Earnings call transcript: Kodiak Gas Services beats Q2 2025 forecasts, stock slips

Kodiak Gas Services reported better-than-expected earnings for Q2 2025, with earnings per share (EPS) of $0.43, surpassing forecasts of $0.40 by 7.5%. Revenue reached $322.84 million, significantly exceeding the forecast of $230.46 million. The company, currently valued at $2.8 billion, has demonstrated strong revenue growth of 19.39% over the last twelve months. According to InvestingPro data, two analysts have recently revised their earnings expectations upward for the upcoming period. Despite these strong results, Kodiak’s stock fell 0.84% to $31.97 in after-hours trading, reflecting broader market trends and potential investor concerns about future challenges.

Key Takeaways

• Kodiak Gas Services reported a 15% year-over-year increase in adjusted EBITDA.
• The company achieved a new record in free cash flow, amounting to $70 million.
• Fleet utilization remained high at 97%, with a focus on large horsepower units.
• Kodiak’s stock experienced a slight decline despite strong earnings results.

Company Performance

Kodiak Gas Services demonstrated robust performance in Q2 2025, with significant growth in key financial metrics. The company’s adjusted EBITDA rose by 15% year-over-year to $178.2 million, driven by strong contract services revenue and improved gross margins. Net income increased substantially to $39.5 million, up from $6.2 million in the same quarter last year, reflecting effective cost management and strategic initiatives. The company maintains an impressive Piotroski Score of 8, indicating strong financial health. InvestingPro analysis reveals additional insights about Kodiak’s financial strength, with over 30 key metrics and exclusive ProTips available to subscribers.

Financial Highlights

• Revenue: $322.84 million, up from the forecasted $230.46 million.
• Earnings per share: $0.43, compared to $0.06 in Q2 2024.
• Adjusted EBITDA: $178.2 million, a 15% increase year-over-year.
• Free Cash Flow: $70 million, setting a new company record.
• Contract Services Adjusted Gross Margin: 68.3%, up by 430 basis points from 2024.

Earnings vs. Forecast

Kodiak Gas Services exceeded expectations with an EPS of $0.43, beating the forecast of $0.40. The revenue surprise was significant, with actual revenue of $322.84 million surpassing the forecast by 40.09%. This performance marks a notable improvement over previous quarters, highlighting the company’s successful execution of its strategic plans.

Market Reaction

Despite Kodiak’s strong financial performance, its stock declined by 0.84% in after-hours trading to $31.97. This movement may reflect broader market trends and investor caution regarding potential risks in the natural gas sector. The stock’s performance remains within its 52-week range, suggesting a moderate investor response to the earnings beat.

Outlook & Guidance

Kodiak Gas Services provided optimistic guidance, increasing the low end of its contract services revenue outlook by $10 million. The company expects discretionary cash flow between $445 million and $465 million, with continued improvements in margins. With a current dividend yield of 5.63% and net income expected to grow this year, Kodiak’s strategic focus on fleet optimization and technology integration is expected to drive future growth. For detailed analysis of Kodiak’s growth prospects and valuation, access the comprehensive Pro Research Report available exclusively on InvestingPro, covering over 1,400 top US stocks.

Executive Commentary

CEO Mickey McKee emphasized the strength of Kodiak’s business model, stating, "Our stable recurring cash flow business model is performing well in the current environment." CFO John Griggs highlighted the company’s synergies, noting, "We stopped counting at probably 45 million." These comments underscore Kodiak’s confidence in its strategic direction and operational efficiency.

Risks and Challenges

• Potential supply chain disruptions could impact operations.
• Market saturation in the natural gas sector may limit growth opportunities.
• Macroeconomic pressures, including inflation and interest rate changes, could affect profitability.
• Labor availability challenges may constrain expansion efforts.
• Environmental regulations could impose additional costs on operations.

Q&A

During the earnings call, analysts questioned Kodiak’s strategy in the Permian Basin, exploring creative customer partnership models and addressing labor availability challenges. The company also discussed trends in electric motor-driven compression, affirming its commitment to strategic asset acquisitions and technological advancements.

Full transcript - Kodiak Gas Services Inc (KGS) Q2 2025:

Conference Operator: Greetings, and welcome to the Kodiak Gas Services Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Graham Sellens, Vice President, Investor Relations.

Please go ahead.

Graham Sellens, Vice President, Investor Relations, Kodiak Gas Services: Good morning and thank you for joining us for the Kodiak Gas Services conference call and webcast to review second quarter twenty twenty five 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 discuss our financial and operating results, review our updated 2025 guidance 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 08/21/2025. Information on how to access the replay can be found on the Investors tab of our website at codietgas.com.

Please note that information reported on this call speaks only as of today, 08/07/2025, and therefore, you’re advised that such information may no longer be accurate as of the time of any replay listening 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. And now I’d like to turn the call over to Kodiak’s President and CEO, Mr. Mickey McKee. Mickey? Thanks, Graham,

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: and thank you all for joining us today. We began all meetings at Kodiak with a safety topic. The tragic events this summer in the Texas Hill Country struck close to home and deeply impacted many of our employees, friends, and colleagues in the industry. Our thoughts and prayers continue to be with those impacted as they recover and they heal from this tragedy. While the extent of the devastation was difficult to grasp, it’s heartening to see our nation and our state rally behind the affected communities.

And I want to personally thank the Kodiak employees who volunteered their time and resources to assist with the recovery efforts. Before we get to our strong financial results, I want to start by discussing two recent developments that we think are very positive for our shareholders. First is the $100,000,000 increase to our share repurchase program that we announced yesterday. Since our initial stock repurchase in September 2024, we bought back about 2,000,000 shares at an average price of just over $30 Given the current stock price and the remaining availability on our previous repurchase authorization, the Board thought it would be prudent to increase and extend the repurchase program reflects our confidence in the company’s strategy, the demand outlook for contract compression and natural gas and underscores Kodiak’s commitment to returning capital to shareholders. Second, we were very pleased to learn last week that Kodiak was added to the S and P Small Cap 600 Index as of yesterday.

This is a significant milestone as it highlights the strength of the company’s business strategy and our commitment to highly profitable growth. The inclusion in the index will increase Kodiak’s visibility in the investment community and enhance shareholder value over the long term. We’re honored to be included. Next, I’d like to discuss a few macro themes in the compression space. Large horsepower compression remains in high demand as reflected on our fourth consecutive quarter since the CSI acquisition of increases in fleet utilization and contract services adjusted gross margin.

For the second quarter, our utilization ticked up to over 97% for the fleet with our large horsepower being effectively fully utilized at over 99. Furthermore, less than 10% of our operating fleet was on month to month contracts at the end of the quarter. One of the many driving forces behind the continued demand for large horsepower compression is the steadily growing natural gas volumes in the Permian, driven by consistent production growth and increasing gas to oil ratios. In fact, one of our largest Permian producers recently stated that plans to increase Permian production by over 40% by 02/1930. Multiple other customers have stated in their second quarter earnings calls that they see short and long term gas volume growth coming out of the Permian Basin.

As has been reported in numerous industry sources, Permian producers are shifting to deeper gassier development zones in both the Midland and Delaware Basins. According to a recent Enveris report, despite initially having much higher oil cuts, mature Midland Basin wells are now starting to compete with Delaware wells on a GOR basis. This dynamic is helping drive strong year over year increases in Permian gas production. The industry is well aware of this dynamic as reflected by the over 4.5 Bcf per day of incremental Permian natural gas pipeline takeaway projects, which are expected to come online between now and the end of the year into 2026. The outlook for natural gas remains robust as well with Golden Pass LNG’s first LNG train reported to begin operations in the fourth quarter of this year.

Further, we’ve seen multiple significant LNG gas purchase contracts announced over the last three months, supporting the potential for expansion at existing LNG terminals. Lastly, we expect the recent trade deal with the European Union where they have agreed to purchase $750,000,000,000 in U. S. Energy products to also further support the build out of LNG export facilities along the Gulf Coast. Given the favorable long term market dynamics for natural gas, our customers continue to order new large horsepower compression units to help optimize the development of their assets.

To date, we have contracted a significant amount of our expected twenty twenty six capital expenditures on new horsepower in line with our growth expectations for the year. The combination of strong natural gas growth along with uncertainty in oil prices is offering some unique opportunities to partner with our customers and in some cases consolidate working horsepower. One example is that we recently worked with an investment grade rated E and P company on the installation of a new compressor station, which will ultimately feature over 25,000 horsepower of electric motor driven compression at the location. Our customer asked that if that we own half of the new units with the customer owning the other half, allowing them to preserve capital. Kodiak will also operate the customer owned units alongside the Kodiak units providing a value added service to the customer.

We’ve already agreed to a similar but larger project for the same customer in 2026 and are in the process of developing several other comparable opportunities both for electric motor driven and natural gas driven compression. In addition to jointly partnering on some projects, we have also executed some small transactions to acquire compressors under contract that fit nicely in our existing footprint and will positively impact our third quarter growth in revenue generating horsepower. Now turning to our second quarter twenty twenty five results. Kodiak’s business model delivers consistent growth and an improving margin profile, allowing us to once again set new records in adjusted EBITDA and free cash flow with strong growth in net income and earnings per share. We also sequentially increased Last Water’s high watermark in discretionary cash flow.

Our leverage ratio continues to tick lower hitting a new all time low of 3.6 times as of June 30. These record setting results were driven by our stable fixed revenue model, outstanding execution on contract renewals, cost management, operational efficiency and new unit growth. Along with outstanding financial results, we continue to return capital to shareholders and bought back approximately $10,000,000 in stock in Q2 twenty twenty five and declared a well covered quarterly dividend of $0.45 per share. Next, let’s dive into some operational highlights. We finished the quarter with an average revenue generating horsepower per unit of nine fifty two, a figure that has increased every quarter since we closed the CSI acquisition.

We added approximately 32,000 new unit horsepower that averaged more than 1,800 horsepower per unit. Approximately half of the new units were driven by electric motors. We also executed several transactions as we continue our strategy to high grade our fleet. In the quarter, we divested approximately 35,000 horsepower of non core, mostly small horsepower, low margin aged units. Next, let’s discuss our re contracting efforts.

As I previously discussed, the market dynamics for large horsepower compression remain extremely favorable. That is highly visible as we once again re contracted a significant amount of horsepower, almost a 5,000,000 horsepower in the second quarter at rates that are above our current fleet average. Given strong customer demand, very high utilization and disciplined decision making by the contract compression industry, pricing conversations with customers continue to be constructive. These dynamics are driving the positive progress on our contract services adjusted gross margin. Kodiak’s contract services adjusted gross margin set a new record of 68.3%, a four thirty basis point increase compared to the 2024.

In addition to the previously discussed revenue growth and fleet optimization efforts, we’re starting to see the cost benefits of several technology investments. Kodiak’s fleet reliability center actively monitors our compression units on a remote real time basis. Paired with the use of industrial artificial intelligence and machine learning algorithms, our technology platform is helping us with the early detection of part failures while extending maintenance intervals. The result of these activities is lower costs and more proactive rather than reactive asset management. The utilization of real time equipment monitoring along with other improvements allowed us to realize a sequential decrease in repair costs this quarter.

Speaking of investing in technology, our rollout of a new enterprise software solution went live on August 1, and we’re successfully operating in the new system today. The system consolidates several legacy systems and helps streamline business operations and enhance operational efficiency. I’d like to thank all of the men and women at Kodiak who invested so much of their time and energy into this important implementation project. We view this as the final step in what has been a wonderfully executed CSI integration that delivered financial synergies that far exceeded expectations. Now I’d like to turn to the outlook for the remainder of 2025.

Our Contract Services segment continues to deliver predictable and strong results and we expect more of the same for the remainder of the year. New unit growth in the third quarter is going to be higher than originally expected and considerably above Q2 due to the timing of deliveries. Additionally, since the end of the second quarter, we’ve acquired approximately 30,000 working horsepower, a portion of which we were previously servicing as part of our contract operations business and the rest were units with a customer that tuck in nicely in an area where we have existing operations. As a result of this, we have incrementally raised the midpoint of our adjusted EBITDA guidance through an increase in the midpoint of contract services revenue and adjusted gross margin, resulting in an incrementally higher discretionary cash flow outlook. The Other Services segment is inherently less predictable as the timing of a few projects can significantly move the needle.

During the second quarter, we wrapped up a couple of projects where we significantly outperformed our margins. We’re scheduled to begin work on some quality new projects late in Q3 and into 2026. We anticipate revenues for Q3 in this segment to be fairly comparable to Q2 and margins to be more in line with our guidance. Taking this into account, we revised our outlook for revenue for the rest of the year for Other Services. Furthermore, we continue to make great progress on our committed capital plan for next year.

We’ve contracted much of our new unit capital at top tier rates and expect to fill out the remaining budget by year end. And lastly, we significantly increased and extended our stock repurchase program. Now I’ll pass the call to John Griggs to further discuss our financial results and our updated guidance for the year. John?

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: Thanks, Nikki. While the energy landscape is constantly changing, we remain focused on what we can control. We delivered another quarter of solid financial performance and great execution all around. As evidence of that, adjusted EBITDA for the second quarter was $178,200,000 a 15% increase versus last year’s second quarter results. From a segment perspective, for the second quarter, we achieved strong year over year revenue growth of over 6% in Contract Services.

In Contract Services, revenue per ending horsepower was $22.77 this quarter, a nice uplift sequentially and versus the same quarter last year. Relative to 2024, we increased our contract services adjusted gross margin percentage by four thirty basis points to 68.3%. This significant increase in margin reflects the success we’ve realized in achieving higher average pricing alongside the progress we made in both high grading our fleet and deploying new technology. In our other services segment, we generated higher than expected gross margins on revenues of approximately 29,000,000 SG and A net of non cash items for the quarter was $28,800,000 up from Q1 and in line with a more normalized level going forward. We reported net income attributable to common shareholders of $39,500,000 or $0.43 per fully diluted share for Q2, a significant increase from the $6,200,000 and $06 per share we earned in 2024.

Growth CapEx for the quarter was just under $38,000,000 consisting primarily of new unit CapEx for the 32,000 new unit horsepower. While growth CapEx was down from Q1, we attribute this to timing as some deliveries moved to Q3. We’re still on track to add roughly 150,000 in new unit horsepower over the course of 2025. And that’s before the 30,000 horsepower of working units we’ve acquired in Q3 that Mickey highlighted earlier and that fit within our existing growth CapEx guidance. Other CapEx was $16,000,000 for the quarter.

As we previously noted, other CapEx is front half weighted in 2025 and we expect it to come down significantly in Q3 and beyond. Growth in other CapEx were partially offset by about $8,000,000 in proceeds related to the divestiture of non core horsepower. Maintenance CapEx for the quarter was approximately $18,000,000 consistent with our expectations. Discretionary cash flow came in at $116,000,000 up substantially from the $91,000,000 generated in the same quarter of last year. And free cash flow was $70,000,000 another company record.

With regard to the balance sheet, the record free cash flow combined with improved working capital management including a $29,000,000 quarter over quarter reduction in accounts receivable allowed us to pay down approximately $4,948,000,000 dollars in debt in Q2. We ended the quarter with just under $2,600,000,000 in debt and as Mickey highlighted earlier, exited the quarter at 3.6 times credit agreement leverage. Last, we declared a dividend of $0.45 per share. As a reminder, even after growing our dividend by approximately 10% earlier this year, our dividend is extremely well covered at 2.9 times. Let’s turn to guidance.

I’ll remind everyone that our new compression units in 2025 are fully contracted, which combined with the contracted nature of our existing compression fleet leads to stable and predictable cash flow. Based on the trends we’re seeing in fleet pricing and our outlook for growth in revenue generating horsepower, we increased the low end of our revenue outlook for contract services by $10,000,000 and increased that segment’s adjusted gross margin percentage to 67% to 69%, a bump to both the low and high end of our prior range. Given the timing of project starts, we reduced our revenue forecast for other services to between $120,000,000 and 140,000,000 However, we left the outlook for adjusted gross margin percentage unchanged. For capital spending, our prior guidance remains unchanged. And as I mentioned earlier, that’s even after purchasing nearly 30,000 of working horsepower during Q3.

The recent passage of the One Big Beautiful Bill increases certain tax deductions on CapEx and interest which were applicable to Kodiak. Our analysis suggests this new legislation will reduce our cash tax burden by roughly $60,000,000 over the next five years. Given our results to date and the expectation of lower cash taxes, we increased our discretionary cash flow guidance to a range of $445,000,000 to $465,000,000 To summarize, we made a lot of progress on several key initiatives this quarter. Our primary value driver, the Contract Services segment continues to deliver smooth and steady growth in profits. This provides further evidence of the success of Kodiak’s business strategy, namely best in class U.

S. Focused large horsepower contract compression and related services. Finally, we continue to deliver on our winning formula of reinvesting in the business to grow organically, returning cash to shareholders through an attractive and growing dividend and opportunistically reducing our share count through an active stock repurchase program. With that, I’ll hand it back

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: to Mickey. Thanks, John. Our stable recurring cash flow business model is performing well in the current environment. Demand for contract compression remains strong as reflected in our pricing power and revenue growth. We’re adding new large horsepower units and capitalizing on opportunities to add existing working horsepower to our fleet as well as divest non core underutilized small horsepower units.

These strategic decisions have helped us set new financial records in several key metrics, allowing us to once again increase margins and deliver growth in earnings per share, positioning us to continue to reward our shareholders for their investment in Kodiak. Thanks for your participation today and now we’re happy to open up the line for questions. Operator?

Conference Operator: Thank you. We’ll now be conducting a question and answer session. Session. Our first question is from Jim Rollison with Raymond James.

Jim Rollison, Analyst, Raymond James: Hey, good morning guys. Nice quarter and thanks for all the outlook commentary, Mickey. I’d like to dig in on that a little bit. Your comments around the gas market, the Permian, etcetera, certainly jive with what we’ve heard and our work on kind of from beginning of the year to now on electricity growth driven by all this data center investment that continues to actually ramp higher and LNG permitted capacity, new permits have been added to where that outlook over the next five years seems like it’s gone up. And obviously the oil macro has been weak and the stock’s not acted great from where we were in the early part of the year.

I’m curious what your view is of the disconnect between what’s going on in the ground versus what investor sentiment seems to be?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Hey, good morning, Jim. I appreciate you joining us this morning and asking the question. I mean, it’s an interesting topic, right? Like, I think that the interesting part about it is there seems to be just that disconnect between what investor sentiment thinks is going on really in the Permian Basin and and and what the reality is. And and I think a lot of it is is is the difference between, you know, the the producer the producers and what they have to do with their gas versus oil growth.

Right? And so I think there’s a a lot of people that attribute oil growth to compression demand and and there’s really a a difference there between, you know, the the the gas growth and the oil growth in the Permian Basin. So I think that’s kind of where it it stems from. And and so even in a in a in a choppy oil price commodity market, we’re kind of bifurcated from that because the demand for large horsepower compression is continuing to grow because of the gas growth out of the Permian Basin.

Jim Rollison, Analyst, Raymond James: Appreciate that. And maybe switching gears on margins a little bit, had best margins you’ve had in a long time maybe ever, raised your margin guidance a bit. As we think about this going forward, your pricing kind of continues to trend up. You highlighted a few things on the technology side and new ERP system, all that probably helped the cost side or at least keep it relatively stable. Is there any reason to think margins don’t continue to kind of creep up at least into the upper end of your guidance over the next several quarters?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: We would hope so. I think that’s where we’d like to see it go. We think that there’s definitely the CRP system that we’ve implemented that we’ve been operating on this week is definitely going to make us a leaner, more efficient company. Now there’s gonna be some some learning curve associated with that. But, you know, we we we chose that system because we think it’s gonna make us a more efficient, better company.

So and and also have the ability to layer on some of the AI and and machine learning type stuff that we can we we can develop and and additionally kind of layer on more technological advances as as we move forward. So we would think that it’ll continue to tick up. But obviously, like I said, there’s going to be a little bit of a learning curve with this ERP implementation in the short term.

Graham Sellens, Vice President, Investor Relations, Kodiak Gas Services: Got you. Appreciate the color and thanks for the time.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yes. Thanks, Jim.

Conference Operator: Our next question is from John McKay with Goldman Sachs.

John McKay, Analyst, Goldman Sachs: Hey, good morning guys. Thank you for the time. You talked through a couple kind of interesting things on the commercial side, but maybe we’re just looking at the units you’re acquiring from operators and or partnering with. I mean how should we think about those deals in relation to your 3% to 4% annual growth in horsepower you’ve been talking about? Is that part of it?

Is it incremental? What could kind of the cadence look like from here?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: I think it’s part of part of what we’re talking about. We don’t have any any big deals in the hopper that that would be earth shattering. But these couple of opportunistic opportunistic type of developments that that we have where we can pluck off some stuff that tuck in really nicely is something that so that that we’re really honed in on and and looking for more opportunities like that. So I don’t think they’re gonna be any any big needle mover type of acquisitions, but but nice type stuff that’ll help us that accrete margins and that kind of thing is is gonna be something that we’re we’re always in the market to look for.

John McKay, Analyst, Goldman Sachs: I appreciate that. Thanks. And then you just touched on this a little bit. But just in terms of buyback cadence, how should we think about your kind of ability to lean into the new authorization? Is that dictated by incremental free cash flow?

Is that the balance sheet? Is it your view of the share price? Maybe just walk us through that.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yes, John. I think a lot of it will be dictated by share price. We’ve stated very publicly that our goal for our leverage target is three and a half times. You know, when we see softness in the in the share price like we’ve seen recently, it it it gives us it gives us reason to kinda lean into that buyback and and and look at that pretty significantly. So we wanna stay kinda within the stone’s throw of that leverage target of where we’re gonna where where we wanna be, but also take advantage opportunistically of weakness in the share price.

John McKay, Analyst, Goldman Sachs: All right. Appreciate that. Thank you.

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: Yeah. Thanks, John.

Conference Operator: Our next question is from Doug Irwin with Citi.

Doug Irwin, Analyst, Citi: Thanks for the questions. I appreciate the context you provided around the contracting efforts into 2026. Just wondering if you’re able to give any more detail around just where you see CapEx or fleet additions maybe trending into next year, at least maybe directionally relative to the last few years? Or maybe a different way to ask, just if you could help frame your level of confidence in next year’s backlog relative to maybe where you were at this point last year?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yes. Hey, good morning, Doug. I don’t think we’re ready to really throw a number out there based on kind of where we’re at. Just because, you know, we we we still have some finalization to do around budgeting for next year and that kind of thing. And and quite frankly, we’re working on some some pretty big deals that could move the needle for us.

So, you know, it’s it’s it’s not something that we’re ready to guide on or or or kinda indicate right now. But I will tell you that, you know, we feel really good about where we’re at right now as as far as where we’re at in the year and and what we’ve contracted so far. And it’s pretty consistent with where we’ve been in past years. And we think that we shouldn’t have a problem filling that out for the remainder of the year and the third and fourth quarter that we’re looking at.

Doug Irwin, Analyst, Citi: Got it. And then maybe just a follow-up on asset sales. You executed another one this quarter. Just curious how much more wood do you have to chop there as to if we generally where you want it to be? Or is there maybe still some smaller horsepower that could be viewed as non core?

And then how are you thinking about proceeds in general? Could that be another lever to potentially be able to recycle some cash into buybacks?

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: Yes, Doug, this is John. So good question. We get asked about this a lot. So I think the overarching answer is we’re constantly looking to high grade the fleet and high grade the fleet in our minds means large horsepower density, quality customers, quality environmental aspects of our units. So we will always seek and kind of look at every single asset as is it providing the appropriate returns and margins and it’s going be core to the fleet and to our customers over the medium and long term.

So that’s the overarching kind of framework that we use. That said, we sold a whole bunch of stuff since we bought CSI. I think in total it’s something like 160,000 horsepower that we sold and we would deem 99% of that kind of non core stuff. So we do have more that we’ll continue to sell whether it’s the asset or it’s the geography. But we like to say it’s just going to be pruning around the edges in small pieces.

The cash proceeds that we’ve received from those are small. But of course, we will redeploy that into the large horsepower or some of the other capital allocation framework things that seem to be best for the shareholder.

Doug Irwin, Analyst, Citi: Understood. Thanks for the time.

Conference Operator: Thanks, Doug. Thank you. Our next question is from Theresa Chen with Barclays.

Theresa Chen, Analyst, Barclays: Good morning. On the topic of your customers experiencing elevated compression costs and there is this natural tension between wanting to save money and investing in growth. What you touched upon earlier, Mickey, in these joint partnerships with your customers to free up their CapEx capabilities, is this how you see the market evolving? Is this a preferred means of capital deployment for you? And are there other creative solutions like this to come?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Hey. Good morning, Theresa. Yeah. I think there’s other other creative solutions like this that that we’re gonna be working on all the time and working with our customers. Know, I’ve stated it very, very publicly before that I think this industry as a whole has underestimated the amount of compression that it takes to produce oil and gas out of the Permian Basin due to the liquids rich nature of of the gas and and how much volume is is ultimately coming out of the Permian.

So I think that that the majority of our customers realize that, hey, we need a strategic partner in compression and that we’re very important to what they do overall in their production and their their operations. So, yeah, that that kind of allocation priority for them of of buying versus owning or versus outsourcing compression is a is a strategic decision for them. In times like these and choppy commodity price environments, there’s a lot of people that are are working to preserve capital right now. And I think that there is gonna be more opportunities for it like this going forward. And and we’ll be look to capitalize on those and and opportunistically jump on those as they happen.

Theresa Chen, Analyst, Barclays: Thank you. And on the topic of the significant investments you made into your technology platform, can you talk about how much savings or ultimate margin uplift you’re targeting or can even be quantified from these investments?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Good question. I know what we would like where we’d like to see our margins go. You know, we have a pretty different operating model than a lot of other people in this industry. So with with our margins, we think where we’re at right now is really a high watermark. That 68.3% in in compression operations is is really a is a high watermark for us.

We think we can continuously drive that up through through additional, you know, efficiencies and that kind of thing gained from not only our ERP system, but also our our artificial intelligence and machine learning and that kind of thing. And we’re really just just beginning to scratch the surface of what that can do for us right now. So can I quantify how how how high it will go or what we what our expectations are? Now it’s probably a little bit early to tell that, but we think that there’s definitely upside here.

Theresa Chen, Analyst, Barclays: Thank you.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Thanks, Theresa.

Conference Operator: Our next question is from Sebastian Erskine with Rothschild and Company.

Sebastian Erskine, Analyst, Rothschild and Company: Yeah. Hi. Good morning, Mickey, John and team. Good to hear you this morning. Most of my questions have been answered.

I just kind of want to follow on the last question in terms of the dynamic with your customers. I guess one of the challenges that we saw in 2024 was producers you otherwise would have wanted to outsource compression kind of forced to go directly to OEMs due to the tightness in the market. Can you talk about a bit more the evolution in lead times with Caterpillar and Aerial? And also just the potential appetite from E and Ps to enter into kind of sale and leaseback arrangements against the backdrop of kind of lower operating cash flows. Could that drive more outsourcing next year as a percentage of the mix?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Hey, good morning, Sebastian. So a couple of points to hit on there with that question. Number one, lead times. We haven’t seen lead times from cat or aerial you know, drastically come in and and change significantly from where they’re at than where they’ve been for the last couple of years. You know, you’re kind of forty forty five weeks out on the on the engine type lead times and and depending on shop availability and shop space, you know, there’s an additional amount of time to get it built and get it out the door.

So I haven’t seen it those, you know, appreciably change significantly over the over the last, you know, three to six months. As far as the E and Ps and and and the the people that own their own compression, I think that that’s a, you know, that’s pretty customer by customer specific on on what their capital allocation priorities are. And there’s gonna be some that are are very apt to wanna outsource more and more all the time, like I said earlier than from a capital preservation mode right now from a with with cash flows being a little bit lower with a lower commodity price potentially. So I think that, you know, we’ll just look to to have those discussions with customers on an opportunistic basis and and and people that are interested in in working on something like that will certainly be interested in having those discussions with them.

Sebastian Erskine, Analyst, Rothschild and Company: Appreciate that, Mickey. And then just a broader point on the consolidation in the sector. I mean, I’d appreciate your view on some of the kind of biggest kind of learnings and challenges from the CSI Compressco acquisition now that we’ve had some time for that to kind of bed in? And then I guess in terms of the nature of the fleet in the remaining kind of 25% or so of that outsourced market that’s not controlled both by you and the big three. Can you give a sense of what that looks like in terms of quality and the nature of that horsepower?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yeah, absolutely. So as far as the nature of the fleet that’s not controlled by call it the big three in this industry, there’s a couple of private operators out there that have some attractive of assets that we that we’d be be interested in. But honestly, the the list is getting shorter and shorter all the time and the and the majority of what else is out there is is is probably dominated by smaller type horsepower that’s not really core to to what we’re looking for. So that all being said, I think that there’s there’s still could be some some interesting m and a opportunity out there, but but it is getting thinner all the time after con considering the consolidation in the industry.

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: Touch on the CSI. You know, Seb, this is John. I’ll touch on the CSI acquisition. I think we would sum it up as a wonderful acquisition. Strategically, financially, culturally, like we’re really blessed that we were able to put that deal together.

We started out, I think we guided a day of announcement, maybe 20,000,000 of synergies. We stopped counting at probably 45,000,000 and that’s really good. We’re in the last step of the integration, which is this ERP system and so far so good. Hats off to our IT team and all the folks that have been involved. It’s going really, really well.

So look, if we could find more like that all day long. But our focus is on increasing shareholder value and being highly strategic and how we act. And so it’s going to have a pretty high bar on what we want to go do.

Sebastian Erskine, Analyst, Rothschild and Company: Appreciate it, John. And appreciate it, Mickey. Thanks very much and congrats on the front. Thank you.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yes. Thanks, Sebastien.

Conference Operator: Our next question is from Brian DeRubio with Baird.

Brian DeRubio, Analyst, Baird: Good morning, Just a couple of questions for me. Just out of curiosity, Mickey or John, one of your competitors was complaining about labor availability. That’s something I haven’t heard anybody in this industry say for about two years now. Is that an issue that you guys are seeing at all?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Hey, good morning, Brian. Thanks for joining us this morning. Know, the labor continues to be tight in the Permian Basin. There is there is no doubt about that and we don’t think we’ve seen that alleviate for for two or three years now since, you know, since kind of the post COVID era. You know, that’s a challenge that everybody deals with in the Permian Basin and and something that we spend a lot of time and effort working on, which is why we’ve kind of deployed and developed this our Bears Academy and and our our elite training program that we have for for operators and and to get younger, less experienced technicians up speed and and trained up to to do their jobs effectively and safely as soon as possible as we as we hire younger people that that have less experience in the industry.

So something that we’re very focused on and something that we we are are are working to develop additional technologies to help advance the careers of our less experienced people at all the time.

Brian DeRubio, Analyst, Baird: Got it. No, appreciate that. And then just as we think about the acquisitions of the assets that you acquired from some operators during the quarter, Any way you can help us understand sort of the economics of that versus maybe some of the recent M and A transactions in the industry? Do think you’re getting a better return on these investments equal? Just trying to understand the economics there.

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: Yes, it’s a great question. So it’s this is John again. So no two acquisitions are the same. And you’re going to usually buy stuff when it’s in creates extra density within your operation or if it’s the right horsepower or both. You’re trying to get all of those things to line up or with a customer.

So that you really want to work for. And I’d say in this case, are opportunistic opportunities where we had great people. We didn’t have enough density in certain areas and we had the counterparty that was willing to sell them because they had the opposite. It was like something they were ready to move forward on. So the economics are, call it, somewhere between $200 and $400 a horsepower typically because you’re going to be buying something used or you pay something more.

And the return on investment, you don’t just base it specifically on that. You’re kind of thinking strategically around the area that you’re going to drop those into. They can be really compelling.

Brian DeRubio, Analyst, Baird: Got it. And final question for me. When you bought CSI, obviously, you bought it mostly for the compression units, but they had some other businesses in and around the wells. I think it was a gas cryo business. Is that an area that’s of any focus?

I know you said you were going to retain those assets at the time of the acquisition, but is that an area of interest or focus for you to expand? Is it still profitable? Just love to understand. I know it’s very tiny, but love to understand any dynamics around that.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yeah. Brian, yeah, that’s true. It is a very, very, very small part of our business right now. But, you know, it’s it’s one of those things that we haven’t put a ton of capital in, and and we’ve just kind of continue to operate it as a cash flow business that is profitable coming out of that out of the acquisition. So our like I said, the capital allocation priorities has been number one on growing the large horsepower fleet, but we still have some of those aiming plants and gas coolers and that kind of thing a that small part of the CSI business that we’ve continued cash flow over the time.

Brian DeRubio, Analyst, Baird: Is that so that could be you could think about maybe ultimately exiting or just going to keep it running for cash at this point?

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: I think the plan right now is just keep it running for cash right now and continue to keep it utilized and continue to harvest that cash out of that business.

Brian DeRubio, Analyst, Baird: Got it. Appreciate all the responses. Thank you.

Graham Sellens, Vice President, Investor Relations, Kodiak Gas Services: Yes. Thanks, Brian.

Conference Operator: Our next question is from Jeremy Tonet with JPMorgan.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Hey, this is Eli.

Graham Sellens, Vice President, Investor Relations, Kodiak Gas Services0: Maybe just wanted to touch a little bit on the electric side versus gas. I know in previous quarters, there was a lot of focus on electric motor drive compression. And I just wanted to get a sense of where that stands today and what your customers are kind of asking for as they start to fill up orders into 2026 and beyond what that market looks like? Thanks.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Yes. Thanks, Eli. I appreciate you joining us this morning. We’re still seeing pretty significant demand on the electric motor driven side of the business. Our the the large players in the industry that that are in our top 10 customer list are are still pretty significantly looking at electric motor driven compression.

They still have goals to electrify additional compression over the course of the next several years. There’s there’s no doubt that access to power is a challenge for everybody surrounding the Permian Basin. And it really is is again, is is kind of a customer by customer thing that that as people are are closer to metropolitan areas and closer to power sources, they’re they’re much more apt to to wanna to wanna electrify or or go with electric compression than people that are in more remote areas. So it really has a lot to do with where the acreage is that they’re producing from and and kind of their corporate goals. So some people are very interested in electric, some people are are are not very interested at all.

So that all being said, we’re still seeing demand for electric compression. We’re still gonna lean into it and and still be very good at it and and be a a quality supplier to our customers.

Graham Sellens, Vice President, Investor Relations, Kodiak Gas Services0: Awesome. And then, you know, I think margins and pricing have been touched on this quite a bit this call, but just maybe to put another point on it. We continue to see dollars per horsepower per month move up into the right. Should we expect this trend to continue? And how kind of consistently does that continue to move up?

Is it just a function of new unit recontracting and other sort of items like that? But just trying to get a sense of how much more we could expect to see that metric move up into the right.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: I mean, Eli, our our goal is to continue to move that up every quarter from from here on out. You know, that’s that’s what that that that’s the what we’ve tasked our commercial team with. And and as we are con as we’re adding contracts for new equipment that is at higher rates than the fleet average, you should see positive pressure there on on that number. You know, you have to keep you have to keep in mind that as, you know, how much horsepower is deployed in any quarter. When you have a heavy amount of horsepower deployed, which we’re what which is what we’re expecting for q three, and you have partial quarters kind of full revenues, it could it could look a little bit different.

But but when you have full quarters revenues for kind of big slugs of horsepower, you should see that number continue to to push up. So we would expect that number to continue to go up. That’s the plan at least. And And so quantifying how far and when it will get to what points is a little bit harder and we’ll look to guide on that a little bit more when we come out with 2026 guidance. Ian, I just want

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: to put a finer point on what Mickey just said there too about when you when we learned a valuable lesson in our Q1 earnings call or the call where our dollar per horsepower fell and people immediately like latched on to

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: that and assumed that, you

John Griggs, Executive Vice President and Chief Financial Officer, Kodiak Gas Services: know, the bloom was off the rose and the compression market and pricing falling. When it was absolutely not the case, that was a function of asset sale. Nothing had changed. It was a function of asset sales. It was a function of kind of when the horsepower came in.

So where Mickey just said, we will have a large, I guess, amount of horsepower coming in, in Q3. That’s going to be something we’re going to be ahead of this time to make sure that the market doesn’t misinterpret adding a lot of horsepower later in the quarter with any softness in the marketplace. If there’s softness, we’ll tell you, but don’t get confused by that number.

Conference Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to Mickey McKee for closing comments.

Mickey McKee, President and Chief Executive Officer, Kodiak Gas Services: Thank you, operator, and thanks to everyone participating in today’s call. We look forward to speaking with you again after we report our results for the third quarter. Thanks.

Conference Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your

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