Kodiak Gas Services, Inc.

Greetings and welcome to the Kodiak Gas Services third quarter 2023 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Graham Sohns, Vice President of Investor Relations. Thank you. You may begin.

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review third 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, third quarter financial results, and our updated 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 and also by phone until November 16, 2023. Information on how to access the replays 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. November 9th, 2023, and therefore you're advised that such information may no longer be accurate as of the time of any replay or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties, and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct. Solicitors are encouraged to read Kodiak's prospectus and quarterly report on Form 10-Q, available on our website or at sec.gov, to understand those risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most comparable GAAP measures are included in the quarterly press release, which can be found on our website. And now I'd like to turn the call over to Kodiak CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I'll start by discussing our recently announced inaugural dividend payment to our shareholders. Then I will share some highlights from the third quarter and ultimately provide some commentary on the industry and our company. When I'm finished, John will provide additional financial details from the third quarter and discuss some updates to our 2023 outlook. We are excited to have announced our first quarterly dividend on October 24th. Our board declared a dividend of 38 cents per share for the third quarter of 2023 or $1.52 per share on an annualized basis. The stable, positive cash flow provided by our resilient business model supports returning capital to shareholders through a well-covered dividend. We believe that with the initiation of our dividend, Kodiak represents one of the most compelling yields in midstream energy today. It is an important part of our capital allocation strategy that also involves reinvesting a portion of our cash flows to grow our fleet, given the attractive returns we see in the current market environment. To be clear, we intend to generate positive free cash flow after growth capital and dividends are funded while driving towards our long-term leverage target of three to three and a half times. Now turning to yesterday's earnings release. We are very pleased with our third quarter results, which reflect the continued execution of our strategy, focused on deploying large horsepower compression infrastructure assets in high quality basins with the best customers. The compression market remains tight, as many of our competitors are near full utilization of their deployable assets, and we are well positioned as the compression provider of choice for our customers. To touch on a few highlights from the third quarter, We maintained our industry-leading utilization rate, ending the third quarter at 99.9% utilization. We have maintained this high utilization rate for years, and now this has allowed us to deliver record revenues of $186.7 million from compression operations and consolidated adjusted EBITDA of $110 million for the third quarter. Both are the highest figures on record in Kodiak's history. As we have discussed many times, our methodical and intentional deployment strategy of our equipment and contracts generates highly visible, steady cash flows that create a very compelling infrastructure investment opportunity. As we look forward to the fourth quarter and next year, our new unit deliveries are completely contracted and are exclusively large horsepower units. As I mentioned on our last call, We know the cost of the equipment, the customer it will be deployed with, and the contract rate it will earn. And because equipment lead times remain extended at about a year, we're already in discussions with our customers related to new equipment orders and customer contracts into 2025. We're also pleased to be in a position to update some of our previously disclosed guidance ranges for the full year 2023. We are raising the low end of our guidance and now anticipate record adjusted EBITDA of $430 to $440 million. John will cover a few other guidance updates. I provided a detailed background on Kodiak on our second quarter call for those of you not familiar with our story. I won't rehash that in full, but I do want to cover a few things that differentiate Kodiak. Our purpose-built fleet of over 3.2 million horsepower of predominantly large horsepower compression equipment is the youngest, most emissions-friendly fleet in the sector, specifically engineered and built to operate in rich gas environments like the Permian Basin, where over 70% of our horsepower is deployed. We have seen additional consolidation in the Permian Basin from our customer base this quarter. This dynamic is ultimately creating more contiguous acreage positions and allowing for longer drilled well laterals and ultimately larger infrastructure build out, creating more demand for services of a company like Kodiak specializing in large horsepower. We view this consolidation in the industry as a positive as our customer base continues to trim costly overhead and drive down ongoing cash production costs. At Kodiak, we strive to deliver the highest level of service and mechanical availability in the industry, also contributing to the superior utilization of our fleet. We charge a fixed monthly revenue rate for our services and ended the third quarter with less than 7% of our horsepower on month-to-month contracts. These factors combine to help insulate our business from short-term commodity price cycles. Natural gas prices have ticked above $3 recently but remain low by historical standards. However, our customers, which operate primarily in liquids-rich, oil-directed basins, continue to exhibit strong demand for compression services. We continue to be excited about the tremendous amount of LNG export capacity being constructed on the U.S. Gulf Coast and the resulting growth in natural gas production that's needed to provide feed gas to these plants. FERC data indicates that there's almost 14 BCF per day of LNG liquefaction capacity under construction on the Gulf Coast today, with about 15 BCF per day of approved projects behind that. Our view remains that the incremental gas will largely come from the Permian and Engleford basins, and we are well positioned as the leader in those basins to capitalize on this growth. as every incremental cubic foot of gas produced out of these basins will need to be compressed multiple times over. Additionally, our industry as a whole has shown tremendous capital discipline. While new unit deliveries have extended out over a year, with the lack of idle horsepower available to be deployed, this means that the supply side of our industry will remain very tight with little relief in sight. So to quickly recap, We are pleased with our third quarter results and continue to believe in a supportive energy market with a multi-decade runway for conventional energy and particularly large horsepower compression to feed the growing LNG export base on the Gulf Coast, providing clean, secure supplies of natural gas to the world. 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 closing comments before we move into Q&A.