Kodiak Gas Services, Inc.

Hello, and welcome to the Kodiak Gas Service's second quarter 2023 conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed in the question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Graham Soans, Vice President Investor Relations. Please go ahead, Graham. Good morning.

We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review second quarter 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, our market, second quarter financial results, and our 2023 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 on the Investors tab of our website at kodiakgas.com. There will also be a replay you can access by phone until August 17, 2023. Information on how to access the replays can be found in yesterday's earnings release. Please note that information reported on this call speaks only as of today, August 10, 2023, And therefore, you're advised that such information may no longer be accurate at 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 available on our website or at FCC.gov to understand those risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations, the most comparable gap 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 CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I'm extremely proud of what Kodiak has accomplished for a company that was founded just 13 years ago, including the pricing of our IPO on June 28th. I want to start out our first earnings call by thanking the extraordinary women and men of Kodiak Gas Services on the accomplishment of getting Kodiak where it is today. It has been no easy task. In becoming a publicly traded company, Kodiak is one of six energy IPOs since the beginning of the COVID-19 pandemic and the first contract compression IPO in 10 years. It's quite a milestone. And I'm thrilled that through this IPO process, we were able to make each and every Kodiak employee a shareholder of the company. I'll begin our first public conference call by discussing a few highlights from the second quarter. And then I'll provide some commentary on the industry and our company. When I'm finished, John will provide additional financial detail from the second quarter and discuss our 2023 outlook. To start and to address the 8K that was released yesterday, Kodiak identified an error in the accounting for unrealized gains on our interest rate hedges that showed up in the Q1-22 comparable financial statements in our S-1 filing. The error understated our net income of Q1 of 22, was non-cash in nature, and did not affect the annual audited financials for 2022 or any non-GAAP measures such as adjusted EBITDA, adjusted gross margin, or discretionary cash flow. Kodiak is taking appropriate steps to make sure this doesn't happen again, and John will go into more detail in this section. We're happy to take any questions about it in Q&A. Now turning to yesterday's earnings release. To touch on a few highlights from the second quarter, we maintained our industry-leading utilization rate, ending Q2 at 99.9% utilization. This allowed us to deliver record revenues of over $203 million and an all-time high adjusted EBITDA of almost $108 million in the quarter. As we look to the remainder of 23, our new unit deliveries are completely contracted and are exclusively large horsepower units, which we define as over 1,000 horsepower. We know the cost of the equipment. The customer will be deployed with and the contract rate it will earn. And because equipment lead times remain extended at over a year, we're already busy firming up new equipment orders and customer contracts into the back of 2024. This provides further support for what we believe is going to be an exciting 2023 and beyond, as TODIAC continues to deliver exceptional results. We're also very excited to issue our first public guidance for full year 2023 that shows record adjusted EBITDA of $425 to $440 million and indicates what we believe will be a very compelling annualized dividend of between $1.40 and $1.60 per share, subject to the approval of our board, with the first payment being in the fourth quarter. Many of you are new to the Kodiak story, so I want to take a few extra minutes today to discuss our company, our role in the industry, and what makes Kodiak different. To start, Kodiak is a leading provider of critical energy infrastructure, enabling the reliable flow of natural gas and oil to feed growing global demand. As the world searches for a clean, affordable, and secure energy source to fuel the energy transition, the US is poised to supply the world with clean-burning natural gas through the development of Gulf Coast LNG export capacity. Kodiak is uniquely positioned to take advantage of this trend, as we have intentionally focused on deploying our assets predominantly in the Permian Basin with the right partnership-based customers and employing the hardest working and most loyal workforce in the industry. At Kodiak, we have purpose-built a fleet of nearly 3.2 million horsepower of predominantly large horsepower compression equipment that is the youngest, most technologically advanced and emissions-friendly fleet in the space, specifically engineered and built to operate in rich gas environments like the Permian Basin, where over 70% of our horsepower is deployed. The demand for large horsepower compression, specifically in low-cost to produce basins like the Permian, has grown significantly due to the development of unconventional resources. Improvements in drilling technology have allowed our customers to centralize wells and design systems for field-wide oil lift and gas gathering infrastructure that use more efficient large horsepower compression to lower their production costs and emissions footprint. These large infrastructure investment decisions being made by our customers require large horsepower compression for longer time spent on location, which in turn leads to more stable and predictable cash flows for Kodiak. We also charge a fixed monthly revenue rate for our services, meaning our business is largely insulated and has shown extreme resiliency across multiple commodity price cycles. In fact, Spot Henry Hub prices averaged $2.16 per MMBTU in Q2, down over 70% versus the same period last year. yet our fleet continued to be effectively fully utilized. We generated record revenues and adjusted EBITDA, and our customers continued to contract with us for future horsepower deployments into 2024. Though the energy transition is well underway, we believe that natural gas and oil demand will continue to grow for many decades to support global population and GDP growth. Last year was a wake up call to the world as to the importance of secure and affordable energy. The global geopolitical events and resulting price spikes of 2022 set off a race by energy importing countries to secure ample supplies of LNG to fuel their respective economies. As the world's number one exporter of clean burning natural gas, the U.S. is standing at the ready to grow production and continue to provide that gas for the benefit of the world. As evidence of that growth, approximately 14 BCF a day of LNG liquefaction capacity is currently under construction. There's roughly an additional 12 BCF a day of projects that are approved and pending final investment decision. What's more, those new LNG plants are destined for the Gulf Coast. from the southern tip of Texas to the eastern border of Mississippi. Added together, those new LNG export facilities represent approximately 26 BCF a day of additional liquefaction capacity, requiring a stable source of feed gas and associated compression to deliver it to the Gulf Coast. To put that in perspective, that's a 25% increase in domestic natural gas production. That LNG feed gas has to come from somewhere. Despite an abundance of reserves, it's very challenging to get new transportation pipelines permitted to move gas from the northeastern United States to the Gulf Coast, which means that gas will likely have to come from the Permian, the Eagleford, or the Hainesville. Most forecasters predict that Permian gas volumes will grow substantially from now through the end of the decade. Here's the important point for Kodiak and our investors. In order for Permian and Eagleford gas to be processed and move from the point of production to the point of demand, it has to be compressed multiple times. And that's before we consider additional compression required for gas-lifted oil production, lower field pressures from unconventional resources, and rising gas-to-oil ratios from new and existing wells. Given that roughly 2.7 million, or about 84%, of Kodiak's existing horsepower is currently operating in the Permian and Eagleford. We feel great about the outlook for compression services demand and think we're well positioned to take advantage of expected market growth. We believe that the continued capital discipline in our industry, increasing desire to outsource compression by producers and midstreamers, and elongated delivery times for new engines supports a continued constructive market. Finally, I want to touch on what I believe is another true differentiator for Kodiak in our industry, and that is our focus on sustainability and ESG. Our goal is to be the most responsible and sustainable company in our industry. As you know, many energy companies, including some of our customers, have announced significant GHG emissions reduction initiatives. We're actively working on solutions to help them achieve those goals. One example is EcoView, our proprietary data acquisition and emissions monitoring system that was awarded patent protection earlier this year. EcoView is in the early stages of commercial deployment and will help our customers manage their emissions footprint while giving Kodiak real-time operational visibility to allow us to further optimize the performance of our fleet. We're also proud to have received a Top Workplaces USA award earlier this year with cultural excellence honors for employee appreciation and professional development. Kodiak is a great place to work with competitive pay and benefits that help us attract and retain the best talent. We're also very focused on the safety of our employees and we have a culture that produces exceptional safety results in conjunction with our superb financial I say it all the time, making sure that our employees get home safely to their families every night is the most important part of my job. In summary, we believe the broader energy market is highly supportive with a multi-decade runway for conventional energy and particularly large horsepower compression to feed the growing LNG export base on the Gulf Coast. Our strategy is to continue to provide compression services safely and sustainably in the best basins with the best customers, while providing investors with an attractive return on their investment through steady growth in cash flows and a compelling dividend. Now I'll hand the call over to John to discuss our financial results for the quarter and 2023 outlook, and I'll come back with some additional closing comments before we move into Q&A. John?