Kodiak Gas Services, Inc. Price & Performance (KGS)

Good morning, and thank you for joining us for the Kodiak Gas Services conference call and webcast to review fourth quarter and full year twenty twenty four 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 and 2025 outlook and then we'll open up the call for Q and A. There will be a replay of today's call available via webcast and also by phone until 03/20/2025. 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 of the time of any replay listening or transcript reading. 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 a company's actual results, performance or achievements to differ materially from those expressed in the statements made by management, 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. I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. [indiscernible] 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 KVAS.

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 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. We've been focused on delivering the strategic value creation of the combination. 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 continue 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 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 basis.

With that in mind, we have been actively divesting assets that don't fit with our long term plans.

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 the average horsepower size of our fleet, reduce the average age of our fleet and geographic 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. 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 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 $139,000,000 in dividends and distributions in '24, about 37% of our discretionary cash flow and bought back over 1,400,000.0 shares of our stock at a weighted average price below $28 stock delivered in 2024. I'm very proud of the work that has been done over the last twelve 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 $1,200,000,000 and adjusted EBITDA grew by 39% to $610,000,000 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 $122,000,000 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 twenty twenty five. We ended 2024 with 4,250,000.00 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 twelve to eighteen 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.

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 4.5 Bcf a day of Permian gas takeaway pipelines reached FID in the second half of twenty twenty four. These projects have strong commercial support and are expected to be online and likely full by the end of twenty twenty six. We're making significant investments to support this growth. Both in our fleet and our people. Last year, we established Bear's 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 constructing a new dedicated facility in mid 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.

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 twenty twenty five. 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 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 [indiscernible] 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. What is leading to an exciting 2025.

To wrap things up, 2024 was a phenomenal year 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, and took strategic action to divest assets that didn't align with our strategy. We also increased our quarterly dividend by 8% and bought back $40,000,000 of our stock at attractive prices. The fundamentals for natural gas compression remain 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 in we continue to believe that Kodiak is well positioned to be the compression provider of choice.

Now I'll pass the call to John Griggs to review the financial highlights and our guidance. [indiscernible] 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 and an outstanding year. We accomplished a lot during 2024.

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 $1,200,000,000 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.

Reported net income attributable to common shareholders of nearly 50,000,000 and adjusted EBITDA of approximately $610,000,000 up 14939% respectively from the prior year.

With regard to the fourth quarter, total revenues were down 5% sequentially as a result of the successful divestitures of multiple packages of low margin non core 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, a 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 seven thirty four in the first quarter post CSI to nine twenty six at year end.

As we start 2025, we're more than halfway back to our high water average horsepower per unit mark of ten seventy two.

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 generates meaningfully higher margins and cash flows its small horsepower brethren. Reducing our exposure to non core horsepower and foreign market but 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 $29,000,000 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 169,000,000 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 $15,000,000 for the quarter and slightly more than $66,000,000 for the full year.

Both right on track with what we expected.

Our growth capital expenditures were approximately $71,000,000 for the fourth quarter and $286,000,000 for the year.

Included in the annual total was a roughly $20,000,000 non cash accrual for potential sales and use taxes relating to our ongoing compression taxability on with the state of Texas as well as approximately $30,000,000 related to getting the CSI fleet 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 in 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 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 2,600,000,000.0 comprised of the $750,000,000 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're at 4.2 times leverage, and we remain 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 $1,310,000,000 and $1,380,000,000 with the Contract Services segment resuming its growth following our second half twenty twenty four non core divestitures, We expect the adjusted gross margin percentage within the Contract Services segment to range between 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, 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 to our competitors in the superior levels of service we strive to provide our customers.

Our adjusted EBITDA guidance range of six eighty five 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 Maintenance CapEx at Kodiak is driven more than anything by engine and compressor hours.

And increasingly by predictive analytics.

Is critical in allowing us to provide extremely high levels of mechanical availability and uptime to which our customers have grown accustomed. We see growth capital spending landing between $240,000,000 and $280,000,000 about two thirds of which at the midpoint will be spent on 150,000 to 155,000 new horsepower.

As we mentioned in prior calls, about 40% of the 25 new horsepower is electric. Nearly all of it will be set in the Permian. The balance of our growth CapEx will go towards a variety of items.

Including fleet upgrades, emissions related projects, capitalize 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 and 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 delever. With the direct line of sight to 3.5 times leverage the end of this year.

To wrap it up, 2024 was a fantastic transformative year at Kodiak Kodiak.

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 even better operating and financial success in the future. With that, 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. 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 line up for questions. Operator?

Our first question is from Jim Rolison with Raymond James. Please proceed.

Hey, good morning, guys.

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, etcetera. And John, you just a minute ago referenced setting new units at higher pricing 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 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. Yes. Thanks a bunch, Jen.

So it's something we thought about. I'll tackle the first part of that and then I hand it back to Mickey about the leading leading edge pricing. So as the numbers you're looking at are going to be our contract services revenue for 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 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 that the impact that it had in 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 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 Last thing I will say is the fourth quarter is traditionally 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 where 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 then from here we continue to do our typical Kodiak up into the right quarter after quarter.

Yes, Jim Kodiak 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 we just you just talked about Maybe just spend a second on 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 you can spend a little time just kind of talking about how that should unfold margins over Yes, I think that that's a great question. I think a little bit of it is projection I'm not 100% sure where margins can go yet. I think that we see a clear path forward towards that upper upper 60% range on the margins 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 conditions based PM cycles on some of our units. So So if we have a strict in this industry before, we've had a strict maintenance kind of cycle of ninety days and we do a maintenance cycle no different than every 3,000 miles ten 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 on the conditions of telemetry and that kind of thing that are going on within your vehicle. We're testing the same kind of thing on these compressors that are saying, you may not need to maintenance that unit at ninety days.

We might be able to push that out to 100 or 110 or one hundred and twenty 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. So 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 the P and 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.

Our next question is from Derek Whitfield with Texas Good morning all and thanks for your time.

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. I mean, really it's to be determined, right? I mean a lot of this stuff we've seen a lot of movement in the last twenty four hours and really haven't talked to a lot of the customers about overall impact. 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 Kevin, 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. So we are expecting that some of that cost will go up, but it's not a tremendous amount of pressure on capital costs It's really 25% to 30% of the overall package. As far as OPEC and some of the pressure on commodity price 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 customers' perspective, 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 want 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 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. Got fixed revenue contracts. We're concentrated in world class highly economic basins like the Permian and Eagle Ford. 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 guide stop start based on short term commodity prices it gives us great confidence in the 2025 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 region you'd like to target for contract compression exposure?

Not really. I mean, I think that 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 the Permian is the right is the the biggest area of focus for us, but also other areas that we're hiring on in South Texas in the the Rocky Mountains and in the Northeast as well. So I don't think that shifts our thought process there. And I think those the Permian, the Eagle Ford are going to have big roles to play in supply of LNG facilities. And and I think we're in the right place at the right time.

That's great. Thanks for your time. Yes. Thanks, Derek.

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

Hey, good morning. Thanks for the time. Maybe I'll start on the macro. We've touched on a couple of 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 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.

Hey, John. Good morning. Thanks. I think that we're seeing the same thing that everybody is 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.

Think that's a little bit of a function of the core premium inventory has largely been drilled by a lot of these, only gas producers there.

But we're not really privy to how many barrels of oil per MCEF of gas are being produced out of the wells that we're sitting next to. So we are seeing the the macro numbers that you are and we are seeing those numbers go up. But as far as kind of here to the grindstone, it is the demand for compression as much as it's ever been.

And we believe that that demand continues to go up because as pressures fall you need more compression. As GORs go up, you need more [indiscernible] As wells age you need more compression. So all those things combined sets up even in an environment where 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 $20,000,000 three mile lateral Permian wells because they were approaching 60 we get down to lower commodity price oil wells. So oil price. So I think that we're in a good spot 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. Just flushing out a little bit more 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?

Yes, 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 $85,000,000 leftover 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 knock on wood, flip the switch midyear, 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, if you were to answer that to kind of finish up that question, I'd say if you looked at the quarters for this and what would that imply for the future? Again, I'd say it's about maybe twothree front half loaded, leaving one third of that $85,000,000 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 significant investments.

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 onetime other CapEx rollover, do you potentially see an opportunity to kind of step up the run rate of fleet additions you 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 adoptionality?

Yes. I think that that is probably likely going into 2026 to 2025 is pretty well baked. With where we're going to land there and pretty well planned out. We've got all of our new unit growth CapEx is basically contracted for the year. So, but looking into 2026, we're not going to have those kind of Acquisition related types of capital requirements that we're having that we've had this year and in the second half of twenty twenty four. And I think the balance of if we're not spending that on on non unit growth stuff, we have it available and if the 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 [indiscernible] You talked in the prepared remarks about kind of the high visibility you had around some of the demand drivers moving forward. 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?

Yes, it's certainly top of mind.

We're going to be doing some analysis on that here pretty quickly.

Yes. Thanks. Thanks Doug.

Our next question is from Sebastian Erchskein 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 the 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?

Yes. 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 that growth and human capital challenge that we've got. So it's something that we're taking very seriously. We're developing some technology that to aid younger type of less experienced technicians with that we're really excited about. And think that that's going to differentiate us through training and technology of our 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 on the 2025 EBITDA outlook kind of $685,000,000 to $725,000,000 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 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 how what is the cadence of the redeployment of some of the the legacy CSI equipment that we've made ready and and spent the capital to get that equipment kind of ready to go. What's the cadence of getting that deployed and starting to generate additional revenues from that. So it's really timing on the deployment of the cash to revenue generation and our success ability on the renewals.

Super. Just I'll squeeze in one final one if I can. A bigger picture question. I guess given consolidation in the contract compression sector, kind of do you see opportunity for Kodiak to take some share from some of the smaller kind of peevac players aren't really deploying capital?

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 of the 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. Spend the capital that we want to spend while we develop our 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 Dingmann with Truist Securities. Please Good morning, guys. It's Chris Miller, the great quarter. Mickey, my question is just supply chain management seems continues to remain pretty tight, continues the timing remains a bit long, given you a nice advantage Has that changed much? And what are you seeing today?

And are you expecting maybe by the end of the year? Are you expecting any improvement I don't know, either from the CAT side or some of the other equipment.

Yes. Hey, Neil. I don't think so. I think that We've seen deliveries come down into that kind of mid-forty week range at the end of last year. That kind of held firm there. I think that actually there's been some orders that have gone on the book that have kind of pushed put some upward pressure on those delivery times from Caterpillar.

But I think they're holding pretty strong with that kind of forty five week delivery time right now.

And the other challenge is making sure that you have shop space build a compressor once you get an engine. So that's at a premium as well. So So 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 and we feel good about where we're at.

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

Yes, that's our expectation. I mean, understanding the compression market even in terms of of M and A, if somebody is to buy somebody else and have our compression out there, the economics don't justify paying for those swap out costs and the downtime associated with it. And 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 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 to get rid of a good strategic partner like Kodiak on the compression side and that's what it really is, it's partnership between us and our customers and we work with them on their own compression as well as [indiscernible] Thanks, Neil.

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

Good 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. 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 look, the new cost the new pricing kind of environment that we see in the compression industry is not one that had is like the OFS business at all where it's opportunistic to really drive drive up returns for on a 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 sell 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 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 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 equipment doesn't change. And so like I said, it's very different than a day rate on a drilling rate.

So I think it's a durable place to be and and if we don't have 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 ask composition as it stands, Mickey, what inning would you say you're at in terms of rightsizing your portfolio following the recent divestitures of non core assets? Where are you in that portfolio optimization process?

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

Thank you so much.

Yes.

Thank you, Teresa.

Our next question is from Robert Moskow 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 is there a change in the type of opportunities you're pursuing? Also seems like the guided us around what you're seeing in other services?

Yes, I'll take that. Thanks, the question. So that other services business pre CSI for us was predominantly our station construction business. And we've always called that out, let's call it that plus or minus $60,000,000 I want to say a $60,000,000 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. You see a reasonably equivalent mix between those two businesses. In 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 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. 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 the midpoint is for 25%. Can you talk about your confidence in 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 a 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 in 'twenty four. So maybe just a look on that legacy fleet Yes. 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 actually toss me a little bit of the softball. I'm going to come back and say that our last quarter is a standalone business and our contract compression segment we posted around a 66% adjusted gross margin in that segment. If you go back and look at CSIs last quarter, the first quarter of twenty twenty four, they were in the mid-50s. Fast forward two quarters and we're back at the 66% last quarter and 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 $66,000,000 to eight 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 twenty back half of twenty twenty four 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 that a lot of that led back to the technology investment.

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 boost 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.

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 Vicky, 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 of years ago?

Sure. It's roughly the same. How are you doing, Brian? Thanks for calling. It's roughly the same We're signing those three to five year contracts on both new unit deployments as well as re contracting 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 combine two into one. Just on the electric drives, just is there a substantial difference in the cost per horsepower on electric drive versus the traditional not gas driven 3,600 engine driven, rigs.

And then also on electric drive, just as we think about maybe two years into those units being deployed, it's a difference in the maintenance on those. Some are saying that the maintenance on the electric drives a lot lower than on the CAT engine ones. Couple of pieces there on the CapEx cost, they're roughly the same. They might be marginally cheaper on a dollar per horse basis by a couple of percentage points, but they're roughly the same As far as the operating costs go on those, your ongoing OpEx, it's 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. And I will say that the trade off there is the grid is still very unpredictable and is very difficult to get reliable electricity to power these things. Especially in the Permian Basin. And so with the 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 any size horsepower of electric drive compression. So 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 additional color. Thank you so much. Yes. Thanks, Brian. 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. Yes. Thank you, operator.

Thanks to everybody participating in today's call. We look forward to speaking with you again after we report results for the first quarter.

Thank you. This will conclude today's conference.