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

John Griggs: Yes, I’ll take it. So Jeremy, great talking to you. You know, it’s always going to come down to — with the utilization kind of where it is, right. You’re not going to see that company utilization. ’24 from a growth CapEx perspective and new unit, we said it — I think since we went public, it’s effectively sold out. So I guess you could see some acceleration of when we would be delivered equipment, we don’t expect that. But I guess you could, and that would kind of drive revenues up more and margins up more, you could go the other way as well too, and be delayed, but we think not going with the worst that’s behind us. So it really comes down to just the fundamentals of price versus costs in our biggest businesses, right.

The compression operation segment. So like, suffice it to say we’re very focused on kind of making sure that we’re charging appropriately for the value that we deliver to our customers. And we’ve always talked in my remarks I said earlier, we’ve always been focused on cost control. And in light of kind of how costs ran over the last couple of years, industry wide membership of post COVID type activities. That’s something where we’re doing what we can with, I’ll call it automation, with our form of artificial intelligence to better understand like how to take care of our units, software to help us with labor, productivity, mean anything and everything. And I don’t think we’re unique in that can’t, we’re just putting full focus on it. So those are two big levers, I guess I need to include the other services segment.

Because if you think about ’23, we had a whopper year in other services, we have guided towards an average year in other services. That’s the station construction work that we do, to guide 60 to 80, with normalized margins of 15% to 20%. So yes, ’23 was to repeat itself, and ’24, which, namely, we had a couple of large contracts come in late and we performed very well on them, generated great margins, you can see some upside there as well. So I think I’ve covered all the different pieces that could drive the business.

Jeremy Tonet : Got it? That’s very helpful. And just want to pivot gears a bit here. And just wondering how, I guess, conversations with customers are going with regard to emissions and just overall trends between, you know, moving towards more electrification? And how you see that trend kind of playing out over time? And what impact that would have on KGS?

Mickey McKee: Yes, Jeremy, I think that, obviously, emissions in being in a better steward of compression, emissions overall, is at the top of everybody’s mind. And that’s why you know, Kodiak is very successful in what we do with the youngest cleanest fleet out there, and emissions friendly fleet out there. The customers are talking about it all the time. And I think that, in a perfect world, we’d love to our customers would love to electrify everything. But the reality is, that’s just not doable from a grid standpoint. So there always be a balance of gas versus electric driven compression in this industry. There is some drive for electric in demand for electric driven compression, looking out into 2025. And I told you earlier that works effectively fully sold out for Q1 of ’25.

And there’s a good portion of that, that is electric motor driven compression for that first quarter. So, 2024 is majority gas engine driven with our growth capital that we’re spending because these customers are trying to get ahead of and get in line to get grid access and that kind of thing. So there’s going be some electric motor driven compression. But I kind of look at it I’ve said this before. I look at it the kind of the same way as renewable energy sources that there’s a market for those and they’re going to gain some market share by think that the overall growth of the market is going to be maybe its gas engines might have a lower percentage of overall but on a total basis, there’s it’s going to be a continued to be a growing market there.

So there’ll be some portion of our fleet that that goes electric and we’re going to be paying attention to what the right allocation is between gas to electric and, and as we do with anything we do, we’re going to be the best at that if we’re going to get into it. So we want to be well off to the best service to our customers and be their first provider of choice when they decide they want to go to electric compression.

Jeremy Tonet : Got it. That’s very helpful. I’ll leave it there. Thanks.

Operator: [Operator Instructions] Our next question comes from the line of Neal Dingmann with Truist Securities. Please proceed with your questions.

Neal Dingmann : Morning, guys. My first question is, is on the compression contract, specifically, making your utilization continues to be no question, I think, better than anybody out there. Given the continued demand, I’m just wondering, do you all anticipate any change in contract length, because of this, and I’m just wondering, is the length about the same and in various areas like the Permian, the Eagle Ford, when and how it can, how it sort of compares regionally?

Mickey McKee: It does, I mean, it’s relatively the same. If we deploy assets into Eagle Ford or some somewhere that isn’t the Permian, we’re going to kind of command that we want to have the same kind of return on capital over the course of that contract that primary contracts, to kind of de risk the spent that capital spend. So you know, but all in all, it’s pretty similar no matter what basin we go into basically 100% of our capital for 2024, that was going to the Permian Basin, because that’s where the most significant demand is, and the highest growth areas with our kind of core customer base. I will say, though, that we have seen a little bit of contract tenor extension over this kind of past cycle. But it’s really not something that we’re pushing tremendously, because now if you kind of recall, some of the things that we’ve said in the past is, is look, I can have a three-year contract on a 3606 engine.