Kodiak Gas Services, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Safety: Reminded of safety during holiday season, emphasizing focus while driving.
• ERP System: New ERP system went live in August, on time and under budget, enabling AI initiatives for processes like parts sales and inventory management.
• International Exit: Exited all international operations, divesting approximately 26,000 operating horsepower in Mexico, focusing on the U.S. market for higher returns.
• Balance Sheet: Termed out $1.4 billion of debt via bond offerings, increasing liquidity to $1.5 billion in ABL Facility availability.
• Shareholder Returns: Returned over $90 million to shareholders, increased dividend by 9% to $0.49/share, with $65 million available for share repurchases.
• Fleet Metrics: Ended Q3 with 4.35 million revenue-generating horsepower, average $965 per unit. Deployed ~60,000 new horsepower, ~40% electric; fleet utilization at ~98%, divested nonstrategic units.
• Margin Improvements: Contract Services adjusted gross margin at 68.3%, driven by fleet growth, optimization, pricing, and technology investments like AI for reducing lube oil consumption and improving fleet reliability.

Segment Performance

• Contract Services: In Q3 2025, revenue grew 4.5% year-over-year and 1.2% quarter-over-quarter. Revenue per ending horsepower was $22.75. Adjusted gross margin was 68.3%, a 230 basis point increase compared to Q3 2024. Fleet utilization was roughly 98%, with margin improvements from fleet growth, optimization, pricing, and technology investments.
• Other Services: Results were consistent with expectations, with positive momentum in station construction, including the award of a 30,000 horsepower compressor station in Texas.

Guidance

• On track to hit segment revenue, margin, and adjusted EBITDA guidance for 2025 despite Q3 nonrecurring expenses related to Mexico divestment.
• SG&A expected to normalize in Q4.
• Discretionary cash flow expected to be between $450 million and $470 million for the year, exceeding prior guidance.
• 2026 capital spending plan effectively fully contracted, with focused large horsepower business model.

Risks

• Uncertainties in market conditions, regulatory changes, and potential delays in project execution as highlighted in forward-looking statements.
• Contingent liability related to Texas taxability resolved but still a risk until settlement in early 2026.

Question and Answer

Q: Details on 2026 backlog, fleet additions, pricing A: Not ready to give explicit guidance but fully contracted for 2026 spending, expect continued growth into next year Q: M&A activity A: Open to M&A, especially in large horsepower, high-quality assets, and power solutions Q: Station construction and power gen A: Significant backlog in station construction, interested in power generation if the right opportunity arises Q: Lead times and pricing A: Lead times due to high demand, expect positive pricing discussions with customers Q: Electric compression A: ~40% electric horsepower in Q3, but power issues affecting customer interest in electric-driven compression Q: Other basins A: Seeing uplift in opportunities in Northeast, Eagle Ford, Rocky Mountains Q: Liquidity and dry powder A: Focus on large horsepower, high-quality assets, power solutions, and purchase leaseback type transactions Q: Pricing trends A: Expect leading-edge pricing to continue, with existing fleet and new units commanding higher prices