Kodiak Gas Services, Inc.

Greetings. Welcome to the Kodiak Gas Services fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. The 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. Please note this conference is being recorded. I would now like to turn the conference over to Graham Soans, 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 fourth quarter and full year 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 high-level commentary on the company, fourth quarter and full year financial results, and our 2024 outlook before opening the call for Q&A. Before I turn the call over to Mickey, I have a few housekeeping items to cover. There will be a replay of today's call available via webcast and also by phone until March 14, 2024. Information on how to access this replay can be found on the Investors tab of our website at CodientGas.com. Please note that information reported on this call speaks only as of today, March 7, 2024, and therefore you advise that such information may no longer be accurate as to the time of any replay or transcript reading. In addition, 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. Listeners are encouraged to read Kodiak's prospectus, quarterly reports on Form 10-Q, or annual report on Form 10-K that we expect to file later today, all of which can be found on our website or at sac.gov to understand those risks, uncertainties, and contingencies. Comments today will also include certain non-GAAP financial measures. Additional details and reconciliations in 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'll kick things off by highlighting several monumental events from 2023 before recapping our record financial results. Then I'll provide some commentary on our outlook, as well as the compression industry as a whole, before turning it over to John to provide additional details about our financial results, as well as discuss our financial guidance for 2024. I want to start by thanking Kodiak's amazing employees. Their hard work, operational proficiency, dedication to detail, and focus on safety is what enables Kodiak's continued operational and financial success. In June of 2023, we took Kodiak public and became listed on the New York Stock Exchange. I'm extremely proud of our team because, as you all know, it is a huge feat to complete a successful IPO and to transition to being a public company. Since that time, we have delivered multiple sequential quarters of record results. We have maintained our industry-leading 99.9% utilization rate. We initiated a meaningful quarterly dividend, and we announced a definitive agreement to acquire CSI Compresco in a transaction that will make Kodiak the largest contract compression provider in the industry, with 4.3 million revenue generating horsepower. Throughout this incredibly eventful year, we stayed true to who we are, what we do, and the goals we set for ourselves as a public company, and I am extremely proud of that. An important priority for Kodiak as a public company was to establish a capital allocation framework that allows us to grow our core contract compression business and return capital to shareholders through a well-covered dividend, all while strengthening our balance sheet. I'm happy to report we accomplished all of these priorities in 2023. We organically increased our compression fleet by almost 130,000 horsepower. primarily adding capacity to our industry-leading position in the Permian Basin. We executed on our shareholder return plan by initiating a 38 cent per share quarterly dividend with our second dividend being paid last month. In our opinion, this dividend represents an attractive yield and offers a compelling total return potential for Kodiak shareholders. Finally, we achieved a milestone debt to EBITDA leverage ratio of under four times at the end of 2023, the lowest in the history of our company and a mark we expect to continue to be able to push down. Now turning to yesterday's earnings release, we are very pleased with our fourth quarter and full year results, which reflect the continued execution of our strategy. During the quarter, we increased our revenue-generating horsepower by nearly 50,000 as we delivered new compression units predominantly to the Permian Basin. The compression market remains tight as strong demand has absorbed idle capacity and pushed utilization rates across the industry to all-time highs. Delivery times for large horsepower Caterpillar engines have improved slightly since our last earnings call, but remain elongated at 40 to 45 weeks. 2024 new unit deliveries are fully contracted with known delivery dates, known customers, known revenue rates, and will once again be focused on the Permian Basin, further strengthening our position in the most important basin in the U.S. We are currently in discussion with our customers related to new equipment orders into the second quarter of 2025. The pricing and returns on new horsepower additions remain attractive. Next, I want to touch on a few highlights from the quarter. Our focus on customer service and the fact that we have the youngest, most emissions-friendly fleet specifically built to operate in liquids-rich environments like the Permian Basin allows us to maintain our industry-leading utilization rate. New compression additions and superior utilization led to compression operations revenues of $190 million and consolidated adjusted EBITDA of $114 million. Both are the highest in Kodiak's history. We ended the fourth quarter with about 7% of our horsepower on month-to-month contracts, driving predictability in our revenues and illustrating the confidence customers have in Kodiak to deliver reliable compression services. As we have discussed many times, the methodical, An intentional deployment strategy of our equipment and contracts generates highly visible, steady cash flows. Remain excited about the pending CSI transaction for all of the reasons discussed when we announced the deal. The assets fit nicely into our portfolio and will meaningfully enhance our discretionary cash flow, giving us optionality within our capital allocation framework to enhance our shareholder returns. Now I would like to discuss some of the recent macro trends in the energy sector. First, there has been and continues to be a tremendous amount of consolidation in the upstream space. This has several positives for Kodiak. It leads to financially stronger customers and increased large-scale, sophisticated infrastructure developments that tend to favor centralized gas lift applications. This in turn creates more visibility and certainty for companies like Kodiak that specialize in large horsepower compression. Next is the recent decision by multiple leading natural gas producers in the U.S. to curtail natural gas production out of the Marcellus and the Haynesville shales in response to low natural gas prices. This once again reinforces why our strategy of focusing our compression footprint on liquids rich associated gas basins like the Permian and the Eagleford has been so successful. As you know, producer economics in the Permian Basin are driven by oil and NGLs, with the lowest production cost per barrel in the U.S. For this reason, we believe the Permian will be the primary supplier of incremental gas volumes to Gulf Coast LNG projects coming online in the next 24 months. US LNG feed gas demand is expected to more than double by the end of 2030, requiring a significant expansion of compression infrastructure. Every incremental cubic foot of gas produced out of liquids-rich basins like the Permian will need to be compressed multiple times over. In fact, using the historical relationship between gas production and compression horsepower, we estimate the industry will need to add roughly the combined horsepower of the top four contract compression providers by 2030. With the ongoing capital discipline that is being showed by Kodiak and its peers, the compression market looks to have many years of tightness ahead of it with very little relief in sight. Also, I would like to point out that the recent politically motivated moratorium on LNG permitting is not expected to have any impact on the natural gas demand growth through the rest of the decade. Longer term, the world needs the U.S. to further increase LNG capacity. Europe has been the largest beneficiary of U.S. LNG as it used U.S.-sourced natural gas to help meet its environmental goals and reduce its dependence on Russia. The next wave of U.S. LNG projects is likely to supply Asian markets, many of which are largely dependent on coal and are struggling with energy security and reliability. Without a doubt, the fastest and most cost-effective way to reduce ongoing worldwide emissions is to unleash low-cost US LNG exports to allow Asian economies to displace their use of coal-fired power to fuel their growth and increase the quality of life for their people. Supplying the world with affordable, reliable, and clean natural gas is not only good for the US economy, but it will also help the environment and humanity. Now I'll hand the call over to John to discuss our financial results for the fourth quarter and full year in 2024 outlook. John?