really tied to dry gas basins and gas prices quite as much as any more than what we do now, which is very little. But from an M&A perspective, we'll be interested in looking at lots of different opportunities, compression and kind of associated ancillary services as well that are complementary to our business today.

And then just one on the synergies. The original $20 million or greater than $20 million you guys noted at the time of the acquisition. Is a lot of that on the cost side? And should we see that show up fully in 2024? And then I'm sure there will be some more in '25 and beyond once you guys get the business under your name.

Yes. So Zach, good question. So, when we announced the deal, and I think in all the first to fourth quarter calls, we always stuck to our greater than $20 million of cost synergies, and that's all we referenced. If you do simple math on kind of where we've guided and use the midpoint of the range, you took the midpoint of where Kodiak was before or 75, you take 3/4 of the midpoint of where CSI guided, that's $105 million. That equals $580 million. In order to get to the midpoint of our range, that would imply $15 million realized synergies, the way we think about it, and again, in Q2, we'll come back with more detail is, we're doing really, really well as a Kodiak stand-alone basis. CSI is kind of at or better kind of where they thought they would be. So, those synergies are somewhere between 15 and something less than 15%. Remember, that's in 9 months. It's not an annualized figure. That's realized during the back half of the year. So it's pretty easy to grow set up and say, hey, there's better than $20 million in cost synergies. The question was asked earlier from Mickey on revenue synergies, again, not guiding on that, not extrapolating, but they're there, and we're optimizing against that fleet. So, we're extremely confident that when we get through, call it, that 12- to 18-month time frame that we will fully realize well beyond that original $20 million of cost synergies that we always knew would be there.

The next question is coming from Bill Austin of Daniel Energy Partners.

So, you guys talked a little bit about the CapEx and the new units that you're seeing out there. How are you seeing deliveries for the remainder of this year on that new unit side? I know you've committed all that CapEx last year and now you're kind of getting to all those coming in? Are they coming in this quarter, next quarter? How are you guys seeing that?

Yes, it's going to come in pretty smooth throughout the rest of the year. I think there's a big chunk in Q2 that CSI had ordered previously from last year, but that's all that will be pretty evenly spread throughout the rest of the year for the combined entities. So, we're not seeing anything slide or any supply chain issues or bottlenecks that would affect that right now, and that's knock on wood. So, you'll see those come in pretty ratably throughout the rest of the year.

Nice saying that the supply chain stuff is getting a little bit more predictable. And I know you guys have addressed it a little bit on the M&A side. From an organic perspective, any other basins that you guys are looking at that sound exciting to start more focusing on or just kind of sticking to the knitting these days?

I mean we obviously have a plenty of work to do in the Permian Basin. But labor is a challenge there. So, we're going to be open definitely to working on some additional type of basins that are important to us. The Eagle Ford, Rocky Mountain region, some stuff up in the Northeast. Those are all areas that we think are opportunistic that have some liquids-rich type of opportunities with associated gas that kind of fit into our overall thesis for the business.

This brings us to the end of the question-and-answer session. I would like to turn the floor back over to Mr. McKee for closing comments.

Thank you, operator, and thanks to everyone who participated in today's call. We look forward to speaking with you again after we report our second quarter results.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time, and enjoy the rest of your day.