Kodiak Gas Services, Inc. Q1 FY2025 earnings call

• Safety is a top priority at Kodiak, with a focus on returning all employees home safely. - The US focused large horsepower business model is resilient, not tied to commodity prices or rig counts, with Permian Basin natural gas production expected to grow. - First quarter 2025 set new records in total revenue, adjusted EBITDA, discretionary cash flow, and all-time low leverage of 3.7 times. - Recontracted a significant amount of horsepower at market rates above the current fleet average, boosting revenue and adjusted gross margin in Contract Services. - Analyzing supply chain for tariffs, with contracts having inflationary adjustments to offset potential cost increases. - Capital expenditures broken into growth capital expenditures (e.g., new units, upgrades) and other capital expenditures (e.g., facility upgrades), with growth CapEx for 2025 expected to be between $180 million and $205 million, and other CapEx between $60 million and $65 million.

For the first quarter, total revenues were $330 million, up approximately 7% sequentially. In the Contract Services segment, monthly dollar per revenue generating horsepower increased from $21.97 last quarter to $22.48 this quarter, and the adjusted gross margin percentage increased to approximately 68%, up a full percentage point from last quarter. The Other Services segment saw revenues of $40.7 million, a 39% sequential increase, with an adjusted gross margin of 13.4%. The core large horsepower assets remain effectively fully utilized, driving the strong performance in Contract Services.

• Contract Services adjusted gross margin percentage raised to 66.5% to 68.5%. - Adjusted EBITDA and discretionary cash flow midpoints increased. - Growth capital expenditures for 2025 expected to be $180 million to $205 million, consisting of new units and upgrades. - Other capital expenditures estimated at $60 million to $65 million. - Maintenance CapEx on track at just over $16 million for the quarter. - Leverage target of 3.5 times by the end of 2025 remains the focus.

• Tariffs could lead to price increases on inputs like steel, though contracts have inflationary adjustments. - Economic growth slowdown could impact demand for compression services. - Potential for supply chain disruptions due to tariffs affecting component costs.

Q: Doug Irwin from Citigroup asked about remaining unknowns for 2025 that might push results and how the macro environment influences drivers.

A: Mickey McKee said recontracting strategy and ability to execute on it are key unknowns, with guidance built to account for inflation and tariff impacts.

Q: John Mackay from Goldman Sachs asked about macro backdrop assumed in upper single digit growth outlook and comfort with flat oil price.

A: Mickey McKee stated that even in flat oil environment, Permian Basin gas production growth and need for compression to maintain production support growth targets.

Q: Connor Jensen from Raymond James asked about cost side actions helping margins.

A: Mickey McKee mentioned using AI and machine learning for condition-based maintenance to extend maintenance cycles, and John Griggs noted repositioning the fleet and investing in team training as cost-saving measures.

Q: Sebastian Erskine from Redburn Atlantic asked about leading edge compression pricing and differences between midstream and upstream customers.

A: Mickey McKee said no significant change in pricing shift yet, and customers are monitoring the environment with some dialing back capital budgets by 5%-10%.

Q: Derrick Whitfield from Texas Capital asked about customer behavior evolution in current environment vs prior cycles.

A: Mickey McKee said customer base is more consolidated with better balance sheets, and industry utilization is at historic highs, positioning both customers and suppliers well.