Kodiak Gas Services, Inc. (NYSE:KGS) Q4 2023 Earnings Call Transcript

Kodiak Gas Services, Inc. (NYSE:KGS) Q4 2023 Earnings Call Transcript March 7, 2024

Kodiak Gas Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, welcome to the Kodiak Gas Services Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to, Graham Sones, Investor Relations. Thank you. You may begin.

Graham Sones: Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review fourth quarter and full year 2023 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 a high-level commentary on the company, fourth quarter and full year financial results and our 2024 outlook before opening the call for Q&A. Before I turn the call over to Mickey, I have a few housekeeping items to cover. There will be a replay of today’s call available via webcast and also by phone until March 14, 2024. 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 7, 2024, and therefore, you’re advised that such information may no longer be accurate as of the time of any replay or transcript reading. In addition, the comments made by management during this conference 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. Listeners are encouraged to read Kodiak’s prospectus, quarterly reports on Form 10-Q, our Annual Report on Form 10-K, that we expect to file later today. All of which can be found on our website or sec.gov to understand those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most comparable GAAP measures are included in the quarterly press release, which can be found on our website. And now, I’d like to turn the call over to Kodiak’s CEO, Mr. Mickey McKee. Mickey?

Mickey McKee: Thanks, Graham. And thank you all for joining us today. Kick things off by highlighting several monumental events in 2023, before recapping our record financial results, then I’ll provide some commentary on our outlook as well as the compression industry as a whole. Before turning it over to John to provide additional details about our financial results, as well as discuss our financial guidance for 2024. For the year, I want to start by thanking Kodiak’s amazing employees, their hard work, operational proficiency, dedication to detail and focus on safety is what enables Kodiak’s continued operational and financial success. In June of 2023, we took Kodiak public and became listed on the New York Stock Exchange.

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Q&A Session

I’m extremely proud of our team because as you all know, it is a huge feat to complete a successful IPO and to transition to being a public company. Since that time, we have delivered multiple sequential quarters of record results. We’ve maintained our industry leading 99.9% utilization rate. We initiated a meaningful quarterly dividend and we announced a definitive agreement to acquire CSI Compressco in a transaction that will make Kodiak the largest contract compression provider in the industry, with 4.3 million revenue generating horsepower. Throughout this incredibly eventful year, we stay true to who we are, what we do, and the goals we set for ourselves as a public company. And I am extremely proud of that. An important priority for Kodiak as a public company was to establish a capital allocation framework that allows us to grow our core contract compression business and return capital to shareholders through a well-covered dividend, and while strengthening our balance sheet.

I’m happy to report we accomplished all of these priorities in 2023. We organically increased our compression fleet by almost 130,000 horsepower, primarily adding capacity to our industry leading position in the Permian Basin. We executed on our shareholder return plan by initiating a $0.38 per share quarterly dividend, with our second dividend being paid last month. In our opinion, this dividend represents an attractive yield and offers a compelling total return potential for Kodiak shareholders. Finally, we achieved a milestone debt to EBIT leverage ratio of under four times at the end of 2023. The lowest in the history of our company and a mark we expect to continue to be able to push down. Now turning to yesterday’s earnings release. We are very pleased with our fourth quarter and full year results, which reflect the continued execution of our strategy.

During the quarter, we increased our revenue generating horsepower by nearly 50,000, as we delivered new compression units predominantly to the Permian Basin. Compression market remains tight, as strong demand has absorbed idle capacity and pushed utilization rates across the industry to all-time highs. Delivery times for large horsepower Caterpillar engines have improved slightly since our last earnings call, but remaining elongated at 40 to 45 weeks. 2024 new unit deliveries are fully contracted, with known delivery dates, known customers, known revenue rates and will once again be focused on the Permian Basin, further strengthening our position in the most important basin in the U.S. We are currently in discussion with our customers related to new equipment orders into the second quarter of 2025.

The pricing and returns on new horsepower additions remain attractive. Next, I want to touch on a few highlights from the quarter. Our focus on customer service and the fact that we have the youngest most emissions friendly fleet, specifically built to operate in liquids rich environments like the Permian Basin allows us to maintain our industry leading utilization rate. New compression additions and superior utilization led to compression operations revenues of $190 million and consolidated adjusted EBITDA of $114 million. Both are the highest in Kodiaks history. We ended the fourth quarter with about 7% of our horsepower on month to month contracts, driving predictability in our revenues and illustrating the confidence customers have in Kodiak to deliver reliable compression services.

And we have discussed many times, the methodical and intentional deployment strategy of our equipment and contracts generates highly visible steady cash flows. We remain excited about the pending CSI transaction for all of the reasons discussed when we announced the deal. The assets fit nicely into our portfolio and will meaningfully enhance our discretionary cash flow, giving us optionality within our capital allocation framework to enhance our shareholder returns. Now, I would like to discuss some of the recent macro trends in the energy sector. First, there has been and continues to be a tremendous amount of consolidation in the upstream space. This has several positives for Kodiak, it leads to financially stronger customers and increased large scale sophisticated infrastructure developments that tend to favor centralized gas lift applications.

This in turn creates more visibility and certainty for companies like Kodiak that specialize in large horsepower compression. Next is the recent decision by multiple leading natural gas producers in the U.S. to curtail natural gas production out of the Marcellus and the Haynesville Shales in response to low natural gas prices. This once again reinforces why our strategy of focusing our compression footprint on liquids rich associated gas basins like the Permian, and the Eagle Ford has been so successful. As you know, producer economics in the Permian Basin are driven by oil and NGLs with the lowest production cost per barrel in the U.S. For this reason, we believe the Permian will be the primary supplier of incremental gas volumes to Gulf Coast LNG projects coming online in the next 24 months.

U.S. LNG feed gas demand is expected to more than double by the end of 2030, requiring a significant expansion of compression infrastructure. Every incremental cubic foot of gas produced out of liquids rich basins like the Permian will need to be compressed multiple times over. In fact, using the historical relationship between gas production and compression horsepower, we estimate the industry will need to add roughly the combined horsepower of the top four contract compression providers by 2030. Fold with the ongoing capital discipline that is being showed by Kodiak and its peers, the compression market looks to have many years of tightness ahead of it with very little relief in sight. So I would like to point out that the recent politically motivated moratorium on LNG permitting is not expected to have any impact on the natural gas demand growth through the rest of the decade.