Greetings, and welcome to the Kodiak Gas Services Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Graham Sones, Vice President, Investor Relations. Thank you. You may begin.

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review second quarter 2024 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Chief Financial Officer. Following my remarks, Mickey and John will provide high-level commentary on the company, our second quarter financial results and our updated 2024 outlook before opening the call for Q&A. There will be a replay of today’s call available via webcast and also by phone until August 27, 2024. Information on how to access the replay can be found on the Investors tab on our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, August 13, 2024. And therefore, you’re advised that such information may no longer be accurate as of the time of any replay listing or transcript reading. The comments made by management during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views, beliefs and assumptions of Kodiak’s management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company’s actual results, performance or achievements to differ materially from those expressed in the statements made by management. And management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday’s earnings release, which can be found on our website. Additionally, during the call, we may reference our earnings presentation that was posted this morning on our website. And now I’d like to turn the call over to Kodiak’s CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I want to begin first by talking about safety. As we always discussed at Kodiak, our first and most significant priority is the health and safety of our employees and making sure that every employee goes home safe and sound to their families every night. The focus of each and every Kodiak employee on this topic truly embodies the philosophy that we have adopted at Kodiak, Safety first, all the time. We recently passed our 1-year anniversary as a public company, and I want to take a minute to thank our over 1,400 employees whose relentless focus on safety, customer service, and drive to improve margins has helped make Kodiak the industry leader in the contract compression space. I want to take a minute to talk about what this company has accomplished over that time period since doing public. We organically increased our contract compression fleet by over 150,000 horsepower while living within cash flow. We’ve completed the highly accretive acquisition of CSI making Kodiak the largest contract compression provider in the U.S. We strengthened our balance sheet, driving leverage down to 3.9x well on our way to our goal of 3.5x by the end of 2025. And we have returned capital to our shareholders through a well-covered and compelling dividend. We think this balance between disciplined growth and shareholder return is being rewarded in the market. An investment in Kodiak at our IPO has generated a 91% total return through last Thursday, significantly outperforming the broader market and we’re not done. Given the strong operating environment and highly accretive acquisition, we were pleased to announce that our Board recently approved an 8% increase to our quarterly dividend to $0.41 per share. And we’ll continue to invest to grow our…

Thank you. I’ll echo what Mickey said, after factoring in the unique things that impacted the quarter, the underlying results were strong, and the outlook for the remainder of the year is solid. I couldn’t be more proud of my team and this company. Needless to say, we’ve had a lot going on around here for the past year and in particular, in the last few months. It’s no small feat combining 2 public companies and getting everyone seen from the same handle. I’d be lying if I said it was easier over because it’s not, but we think the hardest part are behind us, we’re right on track and the future is bright. Before I dive into our quarterly results, I’d like to touch a bit more on our integration success. We initially identified and communicated more than $20 million of annual cost synergies. Now that we’re a few months in, as Mickey mentioned, we’re operating that figure to $30 million. Probably the simplest way to explain the math exists. During calendar ‘24, we expect to realize about $20 million in net cost synergies. But remember, that only includes 3 quarters of combined results. So the implication is that the majority of the ultimate cost synergies we expect to garner from the deal have already been realized, and we think we capture the rest in 2025. Now I’ll highlight a few aspects of our second quarter results. Given that the acquisition closed on April 1, year-over-year comparisons in many cases, are not all that in cycle. So I’m going to avoid doing that. Total revenues for the quarter were $310 million with the step change increase from last year, largely driven by the CSI acquisition, but also from organic growth in the fleet and continued rate increases of recontracting…

Thanks, John. To wrap up, I’m very proud of what this company has accomplished in the year since going public. I want to thank the extraordinary women and men of Kodiak Gas Services for their hard work on integration while staying focused and delivering great results. Each team members’ dedication to safety and our customers are what makes Kodiak special, and we would not be an industry leader without this commitment to excellence. I’m happy we’re in a position to further reward our shareholders for their investment in Kodiak by increasing our dividend. We have great momentum as we head into the second half of the year. At this point, we will open up the line for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from John Mackay with Goldman Sachs. Pleas state your question.

Hey, guys. Good morning. Thanks for the time. I wanted to start a little bit on forward outlook for the business. I understand you’re not giving ‘25 guidance here. Yes, I would love to hear your thoughts on maybe like a medium-term outlook for EBITDA growth going forward. And then very specifically, as part of that, we haven’t talked about potential revenue synergies from the CSI deal. So, maybe if you could frame that as part of that growth outlook?

Yes. Hey, John, this is Mickey. [indiscernible] this morning. Look, I mean, I think the forward outlook is really positive. I think that the way we kind of framed it up for EBITDA growth in for the year is minus the onetime kind of transactional type of EBITDA adjustments for the year, if you look at that kind of where we think we’ll be on a run rate perspective of $162 million in a quarter of EBITDA is pretty representative of where I think we’ll be going forward. And then you can kind of layer on that, what our kind of standard growth has been over and above throughout the years on a pretty standard amount of growth CapEx. So I think you can kind of – our business is pretty easy to predict. And it’s that quarterly EBITDA and annualize that out and layer on some growth from the growth CapEx that we’re investing in the business. And I think you’ve got a pretty good idea of where we think we’ll be. I think that to get to the question about the revenue synergies, John, I mean, we really only have 90 days of data to evaluate right now. We’ve only owned this business for a quarter now. So we’re not really ready to quantify revenue synergies and kind of give any guidance there. I will tell you that we’ve had some good wins early on here, but it is really kind of too early to tell and too early to give any forward-looking kind of outlook there.

I appreciate that. Maybe switching gears a little bit just to the electrification side. You guys, Mickey, to your comments in the prepared remarks, what we saw to your competitors kind of talking up this a little bit, Archrock with their deal, USCC kind of in a different direction. I’d just be curious on what this trend looks like from maybe a run rate CapEx needs? What are you hearing from your customers in terms of how important this is to them? And high level, I mean, does this shift at all and how we’re thinking about the industry’s overall current capital discipline? Thanks.

I don’t think it changes the capital discipline in the industry at all, John. I think that the electrification process going forward is going to have some pockets where it makes sense and some other pockets where it doesn’t make sense. We’re looking at, as I said in the prepared remarks, about half of our CapEx in 2025 is going to spend on electric-driven motor machines. Those are for projects that are that are highly specialized and for our existing customer base that has access to power on those locations. We can tell you that there are – is kind of a mixed view of electrification coming from our customer base. Some are pushing forward with electrification, others are really going back from electrification. I think that when you look at some of the other things in the industry that are going on, we’re going to continue to focus on large horsepower equipment. And large horsepower electric motor-driven equipment is a very different animal than smaller power type of electric motor-driven type of equipment because there’s a very different power demand that comes from those. So like I said, we’re focused on what we’re doing and what we’re looking at going forward, and we’re going to be participating in the electric motor-driven type of realm. We want to be really good at it. We’re going to be focused on it, and we think that’s part of the future, but we don’t think it’s going to dominate in these all future.

I understood. Thanks for the time today.

Thanks, John.

Our next question comes from Jim Rollyson with Raymond James. Please stat your question.

Hey, good morning, Mickey and John.

Hey, Jim.

Mickey, maybe you could just – you got the first batch of some of the smaller horsepower stuff that you were looking to sell kind of in process. And then obviously, that’s going to be ongoing for a period of time. But maybe just a reminder, at the end of the day, as you kind of look at the fleet you acquired and the horsepower that kind of just maybe non-core reminder of how much capacity you think ultimately, over the next handful of quarters, you are likely to sell? And what do you think the range of kind of proceeds of that would be and even maybe what you do with the proceeds?

Yes. I think, look, it’s going to be pretty hit and miss there. I think like the first batch that we’ve got that we’re selling is going to be kind of give you a little bit of a framework to think about is it’s going to be probably between $15 million and $20 million of annual revenue at sub – it’s something – some kind of a margin that’s less than what our fleet – the large horsepower fleet type of margin is contributing. And so I think that you’re looking at a multiple less than what we trade at, that we get for that equipment. And so you’re not talking about big dollars, you’re talking about $15 million of revenue on a company that we’re guiding to be north of $1 billion of revenue already and the numbers are already baked into those guidance numbers. So that’s – we already expect that. So again, I think that overall, in the fleet from a horsepower perspective, we’re probably looking at 150,000 to 200,000 horsepower worth of total horsepower that we look to kind of divest ourselves of that are non-core to what we’re trying to do, which is domestic U.S., large horsepower, oily basin type of liquid rig spacing type of equipment that we can create densification and drive higher margins and have really sticky long life type of cash flows for our investors.

Yes. It makes sense that’s you already said before, I was just trying to get a magnitude so that helps. And Mickey, you guys have done some interesting math in your presentation kind of on the incremental compression horsepower needs relative to the growth outlook for gas volumes. And we can – now that between new U.S.A. and Archrock and even consolidating Archrock, we can obviously track with a large share of the outsourced side of that equation is doing in terms of orders and how we’re keeping up with that demand. Do you have any view or any color from your customer-owned orders and how those have been tracking? Just curious relative to this kind of mid-50 million horsepower fleet that we’ve got today, we can kind of track what the outsourced side is, but I’m just curious if you have any view or color on are your customer orders keeping up from a pace perspective to match where that demand seems to be headed?

Yes. I think it is, Jim. I mean we don’t have any real data, but if you ask me what my answer is, I think that we’re, as an industry, losing market share to the in-sourced market today. And that’s driven by the DAC capital discipline in our industry, and we’re sitting here today saying, hey, we’re only going to spend X amount dollars a year on our growth CapEx. We have well in excess of that in opportunities to grow but we’re not going to deploy that capital and not spend our cash flows in that kind of meaningful way. And I think that you’re seeing that with the big public guys in this industry, pretty considerably. So if you had to ask me today, I’d say that us as an outsourced industry collectively, but we’re losing market share to the in-sourced industry today.

Got it. Appreciate your color.

Thanks, Jim.

Our next question comes from Theresa Chen with Barclays. Please state your question.

Good morning. Thank you for taking my questions. I would love to dig in a little bit more on the supply and demand outlook for compression over the medium and long-term. And Mickey, how long do you think this tightness will persist?

Hi. Good morning Theresa, thanks for joining us. I don’t know I think we have got many, many years of this type of history. So, we have got – if you look at the demand side of the business and LNG plants coming on, that supply gas has to come from somewhere. You talk about AI and data center driven demand for power. I think that people are probably underestimating the power demand profile that’s coming towards us, too. With all of that demand, there are some really interesting stats out there that really are eye-opening. And you get estimates for what that power demand is going to be from anywhere from 10 Bcf to 18 Bcf a day. And if – even if you are on the low side of that kind of demand profile, the supply of natural gas to feed that is going to be just extraordinary. And so it’s – we have been saying it for a year even before the AI and data center type of conversation has kind of become a buzzword in the industry. And I am not an expert to be able to predict power demand. But at the same time, what I do know is it’s going to require a lot of natural gas and more natural gas than what the U.S. is producing today and that requires compression. I think at lower natural gas prices to the $2 range where they are at today, doesn’t feel like it’s economical to drill Haynesville wells. So, the majority of that natural gas in the short-term is going to have to come from oily basins like the Eagle Ford and the Permian Basin, where we have a great position, and it’s going to create long-term kind of stickiness of our revenues. We talk…

Got it. Thank you for that nuanced answer. And maybe going back to your comments about the many different avenues and trajection of growth, so with the CSI assets under your belt for four-plus months at this point, what is your view on the M&A landscape from here given your position and fragmentation or lack thereof in the industry, what do you view as your whole and position within the market in terms of M&A?

I think that we have got, 20 [indiscernible] right now, and we are probably not in the short-term, going to be active in the M&A market. Probably a lot of hard working employees at Kodiak that were breathing us our belief to hear that right now. But we have got a lot of work left to do. I know that we have owned the CSI business for a quarter now. We have made tremendous progress. We are really excited about the synergy potential there, but we have lots to do, quite frankly. And we are newly public company, and our focus right now is in looking, making sure that we deliver for shareholders, making sure that we are focused on our business and that we are building a strong foundation to continue to build on for – to take advantage of that multi-decade runway that we talked about a minute ago.

Thank you very much.

Thank you, Theresa.

[Operator Instructions] Our next question comes from Zack Van Everen with TPH & Company. Please state your question.

Hey guys. Thanks for taking my question. Just going back to the comment on idle compression that you guys can refurbish and bring back to the market. Do you have a rough estimate of kind of timeline and the amount of horsepower that might be?

Yes. Good morning Zack. Probably roughly, I think you are talking about – like I said before, we are very highly utilized in the large horsepower type of segment of Op segment, but kind of portion of the fleet. So, I think the opportunity is probably maybe 30,000 horsepower or 40,000 horsepower over the next six months to nine months. And so pretty low impact of the dollars, but there is some opportunities to get some wins there and put some equipment back to work, and we are focused on doing that. Probably a little less sure about kind of the medium horsepower, that kind of 400 horsepower to 1,000 horsepower range, there might be another 40,000 horsepower or 50,000 horsepower available there that we might be able to redeploy those. Those opportunities are going to be a little bit fewer and farther in between. But I think that opportunity over the next year could present itself and we will have to – that we will be able to take advantage of. And right now in the small horsepower range, which was where the bulk of the units are that are idle in the legacy CSI fleet – it’s probably – there is not a ton of demand in that range today. So, I think you have got some opportunities to continue to deploy in large, in the medium horsepower side.

Got it. That’s super helpful. And then maybe one on the compression side, we saw rates go up to, close to $22 on a monthly base from just below $20 in Q1. I guess was this all just the kind of noise around CSI, or were there also a decent amount of contract renewals that happened in Q2 that kind of brought this number up?

Yes. I mean I think there was – it was both, to be honest with you, Zack. There were some good renewals that we had some success on renewal contracts and that kind of thing. I don’t have the numbers in front of me, but we did – we kind of executed as expected there. And on the same side, CSI has a blended average as everybody kind of knows smaller horsepower equipment has a higher dollar per horsepower average revenue rate. And so blended in with our fleet because it’s a smaller kind of horsepower average per unit, it drives our revenue per horsepower up a little bit.

And just to finish that thought, this is John, too, on that smaller horsepower. It has a higher revenue for horsepower because it carries a lower margin because labor and parts and pieces will be more expensive than in the small horsepower. The best returns will always come from that large horsepower business.

Perfect. Very helpful. Thanks guys.

Thanks Zack.

Thank you. Our next question comes from Selman Akyol with Stifel. Please state your question.

Thank you. Good morning. So, with deployments for 2025 pretty well set and you look out into 2026, and you talked about sort of half being electric today, would you expect that number to continue to move higher as you go into ‘26?

I would expect it to minimally stay the same. Yes, I think it might drive up a little bit, but I would expect that 2026 deployments will probably be at least that much on the electric side.

Understood. And then just kind of going back to the opportunity to refurbish some of the CSI fleet, again electric doesn’t work everywhere and it works better on the smaller horsepower. Is there an opportunity to take those units and convert those over to electric and redeploy them?

There could be, potentially, that’s going to be a capital allocation decision that we want to – that we are going to have to make if we want to spend the capital on converting smaller part of electric or spend that capital on deploying large horsepower stuff. So, there is an opportunity, I think that we will probably explore the – whether or not we want to be in that small horsepower electric type of business. I think there is a market out there, but I think that that’s not traditionally been our focus and has traditionally been our strategy, so we need to discuss that going forward.

Got it. And then I guess just one last one, and I am thinking about this losing market share to the companies themselves. And I guess in part of that, just they are also seeing this longer runway that you are referring to in terms of the need for compression and therefore, they are willing to commit the capital and think that they are going to own those units for 20-plus years.

Well, I think that if they had access to outsource a lot of that equipment, they would, but they are just in, the company is out there spending the capital to buy it they can outsource it to. This is a – I have talked about it before, pretty extensively that I think everybody in this industry has drastically underestimated the amount of compression it takes to produce Permian oil and gas. And it takes traditionally 3x to 4x more horsepower than it takes to produce conventional reservoir type of basin resources. And that’s what a lot of what is causing this tremendous tightness in our market. We have got the highest kind of combined utilization that we have ever had, especially in the large horsepower segment here industry-wide. And so we think a lot of it is – and it just takes more horsepower, horsepower is more expensive today. So, everybody is dollar of CapEx doesn’t go as far as it used to and buys less horsepower. So, all of these things kind of translate into producers and mid streamers are kind of forced to in-source more than they probably traditionally would like to. And it’s taken a tremendous amount of horsepower to produce what this country is producing in the oil and gas market because of the Permian effect.

I will also finish that thought, too. It’s very easy to track the public companies in terms of what we are adding to the market, and we all are talking about capital discipline. We have said a lot in our presentations and in our meetings on the private side, you have seen in our slide where we kind of list a lot of the competitors, it’s a capital-intensive business. That’s more expensive and harder to come by than ever. The industry, the customer base is consolidating. It’s very difficult for startups to get business with the large majors and large independents that now control the majority of the acreage in the Permian. It’s just a different calculus. And so we do believe that, that 75%, 80% of the public companies control is really where most of the growth is coming from in the industry, too, which again leads us back to the operators out of necessity, the customers had a necessity are investing in their own horsepower.

Got it. Thank you very much.

Thanks Selman.

Thank you. And there are no further questions at this time. I will hand the floor back to management for closing remarks.

Thank you, operator, and thanks to everyone today participating in our call. We look forward to speaking with you again after we report our results for the third quarter. Bye.

This concludes today’s conference. All parties will disconnect. Have a good day.