Kodiak Gas Services, Inc.

Welcome to Kodiak Gas Services fourth quarter and full year 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. It is now my pleasure to introduce Grant Soans, Vice President, Investor Relations. Thank you, sir. You may begin.

Good morning and thank you for joining us for the Kodiak Gas Services conference call and webcast to review fourth quarter and full year 2024 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will review recent developments, discuss our financial results in 2025 outlook, and then we'll open up the call for Q&A. There will be a replay of today's call available via webcast and also by phone until March 20, 2025. 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, March 6, 2025, and therefore you are advised that such information may no longer be accurate as at the time of any replay listing 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 to 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 President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you for joining us today. Last quarter, we published our third annual sustainability report. If you've not had a chance to read it, I would highly recommend it. The report highlights our commitment to making a difference in our communities by donating our time and resources through programs like the Kodiak CARES Foundation and KVETS, an employee resource group for veterans who have proudly served in our military. The report also details our relentless focus on safety. 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. Even one incident is too many, so we continue to invest in our industry-leading training program to ensure that our employees are equipped to doing their jobs safely. 2024 has been an amazing and transformative year for the dedicated women and men of Kodiak. In addition to the significant acquisition we made and its integration, We made our debut issuance into the high-yield bond market, returned significant capital to shareholders, and executed upon our strategic plan, including the organic growth of our fleet, development of our cutting-edge training facilities, and the initial deployment of AI technology into our business. Since closing the CSI acquisition on April 1st of last year, we've been focused on delivering the strategic value creation of the combinations, This included realizing synergies through the merger to increase margins and free cash flow, streamlining our operations to focus on our core U.S. large horsepower strategy, continuing to invest in new large horsepower units focused on the Permian Basin, and increasing shareholder returns through an increased dividend and share buybacks. I'd like to touch on each of these briefly. As you know, we vastly exceeded our initial acquisition synergy estimates realizing over 50% more cost savings than originally expected. These synergies, plus our streamlined asset footprint, allowed us to simplify the business and steadily increase margins in our contract services segment. We told you during the CSI acquisition that our core strategy would remain unchanged, focusing on large horsepower compression in oil-directed basins. With that in mind, we have been actively divesting assets that don't fit with our long-term plans. During the fourth quarter, we divested non-core units totaling approximately 33,000 horsepower. And in total, we divested approximately 129,000 horsepower of non-core low margin units. Through these transactions, we have increased the average horsepower size of our fleet, reduced the average age of our fleet, and geographically focused our operations. producing overall better margins and far more stable cash flow. When we closed the CSI acquisition less than a year ago, Kodiak had operations in six countries. Today, we have exited four of those countries with all of our existing operations located in the U.S. and Mexico and greater than 80% of our fleet capacity located in either the Permian or the Eagle Ford. As we divested the assets that did not fit our long-term strategy, We reinvested in new large horsepower units. During the fourth quarter, we added approximately 23,000 new horsepower to our fleet. On average, the units were greater than 2,000 horsepower and primarily put to work in the Permian Basin. Lastly, we returned significant capital to our shareholders. Kodiak paid $139 million in dividends and distributions in 2024, about 37% of our discretionary cash flow. and bought back over 1.4 million shares of our stock at a weighted average price below $28. This return of capital contributed to the 115% total shareholder return that Kodiak stock delivered in 2024. I'm very proud of the work that has been done over the last 12 months to execute on our strategic plan and the commitments we made to our shareholders. Yesterday we released our fourth quarter and full year 2024 financial results. I'll hit the highlights and let John provide more details. For the year, Kodiak set new records in total revenue, adjusted EBITDA, discretionary cash flow, and free cash flow. Total revenue grew by 36% to $1.2 billion, and adjusted EBITDA grew by 39% to $610 million. The growth was driven by outstanding execution of our core strategy by Kodiak personnel, the CSI acquisition and associated synergies, and our ongoing investment in organic fleet growth. We generated $122 million of free cash flow in 2024 after investing to grow our large horsepower fleet and high grading a portion of the CSI fleet we acquired. Our leverage ended the year at 3.9 times, and we are well positioned to achieve our target leverage of 3.5 times by the end of 2025. We ended 2024 with 4.25 million revenue-generating horsepower and a fleet that's nearly fully utilized at 97%. Our core large horsepower assets remain effectively fully utilized in excess of 99%. reflecting the continued strong demand for large horsepower compression. Next, I'd like to discuss the evolving natural gas market. Since our last call, we've seen front month natural gas prices increase from the mid $2 range to the $4 range due to the seasonal increase in demand and the startup of two LNG export terminals along the Gulf Coast, with additional capacity of up to 3.7 BCF a day expected to come online in the next 12 to 18 months. Thinking more long-term, we've witnessed a fundamental shift in the outlook for electricity demand. The combination of society's drive to electrify as well as the forecasted step change in demand from data centers and AI has fundamentally altered the power demand outlook. As a result, companies across several industries are now focusing on securing reliable and affordable energy, Due to its abundance and affordability, it's evident that domestically produced natural gas is going to play a vital role in providing energy solutions in the U.S. and around the world. The combination of highly visible demand drivers and the new administration's support for U.S. oil and gas development providing affordable, secure, worldwide energy gives us confidence we'll see strong natural gas production growth in the coming years. The Permian Basin is expected to lead that growth as oil-directed drilling delivers increasing amounts of associated gas, and as operators develop new and deeper formations, gas-to-oil ratios in the Permian continue to steadily increase. On average, Permian producers are generating 10% more gas per barrel of oil production today compared to 2020, a trend that the industry expects to continue. Given the industry's confidence in future natural gas production growth, four and a half BCF a day of Permian gas takeaway pipelines reached FID in the second half of 2024. These projects have strong commercial support and are expected to be online and likely full by the end of 2026. We're making significant investments to support this growth, both in our fleet and our people. Last year, we established Bears Academy, a state-of-the-art compression training program offering hands-on learning opportunities to both new and experienced personnel to advance their knowledge and skills. Nearly 200 of our employees have already attended this program, and we're currently constructing a new dedicated facility in Midland where we'll develop the next generation of leaders in the contract compression industry. We've also deployed AI machine learning through telemetry analysis that is identifying and predicting failures and other mechanical issues before they occur. This assists our field personnel in troubleshooting and repairs, enhancing our overall uptime and service capabilities for our customers. These are some of the many investments we're making in training and technology to deliver great service to our customers. Now turning to our outlook for 2025. John will cover the numbers in more detail, But I would sum up our guidance in last night's press release as more of what you've come to expect from Kodiak. The strategic actions we took in 2024 positioned us for continued success. We will invest in our fleet to support our customers' demand for large horsepower compression. We will continue to return capital to shareholders and drive towards our leverage target while living within cash flow. That formula has proven itself since our IPO, and it's one we will continue to execute on in what is leading to an exciting 2025. To wrap things up, 2024 was a phenomenal year for Kodiak. We completed and integrated a transformative and highly accretive acquisition while setting new company records in revenue, adjusted EBITDA, discretionary cash flow, and free cash flow. Through our large horsepower fleet, took strategic action to divest assets that didn't align with our strategy. We also increased our quarterly dividend by 8% and bought back $40 million of our stock at attractive prices. The fundamentals for natural gas compression remains extremely strong. The ramp-up of natural gas demand remains highly visible. We've already seen natural gas prices respond, signaling the need to increase production and invest in additional pipeline infrastructure. The increase in gas production 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. And now I'll pass the call to John Griggs to review the financial highlights and our guidance. John?

Thanks, Mickey. Since the details are included in our release, I'll be brief and focus on the key points. Simply stated, We had another solid quarter in an outstanding year. We accomplished a lot during 24. We successfully integrated a major acquisition, completed several debt and equity capital markets transactions, and closed on multiple strategic divestitures. It was a big lift, and one not possible without the relentless efforts of our dedicated Kodiak workforce. I'll quickly hit the financial highlights. For the year, we reported total revenue of approximately $1.2 billion, a 36% increase over 2023. The outsized growth was primarily driven by the acquisition of CSI, but also by solid execution in all aspects of our business. We reported net income attributable to common shareholders of nearly 50 million and adjusted EBITDA of approximately 610 million, up 149% and 39% respectively from the prior year. With regard to the fourth quarter, total revenues were approximately $310 billion, down 5% sequentially as a result of the successful divestitures of multiple packages of low-margin non-coal horsepower and expected seasonal slowdowns in our other services segment. Importantly, however, our contract services adjusted gross margin percentage increased to approximately 67%, up sequentially in direct evidence of the success we've had in raising the average price on our core in new units, capturing synergies related to CSI and exiting lower margin assets and geographies. Those asset sales are the main reason our average horsepower per unit increased from 734 in the first quarter post CSI to 926 at year end. As we start 25, we're more than halfway back to our high water average horsepower per unit mark of 1,072. That particular metric matters a lot because large horsepower compression is central to our strategy. It's what's being demanded most by our customers, and it's stickier and generates meaningfully higher margins and cash flows than its small horsepower brethren. Reducing our exposure to non-core horsepower in foreign markets is something we said we would do, and we've wasted no time doing it. And as a result, our business is much better positioned to serve the most important and fastest growing customer markets. In our other services segment, revenues were just over $29 million in Q4, with an adjusted gross margin percentage of 15%. We typically realize a seasonal slowdown in our other services business as customers exhaust their capital budgets and defer projects until the new year. Adjusted EBITDA for the quarter was slightly more than $169 million, up from Q3 with the higher contract services margins more than compensating for the loss of low-quality revenues attributable to the divestitures. In terms of capital expenditures, maintenance capex came in just under $15 million for the quarter and slightly more than $66 million for the full year, both right on track with what we expected. Our growth capital expenditures were approximately $71 million for the fourth quarter and $286 million for the year. Included in the annual total was a roughly $20 million non-cash accrual for potential sales and use taxes relating to our ongoing compression taxability audit with the state of Texas, as well as approximately $30 million related to getting the CSI fleet up to Kodiak's safety and operating standards, two items that we have called out in prior quarters and excluded from prior guidance. Not including what we acquired through the CSI acquisition, During the year, we added almost 162,000 of new horsepower, all of it large and nearly all of it headed to the Permian. Growth capex related to new fleet units represented about two-thirds of our total growth capex, with most of the balance going towards the aforementioned CSI fleet upgrades and tax accruals, as well as the expansion of our rolling stock and support infrastructure. With regard to the balance sheet, At year-end, we had total debt of just over $2.6 billion, comprised of the $750 million principal amount of our 2029 senior unsecured notes and the rest borrowings under our ABL facility. We exited the year at 3.9 times credit agreement leverage. Coming out of the gates post-IPO, we were at 4.2 times leverage, and we remained focused on getting that down to 3.5 times by year-end 2025. Let's turn to our 25 guidance, where we provided our customary metrics in yesterday's release. We expect overall revenue to range between $1.31 and $1.38 billion, with the contract services segment resuming its growth following our second half 2024 non-recorded vestitures. We expect the adjusted gross margin percentage within the contract services segment to range between 66% and 68%. driven by the combination of new horsepower sets at leading-edge prices, ongoing repricing of the existing fleet on the roughly 30% of our horsepower that renews during the year, and then operating leverage. As Mickey mentioned, we're making meaningful investments in a clutch of bespoke industrial, artificial intelligence, and machine learning projects, as well as the expansion of our industry-leading training and development programs. These are highly strategic and important initiatives, that we believe will drive scalable, higher margin growth over the medium and longer term and further differentiate us from our competitors in the superior levels of service we strive to provide our customers. Our adjusted EBITDA guidance range of $685 to $725 million represents a higher midpoint than the early outlook we provided in our Q3 earnings release, evidence of the confidence we have in our ability to execute on our objectives. We expect maintenance capex to be in a range of 75 to 85 million. Maintenance capex at Kodiak is driven more than anything by engine and compressor hours, and increasingly by predictive analytics. It is critical in allowing us to provide the extremely high levels of mechanical availability and uptime to which our customers have grown accustomed. We see growth capital spending landing between 240 and 280 million. about two-thirds of which at the midpoint will be spent on approximately 150 to 155,000 new horsepower. As we've mentioned in prior calls, about 40% of the 25 new horsepower is electric, and nearly all of it will be set in the Permian. The balance of our growth cap tax will go towards a variety of items, including fleet upgrades, emissions-related projects, capitalized aspects of the aforementioned AI and BEARS Academy projects, a new ERP system, and facility and support equipment expansion to support future growth. In terms of capital allocation, expect more of the same. We'll put as much capital to work as we can in high-returning contracted large horsepower, which should allow us to deliver long-term annual growth and adjusted EBITDA in the upper single-digit percentage range. In 2025, we expect to return about 35% or more of our discretionary cash flow to shareholders, mainly through dividends, but also through opportunistic share repurchases. And we'll continue to deliver with a direct line of sight to three and a half times leverage by the end of this year. To wrap it up, 2024 was a fantastic, transformative year at Kodiak. We're super proud of all that we accomplished in our financial results. The markets for what we do best Namely, U.S.-focused large horsepower contract compression and related services are stronger than ever. And by every indication, it looks like they will remain that way for a while. And we're leaning into a variety of people, process, and technology initiatives and investments during 2025 that we think will set us up for even better operating and financial success in the future. With that, I'll hand it back to Mickey.

Thanks, John. To wrap up, During 2024, we set new records in several key growth metrics, and we did it while maintaining our focus on profitable growth and expanding margins. We stayed true to our word and made progress on all of our strategic objectives and continued to reward our shareholders for their investment in Kodiak. And we're not done. Our 2025 guidance reflects our outlook for continued strength in the contract compression market. We remain excited about the opportunities in front of us and believe the steps we took in 2024 prepared us to deliver even better things in the future. Lastly, I want to thank the women and men of Kodiak for their focus on serving our customers safely, which allowed us to deliver such great results. With that, we're happy to open the lineup for questions. Operator?

Thank you. 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 remove your question from the queue by pressing star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Jim Rolison with Raymond James. Please proceed.

Hey, good morning, guys. Hey, Jim. John. Mickey and John I guess we've been obviously on this upward pricing trend for compression for a while Driven by the tightness driven by the cost of equipment etc And and John you just a minute ago reference obviously setting new units at higher pricing and things are still catching up Mathematically this quarter your average revenue per horsepower per month actually came down slightly and I'm just kind of curious I'm sure there's some noise in there given the what you've been doing with some of the CSI fleet, but maybe just a little color around that and kind of an update on where leading edge is relative to kind of what your fleet average looks like.

Perfect. Yeah. Thanks so much, Jim. So it's something we thought about. I'll tackle the first part of that and then I'll hand it back to Mickey about the leading, leading edge pricing. So, so, so as, numbers you're looking at are going to be our contract services revenue per average or for ending horsepower if you go back to q3 it was 22.25 and if you see in q4 it comes out to 21.97 so a small step down if you look back at our many years of public records as well as stuff that we published before we were public, it does step up every quarter. The simplest way to explain the impact or why that happened is through the impact of the sale of the non-core horsepower. So we call it out, right? In Q3 and Q4, we sold roughly 125,000 horsepower. So a number like that, about say 75,000 of that was actually working at the time of sale. So if you, we did a crude analysis, it said, let's act as if that horsepower that we sold didn't exist. So we can remove it, the impact that it had in the Q3 or the Q4 kind of dollar per horsepower sale. And the answer is if you remove all the revenues and the horsepower associated with those sales from Q4 and Q3, you would have seen a modest step up. from Q3 to Q4 completely in line with our historical trajectory over multiple quarters. So that's the evidence that we needed to see for ourselves. It doesn't come out in the numbers because we don't disclose that, so I just told you the answer that indicates continued repricing of the fleet upwards as well as setting new horsepower. The last thing I will say is The fourth quarter is traditionally one of our smallest quarters in terms of repricing. And you know how much horsepower that we set in the quarter, and it was the smallest quarter of the year. So even though it was up quarter over quarter, what you'd expect to see in, say, first quarter or quarter we had more repricing was an even bigger step up. So I'll finish and then hand it back to Mickey by saying it's completely in line with our expectations, and we think we do a reset. And then from here, we continue to go our typical Kodiak up into the right quarter after quarter.

Yeah, Jim, and this is Mickey. Just to talk a little bit about leading-edge pricing, I'm not going to probably tell the world what our pricing book looks like, but I will tell you that we're still seeing and have confidence in the same kind of leading-edge pricing that we've seen over the last several quarters, which is probably in that 15% to 20% premium over average pricing of the fleet today. So we still see that going strong and don't see any change there.

Got it. Appreciate that. And maybe as a follow-up, obviously margins have improved. You guys had a really strong quarter. The guidance kind of indicates that kind of continues going forward. And we obviously can get the pricing impact as we think about what you just talked about. Maybe just spend a second on some of the things you're doing on the cost side. You mentioned AI, machine learning, and the different things you're doing between training and predictive maintenance and all that. How does, when you roll that up into a margin impact for the investment you're making, maybe you can spend a little time just kind of talking about how, you know, how that should unfold margins over time.

Yeah, I think that, uh, that's a great question. I, I, I think a little bit of it is, is projection. Um, I'm not, not a hundred percent sure where margins can go yet. I think that, um, we see a clear path forward towards that upper 60% range on the margins. One of the things that we're doing right now that we're testing out that we're getting ready to roll out is looking at a conditions-based PM cycles on some of our units. So, you know, if we have a strict, in this industry before, we've had a strict maintenance kind of cycle of 90 days, and we do a, a maintenance cycle, no different than every 3,000 miles, you know, 10 years ago, every 3,000 miles, you'd have gotten the oil changed in your car. And now your car kind of tells you every 5,000 to 7,000 miles today, you need to go get your oil changed based on the conditions of telemetry and that kind of thing that are going on within your vehicle. Well, we're testing the same kind of thing on these compressors that are saying, hey, you may not need to maintenance that unit at 90 days. We might be able to push that out to 100 or 110 or 120 days and cut some of our maintenance interval or extend some of our maintenance intervals, which overall over the course of three or four maintenance cycles per year really saves a tremendous amount of money when you look at the overall impact. We're testing some of those kind of things, and we think that that is a really quality objective for us, and it will have tangible, real margin expansion impact to the P&L. Is it 1%? Is it 3%? I really don't. I can't tell you yet, but you will see it. Got it. Appreciate that. I'll turn it back. Thanks.

Yeah, thanks, Jim.

Our next question is from Derek Whitfield with Texas Capital. Please proceed.

Good morning, all, and thanks for your time. Good morning, Derek. With the recent macro volatility from tariff and OPEC announcements, I wanted to ask if you could offer some color on how these developments are impacting your customer conversations in the rent versus buy decision?

It's a good question. Really, it's to be determined, right? I mean, a lot of this stuff, we've seen a lot of movement in the last 24 hours and really haven't talked to a lot of the customers about overall impact. You know, I think to start out with looking at the tariff impact, again, that's to be determined whether that's a long-term impact or if it's a shorter-term kind of negotiation tactic. And I think that there will be some inflationary pressure on our capital costs, but kind of within the realms of what we were expecting in that 2.5% to 3% range on an annual basis. I don't think this gets back to kind of COVID levels of 10% or 15% inflationary pressure. So just because the biggest impact we'd see is on raw steel costs that go into the cost of our packages. We are expecting that some of that cost will go up, but it's not a tremendous amount of pressure on capital costs, seeing as it's really 25 to 30% of the overall package. As far as OPEC and some of the pressure on commodity prices and oil, that's an interesting conversation too. I think that when you think about it from the context of lease versus buy from our customer's perspective, I think customers with less cash in their pocket are going to be more apt to outsource compression versus buy their own. So I think that that could, in an interesting way, benefit us and have our customers wanting to outsource and spend precious capital on drilling wells and putting pipe in the ground.

Hey, and Derek, I just wanted to come in as well and just remind everybody that, excuse me, we're really blessed with our business model and with the strategy that we set forth in a market like this. And like, why do we say that? Just to remind everyone, we're production focused. We're not tied to drilling or completion. We've got fixed revenue contracts. We're concentrated in world-class, highly economic basins like the Permian and the Eagleford. We've got large horsepower. We've talked a ton about how it's sticky and it sits. And we work with mostly blue chip customers that aren't the fickle customers that are going to stop start based on short-term commodity prices. So it gives us great confidence in the 25 outlook and great confidence in the strategy that we set forth over the longer term.

That's great. And this is my follow-up. Maybe just touching on some of your prepared remarks just on the fundamental shift in natural gas demand. Has that changed, if at all, your view on the producing regions you'd like to target for contract compression exposure?

Not really. I mean, I think the right places for us to be are in basins that have oil exposure and natural gas exposure. That's why I think that Permian is the biggest area of focus for us, but also other areas that we're higher on in South Texas, in the Rocky Mountains, and in the Northeast as well. So I don't think that shifts our thought process there, and I think the Permian and the Eagleford are going to have big roles to play in supply of LNG facilities, and I think we're in the right place at the right time.

That's great. Thanks for your time.

Yep. Thanks, Derek.

Our next question is from John McKay with Goldman Sachs. Please proceed.

Hey, good morning. Thanks for the time. Maybe we'll start in the macro. We've touched on a couple different things here, but I'd love to hear your latest just kind of on-the-ground view of what you guys are seeing for GORs in the Permian, right? Like we've seen pretty impressive gas numbers coming out of fourth quarter. You guys have a pretty good on-the-ground read of what's going on. So just curious the latest story there. Thanks.

Hey John, good morning. Thanks. You know, I think that we're seeing the same thing that everybody's seeing. I think we said that in the prepared remarks that you're about 10% more gas to oil ratio in today compared to 2020 in the Permian Basin. I think that that's a little bit of a function of the core premium inventory has largely been drilled by a lot of these oil and gas producers there. But, you know, we're not really privy to how many barrels of oil per MCF of gas are being produced out of the wells that we're sitting next to. So we are seeing, you know, the macro numbers that you are, and we are seeing those numbers go up. But, you know, as far as kind of here to the grindstone, it is the demand for compression is as much as it's ever been. And we believe that that demand continues to go up because, you know, As pressures fall, you need more compression. As GORs go up, you need more compression. As wells age, you need more compression. So all those things combined sets up even in an environment where commodity price of crude might be falling a little bit. I think it still bodes really well for our business with standard flat rate contracts to be needed to continue to service those wells. I don't think that these producers are going to shut in $20 million three mile lateral Permian wells because we're approaching, you know, we get down to lower commodity price oil price. So I think that we're in a good spot and we're going to continue to need a ton of compression going forward.

Appreciate that, Mickey. Maybe just a follow up for me, you guys John, you pointed a little bit to the details on the CapEx budget for this year. Do you mind just fleshing out a little bit more of the one-third that is for non-unit CapEx? Maybe just how to talk about that maybe having longer-term margin impacts, how to think about 25 relative to maybe what a run rate needs to be, if you could maybe frame those two for us.

Yeah, it's a great question. So, as I said in the prepared remarks, about two-thirds or so of the 25 capex we've got allocated towards what we would call like adding new units to the fleet. So, if you took the midpoint of that range, that would leave you with call it plus or minus $85 million left over for other things, not including maintenance capex. The key message I'd say is that it's definitely front half-loaded. And there's a variety of items that we're spending money on in the first half of the year, maybe a little bit, call it the first like six or seven months or so, that we wouldn't be spending in the back half of the year. So some specific examples of that would be the ERP implementation that we're doing, which we're going to fire on wood, flip the switch mid-year. A variety of continued residual, I'll call it safety and operational upgrades to the fleet that we bought. And then you look at the things that are going to have, like, the impact, not today, but in the future, and it's stuff that Mickey called out in his prepared remarks as well as in mine, but it's the emissions-related technology. It's the initiatives, the capitalized aspect of the initiatives related to some of the telemetry, machine learning, and industrial artificial intelligence investments that we're making, all of which are designed to allow us to do more with the same as we go forward. So I think Those items, to kind of finish up that question, I'd say if you looked at the exit quarters for this and what would that imply for the future, again, I'd say it's about maybe two-thirds front half loaded, leaving one-third of that $85 million in the back half of the year. And that's kind of what I think about as a normal run rate kind of going forward when you're not making a lot of these significant investments.

All right. That's clear. Appreciate it, John. Thanks, Steve. Thanks, John.

Our next question is from Doug Irwin with Citi. Please proceed.

Thanks for the question. Maybe a quick follow-up on John's question on CapEx there and the run rate going forward. I guess as you see some of that more one-time other CapEx rollover, do you potentially see an opportunity to kind of step up the run rate of fleet additions you've seen here over the last couple of years, just as you're thinking about the balance sheet getting in better shape and you have increasing free cash flow here moving forward. Just curious how you're thinking about that optionality.

Yeah, I think that that is probably likely going into 2026 to 2025 is pretty well baked. with where we're gonna land there and pretty well planned out. We've got all of our new unit growth CapEx is basically contracted for the year. But looking into 2026, we're not gonna have those kind of acquisition related types of capital requirements that we've had this year and in the second half of 2024. And I think the balance of if we're not spending that on non-unit growth stuff, we have it available. And if the jobs are still there for us to use on unit growth capital, then we certainly will.

Great. Thanks for that. And then maybe sticking with capital allocation here, you talked in the prepared remarks about kind of the high visibility you have around some of the demand drivers moving forward. I'm just curious if you view that visibility moving forward as allowing you to be a bit more opportunistic around buybacks here in potential periods where you might see some dislocations in the stock price.

Yeah, it's certainly top of mind. We're going to be doing some analysis on that here pretty quickly.

Got it. Thanks, Shuntan.

Yeah, thanks. Thanks, Doug.

Our next question is from Sebastian Erksgun. With Redburn Atlantic, please proceed.

Hi. Good morning, Mickey, John, Graham, and Kevin. Good to be with you this morning. I guess I'll start. I mean, if you could talk a bit more about some of the kind of challenges maybe you're facing given labor tightness in the Permian and maybe how that's impacting growth in light of kind of exceptionally strong demand and kind of when you might expect that to abate.

Yeah, I mean, we're really leaning in. I think we said in the prepared remarks, we're really leaning into our training facilities and the development of people in the Permian Basin, especially to challenge that growth and human capital challenge that we've got. You know, it's something that we're taking very seriously. We're developing some technology to aid younger type of less experienced technicians that we're really excited about and think that that's going to differentiate us through training and technology of our people. It's going to really differentiate us in the marketplace and allow us to not only continue to grow the way we've grown, but continue to provide the best service in the industry. in all basins.

Appreciate that. And just another one on the 2025 EBITDA outlook, kind of 685 to 725. I guess what would need to go kind of better than expected to see sort of upwards pressure on that range?

I think probably the thing that you're looking at the most that could affect those numbers up or down is our ability to execute on kind of the renewals and the contracts and the rate increases within those contracts that we're projecting and expecting within the year. And then I think the other piece of it is what is the cadence of the redeployment of some of the legacy CSI equipment that we've made ready and spent the capital to get that equipment kind of ready to go and what's the cadence of getting that deployed and starting to generate additional revenues from that. It's really timing on the deployment of the capital to revenue generation and our success ability on the renewals.

Super. I'll squeeze in one final one if I can. It's a bigger picture question. I guess given consolidation in the contract compression sector, do you see opportunity for Kodiak to take some share from some of the smaller PE-backed players that aren't really deploying capital? Yeah.

I think maybe we really don't look at our business from the standpoint of market share. We're very, very disciplined on the capital that we spend based on our balance sheet and what we want, the goals that we want to accomplish in our strategy. So whether that's growing market share or losing market share, it really doesn't drive our decision making. And so We think we're in a great spot to grow as fast as we want to grow and spend the capital that we want to spend while we develop our people and strengthen the business and expand margins.

Appreciate it. I'll hand it back now. Thanks very much. Sure. Thanks, Sebastian.

Our next question is from Neil Dingman with Truist Securities. Please proceed.

Good morning, guys. Another great quarter. Mickey, my question is just supply chain management, it seems. continues to remain pretty tight, continues, the timing remains a bit long, giving you guys a nice advantage. You know, has that changed much, and, you know, what are you seeing today, and what are you expecting maybe by the end of the year? Are you expecting any improvement, you know, I don't know, either from the CAT side or some of the other equipment?

Hey, Neil. You know, I don't think so. I think that, you know, we've seen deliveries come down into that kind of mid-40-week range, at the end of last year. They've kind of held firm there. I think that actually there's been some orders that have gone on the books that have kind of put some upward pressure on those delivery times from Caterpillar. But I think they're holding pretty strong with that kind of 45-week delivery time right now. And the other challenge is making sure that you have shop space to build a compressor once you get an engine. So that's at a premium as well. So You know, for our business, we manage those supply chain bottlenecks that you have right there. We've been doing it for many, many years. We're pretty good at it. And so we don't see that that's going to cause any disruption in our ability to get equipment on a timely basis or make sure that we have any other issues there. So we're on top of it, and we feel good about where we're at.

Yeah, no, I'd argue that's a big advantage you all have. You guys are great at it. And then secondly, just, you know, we've seen a lot of M&A. I'm just wondering, but interest in the, you know, Permian and other areas, whether it's private or public, et cetera, but you guys continue to maintain, you know, these customers. Is it, you know, I guess your thoughts that is maybe M&A continues or at least M&A that we've seen, you know, new conversations such that, you know, others that Diamondback have bought or Exxon has bought, your expectation is you're going to continue to work with that new combined customer?

Yeah, that's our expectation. I mean, you know, understanding the compression market, even in terms of M&A, if somebody buys somebody else and they have our compression out there, the economics don't justify paying for the swap out costs and the downtime associated with it. And, you know, as I've said many, many times, the Permian Basin is so compression intense, it requires so much compression to produce a barrel of oil out of the Permian Basin that even these major oil and gas companies, they need a strategic partner to help them with their their compression efforts and what they do and how much compression they need on a daily basis out there. And so it doesn't benefit them to get rid of a good strategic partner like Kodiak on the compression side. And that's what it really is. It's a partnership between us and our customers. And we work with them on their own compression as well as ours.

Well said, Mickey. Thank you.

Thanks, Neil.

Our next question is from Teresa Chen with Barclays. Please proceed.

Morning. Zooming out a bit on the supply and demand outlook for compression with the tightness that you're seeing in the subsequent translation into lengthening lead times or rate tailwinds, that 15% to 20% premium over average pricing, how durable is that? And as others are seeing the same tightness with some of your large cap midstream competitors stepping up their compression investments and efforts, what do you make of this? And can you provide some color on the competitive landscape there?

Sure. Thanks, Theresa. Good to hear from you this morning. Look, I think that the new cost, the new pricing kind of environment that we see in the compression industry is not one that is like the OFS business at all, where it's opportunistic to really drive up returns on a really drastic basis. We've got a higher cost of of equipment today. Equipment is more expensive than it's ever been. I think probably 50% more expensive than it was just two or three years ago when we saw hyperinflation. So leading edge pricing on new equipment is not because we're trying to generate outsized returns on that equipment. It's more because we're trying to generate the same returns on capital that we did off of equipment that costs 60% of new. So I think that that is a durable place to be, right? It's not something that is going to be, that's going to fluctuate tremendously up and down. You still got the same kind of labor costs. You still got the same kind of lube oil costs, parts and pieces for the cost that goes into how we take care of our equipment and how we operate our equipment doesn't change. Like I said, it's very different than a day rate on a drilling rig. So, you know, I think it's a durable place to be. And if we can't command the types of returns on our investment that we're looking for, then we'll pull back on that capital spend and pay down debt and create value in different ways.

Got it. And looking at your asset composition as it stands, Mickey, what inning would you say you're at in terms of right-sizing your portfolio following the recent divestitures of non-core assets? Where are you in that portfolio optimization process?

Yeah, thanks. To be determined a little bit, I think we're definitely the majority of the way there. There's still some opportunistic divestitures that we'd like to do, but probably nothing to the scale of what we saw in Q3 and Q4 of last year.

Thank you so much.

Yeah, thank you, Theresa.

Our next question is from Robert Mosca with Mizuho. Please proceed.

Hey, thanks, everyone. Thanks for squeezing me in. Just wondering on other services, it looks like the revenue that you're guiding to is higher than we've seen in the past, and I'm sure some of that is CSI. But, you know, is there a change in the type of opportunities you're pursuing? Also seems like the guided margin is a bit lower. So just wondering if you could help us get our arms around what you're seeing in other services.

Yeah, I'll take that. Thanks for the question. So that other services business pre-CSI for us was predominantly our station construction business. And we always called that out as call it. That's a plus or minus 60. I want to say a $60 million kind of top line type business. And so what you see now is the combination of that business. with the businesses we bought from CSI, which are their AMS field, AMS kind of shop work, and then some of their parts sales. So you see a reasonably equivalent mix between those two businesses. And the way that it's set up, like our station construction business, kind of going back on memory, was always kind of that mid-teens type margin and when you lump it together with the ams business it just kind of is where it is like it can have some projects that go really really well and have higher margin and some projects that have a lower margin so again we're we're still trying to figure out the right way to grow that and the best way to grow that uh and we spent most of our time optimizing on the contract services time contract services business but i think now is the time we're going to continue to figure out how can we capture the synergies with the customers between those two segments and continue to use our fleet to our advantage to capture more of the AMS and station construction type business.

Got it. Appreciate it, John. And then as a follow-up, I think ended 4Q gross margin is around 67%. I think that's what the midpoint is for 25. Can you talk about your confidence and your ability to maybe outperform and reach the high end of what you laid out, and then also not sure if you could provide maybe a pro-form outlook on what the legacy KGS gross margin profitability is at. I understand you had to, you layered in a lot of CSI there in 24, so maybe just a look on that legacy fleet.

Yeah, so we don't, it's pretty commingled at this point, so it'd be difficult to kind of go back and say what was KGS, what was CSI, but You actually tossed me a little bit of the softball, and I'll come back and say that our last quarter as a standalone business in our contract compression segment, we posted around a 66% adjusted gross margin in that segment. If you go back and look at CSI's last quarter, the first quarter of 2024, they were in the mid-50s. Fast forward two quarters and we're back at the 66% last quarter. Now we're at the 67% this quarter. So that's something we're really proud of. And that's a combination of optimization of the fleet, getting rid of some of the smaller horsepower and then over executing on the synergy figures that we've given everybody before. That's point number one. Two, like the guidance is the guidance. So we said 66 to 68 for the margin in the future. The things that I'll call out that would say, and like something that we think about. So we took a real step back in 2020, back half of 2024, and said, how are we going to set this business up to continue to scale, continue to serve these wonderful customers and these larger customers in the basins that we operate in and where we want to be in the future? And a lot of that led back to the technology investments, the people investments, the Bears Academy investments. So there are a variety of things that a company like us could do to say, hey, let's not spend that money. and let's try to really goose that margin today, that would be penny wise and pound foolish because we think the investments we're making today are going to be able to unlock those margins in the future and unlock the return on investment and really service quality that we'll be able to have in the future as well. So we're guiding on 25. Our expectation is we roll into 26 and 27. We'll be seeing returns on those investments.

Understood. That's helpful. Thanks for the time, everyone.

Our final question is from Brian DiRubio with Baird. Please proceed.

Good morning, gentlemen. Just a couple for me. Mickey, just on the contracts that you're signing today, can you talk about what kind of terms you're getting on tenure versus a couple years ago?

Sure. It's roughly the same. How are you doing, Brian? Thanks for calling. It's roughly the same contract. You know, we're signing those three- to five-year contracts on both new unit deployments as well as on recontracting assets that are in place already. So I haven't seen a real shift in step change there in term as much as we have in kind of leading-edge pricing.

Got it. Okay. That's helpful there. And then just next question, it's going to combine two into one, uh, just on the electric drives, just, is there a substantial difference in the, uh, cost per horsepower on electric drive versus the traditional not gas driven, you know, cat 3,600 engine driven, uh, rigs. And then also on electric drive, just as we think about maybe two years into those, you know, units being deployed, what's the difference in the maintenance on those? Some are saying that the maintenance on the electric drives, are a lot lower than on the cat engine ones.

Yeah, a couple pieces there on the CapEx cost. They're roughly the same. They might be marginally cheaper on a dollar per horsepower basis by a couple percentage points, but they're roughly the same. As far as the operating costs go on those, your ongoing OpEx, They are marginally cheaper there too. They don't use lube oil in the engine like a natural gas driven engine does for their motors. There's less of a maintenance cycle and that kind of thing. So there is some operating expense benefit on the electric drives that we've experienced as well. But I will say that the trade-off there is The grid is still very unpredictable and it is very difficult to get reliable electricity to power these things, especially in the Permian Basin. And so with a natural gas driven unit, you've got a clean burning fuel that is an abundant resource out there that's in every unit that you are compressing gas for. So it's a totally self-contained system. So the ability to reapply that kind of equipment if conditions change or the customer wants to do something differently is a lot easier to reapply and a lot easier to get that second contract on than any size horsepower of electric drive compression. You know, you look at kind of the short-term, maybe it's a little bit higher margin type of equipment, but in the long-term, for long-term cash flows, it might be a little riskier.

Understood. Appreciate all that, District Caller. Thank you so much.

Yeah, thanks, Brad.

We have reached the end of our question and answer session. I would like to turn the conference back over to Mickey for closing remarks.

Yeah, thank you, Operator. And thanks to everybody participating in today's call. We look forward to speaking with you again after we report results for the first quarter. Thanks again. Bye.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.