Kodiak Gas Services, Inc.

Greetings and welcome to the Kodiak Gas Services second quarter 2026 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 Graham Sones, Senior Vice President, Investor Relations. Thank you. You may begin.

Good morning and thanks for joining us for the Kodiak Gas Services conference call and webcast to review our second quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Executive Vice President and Chief Financial Officer. After my remarks, Mickey and John will discuss the steps we've taken towards our 2030 goals, share an update on the commercial progress in our power infrastructure segment, and walk through our quarterly results and updated 2026 outlook. Then we'll open it up for Q&A. Replay of today's call will be available by webcast and phone through August 21st, 2026. Replay details are on the investors tab of our website at kodiakgas.com. And as a reminder, the information discussed today speaks only as of August 7th, 2026 and may no longer be accurate by the time you listen to a replay or read a transcript. The comments made by management during this call may contain forward-looking statements within the meaning of U.S. federal securities laws. These statements reflect management's current views, beliefs, and assumptions 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 a 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. Comments will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in our earnings release, which can be found on our website. Now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thanks to everybody joining us today. I want to start, as we do in all meetings at Kodiak, with safety. August is historically the hottest month of the year. A large portion of Kodiak's workforce is called upon to work outside nearly every day, either in the Permian Basin or South Texas or any other area where we operate. I'd like to remind everyone to be thoughtful when working outside in the summer heat. Studies have shown that you can become dehydrated in as little as 30 to 60 minutes when working outdoors in hot, humid conditions, which we often face in our operating areas. Dealing with the unrelenting summer heat, it is important to drink plenty of water and take breaks in the shade to give yourself time to recover and cool off. And be sure to let someone know if you start to feel dizzy or dehydrated. These are important steps to maintain a safety-first mindset. It is during the hot summer months that people tend to become intensively focused on power reliability and electricity consumption. Recent examples of grid instability due to swings in data center-related demand have once again demonstrated how critically the U.S. needs behind-the-meter power solutions. A few weeks ago, a transmission line in northern Virginia went out of service, resulting in approximately 3 gigawatts of data center demand disconnecting from the grid, stressing the grid and causing a voltage disruption that was felt in surrounding states. This summer we have seen the electric grid strain to maintain reliability as the combination of summer heat and the increase in data center power needs stresses the system. More than half of the US's 50 states have had to declare emergency alerts this summer asking consumers to conserve power. PJM even had to take it a step further. receiving permission from the U.S. Energy Department to require data centers and other large customers to turn on backup generation to help support the grid. This dynamic will further intensify in the coming years as data center power demand is expected to more than double over the next five years. This spike in demand is happening at the same time grid operators are increasingly running low on power reserves. as reflected by PJM's consecutive power capacity auctions where they failed to acquire enough power to cover their reliability requirement. Behind the meter power solutions are going to have to be a part of the solution to solve our nation's growing power crisis. Judging by the depth and strength of Kodiak's rapidly growing commercial power project pipeline, which I will discuss later, the industry fully understands this dynamic and is eager to engage to contract workable solutions. Now I'd like to update you on the progress we're making on our five-year plan. Given the highly divisible demand for natural gas, plus the long lead times for new large horsepower compression equipment, we laid out a target to organically grow our compression fleet to approximately 5.2 million horsepower by year-end 2030. I'm happy to report that we are well on our way to achieving that goal. For the first six months of this year, we added approximately 80,000 horsepower of fleet additions. Factoring in the new units we expect to receive through year end, we're on pace to hit about 170,000 horsepower for the year. Further, through our strong vendor relationships, we've secured new large horsepower compressor packages for 2027, 28, and 29 deliveries to meet our growth goals and expected customer demand. Bottom line, we remain confident in our ability to achieve our targeted annual horsepower growth of 150,000 horsepower per year, resulting in a compression fleet of at least 5.2 million horsepower by the end of the decade. Gifting to power, we recently announced a multi-year gas turbine supply agreement with Baker Hughes that will deliver Kodiak one gigawatt of turbine power by 2030 with an option to increase that order of up to 1.8 gigawatts. There are a lot of reasons why we're excited about this transaction. First, it gives us price certainty for new turbine equipment for the next five years. Additionally, Baker Hughes has a long track record of producing durable equipment that is well known across the world. Baker Hughes' efficient power generation turbine assets are designed to work on long-term projects, enabling us to deliver dependable power for growing data center and energy infrastructure development. Beyond the equipment, the strategic agreement also covers technician training and parts supply. positioning Kodiak to provide the high quality service our customers have come to expect. Combining our previously announced power generation purchases with Baker Hughes, plus some additional opportunistic purchases, we have secured approximately 1.8 gigawatts of power generation for our fleet, of which approximately 66% will be turbines, and all of it which will be available by the end of 2030. Further, we are in discussions to incrementally add to our RCEP fleet, which would align with our goal of achieving 2 gigawatts of power-producing assets by the end of the decade. Now I would like to discuss the subject that comes up the most in our meetings with investors, the commercial landscape as it relates to power. Since closing the DPS acquisition just four short months ago, We have quickly integrated and retooled our commercial power team to focus on larger scale projects with long term contracts and attractive returns. With that focused mandate, the team has been meeting with potential customers while high grading a large, rapidly growing pipeline of projects that significantly exceeds our future power capacity. To give you a sense of how dynamic this industry is, we've added about two gigawatts of potential projects in the last month, while at the same time moving on from opportunities that either don't fit our timeline or aren't the right kind of counterparties for us to commit resources. We feel as confident as ever that the commercial opportunities are real and progressing quickly. As evidence of this, we recently executed a limited notice to proceed with detailed engineering and design work for a data center in West Texas whose capacity is leased out to a hyperscaler. We then invoice them for an initial deposit to reserve power equipment for the project while we negotiate a long-term contract to start supplying power in early 2027 with the ability to scale over time. We'll have more to share on that before the end of the year. Our existing power assets remain in high demand, with our current fleet about 90% utilized as we make ready much of our idle fleet. Our assets that we have on contract continue to be extended as customers are wary of releasing equipment. We recently extended one of our data center commissioning contracts and received an increase in the rate. As we look forward to the second half of 2026, we expect to receive approximately 50 megawatts of new gensets before deliveries ramp up in 2027. In preparation for a sizable increase in our power infrastructure operations, we've been diligently increasing our technician training program and adding a new power curriculum, further boosting our operational advantage over our peers. Starting this fall, Kodiak's Bears Academy Training Facility will become one of the only two facilities in the U.S. that are certified to offer a Waukesha electrical mechanical certification on both compressors and gensets. This certification provides our technicians with the knowledge needed to fully operate and maintain electrical equipment, as well as perform troubleshooting and maintenance on the mechanical equipment. The skilled workforce will be helpful as we start undertaking on-site engine overhauls of power assets and other field-level operations in the second half of the year. This is just one example of where Kodiak is investing in training programs to help create opportunities for our workforce to grow and develop into new, more skilled labor roles. Another example is our internal development of AI-enabled technical monitoring solutions that not only require us to hire software engineers But we also need field technicians to help monitor and assess the information. As we've rolled out new technology, we have reallocated experienced technicians into positions in our industry-leading Fleet Reliability Center and our Fleet Telemetry Group. Kodiak's investment in artificial intelligence and machine learning is creating new roles and opportunities, allowing our workforce to grow and develop. Yesterday afternoon, we released our second quarter 2026 financial results. I'll hit a few highlights and then I'll let John go into more detail. In the compression infrastructure segment, we ended the second quarter with 4.4 million revenue generating horsepower. Average horsepower per revenue generating unit was 991, the highest among our contract compression peers and a figure we expect to keep moving higher given our large horsepower focus. Our investments to grow the fleet, along with the divestiture of some small non-core units, drove yet another increase in fleet utilization to 98.2%, another industry-leading metric. In Q2, we delivered strong year-over-year growth in compression infrastructure revenue and adjusted gross margins. We realized a 4.5% year-over-year price increase to $23.80 per ending revenue generating horsepower. The strong pricing performance reflects the positive progress we've made recontracting our existing fleet and the underlying demand for contract compression in this tight market with highly visible gas growth. Compression infrastructure adjusted gross margin was 70%, marking consecutive quarters at or above 70%. The margin gains continue to be driven by strong operational execution and returns on our technology investments. However, this quarter's margin results were especially impressive considering the negative headwind we faced late in the quarter from higher lube oil prices. Our supply chain team has done a tremendous job planning ahead and negotiating favorable contracts to help us source cost-efficient supplies and reduce price risk. For power infrastructure, we exited the quarter with a fleet of 405 megawatts. We generated revenues of $33 million and an adjusted gross margin of 64.5%. Both were in lines with our expectations. As we reprice our legacy business and align our operational philosophies, we look for those margins to increase. In our other services segment, Second quarter revenue increased by 47% year-over-year as this quarter's results were positively impacted by station revenue and the addition of some other ancillary services related to power. Strong results from each segment drove adjusted EBITDA of $217 million for the quarter, up 22% year-over-year and a new company record. In summary, our compression infrastructure segment continues to deliver solid top line growth and great margins. We've secured new large horsepower compression packages for 27, 28, and 29 deliveries, and we're already 50% contracted for our 2027 deliveries. And we've already started the process of contracting our 2028 deliveries. Technology companies remain focused on historic build-out in data centers, with the top four hyperscalers increasing capital spending by roughly 80% year-over-year in the second quarter. Total Cloud CapEx is tracking to close to $1 trillion in 2026. Given this robust construction boom, our backlog of high-quality commercial opportunities is growing by the day. It's very exciting times for Kodiak, and our energized outlook has never been better. In light of the great results in Q2, and as John will discuss, we are raising the midpoint of our full-year adjusted EBITDA, compression infrastructure gross margin, and discretionary cash flow guidance to reflect our increased visibility for the second half of the year. We remain excited about the investments we are making today that will drive growth and enhance Kodiak's margins in the years to come. And now I'll pass the call to John to further discuss our financial results and our revised outlook for 2026. John?

Thanks, Nicky. Our compression infrastructure business continues to fire on all cylinders. We're out of the gate strong in our new power infrastructure segment. I'm excited about our near, medium and long-term future. Let's review the quarter. We reported revenue of $391 million, up 21% year-over-year. The growth can be primarily attributed to the addition of BPS alongside increases in compression infrastructure revenue, which itself is driven by continued investments in new horsepower, price increases on legacy equipment, and strong operational execution. In compression infrastructure, revenues increased 7% year-over-year and 3% sequentially. Revenue generating horsepower increased by approximately 24,000 sequentially. We exited the quarter at $23.80 per ending horsepower, up 4.5% year-over-year, reflecting strong underlying industry fundamentals and a great customer value proposition. Along with top-line growth, we continued to deliver on segment margins. Compression infrastructure adjusted gross margin for the quarter came in at 70%, up 170 basis points year-over-year. That's two consecutive quarters, 70% margin. This quarter's results overcame the absorption of a significant increase in lube oil costs driven by the spike in oil prices and crack spreads caused by the war in Iran. As we have highlighted in the past, lube oil is a significant component of the cost of goods sold in the compression business. Given that significance, we've historically been very intentional about closely managing that aspect of our supply chain via preferred supplier relationships. In today's volatile market, that strategy is paying off as we've been able to materially blunt the impact of price spikes in lube oil prices and in fact actually raise our guidance for compression adjusted gross margins. Now turning to our new power infrastructure segment. For the quarter, we generated revenues of $33 million and an adjusted gross margin of 65%, the midpoint of our guidance. We fully expect to see margin expansion and others have completed power operations with compression. As an example, consider that today more than half of our power fleet runs on Caterpillar 3500 series engines, an engine class that our compression field technicians know well, since we use essentially the same engine in a significant number of our compression packages. This commonality yields a lot of operational efficiency. This is a competitive advantage and one of the many reasons why we expanded our infrastructure platform into this business. Adjusted EBITDA for the quarter of $217 million was yet another new company record. And adjusted net income was $54 million, or $0.55 per diluted share. Let's turn to capital expenditures. Maintenance CapEx was approximately $20 million in Q2, right in line with our expectations. Other CapEx, excluding a $43 million non-cash long-term capital lease for a new Midland Supercenter, was $11 million. We are excluding the minimum lease expenditure from our CapEx guidance given its non-cash nature. Compression infrastructure growth CapEx was in line with expectations at $67 million, the vast majority of which was for new units. Power infrastructure growth CapEx was $134 million, a portion of which was related to power generation orders that we spoke to last quarter, as well as initial down payments on the Baker Hughes turbine framework agreement. Our multi-year agreement with Baker Hughes provides us with many benefits, not the least of which is enhanced certainty on the cost to achieve our 2 gigawatt fleet goal by the end of the decade. We think an average cost across our fleet build program of about $1.2 million per megawatt before balance of plant is still the right figure. Discretionary cash flow for the quarter was $163 million, substantially higher than what we've seen in the past. This was driven by record-adjusted EBITDA alongside lower interest expense following May's equity offering, as well as a $13 million tax benefit. Moving to the balance sheet, net debt was approximately $2.6 billion at quarter end. In May, we raised approximately $836 million after expenses in primary equity, allowing us to fully fund our power business plan while protecting our balance sheet. A leverage ratio at quarter end after netting out cash was 3.1 times, the lowest in our company's history. Going forward, we think that the strength of our balance sheet plus our access to multiple sources of relatively low-cost capital provides us with yet another meaningful competitive advantage as we build out the power franchise of our energy infrastructure business. Finally, our board declared a dividend of 49 cents per share that would be paid later this month. Based on our second quarter discretionary cash flow, our dividend remains well covered at north of three times. According to our updated 2026 guidance, we raised our compression infrastructure adjusted gross margin range to 69% to 70.5%. We expect pricing improvements alongside technology and training induced operational efficiency to enable us to overcome continued lube oil and fuel headwinds. We're also increasing the outlook for adjusted EBITDA to a range of $830 million to $860 million. Our outlook for discretionary cash flow has increased to a range of $570 to $600 million. The sizable increase is due to a lot of the factors and more. Moving to CapEx, we're increasing our compression infrastructure CapEx to a range of 280 to 300 million. Following our equity offering, we just recently seized the opportunity to spend 33 million to terminate operating leases on 43,000 horsepower of high-quality, contracted, large horsepower units. Essentially, we're adding large horsepower compression for less than a six times multiple at a substantial discount to replacement costs and using our favorable ABL interest rate to do so. That explains the updated guidance. For power infrastructure, we're reducing our capital expenditure forecast to $400 to $450 million. The reduction is a reflection of the tremendous progress we've made in securing power to get to our 2 gigawatt by 2030 goal. We've gotten markedly increased certainty on cost plus timing. and our partnership with Baker Hughes facilitates better cash flow management on our turbine purchases. Also, we now expect to receive approximately 50 megawatts of new power gensets in the second half of 2026. Our outlook for other CapEx remains unchanged and excludes the previously discussed $43 million non-cash Midland facility capital lease that I mentioned earlier. With that, I'll hand it back to Mickey.

Thanks, John. I'd like to finish by saying that I'm extremely excited about the direction of the company. Our financial performance continues to exceed expectations. The contract gas compression market fundamentals remain strong with demand continuing to ramp up. Our right to win in the power infrastructure segment is highly visible with clear operational, supply chain, and financial advantages. Our future customers realize this, too, as we're building a lot of positive momentum in our power infrastructure segment, which I'm eager to share with you at the appropriate time. So thanks for your participation today, and now we're happy to open the line up for questions. Operator?

Thank you, and at this time, we'll conduct the Q&A session. To ask a question, press star 1 on your telephone keypad. A confirmation tone will indicate that 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 questions. And our first question comes from Ellie Jassen with JP Morgan. Please state your question.

Howdy, everyone. Appreciate the update regarding an NTP with the West Texas Data Center, a link to the hyperscaler, but just maybe a little bit of color on what differentiates you from your peers, which are clearly working towards the same goal, and then what milestones should we expect prior to a contract targeted before year-end?

Hey, Eli. How are you doing? Thanks for the question this morning. This is Mickey. You know, I mean, I think that in just the short amount of time that we've owned the power platform here, I think it's pretty obvious to a lot of the customers that we're talking to and potential customers that we're talking to here that we bring a level of expertise with operating rotating equipment, right? And one of the reasons why we thought DPS was such an attractive platform was their engineering capabilities and their commercial capabilities as well. I think that's playing out in real time and backing those capabilities with Kodiak's operational expertise and balance sheet is resonating well with potential customers. So it's exciting times here. As far as milestones to get into a contract, I'd like to be able to give you some firm timeline there. But we're working towards a solution right now, looking at potentially starting to install equipment in the first quarter and hopefully have something to be able to announce more firm to you before the end of the year.

Great. and then maybe pivoting over to the compression business. You know, I think we've seen some headwinds across the space for your peers and, you know, maybe with respect to lube oil costs. Can you just talk about kind of operationally what you guys are doing that allows you to avoid those types of headwinds and raise the guide? Thanks.

Sure, Eli, it's John. Yeah, we're proud of the performance we had in the quarter and it kind of caused us to bump the guide from a compression infrastructure perspective. And really, like the answer is, multifaceted. I'd say the biggest driver that allows us to overcome high Louisville prices, which are real, is it's the continued incremental gains from pouring this next level training in operational artificial intelligence and machine learning across the fleet. And as we scale that out and roll it up, roll it out, we're seeing true results. And I say it all the time, like what we see is we truthfully break things less, we fix things when they need to be fixed, not just based on hours and time, and we have higher labor productivity. And the combination of those things allows us to continue to eke out modest gains as time rolls on. As I pivot to the lube oil piece, one of the big strategies that Kodiak's deployed that Mickey and Chad and the team kind of started to implement years ago is to really think about partnering with vendors. The examples of that would be Caterpillar, some of our dealers that we work with now going forward, some Baker Hughes. We've done the same thing in early world contracts. And so we use our scale to our advantage. We get a lot of benefits, and one of them is that we think we've got favorable pricing and reboils. So, look, it's a real issue. We're going to continue to overcome it, but we're pretty confident as we look for the rest of the year in terms of the guidance that we gave.

Great. Appreciate the color, guys.

Thank you, Eli. Thank you. Your next question comes from Jim Rollison with Raymond James. Please state your question.

Hey, good morning, guys. Nice, solid results again, as usual. I guess, Mickey, maybe spend a minute on power here. Obviously, you've got a lot of equipment secured. You kind of talked about the 50 megawatts coming in this year. Can you kind of elaborate on the delivery timeline when we get into 27 through 2030 based on the 1.8 you've got secured, just to kind of understand how that scales up?

Yeah, hey, good morning, Jim. Appreciate you listening this morning. Yeah, so we've got the 50 megawatts coming at the end of the year. And, you know, like I said, we've only owned this business for four months. One of our early priorities was securing the power we needed to grow the business. We've kind of told everybody that the megawatts over the next four years comes in pretty radically at about 400 megawatts a year, give or take a little bit. So It's pretty consistent with that, but I would say that the 2027 deliveries are probably a little bit more back-end loaded than 2027, just because that's when the first of the kind of the big Baker Hughes turbines start coming in and kind of early in the fourth quarter. So, like I said, we'll take delivery of another 400 megawatts next year, but it's mostly back-end loaded for next year, and then it starts to level out through 28 through 30.

Got it. That's very helpful. And as a follow-up, I guess, John, you talked about kind of being on track from an equipment standpoint of around 1.2 million a megawatt before balance of plant. I'm curious, maybe, Mickey, what was your talk into some of these data center guys and hyperscalers? What kind of balance of plant requirements are you looking at? What kind of reliability do they need? And just trying to understand where this overall capital needs goes that you will, I presume, price into your return equation.

Yeah, we'll absolutely price it into our return equations. And so typical projects are all going to have basically the same Thank you for joining us. The standard balance of plant of the projects that we've looked at will end up in that $1.6 million per megawatt range. And then if we need, give or take a little bit, and if we need battery backup on top of that that the customer is looking for, then it'll be a little bit higher from there.

Appreciate the context. Thank you.

Yeah, thanks, Jim.

Your next question comes from Neil Dingman with William Blair. Please state your questions.

Morning, guys, and making John a great update. My first question is just, again, I want to turn to compression. Specifically, John, you announced and talked about today that strategic announcement of acquiring those previously leased horsepower. Could you remind me, besides now that, you know, is there still potential for accretive purchases of compression, either owned by your customers, you know, both on the EMP and midstream side, or just other EMPs and midstream out there?

Hey, good morning, Neil. It's Mickey. Yeah, we kind of opportunistically exercised this capital lease buyout this quarter, and it was something that really made sense for the company and using our lower-cost capital than what we were paying from some previous capital leases that we had inherited from CSI. After the equity offering with a little bit lower leverage and some dry powder, we thought that was a prudent thing to do. Kind of looking forward, you know, there's definitely some other opportunities out there that we're looking at for some additional purchase leasebacks. I don't know that they're imminent or not, but there's definitely some discussions going on, and certainly we'll look to jump on those opportunistically if they materialize.

And I will just chime in just to avoid confusion because this topic has kind of had some people already ask us questions about it. We bought out operating leases and, in effect, converted them into owned assets. We didn't buy out capital leases, so just a simple financial transaction.

Helpful, John. And then, John, maybe sticking with you, just a quick one on shareholder return. Is it fair to assume – Obviously, we'll pay that, you know, again, a lot of the money you talked about the upcoming or you and Mickey talked about the upcoming CapEx for power is that, you know, I would call it until you hit that inflection. Most of the dollars would be going that or debt repayment. And then at some point you would increase shareholder return or how actively are you looking at watching the shares and potentially thinking about opportunistic buybacks?

I'll kind of cover that. It's a wide-ranging topic. Obviously, it involves a lot of conversations with our board. Before we bought the DPS business, we were pretty aggressive about buying back some shares. Some of that was because we thought it was the right thing to do and our shares were undervalued. Some of it was to support EQT as they were selling their way down over the last 18 months or so. And from a dividend perspective, we always kind of thought, look, let's pay out about 35% of our discretionary cash flow in the form of a dividend. And given our growth algorithm and how predictable our business was, that all kind of translated into about upper single digits annual growth for several years in dividend growth. With the addition of the power business, A, we're going to have a lot of CapEx to spend. We think it's great. are returning CapEx that builds that infrastructure platform and power. And then B, we're going to grow faster. And so we can't tie the DCF to the dividend anymore. And so the way that we articulated it internally, and I think the right answer from a capital allocation perspective is we think we want to pay an attractive dividend that grows. We want to manage the balance sheet. We want to fund the growth and the power business. So you saw that we announced, you know, kind of an equivalent or a flat dividend this quarter. And as we kind of grow the business over time, we'd like to think that we can grow it on an annual basis at an attractive level. Kind of leave it at that. From a share repurchase perspective, we'll always be opportunistic. And now that we, of course, got lower leverage, like that affords us the ability to do so. But we do have a lot of capex to spend to execute on our business plan in power. So we're going to be leaning into that.

Very helpful. Thanks, Craig.

You bet. Your next question comes from Teresa Chen with Barclays. Please state your question.

Good morning. Going back to your comments, Mickey, on high grading the power generation commercial pipelines, Can you walk us through your process here? What criteria are you using to prioritize opportunities? How's that evolved over the past few months? More specifically, what are the key trade-offs you consider when deciding which project to advance versus which to deprioritize?

Yeah, hey, good morning, Theresa. Thanks for the question. Really, the two big criteria that we're looking at, number one is the creditworthiness of the counterparty and who the contract will be with. We want to make sure, as we're making pretty sizable investments right here, that we're protecting any downside risk here for the business and our shareholders. And the other one is just is, you know, how Thank you. Thank you.

And you've previously discussed unlevered returns above 15% and billed multiples of roughly five times EBITDA. As customer conversations have advanced and project designs have become more defined, has your view on those economics changed at all? And any early indication of expected contractual terms in terms of duration or other important factors to keep in mind?

Teresa, it's John. I'll answer the first part and then hand it back to Mickey for the second part. We spent a lot of time in the last four months refining, I'll call it the unit slash project economic model, as well as kind of pressure testing that model with conversations with customers. The short answer is what we said before, we stand behind. The five-year paybacks, 15% plus internal rates of return with the ability to kind of think about it differently depending upon duration and customer type, et cetera, those all still hold.

Yeah, as far as contract duration here, we're focusing on the longer-term contract duration. We're seeing pretty typically 10- to 15-year type contracts contract terms in the preliminary discussions that we're having with customers. And, you know, there might be some instances where we would agree to a seven or eight-year contract just depending on the kind of deal it is and the terms of the agreement.

Thank you very much.

Thanks, Teresa. Your next question comes from Doug Irwin with Citi. Please say your question.

Hey, team. Thanks for the question. Maybe a quick follow-up on Teresa's question there. Just curious how we should think about the size of some of these deals you're working through right now. I'd imagine there's a pretty wide spectrum of opportunities out there. So just curious where you see yourself having the biggest competitive advantage in the market. And I guess in general, should we expect just a couple of larger chunky deals for this gigawatt of equipment you've secured or maybe a handful of smaller contracts?

Hey, good morning, Doug. This is Mickey. You know, it is a pretty wide spectrum of type deals that we're looking at here. You know, this first one on the limited notice to proceed that we have in place is relatively small because we don't have that much power to put to work, you know, in the first quarter being 90% utilized. So it's kind of a sub 100 megawatt type deal, but with the ability to scale over time. So we like that as a kind of a first bite-sized chunk to get on the board here. And then, you know, after that, like I said, the other opportunities we're looking at are a pretty wide spectrum of different things, anywhere from a couple hundred megawatts of long-term kind of contracted commissioning equipment that would be, you know, kind of a 10- to 15-year deal that would be more mobile in nature to, you know, to permanent primary islanded behind the meter solutions for up to a gigawatt scaled over time. So like I said, it's pretty typical. There's a lot of opportunities out there. And as we high grade these, we're looking at several different things here. But with the commonality being, hey, we want to make sure we lock this stuff in for long term. And we want to make sure that it's with the right counterparty.

That's helpful. And maybe a follow-up on compression contracting. I saw one of your peers this quarter announced a pretty large eight-year contract. You've also announced a few longer-term deals so far this year. Just curious if you could talk about what kind of demand you're seeing for longer-duration contracts and whether you might be in a position to keep charming out your fleet a bit.

Yeah, we absolutely would love to do that and are in some conversations with some other customers. It's really a kind of a customer-by-customer preference here. So some want to keep them a little shorter to preserve some optionality, which in our minds is not a bad thing either because it gives us the ability to churn the fleet a little bit and kind of high-grade customers there if we want to do that. But with the right customers in the right place, we certainly are talking about longer-term deals with them, too.

Got it. Thanks for your time. Yeah, thanks, Doug.

Your next question comes from Jackie Colettis with Goldman Sachs. Please state your question.

Hi, good morning. Thank you so much for the time. First, just wanted to go back to power. On the West Texas Data Center project where you executed the limited notice to proceed, could you provide a little bit more color on the counterparty structure there, specifically what kind of counterparty is the data center developer and the nature of their commitment with the underlying hyperscaler?

Jack, we're probably not ready to divulge that publicly yet, but we're paying very close attention to making sure that the counterparty is a creditworthy counterpart and has the appropriate amount of risk for the size of the project, for sure.

Understood. And then just pivoting to compression, given that peers are increasingly formalizing long-term spending plans, how do you view a competitive landscape for large horsepower compression? And does this multi-year visibility change your approach to securing engine supply or alter pricing leverage when negotiating those long-term contract extensions?

Yeah, I mean, you know, deliveries are still in almost 200 weeks out. So you're still so we're having to plan our business in the compression, you know, much like power right now and look and have a much longer term kind of strategic approach here than we have typically in the past. And so, yeah, we are planning out three, four or five years in advance right now. And that's what you know, that's what gives us the visibility into the ability to Thank you for joining us. with the visibility that you see into specifically Permian natural gas growth in the future is feeding LNG. We're really looking at a long-term forecast here that we feel really good about and that we can continue to execute on.

Great. Thank you so much. Appreciate the time.

Thanks. Your next question comes from Julian Dumoulin-Smith with Jefferies. Please state your question.

Hey, thanks, guys. This is Alex Overmiron for Julian. Just really quick, back on the PowerCapX. First, is all of the reduction in PowerCapX purely driven by just the down payment? And then separately, It sounds like maybe that 1.6 million per megawatt including balance of plant has come up a little bit versus your previous expectations of 1.4 to 1.5. Is that fair to say?

I'll take that in order. So number one, when we bought DPS and came out of the gates, we knew kind of mentally where we wanted to land in terms of how much power we wanted to acquire and when. But we hadn't actually negotiated many of those deals yet. We'd had a few conversations. So as we rolled through the quarter, we strategically basically got an extremely comfortable and great visibility on our two gigawatt by 2030 target. And that allowed us to say, OK, we can take this guidance down to a lower level because we now know what we're going to pay. I will say with the Baker Hughes agreement, I go back to the comment that I made earlier where our supply chain strategy has always been let's find great partners and work with them. Let's trade volume for price, so to speak, too, in that sense. And so we were able to kind of work with Baker Hughes, get some favorable payment terms, and that also mentally, again, probably lined up with what we hoped to achieve. But that's what the second aspect allowed us to kind of tuck in that guidance in 2026. I didn't want to correct Mickey earlier when he said the 1.6. I think it's 1.5 is probably where I would say. He did say kind of plus or minus. So the answer is, I don't think it's gone up from where we originally were last quarter. We think we're still right in that zone. I call it plus or minus 1.2 million a megawatt for the raw power and kind of round up to the 1.5 million, again, plus or minus, including balance of plant with a heck of a lot of certainty because we basically locked this in through 2030.

Yeah, and Alex, I'd probably just say that maybe I was thinking about some specific projects that I was looking at some numbers on. I would say that any, you know, if that balance of plant does come in a little higher than what we expected early on, maybe that's going to come with incremental returns. It's been pretty well documented amongst us and our peers.

Got it. Yeah, that's super helpful. And then just really quick, do you guys have any thoughts on this Texas moratorium on data center grid connections that was announced this week and If you've heard anything from potential customers in the wake of that announcement?

Yeah, I mean, I think that announcement of this moratorium on these data center interconnections that have been requested, that's something in the range of, what, 450 gigawatts on a system that has 95 gigawatts of capacity today. That does nothing but benefit behind the meter power solutions providers like ourselves. And I understand why they're doing it. I think it's a smart thing to do to kind of flush out what are real projects and what are more speculative projects with this audit here. So I think it's a good thing, and we certainly have heard initial feedback that there is – data centers and customers that are saying, man, behind the meter power solutions are going to be key to the future of our businesses. So we think it's positive for us and our peers, to be honest with you.

Awesome. Thanks, guys.

Thanks, Alex.

Your next question comes from Derek Whitfield with Texas Capital. Please state your question.

Good morning, guys, and thanks for your time. I wanted to start with power for my first question. While the focus of today's discussion has been on data centers with your power offering, could you speak to how your discussions are going in other areas?

Yeah, hey, Derek. Good morning. This is Mickey. We absolutely have got some other opportunities for some microgrid type stuff in the Permian Basin and are progressing some conversations with some customers there, too. And we think that's going to be a really, really attractive opportunity for us going forward, especially with the RECIP fleet that we're complementing with the turbines here as well. It leaves us that optionality to be able to chase both of those. And as you're seeing more and more of the limitations on power, we're having a lot of conversations with oil and gas customers on microgrid opportunities as well.

Great. And as my follow-up, I wanted to focus on compression. As you guys think about the amount of natural gas pipelines that are coming on this year and over the next couple of years in the Permian, under what circumstance would you guys consider accelerating compression to build out to meet customer demands?

It's a good question, Derek. I think that, you know, with engine lead times and deliveries where they're at, I wouldn't say that our capacity for future growth is locked in. We will certainly look at projects if they come to us that are incremental to that, if we have the ability to procure equipment and have the balance sheet capacity as we have to evaluate those opportunities and opportunistically jump on them if they make sense. I'd probably say in the shorter term over the next year or two, it's going to be pretty hard to get our hands on additional equipment just because of lead times. But if those opportunities arise, we'll certainly evaluate them. And certainly if a customer wants us to engage in some sort of conversation around purchase leasebacks or something like that, that's an opportunity for us to certainly deploy more capital in the compression side.

And I might just – I'm going to tack on there too. After the equity offering or – Leverage ratio kind of bottomed out at around three times. We said a lot over the course of the last quarter that we can have a line of sight towards peeking out in the mid threes under the base business plan as we fund the power business. And so that's squarely in the middle of our long-term leverage targets. And so, like, I think nothing would make us happier than to find wonderful purchase leaseback opportunities or maybe a chunky customer opportunity or two on the compression side. That's just such a wonderful business with great steady returns that we'd love to find those opportunities to fund a little more. And we absolutely have the balance sheet capacity to do it.

Very helpful. Thanks for your time. Thanks, Derek.

Your next question comes from Derek Podheiser with Piper Sandler. Please state your question.

Hey, good morning, guys. Wanted to go back to the West Texas Data Center conversation. So you mentioned that, you know, initially it could be sub 100 megawatts just given your current fleet and scale that over time in line with more of your delivery schedule and appreciate you don't want to give out too much information until we get a contract here. But I'm curious, for this specific project, do they have aspirations to ultimately connect to the grid and integrate with the grid? Or do you think this would always be primary power behind the meter, just maybe a little bit more color on kind of the future generation mix as we think about this project over time?

Yeah, I think this project, like a lot of projects that we're looking at, ends up with a mix of grid power and behind the meter power. There are some that are talking about exclusive behind the meter power for the long term here, but I think that there's a lot of thought process right now going around with some of these projects that is, hey, we need behind the meter power, but we also, you know, in the future are going to supplement with some grid power and that's where A lot of people's heads are at the moment. With this recent Texas moratorium on grid interconnects, I think that may shift more towards sole behind-the-meter power solutions going forward.

Got it. Okay. That's helpful. And I know one of the benefits to the Kodiak platform is about the technician crossover on the power generation assets, particularly for the RECIP side of things. but given you're leading a bit heavy or more so into the turbine side, you know, backed by the Baker Hughes framework agreement, how should we think about really developing your technicians, leaning on Baker for their technicians and expertise as we, given you're gonna be going more towards like 75, 25% turbines versus resets?

Yeah, this is absolutely going forward, gonna be a partnership approach with Baker Hughes on developing technicians in-house for Kodiak. We, part of that framework agreement, expressly addresses Baker Hughes bringing in in-house training for Kodiak and Kodiak technicians, which we think is a real upside for that agreement and why we think the partnership with Baker Hughes is really quality for us going forward. We've got a little bit of time here before the first turbine starts showing up. So we're going to aggressively start that turbine curriculum and training program that is going to get those technicians up to speed and get those people in place early on. And so we think that's a huge advantage there and we'll continue to develop those people and have high quality personnel to operate this equipment.

Great. Thanks, Mickey. I'll turn it back.

Thanks, Derek. Thank you for calling. The next question comes from Elvira Scotto with RBC Capital Markets. Please state your question.

Hey, good morning, everyone. So on the power side, you talk about the two gigawatt by 2030, but then you also talk about, you know, there's tremendous opportunity in excess of that now. Can you do more than two gigawatts by 2030, or is that capped by equipment availability? And then would you consider maybe other bolt-on acquisition opportunities and distributed power?

Yeah, so I'll take this, and I suspect Mickey and I will tag-team it. So I don't want to go back and repeat what I said before, but we do have the balance sheet capacity to continue to scale, number one. Number two is like we're right out of the gates on this. We've gotten out of the gates strong, but we're all at Kodiak, like we pride ourselves on being great operators, kind of keeping our head down, thumbs up, and kind of trying to avoid the distractions. And so we've got, you know, the next little while to get our foundation underneath us to continue to operate this business successfully. And Mickey says it all the time. We want to basically take this wonderful engine that we've created in the compression business and take that mental mindset and apply it to the power business so we have a well-oiled machine down the road. So that truly is kind of where we're focused. Now that said, I have every expectation that we'll think about how can we build a moat around this power business such that we can continue to basically incrementally gain ground or build a bigger moat relative to the competition, and that could involve kind of strategic talking acquisitions of technologies, of capabilities, of services, of things that we need in order to service our customers day in and day out. Or it could include adding additional capacity Last thing I'll say on this is what we fundamentally believe is that the power business will not have 50, 100 different, our end of the power business will not have 50 or 100 different competitors. Ultimately, there's going to be a handful of people that are successful and they're going to be successful because they know what they're doing and they take care of their customers. They've got nice balance sheets. They can scale. They're ultimately someone that the counterparties can say, these folks can take care of my needs. We think that's what Kodiak's proven in the compression business, and it's where we're headed in the power business. So I would have every expectation that over time we'll be a consolidator in that space.

Thank you for that. And then just moving over to the contract compression side, you talked a little bit about some of the things that you're doing to mitigate the cost increases and your contract services margin guidance moved higher. If lube oil costs hadn't been a headwind, where do you think margins could have been? And just how much higher can those margins go?

You're going to test my CFO math in public, which scares me. But I would tell you that relative to kind of where we were at the beginning of the year, kind of to where we probably land at the end of the year, it's kind of a $1.5 million a month or so uptick. in terms of the cost. So it's really substantial. So if you got back into a normalized market, I guess that's about, what, $18 million in annualized margin that you would benefit from had that not occurred.

Great. Thank you very much.

Thanks, Eldar. Your next question comes from James Larkin with Bank of America. Please say your question.

Thanks for taking my question. I guess my first question here is just on the total 2 gigawatt supply. It seems like right now we're a little more tilted towards engines, and I think maybe the long-term goal was, and I think with an additional kind of research, I'll answer the first point, and then I'll turn it back to Mickey to comment on what the customers are telling us.

So the two gigawatt target, we still think we're going to stand on will be about three quarters turbines and about one quarter resips. So obviously the Baker Hughes is a big chunk of the turbine orders. We've also got some solar equipment as well, too. Then on the resip side, you know, I think I'm not sure if we publicly announced kind of who all we're buying from. We clearly have a whole bunch of cat stuff and we're looking at other parties, too. And we are hoping to kind of lock into some agreements as we roll through the and the Reset Power by 2030.

Yeah, as far as customer kind of preference there right now, speed to power is one of the most important things that our customers and potential conversations are having. So quite frankly, at this point, customers are relatively agnostic to turbine versus Reset Power.

Thank you. And I guess my second question here is a lot of developers now are kind of purchasing their own equipment or have purchased their own equipment. Is there an opportunity maybe outside of the two gigawatt target that you guys have to operate some of that equipment for them?

Yes. Yeah, absolutely. There definitely is. There's a lot of these folks that have procured equipment that they've got coming in. They can hire somebody to help them install it, but on a day-to-day operational piece, that's something that Kodiak brings a lot of credibility to the table on, and there's a lot of ongoing conversations about us taking care of other people's equipment alongside ours.

Thank you. And your next question comes from and Sunil Sibal with Seaport Global Securities. Please, your question.

Yeah, hi. Good morning, everybody, and thanks for squeezing me in. A lot of good discussion today, but I wanted to understand a little bit on the gas infrastructure part of the distributed power business. Is that something that you guys are looking at or responsible for? Thank you for joining us.

Yeah, hey, good morning, Sunil. Thanks for the question. We absolutely have the expertise in-house to do that. I will tell you that the projects that we're looking at right now, especially in the short term, most of the customers that we're talking to have already procured that and already have that covered. So we're not looking at any projects right now where we would have to procure fuel for the generation equipment. But like I said, we certainly have the expertise in-house to do so and some relationships with some partners that would want to partner up to do that if need be.

Got it. Thank you.

Thank you.

Your next question comes from Sebastian Erskine with Rothschild and Company. Redburn, please, to your question.

Yes, good morning. Thanks for squeezing me in. A lot has been asked, but just to follow up on the opportunity around It seems like that's an area of great interest. In terms of your communications, is that something that the majority of your prospective customers are inquiring about? And I guess how easy is it for you to procure that additional equipment, whether it's battery energy storage systems or switchgears or transformers? How easy is that to procure? And then potentially, I mean, I appreciate it's early, but is there any sort of way of quantifying that potential kind of uplift on the potential EBITDA profile of those contracts?

As far as the second part first, Sebastian, hey, good morning. It's hard to quantify the potential EBITDA uplift right there just because, you know, every one of these projects are very different. But there is a baseline of balance of plant that's going to be needed in basically every one of these projects with transformer switchgears and SCR with emissions reduction capabilities. So we've already begun procuring that balance of plant to line up with the orders that we've got. and then to make sure that we've got some batteries in inventory, basically, for lack of a better word, to go after some of these projects as well. So, you know, John hit earlier on our supply chain strategy. We're going to take the same sort of strategy and make sure that we've got the things that we need to be successful in the business. and make sure that we have all the long lead items ordered and taken care of on the balance of plant that would line up with turban and reset deliveries there. So we've already begun procuring that stuff. That balance of plant stuff could be anywhere between four months and 18 to 24 month lead time. So we're working with suppliers on that and make sure that we've got everything we need to execute on these projects when they materialize.

Perfect. That makes total sense. And then the second question is just on the customer mix. Is it predominantly you're communicating and speaking with hyperscalers or potentially partnering with powered land developers and data center builders? I guess one of your peers announced a JV with a land developer and a relationship with a builder. Is that, yeah, just get a sense of kind of, yeah, the customer mix, who you're communicating with, where the interest is, and how diverse that potential pipeline is.

Yeah, it's kind of a mixed bag there, Sebastian. We're talking to directly the hyperscalers right now. We're talking to data center developers, and we're also talking to some power land developers as well. Obviously, we're going to... handicap each of those opportunities based on how far progressed their projects are and who the counterparties are that we'll end up contracting with. So like I said, it's a mixed bag right now. We're talking to several in each of those parties that we discussed. And so all of the above is probably the answer.

Perfect. Thanks very much for the call, Mickey, and congrats on the results today. Thank you.

Thanks, Sebastian.

Thank you, and we have reached the end of the question-and-answer session, so I'll turn the call over to Mickey McKee for closing remarks.

Thanks, Operator, and thanks for everyone participating in today's call. We look forward to speaking with you again after we report our results for the third quarter.

Thank you. This concludes today's call. I'll pause and disconnect. Have a good day.