Kodiak Gas Services - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered record adjusted EBITDA ($178.2M) and free cash flow ($70.3M), but GAAP diluted EPS ($0.43) and total revenue ($322.8M) came in below Wall Street consensus; EBITDA was modestly above consensus based on company’s adjusted definition. EPS consensus was ~$0.46*, revenue ~$332.6M*, EBITDA ~$177.6M*; EPS and revenue missed, adjusted EBITDA slightly beat.*
• Contract Services margins expanded for the fourth consecutive quarter to 68.3% (+430 bps YoY) on high utilization (97.2%) and pricing discipline; Other Services margins improved to 24.5% despite lower revenues.
• Guidance raised: FY25 adjusted EBITDA to $700–$725M (+$5M to low end) and discretionary cash flow to $445–$465M; Contract Services revenue/margin raised, Other Services revenue lowered.
• Capital return accelerated: share repurchase authorization increased by $100M (total remaining $115M), dividend maintained at $0.45/share; added to S&P SmallCap 600 effective Aug 6, a potential index inflow catalyst.
• Management highlighted structural demand tailwinds (Permian gas growth, data-center power, LNG build-out) and cost/efficiency gains from technology and ERP implementation as drivers of sustained margin expansion.

What Went Well and What Went Wrong

What Went Well

• Record adjusted EBITDA ($178.2M, +15.5% YoY) and record free cash flow ($70.3M), driven by pricing, fleet optimization, and technology-enabled reliability.
• Contract Services adjusted gross margin reached 68.3%, fourth straight sequential increase; fleet utilization rose to 97.2% (+290 bps YoY).
• Strategic capital return and index inclusion: $100M buyback increase (remaining authorization $115M) and addition to S&P SmallCap 600 effective Aug 6. CEO: “record quarterly adjusted EBITDA… strategic focus on large horsepower compression, fleet optimization and significant investments in both technology and our people”.

What Went Wrong

• Top-line softness versus Street: revenue ($322.8M) and EPS ($0.43 diluted) were below consensus; Other Services revenue fell sequentially and YoY, prompting a full-year reduction.*
• Sequential revenue decline (-$6.8M vs Q1) due to lower Other Services activity and timing of unit deliveries, with management signaling heavier unit additions in Q3 (partial-quarter revenue effect risk).
• Continued macro and operational constraints: tight Permian labor markets and unchanged 40–45 week OEM lead times for engines (Cat/Aerial) could limit pace/efficiency of deployments.

Transcript

Speaker 0

Welcome to the Kodiak Gas Services second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Graham Sones, Vice President, Investor Relations. Please go ahead. Good morning and thank you for joining us for the Kodiak Gas Services conference call and webcast to review second 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, review our updated 2025 guidance, and then we'll open up the call for Q&A.

There will be a replay of today's call available via webcast and also by phone until August 21, 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, August 7, 2025, and therefore you're advised that such information may no longer be accurate as of the time of any replay listening or transcript reading. The comments made by management during this 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. 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. 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 topic. The tragic events this summer in the Texas Hill Country struck close to home and deeply impacted many of our employees, friends, and colleagues in the industry.

Our thoughts and prayers continue to be with those impacted as they recover and heal from this tragedy. While the extent of the devastation was difficult to grasp, it was heartening to see our nation and our state rally behind the affected communities. I want to personally thank the Kodiak employees who volunteered their time and resources to assist with the recovery efforts. Before we get to our strong financial results, I want to start by discussing two recent developments that we think are very positive for our shareholders. First is the $100 million increase to our share repurchase program that we announced yesterday. Since our initial stock repurchase in September of 2024, we've bought back about 2 million shares at an average price of just over $30.

Given the current stock price and the remaining availability on our previous repurchase authorization, the Board thought it would be prudent to increase and extend the program. The meaningful step up in our share repurchase program reflects our confidence in the company's strategy and the demand outlook for contract compression and natural gas and underscores Kodiak's commitment to returning capital to shareholders. Second, we were very pleased to learn last week that Kodiak was added to the S&P SmallCap 600 Index as of yesterday. This is a significant milestone as it highlights the strength of the company's business strategy and our commitment to highly profitable growth. The inclusion in the index will increase Kodiak's visibility in the investment community and enhance shareholder value over the long term. We're honored to be included. Next, I'd like to discuss a few macro themes in the compression space.

Large horsepower compression remains in high demand as reflected on our fourth consecutive quarter since the CSI acquisition of increases in fleet utilization and contract compression services adjusted gross margin. For the second quarter, our utilization ticked up to over 97% for the fleet, with our large horsepower being effectively fully utilized at over 99%. Furthermore, less than 10% of our operating fleet was on month-to-month contracts at the end of the quarter. One of the many driving forces behind the continued demand for large horsepower compression is the steadily growing natural gas volumes in the Permian driven by consistent production growth and increasing gas to oil ratios. In fact, one of our largest Permian producers recently stated it plans to increase Permian production by over 40% by 2030.

Multiple other customers have stated in their second quarter earnings calls that they see short and long term gas volume growth coming out of the Permian Basin. As has been reported in numerous industry sources, Permian producers are shifting to deeper, gassier development zones in both the Midland and Delaware basins. According to a recent Invaris report, despite initially having much higher oil cuts, mature Midland Basin wells are now starting to compete with Delaware wells on a GOR basis. This dynamic is helping drive strong year over year increases in Permian gas production. The industry is well aware of this dynamic as reflected by the over four and a half BCF per day of incremental Permian natural gas pipeline takeaway projects which are expected to come online between now and the end of the year in 2026.

The outlook for natural gas remains robust as well, with Golden Pass LNG's first LNG train reported to begin operations in the fourth quarter of this year. Further, we've seen multiple significant LNG gas purchase contracts announced over the last three months supporting the potential for expansion at existing LNG terminals. Lastly, we expect the recent trade deal with the European Union where they have agreed to purchase $750 billion in U.S. energy products to also further support the build out of LNG export facilities along the Gulf Coast. Given the favorable long term market dynamics for natural gas, our customers continue to order new large horsepower compression units to help optimize the development of their assets. To date, we have contracted a significant amount of our expected 2026 capital expenditures on new horsepower in line with our growth expectations for the year.

The combination of strong natural gas growth along with uncertainty in oil prices is offering some unique opportunities to partner with our customers and in some cases consolidate working horsepower. One example is that we recently worked with an investment grade rated E&P company on the installation of a new compressor station which will ultimately feature over 25,000 horsepower of electric motor driven compression at the location. Our customer asked that we own half of the new units with the customer owning the other half, allowing them to preserve capital. Kodiak Gas Services will also operate the customer owned units alongside the Kodiak units, providing a value added service to the customer. We've already agreed to a similar but larger project for the same customer in 2026 and are in the process of developing several other comparable opportunities both for electric motor driven and natural gas driven compression.

In addition to jointly partnering on some projects, we have also executed some small transactions to acquire compressors under contract that fit nicely in our existing footprint and will positively impact our third quarter growth in revenue generating horsepower. Now turning to our second quarter 2025 results, Kodiak Gas Services' business model delivers consistent growth and an improving margin profile, allowing us to once again set new records in adjusted EBITDA and free cash flow with strong growth in net income and earnings per share. We also sequentially increased last quarter's high water mark in discretionary cash flow. Our leverage ratio continues to tick lower, hitting a new all time low of 3.6 times as of June 30th. These record setting results were driven by our stable fixed revenue model, outstanding execution on contract renewals, cost management, operational efficiency, and new unit growth along with outstanding financial results.

We continue to return capital to shareholders and bought back approximately $10 million in stock in Q2 2025 and declared a well covered quarterly dividend of $0.45 per share. Next, let's dive into some operational highlights. We finished the quarter with an average revenue generating horsepower per unit of 952, a figure that has increased every quarter since we closed the CSI acquisition. We added approximately 32,000 new unit horsepower that averaged more than 1,800 horsepower per unit. Approximately half of the new units were driven by electric motors. We also executed several transactions as we continue our trust strategy to high grade our fleet. In the quarter, we divested approximately 35,000 horsepower of non-core, mostly small horsepower, low margin aged units. Next, let's discuss our recontracting efforts. As I previously discussed, the market dynamics for large horsepower compression remain extremely favorable.

That is highly visible as we once again recontracted a significant amount of horsepower, almost $0.5 million horsepower in the second quarter at rates that are above our current fleet average. Given strong customer demand, very high utilization, and disciplined decision making by the contract compression industry, pricing conversations with customers continue to be constructive. These dynamics are driving the positive progress on our contract services adjusted gross margin. Kodiak's contract services adjusted gross margin set a new record at 68.3%, a 430 basis point increase compared to the second quarter of 2024. In addition to the previously discussed revenue growth and fleet optimization efforts, we're starting to see the cost benefits of several technology investments. Kodiak's Fleet Reliability Center actively monitors our compression units on a remote real time basis.

Paired with the use of industrial AI and machine learning algorithms, our technology platform is helping us with the early detection of part failures while extending maintenance intervals. The result of these activities is lower costs and more proactive rather than reactive asset management. The utilization of real time equipment monitoring along with other improvements allowed us to realize a sequential decrease in repair costs this quarter. Speaking of investing in technology, our rollout of a new enterprise resource planning (ERP) system went live on August 1st and we're successfully operating in the new system today. The system can consolidate several legacy systems and help streamline business operations and enhance operational efficiency. I'd like to thank all of the men and women at Kodiak who invested so much of their time and energy into this important implementation project.

We view this as the final step in what has been a wonderfully executed CSI integration that delivered financial synergies that far exceeded expectations. Now I'd like to turn to the outlook for the remainder of 2025. Our contract services segment continues to deliver predictable and strong results and we expect more of the same for the remainder of the year. New unit growth in the third quarter is going to be higher than originally expected and considerably above Q2 due to the timing of deliveries. Additionally, since the end of the second quarter, we've acquired approximately 30,000 working horsepower, a portion of which we were previously servicing as part of our contract compression services business, and the rest were units with a customer that tuck in nicely in an area where we have existing operations.

As a result of this, we have incrementally raised the midpoint of our adjusted EBITDA guidance through an increase in the midpoint of contract services revenue and adjusted gross margin, resulting in an incrementally higher discretionary cash flow outlook. The other services segment is inherently less predictable as the timing of a few projects can significantly move the needle. During the second quarter, we wrapped up a couple projects where we significantly outperformed our margins. We're scheduled to begin work on some quality new projects late in Q3 and into 2026. We anticipate revenues for Q3 in this segment to be fairly comparable to Q2 and margins to be more in line with our guidance. Taking this into account, we revise our outlook for revenue for the rest of the year for other services. Furthermore, we continue to make great progress on our committed capital plan for next year.

We've contracted much of our new unit capital at top tier rates and expect to fill out the remaining budget by year end. Lastly, we significantly increased and extended our share repurchase program. Now I'll pass the call to John Griggs to further discuss our financial results and our updated guidance for the year. John, thanks Mickey.

Speaker 1

While the energy landscape is constantly changing, we remain focused on what we can control. We delivered another quarter of solid financial performance and great execution all around. As evidence of that, adjusted EBITDA for the second quarter was $178.2 million, a 15% increase versus last year's second quarter results. From a segment perspective, for the second quarter we achieved strong year-over-year revenue growth of over 6% in contract compression services. In contract compression services revenue, revenue for ending horsepower was $22.77 this quarter, a nice uplift sequentially and versus the same quarter last year. Relative to Q2 of 2024, we increased our contract compression services adjusted gross margin percentage by 430 basis points to 68.3%. This significant increase in margin reflects the success we've realized in achieving higher average pricing alongside the progress we made in both high grading our fleet and in deploying new technology.

In our other services segment, we generated higher than expected gross margins on revenues of approximately $29 million. SG&A net of non-cash items for the quarter was $28.8 million, up from Q1 and in line with a more normalized level going forward. We reported net income attributable to common shareholders of $39.5 million or $0.43 per fully diluted share for Q2, a significant increase from the $6.2 million or $0.06 per share we earned in Q2 of 2024. Growth CapEx for the quarter was just under $38 million, consisting primarily of new unit CapEx with 32,000 new unit horsepower. While growth CapEx was down from Q1, we attribute this to timing as some deliveries moved to Q3.

We're still on track to add roughly 150,000 in new unit horsepower over the course of 2025 and that's before the 30,000 horsepower of working units we've acquired in Q3 that Mickey McKee highlighted earlier and that fit within our existing growth CapEx guidance. Other CapEx was $16 million for the quarter. As we previously noted, other CapEx is front half weighted in 2025 and we expect it to come down significantly in Q3 and beyond. Growth and other CapEx were partially offset by about $8 million in proceeds related to the divestiture of non-core horsepower. Maintenance CapEx for the quarter was approximately $18 million. Consistent with our expectations, discretionary cash flow came in at $116 million, up substantially from the $91 million generated in the same quarter of last year, and free cash flow was $70 million, another company record with regard to the balance sheet.

The record free cash flow combined with improved working capital management, including a $29 million quarter-over-quarter reduction in accounts receivable, allowed us to pay down approximately $49.48 million in debt in Q2. We ended the quarter with just under $2.6 billion in debt, and as Mickey highlighted earlier, exited the quarter at 3.6 times credit agreement leverage. Last, we declared a dividend of $0.45 per share. As a reminder, even after growing our dividend by approximately 10% earlier this year, our dividend is extremely well covered at 2.9 times. Let's turn to guidance. I'll remind everyone that our new compression units in 2025 are fully contracted, which, combined with the contracted nature of our existing compression fleet, leads to stable and predictable cash flow.

Based on the trends we're seeing in fleet pricing and our outlook for growth in revenue-generating horsepower, we increased the low end of our revenue outlook for contract services by $10 million and increased that segment's adjusted gross margin percentage to 67% to 69%, a bump to both the low and high end of our prior range. Given the timing of project starts, we reduced our revenue forecast for other services to between $120 million and $140 million. However, we left the outlook for adjusted gross margin percentage unchanged. For capital spending, our prior guidance remains unchanged, and as I mentioned earlier, that's even after purchasing nearly 30,000 of working horsepower during Q3. The recent passage of the One Big Beautiful Bill increases certain tax deductions on CapEx and interest, which were applicable to Kodiak.

Our analysis suggests this new legislation will reduce our cash tax burden by roughly $60 million over the next five years. Given our results to date and the expectation of lower cash taxes, we increased our discretionary cash flow guidance to a range of $445 million to $465 million. To summarize, we made a lot of progress on several key initiatives this quarter. Our primary value driver, the contract services segment, continues to deliver smooth and steady growth in profits. This provides further evidence of the success of Kodiak's business strategy, namely best-in-class U.S.-focused large horsepower contract compression and related services. Finally, we continue to deliver on our winning formula of reinvesting in the business to grow organically, returning cash to shareholders through an attractive and growing dividend, and opportunistically reducing our share count through an active share repurchase program. With that, I'll hand it back to Mickey.

Speaker 0

Thanks, John. Our stable recurring cash flow business model is performing well in the current environment. Demand for contract compression remains strong as reflected in our pricing power and revenue growth. We're adding new large horsepower units and capitalizing on opportunities to add existing working horsepower to our fleet as well as divest non-core underutilized small horsepower units. These strategic decisions have helped us set new financial records in several key metrics, allowing us to once again increase margins and deliver growth in earnings per share, positioning us to continue to reward our shareholders for their investment in Kodiak. Thanks for your participation today and now we're happy to open up the line for questions. Operator, thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press Star 1 on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You may press Star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is from James Michael Rollyson with Raymond James & Associates. Hey, good morning guys. Nice, nice quarter and thanks for all the outlook commentary. Mickey, would like to dig in on that a little bit. Your comments around the gas market, the Permian Basin, et cetera, certainly jive with what we've heard. Our work on kind of from beginning of the year to now on electricity growth driven by all this data center investment that continues to actually ramp higher and LNG permitted capacity.

New permits have been added to where that outlook over the next five years seems like it's gone up and obviously the oil macro has been weak and the stock's not acted great from where we were in the early part of the year. I'm curious what your view is of the disconnect between what's going on in the ground versus what investor sentiment seems to be. Hey, good morning, Jim. Appreciate you joining us this morning and asking the question. I mean, it's an interesting topic, right? I think that the interesting part about it is there seems to be just that disconnect between what investor sentiment thinks is going on really in the Permian Basin and what the reality is. I think a lot of it is the difference between the producers and what they have to do with their gas versus oil growth. Right.

I think there's a lot of people that attribute oil growth to compression demand. There's really a difference there between the gas growth and the oil growth in the Permian Basin. I think that's kind of where it stems from. Even in a choppy oil price commodity market, we're kind of bifurcated from that because the demand for large horsepower compression is continuing to grow because of the gas growth out of the Permian Basin. Appreciate that. Maybe switching gears on margins a little bit, best margins you've had in a long time, maybe ever, raise your margin guidance a bit. As we think about this going forward, your pricing kind of continues to trend up. You highlighted a few things on the technology side and new enterprise resource planning (ERP) system. All that probably helped the cost side or at least keep it relatively stable.

Is there any reason to think margins don't continue to creep up at least into the upper end of your guidance over the next several quarters? We would hope so. I think that's where we'd like to see it go. We think that there's definitely the ERP system that we've implemented that we've been operating on this week is definitely going to make us a leaner, more efficient company. There's going to be some learning curve associated with that. We chose that system because we think it's going to make us a more efficient, better company. Also have the ability to layer on some of the AI and machine learning type stuff that we can develop and additionally kind of layer on more technological advances as we move forward. We would think that it'll continue to tick up.

Obviously, like I said, there's going to be a little bit of a learning curve with this ERP implementation in the short term. Gotcha. Appreciate the color and thanks for the time. Yep, thanks, Jim. Our next question is from John Mackay with Goldman Sachs Group. Hey, good morning guys. Thank you for the time. You talked through a couple kind of interesting things on the commercial side, but maybe we're just looking at the units you're acquiring from operators and, or partnering with. How should we think about those deals in relation to your 3% to 4% annual growth in horsepower you've been talking about? Is that part of it? Is it incremental? What could kind of the cadence look like from here? I think it's part of what we're talking about. We don't have any big deals in the hopper that would be, you know, earth shattering.

These couple of opportunistic type of developments that we have where we can pluck off some stuff that tuck in really nicely is something that we're really honed in on and looking for more opportunities like that. I don't think there are going to be any big needle mover type of acquisitions, but nice type stuff that'll help us accrete margins and that kind of thing is going to be something that we're always in the market to look for. I appreciate that. Thanks. Then you guys touched on this a little bit. Just in terms of buyback cadence, how should we think about your kind of ability to lean into the new authorization? Is that dictated by incremental free cash flow? Is that the balance sheet? Is it your view of the share price? Maybe just walk us through that.

Yeah, John, I think a lot of it'll be dictated by share price. We've stated very publicly that our goal for our leverage target is 3.5 times. When we see softness in the share price like we've seen recently, it gives us reason to kind of lean into that buyback and look at that pretty significantly. We want to stay kind of within a stone's throw of that leverage target of where we want to be, but also take advantage opportunistically of weakness in the share price. All right, appreciate that. Thank you. Yeah, thanks, John. Our next question is from Doug Irwin with Citigroup. Thanks for the questions. I appreciate the context you provided around the contracting efforts into 2026.

Just wondering if you're able to give any more detail around just where you see CapEx or fleet additions maybe trending into next year at least maybe directionally relative to the last few years, or maybe a different way to ask just if you could help frame your level of confidence in next year's backlog relative to maybe where you were at this point last year. Yeah. Hey, good morning, Doug. I don't think we're ready to really throw a number out there based on kind of where we're at just because we still have some finalization to do around budgeting for next year and that kind of thing. Quite frankly, we're working on some pretty big deals that could move the needle for us. It's not something that we're ready to guide on or kind of indicate right now.

We feel really good about where we're at right now as far as where we're at in the year and what we've contracted so far. It's pretty consistent with where we've been in past years, and we think that we shouldn't have a problem filling that out for the remainder of the year and the third and fourth quarter that we're looking at.

Speaker 1

Got it.

Speaker 0

Maybe just to follow up on asset sales, you executed another one this quarter. Just curious, how much more wood do you have to chop there? Is the fleet generally where you want it to be, or is there maybe still some smaller horsepower that could be viewed as non-core? How are you thinking about proceeds in general? Could that be another lever to potentially be able to recycle some cash into buybacks?

Speaker 1

Yeah, Doug, this is John. Good question. We get asked about this a lot. I think the overarching answer is we're constantly looking to high grade the fleet, and high grade the fleet in our minds means large horsepower, density, quality customers, quality environmental aspects of our units. We will always seek and look at every single asset, is it providing the appropriate returns and margins. It's going to be core to the fleet and to our customers over the medium and long term. That's the overarching kind of framework that we use. That said, we sold a whole bunch of stuff since we bought CSI. I think in total it's something like 160,000 horsepower that we've sold and we would deem 99% of that kind of non core stuff.

Speaker 0

We do have more that we'll.

Speaker 1

Continue to sell whether it's the asset or it's the geography. We like to say it's just going to be, you know, pruning around the edges in small pieces. The cash proceeds that we received from those are small. Of course, we will redeploy that into the large horsepower or some of the other capital allocation framework things that kind of seem to be best for the shareholder.

Speaker 0

Understood.

Speaker 1

Thanks for the time.

Speaker 0

Thanks. Thank you. Our next question is from Theresa Chen with Barclays Bank PLC.

Speaker 1

Morning. On the topic of your customers experiencing elevated compression costs, and there is this natural tension between wanting to save money and investing in growth. What you touched upon earlier, Mickey, in these joint partnerships with your customers to free up their CapEx capabilities, is this how you see the market evolving? Is this a preferred means of capital deployment for you, and are there other creative solutions like this to come?

Speaker 0

Hey, good morning Theresa. I think there's other creative solutions like this that we're going to be working on all the time and working with our customers. I've stated it very, very publicly before that I think this industry as a whole has underestimated the amount of compression that it takes to produce oil and gas out of the Permian Basin due to the liquids rich nature of the gas and how much volume is ultimately coming out of the Permian. I think that the majority of our customers realize that, hey, we need a strategic partner in compression and that we're very important to what they do overall in their production and their operations. That kind of allocation priority for them of buying versus owning or versus outsourcing compression is a strategic decision for them in times like these, in choppy commodity price environments.

There's a lot of people that are working to preserve capital right now and I think that there is going to be more opportunities like this going forward and we'll look to capitalize on those and opportunistically jump on those as they happen.

Speaker 1

Thank you. On the topic of the significant investments you've made into your technology platform, can you talk about how much savings or ultimate margin uplift you're targeting or can even be quantified from these investments?

Speaker 0

Good question. I know what we would like, where we'd like to see our margins go. We have a pretty different operating model than a lot of other people in this industry. With our margins, we think where we're at right now is really a high water mark. That 68.3% in compression operations is really a high watermark for us. We think we can continuously drive that up through additional efficiencies and that kind of thing gained from not only our enterprise resource planning (ERP) system, but also our artificial intelligence, machine learning, and that kind of thing. We're really just beginning to scratch the surface of what that can do for us right now. Can I quantify how high it will go or what our expectations are now? It's probably a little bit early to tell that, but we think that there's definitely upside here. Thank you. Thanks, Theresa.

Our next question is from Sebastian Erskine with Rothschild and Company. Yeah, hi, good morning. Mickey, John and team. Good to be with you this morning. Most of my questions have been answered. I just kind of want to follow up on the last question in terms of the dynamic with your customers. I guess one of the challenges that we saw in 2024 was producers who otherwise would have wanted to outsource compression kind of were forced to go directly to OEMs due to the tightness in the market. Can you talk about a bit more the evolution in lead times with Caterpillar and Ariel, and also just the potential appetite from E&Ps to enter into kind of sale and leaseback arrangements against the backdrop of kind of lower operating cash flows. Could that drive more outsourcing next year as a percentage of the mix? Hey, good morning, Sebastian.

A couple of points to hit on there with us with that question. Number one, lead times. We haven't seen lead times from CAT or Ariel drastically come in and change significantly from where they're at than where they've been for the last couple years. You're kind of 40, 45 weeks out on the engine type lead times. Depending on shop availability and shop space, there's an additional amount of time to get it built and get it out the door. Haven't seen those appreciably change significantly over the last three or six months. As far as the E&Ps and the people that own their own compression, I think that that's pretty customer by customer specific on what their capital allocation priorities are. There are going to be some that are very apt to want to outsource more and more all the time.

Like I said earlier, they are in a capital preservation mode right now with cash flows being a little bit lower, with a lower commodity price potentially. I think that we'll just look to have those discussions with customers on an opportunistic basis, and people that are interested in working on something like that will certainly be interested in having those discussions with her. Appreciate that, Mickey. Just a broader point on the consolidation in the sector. I'd appreciate your view on some of the biggest learnings and challenges from the CSI Compressco acquisition now that we've had some time for that to bed in.

In terms of the nature of the fleet in the remaining 25% or so of that outsourced market that's not controlled by you and the big three, can you give a sense of what that looks like in terms of quality and the nature of that horsepower? Yeah, absolutely. As far as the nature of the fleet that's not controlled by, call it the big three in this industry, there are a couple of private operators out there that have some attractive assets that we'd be interested in. Honestly, the list is getting shorter and shorter all the time, and the majority of what else is out there is probably dominated by smaller type horsepower. That's not really core to what we're looking for.

That all being said, I think that there still could be some interesting M&A opportunity out there, but it is getting thinner all the time after considering the consolidation in the industry. I'll touch on CSI.

Speaker 1

You know, this is John. I'll touch on the CSI acquisition. I think we would sum it up as a wonderful acquisition strategically, financially, culturally.

Speaker 0

We're really blessed that we were.

Speaker 1

Able to put that deal together. We started out, I think we guided at day of announcement, maybe $20 million of synergies. We stopped counting at probably $45 million. That's really good. We were in the last step of the integration, which is this enterprise resource planning (ERP) system. So far, so good. Hats off to our IT team and all the folks that have been involved. It's going really, really well.

Speaker 0

If we could find more like that all day long.

Speaker 1

Our focus is on increasing shareholder value and being highly strategic in how we act. It's going to have a pretty high bar on what we want to go do.

Speaker 0

Appreciate it, John, and appreciate it, Mickey. Thanks very much and congrats on the print. Thank you. Yeah, thanks, Sebastian. Our next question is from Brian DiRubbio with Barclays.

Speaker 1

Good morning, gentlemen.

Speaker 0

Just a couple of questions for me.

Speaker 1

Just out of curiosity, Mickey.

Speaker 0

John, you know, one of your competitors was complaining about labor availability.

Speaker 1

That's something I haven't heard anybody in this industry say for about two years now.

Speaker 0

You know, is that an issue?

Speaker 1

You guys are seeing at all?

Speaker 0

Hey, good morning, Brian. Thanks for joining us this morning. Labor continues to be tight in the Permian Basin. There is no doubt about that. We don't think we've seen that alleviate for two or three years now since the post Covid era. That's a challenge that everybody deals with in the Permian Basin and something that we spend a lot of time and effort working on, which is why we've deployed and developed our BEARS Academy and our elite training program that we have for operators to get younger, less experienced technicians up to speed and trained to do their jobs effectively and safely as soon as possible as we hire younger people that have less experience in the industry.

That's something that we're very focused on and something that we are working to develop additional technologies to help advance the careers of our less experienced people all the time. Got it. Appreciate that. As we think about the acquisitions of the assets that you acquired from operators during the quarter, any.

Speaker 1

Way you can help us understand, sort.

Speaker 0

Of the economics of that versus maybe some of the recent M&A.

Speaker 1

Transactions in the industry, do you think you're getting a better return on these investments?

Speaker 0

Equal.

Speaker 1

Just trying to understand the economics there. It's a great question. This is John again.

Speaker 0

So.

Speaker 1

No two acquisitions are the same, and you're going to usually buy stuff, and it creates extra density within your operation or if it's the right horsepower or both.

Speaker 0

You're trying to get all of.

Speaker 1

Those things to line up or with a customer that you really want to work for. I'd say in this case these are opportunistic opportunities where we had great people, we didn't have enough density in certain areas, and we had the counterparty that was willing to sell them because they had the opposite. It was like something they were ready to move forward on. The economics are, you know, call it somewhere between $200 and $400 a horsepower, typically because you're going to be buying something used or you pay something more, and the return on investment, you don't just base it specifically on that. You're kind of thinking strategically around the area that you're going to drop those into. They can be really compelling.

Speaker 0

Got a final question for me. You know, when you bought CSI, obviously you bought it mostly for the compression units, but they had some other businesses in and around the wells. I think it was a gas cryo business.

Speaker 1

Is that an area that's of any focus?

Speaker 0

I know you said you were going to retain those assets at the time of the acquisition, but is that an area of interest or focus where you expand? Is it still profitable? Just love to understand, I know it's.

Speaker 1

Very tiny, but love to understand any dynamics around that.

Speaker 0

Yeah, Brian, that's true. It is a very, very, very small part of our business right now. You know, it's one of those things that we haven't put a ton of capital in, and we've just kind of continued to operate it as a cash flow business that is profitable coming out of that, out of the acquisition. Like I said, the capital allocation priorities has been number one on growing the large horsepower fleet. We still have some of those hanging plants and gas coolers and that kind of thing. That was a small part of the CSI business that we've continued to cash flow over the time. Is that. So that could be, you could think.

Speaker 1

About maybe ultimately exiting or just going to keep it running for cash at this point.

Speaker 0

I think the plan right now is just keep it running for cash right now and continue to keep it utilized and continue to harvest that cash out of that business.

Speaker 1

Got it. Appreciate all the responses.

Speaker 0

Thank you. Yep. Thanks, Brian. Our next question is from Jeremy Tonay with JPMorgan Chase & Co. Hey, this is Eli. Maybe just wanted to touch a little bit on the electric side versus gas. I know in previous quarters there was a lot of focus on electric motor drive compression and I just wanted to get a sense of where that stands today and what your customers are kind of asking for as they, you know, start to fill up orders into 2026 and beyond what that market looks like. Thanks. Yeah, thanks, Eli. I appreciate you joining us this morning. You know, we're still seeing pretty significant demand on the electric motor driven side of the business. The large players in the industry that are in our top 10 customer list are still pretty significantly looking at electric motor driven compression.

They still have goals to electrify additional compression over the course of the next several years. There's no doubt that access to power is a challenge for everybody surrounding the Permian Basin. It really is, again, kind of a customer by customer thing that, as people are closer to metropolitan areas and closer to power sources, they're much more apt to want to electrify or go with electric compression than people that are in more remote areas. It really has a lot to do with where the acreage is that they're producing from and kind of their corporate goals. Some people are very interested in electric, some people are not very interested at all. That all being said, we're still seeing demand for electric compression. We're still going to lean into it and still be very good at it and be a quality supplier to our customers. Awesome.

I think margins and pricing have been touched on quite a bit this call. Just maybe to put another point on it, we continue to see dollars per horsepower per month move up and to the right. Should we expect this trend to continue and how consistently does that continue to move up? Is it just a function of new unit recontracting and other items like that? Just trying to get a sense of how much more we could expect to see that metric move up and to the right. I mean, Eli, our goal is to continue to move that up every quarter from here on out. That's what we've tasked our commercial team with. As we're adding contracts for new equipment that is at higher rates than the fleet average, you should see positive pressure there on that number.

You have to keep in mind that as you know how much horsepower is deployed in any quarter, when you have a heavy amount of horsepower deployed, which is what we're expecting for Q3, and you have partial quarters, kind of full revenues, it could look a little bit different. When you have full quarters revenues for kind of big slugs of horsepower, you should see that number continue to push up. We would expect that number to continue to go up. That's the plan at least. Quantifying how far and when it will get to what points is a little bit harder, and we'll look to guide on that a little bit more when we come out with 2026 guidance.

Speaker 1

Ian, I just want to put a finer point on what Mickey just said there too about when we learned a valuable lesson in our Q1.

Speaker 0

Earnings call or the call where our

Speaker 1

Dollar per horsepower fell, and people immediately latched onto that and assumed that, you know, the bloom was off the rose in the compression market and pricing falling, when it was absolutely not the case. That was a function of asset sale. Nothing had changed. It was a function of asset sales, was a function of kind of when the horsepower came in. Where Mickey just said we will have a large, I guess, amount of horsepower coming in in Q3, that's going to be something we're going to be ahead of this time to make sure that the market doesn't misinterpret adding a lot of horsepower later in the quarter with any softness in the marketplace. If there's softness, we'll tell you. Don't get confused by that.

Speaker 0

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mickey McKee for closing comments. 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 third quarter. Thanks. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.