Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Kodiak Gas Services First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Graham Sones, Vice President, Investor Relations for Kodiak Gas Services. Thank you. You may begin.

Good morning and thank you for joining us for the Kodiak Gas Services conference call and webcast to review first quarter 2025 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will discuss our financial and operating results and review our updated 2025 guidance, and we'll open the call for Q and A. There will be a replay of today's call available via webcast and also by phone until May 22, 2025. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, May 8, 2025, and therefore, you are advised that such information may no longer be accurate as of the time of any replay listening or transcript reading. The comments made by management during this call may contain forward-looking statements within the meaning of United States federal securities laws. These forward-looking statements reflect the current views, beliefs and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. And now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham. And thank you all for joining us today. We begin all meetings at Kodiak with a safety moment. And I want to thank the women and men of Kodiak for their continued focus on serving our customers with a safety first mindset. Kodiak's dedication to returning all of our people home safely every night is truly a differentiator in the industry and something we take very seriously. Before discussing our outstanding first quarter financial results, our increased guidance for 2025, the increase to our quarterly dividend and our all-time low leverage level, I'd like to discuss a few macro topics that have been in the news lately. Given the recent volatility in oil prices, tariff uncertainty and concerns about a potential slowdown in economic growth, I thought I'd start by highlighting the strength and resiliency of our US focused large horsepower business model and why we remain bullish on the outlook for US natural gas growth and the associated demand for Kodiak's compression services. First, large horsepower compression is a critical component of the production, processing and transportation infrastructure of oil and natural gas. Our business isn't tied to commodity prices or rig counts. Compression is required to maintain ongoing production volumes and we're seeing producers and midstream companies add compression for increased volumes and enhanced throughput on systems where capital investments have already been made. As you know, Kodiak is the industry leader in contract compression in the Permian Basin, where gas to oil ratios have been steadily increasing. In 2024, Permian oil production grew by about 2%, while marketed natural gas production grew by 12%. In 2025, the EIA continues to project a meaningful increase in Permian natural gas production. And even if Permian Basin oil production just stays flat, natural gas volumes would continue to…

Thanks, Mickey. A lot's happened in the short time since our last call, but the teams remain focused on what we can control and delivered another quarter of outstanding financial performance. For the first quarter, total revenues were $330 million, up approximately 7% sequentially. We realized revenue growth in both of our segments. We saw a nice uptick in our contract services monthly dollar per revenue generating horsepower from $21.97 last quarter to $22.48 this quarter, a good indicator of the underlying strength of our core large horsepower market. Our contract services adjusted gross margin percentage increased to approximately 68%, up a full percentage point from last quarter and nearly 2% from the same quarter last year, reflecting the success we've realized in achieving higher average prices on our core fleet, reorganizing our operations to capture efficiencies and the financial impact of exiting lower margin assets and geographies late last year. During the first quarter, we continue to high grade the fleet. We divested more non-core units and we set 49,000 new unit horsepower that averaged 1,600 horsepower per unit, resulting in a Q1 ending average horsepower per working unit of 943, which is the highest in the industry. The horsepower per unit metric matters a lot because large horsepower compression is central to our strategy. It's what's being demanded most by our customers and it's stickier and generates meaningfully higher cash flows and margins than its small horsepower brethren. In our Other Services segment, we realized a sizable revenue increase from the seasonally slow Q4. Revenues for the first quarter were $40.7 million a 39% sequential increase. Revenues were supported by the completion of a large revamp of a gas storage project as well as several station construction projects. For the quarter, our adjusted gross margin for other services…

Thanks, John. We've had a great start to the year. Our recontracting efforts are ahead of schedule, and we continue to add new large horsepower units and divest non-core underutilized small horsepower units. These achievements helped us set new financial records in several key metrics, allowing us to once again expand margins and position us to continue to reward our shareholders for their investment in Kodiak. Our increased 2025 guidance reflects our outlook for continued strength in the contract compression market and the resilience of our business model. We remain excited about the opportunities in front of us and are prepared to navigate the ever changing environment to deliver even better things in the future. Thanks for your participation today. And now we're happy to open up the line for questions.

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

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

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

Great. And then, Mickey, maybe just wanted to follow-up on one of your opening comments around potentially seeing a shift in demand towards more outsourced horsepower from customers in this environment. I guess just as far as the appetite for outsourcing versus insourcing goes, have you seen or do you maybe expect to see any differences between demand from midstream customers versus upstream customers who might be looking to cut costs more rapidly in this environment while still maintaining production?

Yes. I mean, think that it's only natural to think that in an environment like we're in today that some customers, be it producers or midstream companies are going to want to shift some CapEx to OpEx and would rather outsource probably than spend their precious capital on compression. So I wouldn't say that we've seen a drastic shift yet, but I think that that could come as people begin to execute on their 2026 budgets.

Our next question is from John Mackay with Goldman Sachs. Hey, guys.

I want to pick up on a couple of these things, but you guys have framed up kind of upper single digit growth outlook going forward next couple of years. Can you just kind of frame up for us kind of what kind of macro backdrop is assumed in there and if we're in a flatter oil price environment, how comfortable you are with that level?

I think it's still a pretty comfortable level to be at. As we said in the prepared comments, John, even in a flat oil environment in the mid $50 oil environment, we think that there's still going to be gas production growth out of the Permian Basin. And we still think that there's going to be a need as downhole pressures fall and that kind of thing and people are in kind of maintenance mode here. You're going to need to add compression to maintain production levels. So we feel really good about our growth targets and our ability to continue to execute some of the things that we've got going on with our AI development and technologies, our ability to continue to push margins up to help that EBITDA growth rate. And so we think that we feel really good about the future of the business here.

And in that context, you guys have mentioned the buybacks a couple of times. Just maybe frame up for us how you're thinking about using that, whether you're willing to be a little more aggressive and maybe how you balance that against the leverage target?

Yeah, thanks John. This is John too. So the big picture is we definitely are driving towards our leverage target of 3.5 times by the end of this year. We know we're going to get there. So that's got to be a governor in this whole discussion. You saw that we did repurchase some shares in the first quarter. We did that opportunistically underneath our board approved share buyback program. We think there's great value there. We think our stock kind of got to a level that made it attractive for us. We have the ability to continue to do that going forward. The other thing we have to bear in mind is EQT, which has been an active seller over the last several months or so. We anticipate no surprise to anybody on this call that they'll continue to be a seller going forward and we want to be there when they do that. So we would expect to support them whether you call it the first order or the last order in the book when they do that, but we'll also take advantage of any weakness in the share price because we're that confident in the future.

Next question comes from Connor Jensen with Raymond James.

Thanks for taking my call and really strong quarter here. Another strong quarter for compression margins. Obviously, the increase in prices has helped us a lot as you guys were saying, but what have you guys been doing on the cost side that have really helped those margins drive higher?

Yes, I mean, appreciate you being on today, Connor. One of the things that we're doing on the cost side is really implementing some of our machine learning and technology advancements through AI to implement some conditions based maintenances that are giving us the ability to extend our maintenance cycles a little bit based on data that we're getting from the machines kind of like I'll liken it to you go buy out and buy a new car today in 2025 and it'll tell you when the oil needs to be changed. You don't have to say, hey, I got to do it every 3,000 miles. So we're kind of implementing some stuff like that on the equipment and it's flowing through to our operating expenses and we're really excited about it.

I was going to jump into and say another big picture thing that we've done is reposition the fleet. Last year, at the end of the year, we exited the gas jack business in several of the international businesses and sold off some non-core horsepower. That has an impact on our ability kind of to continue to generate nice margins going forward. You saw the average horsepower per unit tick back up to 943. We called that out. That's a great metric that we kind of think about all the time because larger horsepower is more profitable for us as well too. And the third thing I'll say, it's a bit of a double edged sword as it relates to like near term margins and long term margins, but it's all the investments we make in our team. This is at its core, we're governed by a horsepower per field tech metric and we want to do more with the same. That's the technology that Mickey mentioned that we think will have a payoff in the years to come, but it's also all the investments we're making in training, attracting and training and developing and retaining our workforce. So all those are going to have a better impact on the bigger impact on margins going forward as well too.

Got it. That's helpful. Then I guess just quickly in that same vein, saw that the training center was opened in the press release. Just wondering how you think this will alleviate some of the problems in the labor market that a lot of the industry has seen in the Permian?

I mean, labor is the biggest challenge that we've got, especially in the Permian Basin. And so we think that the more we can do to bring along a workforce and the better trained they are, the more we can do to help make that training and development faster and accelerate that timeline, the better off we're going to be. So we're really leaning into that and focusing on the training and development of our people. And we're very serious about it. And we think that, that too will flow through to the margin and it will flow through to the overall success of the business.

Our next question comes from Sebastian Erskine with Redburn Atlantic.

Yes. Hi, good morning, guys. Thanks for taking my questions. Just the first one, I guess, in kind of the light of the current environment, how do you see leading edge kind of compression pricing evolving from here? And following up a bit on Doug's question, just how are your conversations differing between midstream and upstream customers kind of given the differing intensities of their operations? Any color would great.

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

And just on the Basin side, your business has grown up in the Permian. It's been a key differentiator for you. I mean, I guess in this potential weakness in some of the liquids rich basins and clearly the demand for US natural gas remains very robust driven by the LNG ramp up. Now how do you think about kind of potential redeployments of equipment to other basins? Or is that just not in the frame given the trend you mentioned in the prepared remarks on kind of gas to oil ratios and that kind of secular theme there?

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

Our next question comes from Jeremy Tonet with JPMorgan.

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

Yes, absolutely. We're certainly in the market for potential bolt ons and that we'd look at opportunistically right now and especially if some of our customers wanted to monetize some compression in different areas where it made sense to us. We think that'd be an interesting opportunity right now. So we have substantially completed the CSI acquisition. We feel good about where that's at in that integration. We feel good about where we're going to be over the next several multiple quarters with our ERP implementation and getting that behind us and that's going well. So certainly looking forward into the future additional M&A opportunities we're certainly going to be looking at all the time.

Our next question is from Derrick Whitfield with Texas Capital.

Historically, your contract compression model has been quite resilient in past down cycles. While you've touched on this in previous remarks, could you perhaps speak to how customer behavior has evolved in today's environment versus prior cycles?

Yes. I think we touched on it a little bit in the prepared remarks, right? The customer base today is a more consolidated customer base with better balance sheets and to me is really financially more prepared to weather the storm of a potential down cycle than they've ever been. That being said, it also from the other side, from the compression industry side, this industry has never been more highly utilized than it is today. There just isn't any excess equipment sitting around on anybody's shelf that needs to be deployed right now, especially in the large horsepower market. So we don't foresee anybody that will end up being a bad actor in the time of a potential softness in the market. So, think from the customer side and the supplier side here, both sides are in a better position to weather the storm quite frankly.

It makes sense. And with the potential for a more sustained slowdown in Permian activity, at what point does the industry broadly lose or start to lose some pricing power? And is there a difference between operators using compression for gas lift versus midstream?

Really no difference in operators using compression for gas lift versus midstream. Both are required to produce oil and both are necessary to maintain ongoing production. So both are just as integral as pieces of the infrastructure development. So that being said, I think that the ultimate issue that you'd face that would cause some pricing softness would be really a significant reduction in utilization amongst the players in the industry. And that's when kind of pricing gets softer because there's, like you said, some bad actors in there that try to kind of secure contracts at all costs and trade price for utilization. So like I said, I think that where the utilization rate is as an industry right now makes me feel really good about kind of where the industry is, how we're positioned to weather the storm going into this. And like I said, flat oil production in the Permian Basin means gas growth in the Permian Basin. So keep that in mind and also as pressures fall, you need more compression. So it's a little bit counterintuitive there.

Yes, was going chime in too and say, you've seen all of our public peers report utilization metrics and that's a combination of their entire fleet. But if you were to bifurcate the fleets into large horsepower and small horsepower, which we can say a lot, the large horsepower is probably 99% utilized. I mean there's literally not a single asset out there and that's what continues to be in high demand in the Permian. So we would think you've got a long ways to go, net debt one heck of a downturn to see the utilization get to the levels that Mickey just described before you'd see that kind of pricing weakness persist. And then I do want to say too, the silver lining in all of this is for the last couple of years, at every energy conference you or we would go to, the big discussion topic was always about OPEC overhang and what are they going to do and that caused investors to be reluctant to make big investments in energy. Well, they're doing and it's going to basically eliminate that overhang and that's going to set us up for a really nice up cycle in the future. So that's something that we're really excited about coming out of this downturn ready to basically continue to go on offense and be ready for this next up cycle.

Our next question is from Brian DiRubbio with Baird.

Good morning, just a couple of questions for you. First off on CapEx, there's been a clear bifurcation on those who have the capital flexibilities buying the CapEx and those who don't. Just are you seeing better availability of particularly on the packager side, the ability to get new equipment? Just love to get any sense of lead times for the new horsepower today.

We're really not seeing too much of a change of where it's been over the last year. Lead times are still a year out, kind of 45 to 50-week timeframe from Caterpillar depending on the size of the engines. You might be able to beat that lead time a little bit with some other engine providers. But at the end of the day, the shop space and capacity to build that equipment, package it into a compressor, fully functional compressor packages is also a bottleneck that we have today too. And that's that kind of shop space and that kind of thing is still a year out as well for the most part. So we're not seeing any softness in that supply side. It's still a really tight game out there and having to manage that supply chain piece pretty actively.

Well, I guess it helps the goldenated [ph] compression as I've been calling it. So no complaints there. Just a follow-up, we think about sort of the improvements you had on the contract compression side this quarter, any sense you can help us understand how much of that was organic pricing, how much of that was just mix shift within the fleet given that you're still managing through the CSI assets?

I mean, we've got about 1% or 2% kind of churn rate that we follow. And anytime some equipment comes back to us and we send it back out the door and recontract it, comes back and goes back out under a new contract right now, it kind of 15% to 20% premium contracts, right? Like so that churn is a good thing for us. We feel like we can turn it around and recontract it with another customer or potentially a new customer or an existing customer at rates that are closer to spot. But like I said, that's about a 1% to 2% churn rate that we see. And then obviously that new horsepower growth of that 49,000 horsepower that's going out at new spot pricing as well. And then we had a pretty active quarter early on in Q1 recontracting big bulk renewals that we had coming through the system and had a lot of success there, which kind of got that 10% to 15% kind of uplift in pricing along with those recontracts also. So it really is the mix of all of it and all of it is we're having the ability to lift pricing across the board and continue to do so.

Thanks. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mickey McKee for closing remarks.

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

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