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?

Thanks, Mickey. It was truly a historic year for Kodiak, and we look to continue to building on our positive momentum in 24. In my remarks, I'll review our fourth quarter and full year results, and then I'll turn to our outlook for the year. Total revenues for the fourth quarter were approximately $226 million, up about 26% when compared to last year. Revenues for the full year increased 20% to approximately $850 million in 2023. Adjusted EBITDA for the quarter was $114 million, up 4% from Q3, and up over 10% versus the same quarter of last year. Our fourth quarter adjusted EBITDA excludes $2.5 million of non-cash stock comp expense and $4.3 million related to non-recurring items, such as transaction-related fees. I'd be remiss to not point out that included in the quarters and years adjusted EBITDA, specifically within SG&A, was about $5 million and $7 million, respectively, in reserves for bad debts associated with a challenged customer. We've talked about this before. Record low gas prices have put them in a tough spot, and it's a clear reminder of why we have strategically positioned 95% plus of our assets and revenues in liquid-rich associated gas basins. In line with our expectations, the adjusted EBITDA for the full year increased nearly 10% to over $438 million in 2023. Looking at our segments, compression operations revenues for the quarter were nearly $190 million, up about 11% when compared to the same quarter a year ago. Compression operations revenues for the full year 23 totaled approximately $736 million, an increase of 12% over 2022. revenue-generating horsepower increased by over 48,000 sequentially and 127,000 for the year. Consistent with prior periods, revenue growth in this segment was a function of mid-single-digit percentage growth in revenue-generating horsepower alongside higher overall fleet pricing. In our other services segment, fourth quarter revenues were approximately $36 million, up substantially compared to approximately $9 million in last year's fourth quarter, but down nearly $8 million sequentially. This segment's revenues and margins were positively impacted by the award and accelerated progress of two large projects in the second half of 23, finishing the year well in excess of what we'd originally forecasted. From an overall adjusted gross margin perspective, our operations team continues to focus on the smarter application of people, processes, and systems in order to contain costs and offset inflationary pressures. We saw the benefits of that in Q4, as evidenced by compression operations costs declining sequentially by $1.6 million while revenues grew. The focus on cost and efficiency allowed our compressions operations segment to generate a 66% plus margin, a nice bump from the prior quarter. On the dollar basis, for the quarter, our adjusted gross margin in the other services segment was approximately $8.5 million, up substantially sequentially and over the fourth quarter of last year. On a percentage basis, the quarter came in at 23%. As we've highlighted previously, our fourth quarter reflects what we believe to be an abnormally strong one, realizing above average margins as we completed and advanced on a few meaningful projects at better than expected margins. The other services segment is a lumpy but valuable segment. Station construction projects are synergistic with our compression business and require no capital. Every dollar of incremental cash flow adds to both our overall return on capital employed and discretionary cash flow, which in turn allows us to pay more dividends and invest in high-return growth capital projects. Over the medium term, we continue to expect to realize gross margins for this segment between 15% to 20%. In terms of CapEx, for the quarter, our maintenance CapEx was about $9 million. For the full year, maintenance CapEx was $37 million. which was approximately 11 million less than what we had spent in 22. As a reminder, our maintenance is a function of the hours and age of our equipment, and will vary by year depending upon when units were added to the fleet. Growth capex was 60 million for the quarter, and 15 million of that was non-new unit capex. We mentioned in Q3 that we had some opportunistic real estate purchases, and those closed in Q4. Going forward, we expect more normalized levels of non-unit growth CapEx. Overall growth CapEx for 23 totaled approximately $184 million. As we previously mentioned, CapEx was expected to be back-end loaded, and you saw that in the fourth quarter. Moving to the balance sheet. As of year-end, we had debt of $1.8 billion, consisting entirely of borrowings on our ABL facility. Our credit agreement leverage ratio was just shy of four times, and we exited the year with approximately $355 million of availability on the facility. As most of you know, last month we issued $750 million of 7.25% senior unsecured notes due 2029. As a debut issuer, we were very pleased with both the credit ratings we achieved and the pricing. It's clear that the ratings agencies and debt investors wholly subscribed to the current strength and future outlook of the U.S. compression market, as well as the durability and quality of Kodiak's cash flows. We issued the notes in advance of the CSI close in order to capitalize on the strength in the credit markets and de-risk the transaction. We used the proceeds to pay down our ABL and pay debt fees. At the time the CSI deal closes, we'll redraw on our ABL to pay off CSI's debt, as well as transaction expenses. When it's all said and done, we'll wind up with roughly $60 million plus of incremental liquidity on the ABL by virtue of issuing more in notes than we needed to close the transaction. With our IPO, the recent financing-related activities, and the benefits of an accretive and leverage-neutral CSI transaction, we remain on track to achieve our long-term leverage target of three and a half times or less by year in 2025. Moving to our 2024 outlook. For the year, on a standalone basis, we estimate total Kodiak revenue will range between $855 and $905 million. We estimate that adjusted EBITDA will range between $460 and $490 million. I'll now break that down by segment. In our core compression operations segment, we are forecasting full-year revenue of $795 to $825 million. and segment adjusted gross margins between 64% and 66%. Given constructive market dynamics, the attributes of our contracts, and our solid execution, we're confident in our segment outlook and are laser-focused on growing long-term, high-quality cash flows. In our other services segment, we are forecasting full-year revenue of $60 to $80 million and segment adjusted gross margins between 15% and 20%. We view 23 results for this segment as being an outlier to the high side. Our 24 guidance reflects more normalized revenue and margin levels. Turning to CapEx. Due to timing and customer demand, our 24 capital spending program is front half loaded with approximately 60% of spending happening in the first six months of the year. We expect maintenance CapEx to come in between 40 to 50 million for the year. On the growth side, we're forecasting net CapEx of between $165 and $185 million for the year. Included in our forecast is approximately $12.5 million in non-new unit-related CapEx. At the midpoint of that guidance, we'll grow our fleet horsepower in the low to mid single-digit percentage range. For modeling purposes, and to give you something to look forward to, CSI provided its 24 outlook in its fourth quarter earnings release on March 1. Shortly after transaction close, we plan to issue updated guidance for the combined companies, as well as a refined view on transaction synergies and any modifications to our capital allocation framework. To wrap things up, as Mickey noted, earlier this year our board declared our second quarterly dividend payment of $0.38 per share, which was paid last month. This equates to an annualized dividend of $1.52 per share. yielding about 5.5% to 6% at recent prices. Dividends are a key aspect of our overall capital allocation framework, which I'll remind you encompasses measured growth alongside attractive return of and return on capital while living within cash flow in deleveraging. Operator, we're now ready to take questions.

Thank you. We will 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 if you would like 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 your questions. Our first questions come from the line of Jim Rolison with Raymond James. Please proceed with your questions.

Hey, good morning, Mickey, John, Graham. Nice quarter. Obviously, nice business that continues to press on. But just one thing, just to clear something up here, just based on the stock price reaction. So your guidance for $460 to $490 million of EBITDA, that is just for Kodiak. And obviously, CSI can press go on. I think it was last Friday it gave guidance of $135 to $145 million of EBITDA. So When you guys put these together, assuming it happens around the beginning of the second quarter, it's going to be taking the guidance you're giving today plus roughly three-quarters of that guidance to get to a number, right? I'm assuming maybe the stock's off just because people are looking at some of the street numbers that already have this combined, but just wanted to 100% confirm that.

Yeah, no, hey, Jim, that is an important question. It's one that's kind of tripped folks up. This is John, by the way. Um, so, so if you just looked at guidance today and I looked this morning because the question has come up, like the mean guidance for Kodiak is for two, uh, for 2024 is 523 million. But obviously that includes some analysts that have updated their models and turn them in. And, you know, we don't really control when they're, uh, counting the CSI transaction is closed. So to come back to your question, uh, our guidance is on a standalone basis. But if you did assume the transaction closed, say, for example, April 1st, then you would take, in that math, 75% of the guidance that CSI had put out, summit with ours, add in synergies, and kind of you're off to the races. But it has created some confusion, so I'm glad that you've kind of asked that question. Perfect.

That's what I thought, but I just was making sure, just giving the reaction and all. And then as a follow-up, Mickey, you talked about the fact that you're already sold out for 24 months. you're actually already working into 20 second quarter of 25 with known customers, known contract pricing, maybe a little color. You know, we, when I look at this as a revenue per horsepower per month basis on the compression operation side, and you guys were kind of in the 19 and a half, uh, in that ratio in that this quarter, um, maybe some sense or some color just, How much higher, when you look at where those new contract rates are, are we above what the average realized is for the entire fleet? Is it 5%, 10%, or are we talking 20%, 30%, or is that even bigger than that?

Yeah, I think kind of where, yeah, Jim, this is Mickey. Good talking to you this morning. You know, I think that I don't want to put out too sensitive information here, but I related to the fleet is probably in that 20 to 25% premium range based on kind of where existing fleet pricing ranges today. And that's obviously based on higher operating expenses and higher capital costs that we're paying today, too. So really, it's along the same lines from a return on capital standpoint. That's how we price our equipment. But it commands... With a higher capital cost, it commands a higher rate to get the same amount of return on that capital. Right.

But gradually over time, the equipment that costs you less that you delivered two years ago or three years ago eventually reprices up there, assuming that the macro all continues to work like we all think it does.

Yeah, I think that's right. And, you know, I think that you heard on the call we're pretty bullish on the macro environment around LNG and natural gas right now. even despite a little bit low gas prices today.

Yeah, I noticed that. Great. Well, thanks, guys. I'll turn it over and let someone else ask questions. Yeah, thanks, Jim.

Thank you. Our next question has come from the line of John McKay with Goldman Sachs. Please proceed with your questions.

Hey, guys. Good morning. Thanks for the time. Maybe let's stay on the compression market overall and pricing. Could you just give us a sense, you know, you talked about the lead times of Caterpillar coming in from, you know, a year-ish to 40 to 45 weeks. Has that had any impact on your conversations with customers around your, I guess you're working on second quarter 25 right now? And maybe if you could tie in there, Caterpillar's talked about adding some capacity on some of their engine lines and maybe just an update on what you're hearing there. Thanks.

Yeah, John, good to talk to you this morning. I appreciate the question. So, look, just to address the Caterpillar issue right up front, you know, they pulled in their delivery times on large horsepower gas compression engines to 40 to 45 weeks. Most notably, the reason for that is kind of from hearing from Caterpillar is alleviating some of their supply chain constraints they were experiencing. it's not necessarily an increase in capacity on that engine line. When you heard on their last earnings call about some investments they're making in increased engine capacity, from our understanding, that's mostly in their PowerGen line of engines, which are going to support kind of data centers and AI, which is a tremendous amount of demand for power today, all fueled, obviously, by natural gas. So that's an interesting point there.

What was the second part of your question there?

You were talking about pricing? Is that right?

Yeah, that was really. So if you've come into, you know, 40 to 45 weeks, I guess it sounds more on their supply chains alleviating versus new capacity coming to the market. But does that, you know, 10 week or so better lead time? Has that had any impact on pricing when you're talking to your customers?

No, not at all. I mean, quite frankly, our customers at this point, we've been taking care of our existing customer base for the last, you know, year, two years out. And and not going out and soliciting new business per se. So all the customers that we're talking about, about first and second quarter type business of 2025, they understand that capital is precious and they need to get in line to get their allocation of that capital going forward. So I think the long type of backlog that we're seeing here probably is more related to the precious allocation of capital rather than directly involved with Caterpillar lead times.

All right. That's very clear. Thanks for clearing that up. Maybe just as a follow-up, if we're not seeing a ton of new capacity from Caterpillar or others coming into this, when do we have to start worrying about the amount of engines we can bring into this market and how we get the market overall lined up for how much gas is going to be flowing and

It's a good question, John, and I don't have a great answer for it. I think that there's going to be a pretty significant shortage of compression capacity, whether these customers and these EMPs decide to buy it on their own or decide to outsource it to people like us. I think everybody is capital disciplined right now. I think there's more gas to be compressed than I think anybody realizes as a function of the compression intensity of that gas that's coming out of the Permian Basin requiring four or five times more compression than a standard kind of conventional type of a well for dry gas, natural gas production. compression required for gas lift in the Permian, which is required for basically all of the oil production coming out of the Permian Basin. And then couple on top of that, relatively no additional idle capacity amongst Kodiak or our peers. I think that for the last several years, it's been a great market in compression. And if that idle capacity hasn't gone back to work now, it's probably relatively difficult to reapply in this situation right now. So with no idle capacity and spare capacity in the market, it's going to be very, very tight. And I don't see additional sources of equipment coming through to be able to take that capacity on. And I think that, you know, we're the beneficiary of it because we're sitting here in the in the seat of being able to drive pricing and drive utilization and that kind of thing. And so I don't foresee anything changing in this market for at least the foreseeable future.

All right. It's going to be interesting. Thanks for all that, Mickey. Appreciate it.

Thank you. Our next questions come from the line of Neil Mitra with Bank of America. Please proceed with your questions.

Hi. Thanks for taking my question. Mickey, I was wondering if you could maybe discuss the advantage you have versus an E&P or a midstream company in terms of securing compression and being able to have that in time for field operations versus an E&P or a midstream company going out and trying to secure that on their own? what gives you that pricing power versus them going out and getting the equipment themselves?

Yeah, no problem. Good to talk to you this morning, Neal. You know, at the forefront of it is the fact that we are a Caterpillar, basically a Caterpillar distributor, and so we have a special contractual relationship with Caterpillar that allows us to and requires us basically to purchase a certain amount of engines, percentage of our engines from Caterpillar every year for preferred pricing on that equipment. So we have basically the deepest discounts that you can achieve in the industry from both Caterpillar and Ariel that makes our compressor frames that couple up with the engines. So the fact that we have, you know, distributorship arrangements with them. We've been a very large purchaser of Caterpillar engines, obviously, for years and years now. I mean, we've grown almost a 3.5 million horsepower fleet here of almost exclusively Caterpillar engines. So we've got a long history with CAT and the packaging facilities that are required to build this equipment, fabrication facilities. So with all those relationships and the history of doing business with those companies for years and years and being a big part of their businesses, they are obviously incentivized to continue to do business with us. And so it makes it kind of allows us to take a spot at the head of the line and allows us to continue to manage our supply chain and make sure that we're thinking with our customers a year plus out on deliveries.

Got it. And then I'm assuming that some of these companies don't exactly anticipate what field pressure will be and the type of compression they'll need. Do you have somewhat of a, I guess I would describe it as a spare backlog that you can deploy to alleviate any constraints that some of these companies are facing that otherwise, you know, they wouldn't normally anticipate?

No, we really don't, Neil. I mean, 100% of our capital allocation that is going towards new horsepower growth is contracted with customers that are requiring it basically throughout 2024 and into 2025 now. So we don't have excess capacity at 99 plus percent utilization. Um, there's, there's now and then some churn within the fleet that we can, um, make things happen pretty, um, uh, a little faster than a 40 to 45 week lead time requires. But, um, there's really not a lot of that going on either when you had talked about production in the Permian basin where the majority of our assets are allocated. So, um, you know, historically in this industry, um, people kind of, uh, managed that excess capacity that they needed for, for, uh, changes in pressures and flows and that kind of thing, changes in drilling programs with the idle capacity that sits in the industry that just doesn't exist today. So I think that the winners throughout this cycle are going to be the ones that really can plan ahead and look into the crystal ball and be accurate with what their production profiles are going to look like a year out.

Hey Neil, this is John. I'm going to put a finer point on that too. So the headline figures throughout the public companies in the industry around utilization You know, eye-popping. Ours has always been pretty good. Our truck's at record. USAC's recording great numbers. If you were to take the horsepower that's in the highest demand, the large horsepower, I mean, that's going to be even higher, right? So it goes back to Mickey's answer to the last question. We think this is a fundamental industry challenge that we're going to be wrestling with in terms of where the horsepower is going to come from to move the oil and the gas in this country for the foreseeable future. Got it.

Appreciate it. Thank you.

Thank you. Our next questions come from the line of Jeremy Tonette with JP Morgan. Please proceed with your question.

Hi, good morning.

Hey, Jeremy.

I just wanted to start off with the base business in the EBITDA guidance there. I was wondering if you might be able to talk a bit more as far as what the drivers could be for the high end versus the low end of the guidance range there.

Yeah, I'll take it. So, Jeremy, great talking to you. You know, it's always going to come down to, with utilization kind of where it is, right? You're not going to see that come from utilization. 24, from a growth CapEx perspective, a new unit, we've said it since we went public, it's effectively sold out, right? So, I guess you could see some acceleration of when we would be delivered equipment. We don't expect that, but I guess you could, and that would kind of drive revenues up more. and margins up more, it could go the other way as well too and be delayed, but we think knock on wood, the worst of that's behind us. So it really comes down to just the fundamentals of price versus costs in our biggest businesses, right? The compression operations segment. So like, suffice it to say, we're very focused on kind of making sure that we're charging appropriately for the value that we deliver to our customers. And we've always talked, in my remarks I said earlier, we've always been focused on cost control. And in light of kind of how cost ran over the last couple years industry-wide by virtue of post-COVID type activities, that's something where we're doing what we can with, I'll call it automation, with our form of artificial intelligence to better understand, like, how to take care of our units, software to help us with labor productivity, I mean, anything and everything. And I don't think we're unique in that camp. We're just putting full focus on it. So those are the two big levers. I guess I need to include the other services segment, because if you think about 23, we had a whopper year in other services. We have guided towards an average year in other services. That's the station construction work that we do guide 60 to 80 with normalized margins of 15 to 20%. So if 23 was to repeat itself in 24, which namely we had a couple of large contracts come in late and we performed very well on them, generated great margins. You could see some upside there as well. So I think I've covered all the different pieces that could drive the business.

Got it. That's very helpful. And just wanted to pivot gears a bit here and just wondering how, I guess, conversations with customers are going with regards to emissions and just overall trends between moving towards more electrification and how you see that trend kind of playing out over time and what impact that would have on KGS.

Yeah, Jeremy, I think that, you know, obviously emissions and being a better steward of compression emissions overall is at the top of everybody's mind, and that's why, you know, Kodiak's very successful in what we do with the youngest, cleanest fleet out there and emissions-friendly fleet out there. The customers are talking about it all the time. And I think that, you know, in a perfect world, we'd love to, our customers would love to electrify everything. But the reality is that that's just not doable from a grid standpoint. So there'll always be a balance of gas versus electric driven compression in this industry. There is some drive for electric and demand for electric-driven compression looking out into 2025. And I told you earlier that we're effectively fully sold out for Q1 of 2025, and there's a good portion of that that is electric motor-driven compression for that first quarter. So 2024 is majority gas engine-driven with our growth capital that we're spending because these customers are trying to get ahead of and get, get in line to get grid access and that kind of thing. So there's going to be some electric motor driven compression, but I kind of look at it. I said this before, I look at it kind of the same way as renewable energy sources that, that there's a market for those and they're going to gain some market share. But I think that the overall growth of the market is going to be maybe it's a gas engines might have a lower percentage of a, overall, but on a total basis, it's going to continue to be a growing market there. So there'll be some portion of our fleet that goes electric, and we're going to be paying attention to what the right allocation is between gas to electric. And as we do with anything we do, we're going to be the best at it if we're going to get into it. So we want to offer the best service to our customers and be their first provider of choice when they decide they want to go to electric compression.

Got it. That's very helpful. I'll leave it there. Thanks.

Yep. Good talking to you, Jeremy.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Neil Dingman with Truist Securities. Please proceed with your questions.

Morning, guys. My first question, guys, is on the compression contract specifically. Baker, your utilization continues to be no question, I think, better than anybody out there. Given the continued demand, I'm just wondering, do you all anticipate any change in contract length because of this? And I'm just wondering, is the length about the same in various areas like Permian, Eagleford? I'm just wondering how it sort of compares regionally.

It does. I mean, it's relatively the same. If we deploy assets into the Eagleford or somewhere that isn't the Permian, we're going to kind of command that we want to have the same kind of return on capital over the course of that contract. that primary contract to kind of de-risk the spend, that capital spend. So, you know, but all in all, it's pretty similar no matter what basin we go into. Basically, 100% of our capital for 2024, though, is going to the Permian Basin because that's where the most significant demand is in the highest growth areas with our kind of core customer base. But I will say, though, that we have seen a little bit of contract tenor extension over this kind of past cycle, but it's really not something that we're pushing tremendously. Because, Neil, if you kind of recall, some of the things that we've said in the past is, look, I can have a three-year contract on a 3606 engine, and if it's sitting on top of 25-year life production, then I feel like that unit's going to generate cash flows for 25 years as we go through multiple renewal cycles. So, Because of the quality of the production that we're looking at that we're putting this equipment on, I feel good about contract tenure and our ability to recontract at the end of those cycles.

Yeah, it really seems like you all are in the driver's seat there. And then my second is kind of a little bit more on regional demand. I'm just wondering something you had said earlier today. It seems like specifically outside the Permian where we know demand is high, it You know, what are you seeing? I mean, you mentioned about LNG, and, you know, my comment is I would think a lot of those larger LNG players would be knocking hard at your door to try to make sure something's lined up as, you know, some of these things come on late, you know, specifically next year and into 26. I'm just wondering, you know, how much, you know, what kind of conversations and how, you know, how many conversations are you continuing to have these days outside the Permians?

A few. You know, the typical LNG supply feed gas type conversation isn't a conversation that those facilities are having with us. They're having those conversations with our customers, and then our customers are dealing with us to make sure that they have the ability to move the gas as it's needed. So, we're really more of a We're needed to make sure that the gas gets to those LNG facilities, but we're not negotiating or dealing directly with those LNG terminals to make sure that they have gas on location. You see a little bit of it. I think a lot of this is going to be driven by natural gas prices. With what we've seen with sub-$2 gas driven by this LNG moratorium from this administration that I think the longer gas prices stay depressed where they're at, the longer and more significant the requirement for feed gas is going to come out of the Permian Basin versus the Haynesville or other outside areas. Thanks, Mickey. Well said.

Thank you. Our next question has come from the line of Zach Van Everen with TPH. Please proceed with your questions.

Hey, guys. Thanks for taking my question. Just one on... The fleet age, I know your guys' core fleet is relatively new. I think it's some of the newest out of all your competitors. Could you give an average, I guess, age of the CSI fleet once that comes under your guys' belt?

Yeah, I mean, look, I think our fleet age is in that five- to six-year range on an average basis for our fleet. CSI, when they bring their equipment to the table, they've grown a lot of horsepower with new equipment in the large horsepower basis over the last several years, and they've done a lot of work to kind of churn some of the older stuff out of their fleet. So I think that you look at kind of an average fleet age that they would roll in is about nine to ten years on their fleet basis, right, with ours being six. So The average in between is going to be somewhere in between. But, you know, we don't put a lot of stock in that fleet age because if you adhere to, you know, strict overhaul type of regimen that basically you zero hour and overhaul this equipment every eight to ten years anyway. So an eight to ten year old piece of equipment that has a brand new engine on it is going to, in our maintenance cycle, is going to look and act and perform just like a brand new piece of equipment.

Okay, got it. So a lot of theirs have already been rebuilt at the age that they're sitting at right now? Yep. Perfect. And then one last quick one. You know, you mentioned rates are still coming in well above kind of the base rate of the full fleet. Can you remind us, you know, maybe how many of those legacy two- to three-year-old contracts are rolling off in 2024 and 2025?

Yeah, absolutely. We have, at the end of the year, we had about 7% of our fleet was on month-to-month contracts. And you can expect kind of with our fleet, we'll roll over about 30% of our contracts every year. So because we have such a heavily contracted fleet, and we have so few month-to-month contracts in that fleet, our fleet kind of turnover for contracts is a little slower than some of the other guys. So you won't see... kind of the spikes in revenues that you see in other places. But like I said, we should be able to reprice kind of 30% of the fleet as those contracts roll over this year.

Got it. Perfect. Thanks, guys.

Yeah, thanks, Zach.

Thank you. Our next question has come from the line of Salman Akhil with Stifel. Please proceed with your questions.

Thank you. Good morning. First of all, just high level. We've seen some capacity additions in the storage market, and I'm just wondering, is that a market for you guys at all that you could play in? Is that an opportunity?

Yeah, good morning, Selvin. You know, that's another thing. It's kind of like the LNG terminals, right? We don't really control where the gas goes after we compress it and put it in a pipe for our customers, especially on the midstream side after post-processing and gas lift and that kind of thing. So That, obviously, increased capacity for storage and cycling gas in and out of storage is definitely a demand driver for our industry, and it is definitely something that requires additional compression on the front end. So, again, that's something that our customers are determining where they're going to take their gas, whether it be to a to residential use or LNG terminals or to storage is negotiations that they have in place, but they require companies like Kodiak to provide compression for all of those demand drivers.

Understood. And then just a smaller question. In your guidance, you talked about $12.5 million for non-unit compression for capital, and I'm just kind of curious to what that was or what that will be.

Yeah, that's kind of rope, soap, and dope, Selman. This is John. You know, it's the trucks, it's crane trucks, it's software that's capitalized, leasehold improvements, things of that nature. And we're always going to have it every single year just to kind of take care of older equipment that's kind of aging out or else just keep up with the growth in the business.

Got it. And then the last one for me, just on the other services, you know, you talked about how 23 was skewed by a couple of large contracts. Is there any thoughts or guidance around just sort of the cadences we should think about our model and going forward on that? Great question.

No, it's, I would say, divided in four. I mean, that's probably the best way to approach it at this point. The nature of those contracts, some you may be awarded a contract, call it nine, 10 months in advance of when you actually complete it. But it'll be chunky in terms of how the revenues kind of unfold and that you'll have some stuff happening at the front end. And then the field work might be four weeks at the very end. And that's when the main chunk would come in. And then other contracts might be just more the field related stuff can be shorter So that's where it becomes difficult to predict because you might be awarded a contract, you know, in third quarter and finish it by the end of the fourth quarter. So that's what happened in 23.

Got it. Thank you so much.

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to management for closing remarks.

Thanks, Operator. In summary, I could not be more pleased with our record-setting results in 2023. We believe that Kodiak's brightest days are in front of us, and we look forward to continued profitable growth in 2024 and beyond. We look forward to speaking with everybody again on our next earnings call. Thank you.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.