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

John Mackay: It’s going to be interesting. Thanks for all that, McKee. Appreciate it.

Operator: Thank you. Our next question is coming from the line of Neel Mitra, with Bank of America. Please proceed with your questions.

Neel Mitra: Hi, thanks for taking my question. McKee, just wondering if you could maybe discuss the advantage you have versus a pure midstream company in terms of securing compression and being able to have that in time for field operations versus an E&P or midstream company going out and trying to secure that on their own. What gives you that pricing power versus them going out and getting the equipment themselves?

Mickey McKee: Yes, no problem. Good to talk to you this morning, Neel. At the forefront of it is the fact that we are a Caterpillar, basically a Caterpillar distributor. And so we have a special contractual relationship with Caterpillar that allows us to — and requires us basically to purchase certain amount of engines percentage of our engines from Caterpillar every year for preferred pricing on that equipment. So we have basically the deepest discounts that you can achieve in the industry from both Caterpillar and Ariel that makes our compressor frames that couple up with the engine. So, the fact that we have, you know, distributorship arrangements with them, we’ve been a very large purchaser of Caterpillar engines, obviously, for years and years now.

I mean, we’ve grown to almost a 3.5 million horsepower fleet here, of almost exclusively Caterpillar engines. So we’ve got that have got a long history with Cat and in the packaging facilities that are required to build this equipment, fabrication facilities. So with all those relationships in the history of doing business with those companies for years and years and been a big part of their businesses, they are obviously incentivized to continue to do business with us. And so it makes — it kind of allows us to take a spot at the head of the line and allows us to continue to manage our supply chain and make sure that we’re thinking with our customers a year plus out on deliveries.

Neel Mitra: Got it. And then I’m assuming that some of these companies don’t exactly anticipate what field pressure will be in the type of compression they’ll need. Do you have somewhat of a — I guess I would describe it as a spare backlog that you can deploy to alleviate any constraints that some of these companies are facing that otherwise, they wouldn’t normally anticipate?

Mickey McKee: No, we really don’t Neel, I mean, 100% of our capital allocation that is going towards new horsepower growth is for, is contracted with customers that are or required basically, throughout 2024 and into 2025 now. So, we don’t have excess capacity at 99 plus percent utilization. There’s now and then some churn within the fleet that we can make things happen pretty, a little faster than a 40 to 45 week lead time requires. But there’s really not a lot of that going on either when you had talked about production in the Permian Basin where the majority of our assets are allocated. So, you know, historically in this industry, people kind of manage that excess capacity and they needed for changes in pressures and flows and that kind of thing changes in drilling programs, with the idle capacity that sits in the industry that just doesn’t exist today.

So, I think that the winners in throughout this cycle are going to be the ones that really can plan ahead and look into the crystal ball and be accurate with what their production profiles are going to look like a year out.

John Griggs: Hey, Neel, this is John. I’m going put a finer point on that, too. So the headline figures throughout the public companies in the industry around utilization are eye popping, ours has always been pretty good. Our tracks at record use x recording great numbers, if you were to take the horsepower that’s in the highest demand the large horsepower, I mean, that’s going to be even higher. Right. So that this is if you goes back to Mickey’s answer to the last question, like we think this is a fundamental industry challenge that we’re going to be wrestling with in terms of where the horsepower is going to come from to move the oil and the gas in this country for the foreseeable future.

Neel Mitra: Got it. Appreciate it. Thank you.

Operator: Thank you. Our next questions come from the line of Jeremy Tonet with JPMorgan. Please proceed with your questions.

Jeremy Tonet : Hi, good morning. Just wanted to start off with the base business in the EBITDA guidance there. Just wondering if you might be able to talk a bit more as far as what the drivers could be for the high end versus the low end of the guidance range there?