Kodiak Gas Services, Inc.

Greetings and welcome to the Kodiak Gas Services Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I now turn the conference over to your host, Graham Soans, 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 2024 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 review recent developments, discuss our third quarter financial results, our updated 2024 outlook, and some initial thoughts on 2025 before opening the call for Q&A. There will be a replay of today's call available via webcast and also by phone until November 21, 2024. 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, November 7, 2024, and therefore you are 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 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 of the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. And now I'd like to turn the call over to Kodiak's CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you for joining us today. I'd like to start the call as we do every internal meeting at Kodiak, discussing safety. As a company, we set a high bar for safety with a goal to make certain that every employee goes home safe and sound to their families every night. We have invested in an industry-leading training program to make certain that all of our employees have the knowledge and the training needed to do their job safely. The focus of each and every Kodiak employee on this topic truly embodies the philosophy that we've adopted at Kodiak. Safety first, all the time. Before we talk about our financial results, I'd like to briefly touch on a few noteworthy events that happened during the third quarter. We've been actively evaluating opportunities to high-grade our compression fleet. The first step in that process was the divestiture of the small horsepower gas jack business that we acquired in the CSI transactions. The sale, which we completed in September, involved about 90,000 horsepower, less than half of which was being utilized. The transaction also allowed us to fully exit Canada and Romania, simplifying our operations while increasing the average horsepower of our fleet and reducing our exposure to dry gas basins. As you know, Kodiak's strategy is focused on large horsepower compression in liquids-rich basins and you should expect us to continue to high-grade our fleet over time. Another notable development during the quarter was the successful completion of the first marketed follow-on offering by EQT, our largest shareholder, which allowed us to take a large step towards diversifying our shareholder base. At the start of the year, our top five shareholders collectively represented about 84% of our shareholder base, limiting are trading liquidity and float. As of today, we have reduced that concentration by about 20%, and the trading liquidity in Kodiak stock has increased by over 100%, making Kodiak a more attractive investment for large institutions. I want to thank the investors who participated in the offering, which we completed in September. We had very strong demand, and it was one of the tightest-priced follow-on offerings in the energy sector in the last few years. We viewed the success of this transaction as a vote of confidence in our strategy and future earnings growth potential. We were pleased to complete our first share repurchase in connection with the offering, demonstrating our confidence in the outlook of our business and adding to our multi-pronged approach to delivering shareholder value. Measured growth, a strong and growing dividend, and now share repurchases, all while driving leverage to three and a half times or less by the end of next year, have proven to be the right formula and delivered total shareholder returns of approximately 110% since our IPO. Yesterday, we released third quarter 2024 financial results. including another record quarter with revenues of $325 million and adjusted EBITDA of $168 million. We also generated $53 million of free cash flow in the quarter. Through the combination of putting idle equipment back to work, divesting lower margin small horsepower, and adding new large horsepower units, Kodiak's fleet utilization increased sequentially to over 96%. Our core large horsepower assets remain near full utilization, in excess of 99%, reflecting the continued tightness and capital discipline of the large horsepower compression market. Demand for large horsepower compression remains as strong as ever. During the third quarter, we added roughly 50,000 horsepower of new units to our fleet. All were Permian-focused large horsepower. averaging over 2,000 horsepower per unit, and they were deployed at rates well above the fleet average. Additionally, we were able to redeploy approximately 38,000 horsepower that was previously idle. Our commercial team has done a great job working with our customers and recontracting units of all sizes that were up for renewal and realizing prices closer to current market rates that are also above our current fleet average. We continue to differentiate our compression offering through our mechanical availability guarantee and the service we provide. After realizing cost synergies, returning idle equipment back to work, and another strong quarter of re-contracting, I am pleased to announce that we delivered a third quarter adjusted gross margin of 66% in our contract services segment. Not only does that match the high end of our annual guidance but it also matches our historical record margin even before the CSI acquisition. This is no small accomplishment and reflects the great results our team has been able to achieve through the integration process. Switching to our other services segment. As a reminder, this segment primarily consists of our station construction and aftermarket services businesses, which are somewhat less predictable than contract compression that generate significant free cash flow with very little capital investment. We realized strong revenue growth from our station construction business in the third quarter and delivered an adjusted gross margin in line with our expectations. One great example of our segments working together to provide customized integrated solutions for our customers is a project that we are currently working on in Midland, Texas. A midstream customer needed to add a compressor station inside the city limits where the compression equipment must meet strict emissions and noise requirements. The location is close to reliable grid power, so we were able to offer as a customized electric motor driven large horsepower solution. We were hired to design and install the compression infrastructure as well as contracted to deliver four large horsepower electric driven compressors. We recently completed the engineering, the site construction expected to begin before year end, and we are currently on schedule to set the four new units in the second quarter of 2025. As we have previously discussed, electric motor driven large horsepower compression units are going to represent an increased portion of our capital spend as we strive to help customers lower their emissions to produce oil and natural gas. Approximately half of the new units we plan to install next year will use electric motors. However, large horsepower electric compression presents unique challenges as the motors require a significantly higher voltage than smaller motors, requiring a step-up transformer and increasing the overall power demand for the project. As many of you know, West Texas power demand has been increasing at a materially faster pace than the rest of Texas. growing by approximately 11% per year over the last decade. This demand increase has been driven by oil and natural gas production, cryptocurrency mining in data centers, and has resulted in regional power shortages. Thankfully, this summer, we saw several meaningful steps by the state of Texas to address the sizable demand growth, including the Public Utility Commission moving forward with more than $5 billion in loans for 17 new natural gas-fired power plants, which are expected to add approximately 10 gigawatts of electricity. Then in September, the Permian Basin Reliability Plan was approved, calling for $13 to $15 billion of investments in electric transmission line upgrades in West Texas. These investments in the security of the supply of power are crucial for the oil and gas industry to continue powering our economy. In last night's earnings press release, we increased the low end of our full year revenue guidance for both segments, as well as our full year 2024 adjusted EBITDA guidance. Given the third quarter gas jack sale, plus a handful of small additional divestitures, we thought it would be helpful to provide an early outlook on our financial expectations for 2025. After factoring in these asset sales, along with our new unit expectations for the fourth quarter, we expect to exit the year with roughly $4.25 million of operating compression horsepower. With that in mind, we expect adjusted EBITDA for the full year 2025 to be in a range of $675 to $725 million. In summary, We're very pleased with our third quarter results. The realized transaction synergies, as well as strong industry fundamentals, resulted in improved margins and increased cash flows. We made progress high grading our fleet, and our commercial team has been actively redeploying idle assets, improving fleet utilization. Our dividend remains well covered, and we are on track to achieve our increased guidance for the year. The ramp up of natural gas demand remains highly visible. The US needs to continue to add electric generation capacity, and natural gas remains the most reliable and affordable fuel of choice. And that's on top of the wage of LNG export terminals expected to enter service in the coming years. The increase in gas production required to meet this demand is going to require significant compression infrastructure development. And we continue to believe that Kodiak is well-positioned to be the compression provider of choice. Our focus on customers and employees, industry-leading mechanical availability, and our market position separates us from our peers. And now I'll pass the call to John Griggs to review third quarter financial highlights and our guidance. John?