Archrock, Inc. Q3 FY2025 Earnings Call

Good morning, and welcome to the Archrock Third Quarter 2025 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin. Thank you, Julianne. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the third quarter of 2025. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrock's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted net income, adjusted EBITDA, adjusted EPS, adjusted gross margin, and cash available for dividend. For reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's third quarter results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. Third quarter performance again demonstrated the strength of our operations and the natural gas and compression markets. The U.S. natural gas infrastructure build-out continued to support robust third quarter and full-year 2025 performance, and we expect this to continue into 2026 and beyond. At Archrock, customer service remained outstanding, operational execution excellent, and profitability at high levels. We continue to expand our adjusted EPS and adjusted EBITDA during the quarter. Compared to the third quarter of 2024, we increased our adjusted EPS by 50% and our adjusted EBITDA by more than 46%. Our contract operations and Aftermarket Services segments both delivered impressive revenue and gross margins due to strong activity levels, a supportive pricing environment, and the efficiency improvements we've driven across our operations. We maintained our sector-leading financial position, including an attractive quarter-end leverage ratio of 3.1x, driven by the stability of our cash flows. Our quarterly dividend per share was up 20% compared to a year ago, and we maintained robust dividend coverage of 3.7x. We also continue to accelerate the repurchase of shares on the confidence we have in the durability of natural gas demand, compression market strength, and Archrock's competitive position. Since the inception of our share repurchase program in April of 2023, we've repurchased more than 3.9 million shares of common stock at an average price of $20.21 per share. I'm both excited by and proud of the level of operational and financial execution we are achieving, which is also giving us strong momentum heading into 2026. Day-to-day, we remain focused on driving the next increment of Archrock's success through our first-rate customer experience, implementation of innovative technology, and our returns-based capital allocation. When coupled with the opportunity-rich market for compression we believe we are in today and see for the period ahead, we believe that Archrock is set up for an extended period of strong and sustained growth in earnings, free cash flow, and returns to our shareholders. With that overview, I want to dive more into the constructive compression dynamics we see on both a short- and a long-term basis. Beginning with the short term. The current environment is characterized by commodity price volatility, oil rig count declines, and the possibility that oil volumes could flatten or even decline slightly in 2026. Should this scenario play out, however, we still expect natural gas production growth in the U.S. with a rate that is likely in the low single digits, including continued gas production growth in the Permian Basin. The dynamic of natural gas production outpacing oil production is one that is consistent with historical trends in other more mature associated gas shale plays like the Eagle Ford and the Bakken, where rising gas-to-oil ratios have led to natural gas volume growth long after oil volume peaks. Because of this, we expect short-term gas market fundamentals will require a similar amount of growth investment by the industry and Archrock during 2026 compared to 2025, a point I will return to in a bit. Shifting to the long-term, we believe the compression industry has entered a durable upturn driven by natural gas demand growth and bolstered by the pervasive level of capital discipline across the energy complex, including by the producers, midstream operators, and compression service providers. Expanding on natural gas demand growth, in particular, we see visible growth in U.S. LNG exports and emerging demand for AI-driven power generation. Combined, we expect these demand pressures will require a significant call on U.S. natural gas production to the tune of an incremental 20 to 25 Bcf a day by 2030, depending upon the forecast and with similar levels of growth likely into the next decade. First, on LNG export facilities. U.S. demand is expected to grow by more than 17 Bcf a day by 2030, much of which is already under construction and at least another 6 Bcf a day of projects could be operational before 2035. Second, the proliferation of AI is creating a new and meaningful source of domestic energy demand and the opportunity for natural gas production and infrastructure to play a critical role is becoming more tangible. We've now seen hundreds of data center projects announced across the U.S., driving a virtual arms race for power. This includes investments in new power plants by utilities and more recently, natural gas pipeline expansion and direct power generation projects to meet this growing demand. Variation in the forecasted magnitude and timing of this opportunity remains wide, but the risk forecasts through 2030 are significant, totaling up to 10 Bcf a day with additional growth expected well into the next decade. Simply put, we need all the gas we can produce, transport, and therefore compress. At Archrock, we expect to fully participate in these developing markets and are increasingly encouraged by these leading indicators for our business. Moving on to our contract operations segment. Our fleet is younger, larger, and positioned in competitive basins with high-quality customers. This is translating into enhanced performance across several fleet metrics. First, utilization. We remained fully utilized during the quarter with utilization exiting at a rate of 96%. I'm proud to share that we've maintained utilization in the mid-90s range for the past 12 quarters. Second, stop activity. Stop activity year-to-date remains at historically low levels. Third, time on location. Based on 2024 data, the average time at Archrock compressors stays on location is now more than 6 years, representing a 64% improvement since 2021. With the investments we've made to high-grade the quality of our fleets and given what we see in the market today, we expect these recent trends in utilization, stop activity, and time on location to continue into the foreseeable future. At quarter end, we had 4.7 million operating horsepower. As a reminder, on August 1, we completed the sale of several small high-pressure gas lift units for $71 million. Excluding this and other active asset sales, we grew horsepower organically by approximately 56,000 horsepower on a sequential basis in the quarter. As we look ahead, we have a substantial contracted backlog and continue booking units for 2026 delivery to meet strong customer demand led by the Permian Basin. Spot pricing continued to increase during the quarter, and as our team remains focused on achieving market rates for all of our units, rates on our active fleet also moved higher. Now as many of you track trends in quarterly revenue per average operating horsepower per month, I wanted to point out the impact of the recent acquisition and divestment activity on that calculation this quarter. As I mentioned, pricing on our installed base of compression increased sequentially in the quarter. Third quarter 2025 revenue per average operating horsepower per month declined slightly compared to the second quarter of 2025, however, due to two factors. First, the average size of our compression units increased from 899 horsepower per unit to 927 horsepower per unit in the quarter, which was primarily the result of the high-pressure gas lift unit sale I just mentioned. Second, the full quarter impact of the NGCSI fleet acquisition had an average pricing on an equivalent unit basis a bit lower than the Archrock fleet, but we believe this gives us the opportunity to bring rates on those units up to market over time. Concurrent with the decline in revenue per average operating horsepower per month, as you would expect, part of the cost per average operating horsepower per month decline we experienced in the quarter was also due to this increase in average horsepower size. We achieved a quarterly adjusted gross margin percentage of 73%. Strong pricing and solid cost management drove underlying contract operations gross margin to 70.4%, up slightly from the prior quarter. Third quarter 2025 adjusted gross margin further benefited from a $9.9 million cash tax credit, which is the driver of the gross margin increase from the 70.4% level to the reported 73% level. In the Aftermarket Service segment, the large base of owned compression continues to support strong AMS activity, particularly in contract maintenance and service work, and great customer service is driving repeat business. Third quarter 2025 AMS gross margin percentage remained at impressive levels and was consistent with guidance. Shifting to our capital allocation framework. We remain committed to our prudent and returns-based approach. The successful execution of this capital allocation strategy has put us in a position to generate positive free cash flow after dividend moving forward. Over the long term, we are committed to positioning and managing this business to generate positive free cash flow and increase returns to our shareholders. Now more on our objectives as we look into 2026. We see an opportunity-rich market ahead and the IRRs at which we expect to invest new build capital remain robust. As I mentioned earlier, the average compressor time allocation has extended to more than 6 years, which is beyond our expected payback period on new investments. Our investments continue to be underpinned by multiyear contracts with blue-chip customers in highly profitable basins. As we indicated last quarter, we expect 2026 growth CapEx to be not less than $250 million and within the range of investment levels that we've made annually since 2023. We believe this is the level of CapEx required to support the infrastructure build-out we are experiencing in the U.S. in order to satisfy the growing demand for natural gas described earlier. As we invest in these compelling opportunities, we're committed to maintaining an industry-leading balance sheet and plan to maintain a target leverage ratio of between 3x to 3.5x. At the same time, we're delivering on our promise to provide an ongoing and growing return to our shareholders through the payment of a quarterly dividend. We will continue to also use buybacks as an additional tool for value creation for our shareholders. We've returned $159 million to stockholders through dividends and share repurchases during the first three quarters of 2025, compared to $93 million at this time last year. Given our confidence in the company's strategy and our commitment to returning capital to shareholders, the Board has approved a $100 million increase to our existing share repurchase program. After accounting for the recent repurchases during the third quarter of 2025 and in October, with this additional authorization, our current capacity is approximately $130 million. In summary, 2025 continues to be a tremendous year for our company, and I'm as optimistic as I've ever been about where we can drive this business in 2026 and beyond. As the structural growth in natural gas production and compression continue to take hold, we are focused on growing our business, growing our attractive and durable earnings power, and growing our free cash flow generation. With that, I'd like to turn the call over to Doug for a review of our third quarter performance and to provide additional color on our updated 2025 guidance.

Thank you, Brad, and good morning. Let's look at a summary of our third quarter results and then cover our updated financial outlook for 2025. Net income for the third quarter of 2025 was $71 million. Excluding transaction-related and restructuring costs and adjusting for the associated tax impact, we delivered adjusted net income of $73 million or $0.42 per share. We reported adjusted EBITDA of $221 million for the third quarter of 2025. Underlying business performance was strong in the third quarter as we delivered higher total adjusted gross margin dollars on a sequential and year-over-year basis despite the lost revenue and profits from a larger asset sale during the quarter. We reported a $4 million net gain on the sale of assets, which was offset by $4 million in other expense and related to an amendment fee for our MaCH4 natural gas liquid recovery new venture agreement with our partner. Turning to our business segments. Contract operations revenue came in at $326 million in the third quarter of 2025, up 2% compared to the second quarter of 2025, driven by growth in horsepower and pricing, and revenue would have been up even more at 4% sequentially, absent the sale of active horsepower, as Brad discussed. Compared to the second quarter of 2025, we grew our adjusted gross margin dollars by more than $17 million. We expanded our adjusted gross margin percentage by approximately 73%. Underlying operating profitability was 70.4% in the quarter, up slightly compared to the second quarter of 2025. Results further benefited from the receipt of a $9.9 million cash tax settlement. In our Aftermarket Services segment, we reported third quarter 2025 revenue of $56 million compared to the second quarter of '25 of $65 million, but up 20% from $47 million in the year-ago period. Third quarter 2025 AMS adjusted gross margin percentage was 23%, consistent with the second quarter of 2025 and consistent with guidance. Turning to our balance sheet. Our period end total debt was $2.6 billion and available liquidity totaled $728 million. As previously announced in October, we intend to take advantage of the lower rate environment and use existing capacity on our ABL facility to redeem all $300 million of our outstanding senior notes due 2027 at par. The redemption date for the notes will be November 17, 2025. Our leverage ratio at quarter end was 3.1x calculated as quarter-end total debt divided by our trailing 12-month EBITDA. This was down from 3.3x at the end of the second quarter of 2025. With continued strong performance in our business, we expect to continue deleveraging as the year progresses. We recently declared a third quarter dividend of $0.21 per share or $0.84 on an annualized basis. This level was consistent with the second quarter of 2025 and represents a 20% year-over-year increase. Cash available for dividend for the third quarter of 2025 totaled $136 million, leading to impressive quarterly dividend coverage of 3.7x. In addition to our quarterly dividend payment, we repurchased approximately 1.1 million shares for approximately $25 million at an average price of $23.18 in the quarter. Including the additional $100 million authorization, this leaves approximately $130 million in remaining capacity for additional share repurchases on the replenished authorization as of October 22. Turning to our updated outlook. Archrock increased its 2025 annual guidance to reflect continued outperformance during the third quarter of '25 and our expectation for continued strength in our underlying business during the fourth quarter. As a reminder, our guidance reflects 8 months of contribution from the NGCS acquisition and outperformance in our business, partially offset by the removal of 5 months of contribution from the high-pressure gas lift units we sold. We are raising our 2025 adjusted EBITDA range to $835 million to $850 million from the prior range of $810 million to $850 million. Additional detail can be found in our earnings release issued last night. Turning to capital. We are narrowing our growth CapEx guidance range to between $345 million and $355 million to support investment in new build horsepower and repackage CapEx to meet continued customer demand. Our growth CapEx is underpinned by multiyear contracts. Maintenance CapEx is forecasted to be approximately $110 million to $115 million. We also expect approximately $35 million to $40 million in other CapEx, primarily for new vehicles. Total capital expenditures are expected to be funded by operations and further supported by non-strategic asset sale proceeds, which total more than $114 million in 2025 year-to-date. In summary, as the structural growth in our natural gas production and compression continues to take hold, we are focused on finishing out the year strong and setting a solid foundation for even higher levels of customer service, operational execution, and financial performance in 2026. With that, Julianne, we are now ready to open the line for questions.

Our first question comes from Jim Rollyson from Raymond James.

Great job as usual. Brad, you're in an interesting position where it's kind of the first time that I can recall in a long time where you guys generated free cash flow, and as you mentioned, you're set up to do that going forward. At the same time, you're at the bottom end of your leverage goals and you're basically set up to just continue to put cash. I'm curious how you think about deploying that. Obviously, you've been growing the dividend, and there's obviously room for that to continue to grow even today. You just expanded the repurchase program. You've been active in M&A, but maybe just a little color about how you think about that given the kind of unusually strong position that you're in today.

Thanks, Jim. I appreciate it. I'm sure you don't want to expand on that question anymore because I love the way you asked it. We have a tremendous opportunity to create value for our shareholders. When we look at our capital allocation priorities, our absolute best use remains investing in and growing this business. The returns that we get by growing our fleet organically by expanding our footprint with our great customers remains the best return we can generate for our investors going forward. We have the additional tools because we are generating sufficient cash. We have great coverage. I think we exited at 3.7x what I talked about. We have a tremendous opportunity to continue to grow our dividend over time. As we've demonstrated in the past, it's up 20% on a year-over-year basis. We can grow that over time as we continue to grow our business. In this market today, the macro is dislocated to our stock price, giving us also the opportunity to deploy capital and buy shares when the market is not valuing it appropriately. We get to buy shares with this complicated oil market and this dislocation and generate additional and great returns for our investors that way. We intend to use all three tools for capital allocation going forward, but the priority is we get to grow our business. The market that we see ahead for natural gas demand is tremendous, and that's what we expect to do with most of our cash.

Appreciate that color. Then maybe my second question, just circling back to margins. Even without the tax benefit, you topped 70%. My math on midpoint of guidance implies 71.5% for 4Q. Maybe just a little color about some of the things that are helping drive this outside of just pricing gains and sustainability and upside. We've had this discussion, I think, off and on every quarter because you keep having better and better margins, but just curious the latest state of the union on margin opportunity.

The first comment I want to address is that this business, the base business, absolutely outperformed without the tax benefit. We saw that in the roughly 70.4% gross margin that we delivered, which was delivered over a combination of continuing pricing prerogative as well as excellent cost management by our teams throughout the organization and especially in the field. That outperformance that you cited is absolutely independent of the tax benefit that we got to claim back, which is a cash tax benefit. Now on the substance of your question, one of the biggest drivers beyond pricing that we have in our operation today is we have been investing in a very disciplined way over the years into technology, the combination of telemetry sensors on the edge on our equipment, a big data engine that gets to sort through the data and help us prioritize our customer service so that we can maintain better run time for our customers for the benefit of our customers as priority one, but also we drive a lot more efficiency in how we are touching the units. The units are telling us more and giving us more information. Our mechanics are able to dispatch in a more efficient way, well-equipped when they arrive on location and it just creates a much more cost-effective approach to managing the operation. We've gotten the benefit of those investments in our numbers today, and we expect to continue to drive improvement in those numbers in the future based on those investments in technology.

Our next question comes from Doug Irwin from Citi.

I wanted to maybe start on the demand side, and I know you kind of touched on it in your prepared remarks already. We've seen an uptick in LNG project FIDs and data center announcements over the past couple of months. These are obviously drivers you've been talking about for a long time now. Just curious if some of that recent activity has maybe translated into an acceleration in some of the discussions you're having with customers on your end? Then just generally, how that momentum might impact the way you're thinking about your multiyear growth outlook and especially kind of where and what basins that growth might be coming from moving forward?

Thank you, Doug. To elaborate on my earlier remarks, the current market indicates a global shortage of power, which is significantly increasing demand for LNG. At Archrock, we believe we contribute to a cleaner America, and with our natural gas largely being transformed into LNG exports, we are also helping to create a cleaner world, which we take pride in. The demand for LNG is surging, and we are witnessing considerable growth in this area. Additionally, we saw peak exports to Mexico during the quarter, reflecting growth in pipeline gas as well. Regarding AI data centers, the forecasts vary widely, estimating incremental demand ranging from 3 Bcf to as much as 12 Bcf a day through 2030, with expectations of continued growth beyond that. We are currently seeing an increase in pipeline and LNG facility developments, along with a need for data centers. However, there’s also significant pressure due to past underinvestment in infrastructure, particularly in pipelines and power, which will need to be addressed. The strong demand for our units is resulting in a concrete CapEx guidance of at least $250 million for 2026, consistent with our 2025 levels, but we are increasingly confident in the multi-year growth ahead as we allocate this CapEx to support the growing need for power and LNG exports.

Then maybe for a follow-up, I guess you've talked a few calls in a row now about units staying on location longer than they did even just a few years ago. Just curious if you've seen this translate into increased customer demand for longer duration contracts, even if it's maybe just a shift towards the higher end of your typical 3- to 5-year contract range that you talk about. Then just curious if you can maybe comment on how you're thinking about the right mix of month-to-month versus long-term contracted capacity moving forward.

The good news is that our units are now remaining on location for more than 6 years, which reflects a significant market improvement. This change highlights Archrock's focus on larger horsepower installations and the strong position in midstream infrastructure that we currently hold. As a result, we are able to stay on location longer, which leads to greater stability in our operations as we become a vital part of our customers' operations and capital structures. The investments we've made in large horsepower have contributed to this. While contract terms typically fall within the 3- to 5-year range, we are seeing these contracts trend towards the longer end of that spectrum, particularly with the larger capital investments involved. However, we have not aimed to change those contract terms. An essential aspect of our relationships with major customers goes beyond individual contract terms. We maintain a strategic position backed by a master services agreement, which fosters a long-term relationship. Given our critical role in their operations, we have confidence that our units will remain on location for as long as they are needed, regardless of the contract term. The expense associated with switching out a unit also incentivizes customers to keep our units operational on location for an extended period, enhancing stability over time.

Our next question comes from Selman Akyol from Stifel.

This is Tim on for Selman. Congrats on the quarter. Just wanted to get an update on how lead times are trending. Just wondering if there's any update to that.

Yes. The gating item for lead times remains Caterpillar engines predominantly for our gasified engines. Those are in the 60-week lead times now we order a new unit from Caterpillar. There are some units available in the market that we can get sooner just because with all this pressure right now for growth, people are ordering equipment, the packagers are maintaining a bit of equipment available. That will get sucked up pretty quickly though or used up pretty quickly. There' the lead times are 60 weeks with a little bit of opportunity in the market to grab engines from others if we needed to.

Then just my follow-up. Curious on how some of the customers are maybe shifting behavior in a lower crude environment. Are you seeing any more outsourced opportunity? Or is there any changes to the AMS business? Are they looking to defer some of those costs? Just curious on real-time changes in customer behavior.

Sure. Apart from the seasonal fluctuations in order activity, this period coincides with customers preparing budgets for their 2026 business plans. We are currently collaborating with our customers on their new equipment requirements and initiating pricing discussions. This time of year often sees a slowdown due to the holiday season as customers finalize their plans. However, we have not observed any significant changes in how customers allocate capital, whether by utilizing our outsourced compression services or by investing in their own equipment. Activity levels in our AMS remain strong. The industry overall is operating at high utilization rates, with us at 96%, and our competitors also maintaining high levels. Our customers’ fleets are being effectively utilized, and we’re seeing substantial activity in both contract operations and AMS to ensure continuous gas flow and equipment maintenance. At a macro level, nothing has changed in this regard.

Our next question comes from Eli Jossen from JPMorgan.

I wanted to touch on the extended time on location you're seeing from your customers and you talked about it in your opening remarks. Obviously, that reflects really strong utilization and demand from those customers, but can you talk a little bit about how it impacts recontracting? Obviously, we're seeing the dollar per horsepower per month broadly move up into the right, but just how should we think about overall recontracting discussions with those customers?

Sure. I see two aspects to the recontracting question. The first is recontracting that unit to ensure it remains on location longer. Even with the more than six years we're achieving, that includes a mix of smaller horsepower. As we add more large horsepower, I expect that the time on location will continue to grow. The second aspect, which may be central to your question, is what happens to pricing and the opportunities to drive it going forward. On a positive note, our contracts with most of our large strategic accounts include pricing mechanisms, allowing us to adjust rates based on an index or to renegotiate terms. For our nonstrategic accounts, we can update pricing when their contracts expire. Consistently, around 60% to 65% of our contracts are available for repricing annually, either through built-in negotiation terms or as they reach the end of their primary term. We're quite optimistic that given the high levels of utilization we're experiencing, we will be able to continue increasing prices, especially into 2026.

Eli, this is Doug. I may make another point that we really haven't talked much about, if at all, on this call, and that is the level of stop activity or units getting returned. We really are seeing that at historically low levels. That's a function of a lot of different things, but most notably, gas volumes are growing in the U.S., and there's just a real lack of available equipment. Archrock at 96% utilization, the industry at a very similar level, I think our customers have started to understand there's a real need to plan in advance for units, and so part of the contracting is that if we don't have units that are stopping on location, we don't have those available to rebook. All of that, as Brad talked about, leads to an opportunity to continue to reprice. I think, again, if you think about that utilization for the industry as the best sign of just, frankly, how healthy this business is, and we expect it to continue to be.

In terms of costs, I wanted to understand how input costs are moving. It's clear that there is some inflation affecting companies like Caterpillar. You seem to be effectively passing on many of these costs, which is reflected in the dollars per horsepower per month. Could you provide insights on the cost trends within the business, particularly comparing the Permian to other areas, and how this might impact margins in the long run?

The overall costs are trending at a normalized level of inflation, which is in the low single digits. This is what we're observing from the OEMs for both new equipment and parts and materials moving forward. Lube oil pricing has moderated due to the decline in crude oil prices. The exception to this trend is labor costs, particularly in the Permian, which remain in the mid-single digits. There is increased pressure on labor due to its scarcity in the energy sector, especially in the Permian. Currently, costs are manageable and create a comfortable environment for building budgets for our customers as well as for us. We anticipate being able to continue passing on and sharing cost increases through rate adjustments over time.

Our next question comes from Gabe Moreen from Mizuho.

I would like to revisit the topic of capital return. You've been very effective with share buybacks. Do you have any plans to make this approach more systematic? Additionally, I’m interested to know if there is a specific leverage level that you aim not to fall below, or are you considering that you're currently under-levered and could manage more debt at this time?

Yes. Look, fair question, Gabe. I think Brad outlined, we really believe we somewhat uniquely even in the compression space are positioned to be able to do all of the above. That being deploy capital to our customers, grow our dividend, and ask our Board for an incremental $100 million share authorization. I think we've been pretty consistent repurchasing shares quarterly. I don't certainly want to share exact specifics of where and at what target price. Look, as you point out, our leverage is trending towards and headed to even below our target range, which means that not to say we won't end up below that for some period of time, but we have both the luxury and the desire to do all of the above. I think you should expect to see us continue to do that.

Maybe, Brad, if I can ask an open-ended question. You talked about the arms race around power gen. It seems like not a week goes by where there's not some sort of creative solutions to get near-term power to procure to those who demand it. Just curious if Archrock is looking at, in some way, shape, or form, participating more directly in that power procurement. Again, open-ended question, but I'll leave it at that.

What we're excited about for the future is the amount of power that is going to be required is going to require the production and the increased production growth in natural gas. That is where we are focused in deploying compression to support natural gas to help support the power growth. The unique position of the industry today is that only natural gas can respond as quickly as is needed to deliver on an intermediate and I think also a long-term basis, but on an intermediate basis, the amount of feedstock required for the dense sharp, incredibly high demand growth for power that we see ahead. Our primary goal right now is to deploy our capital to grow our compression infrastructure business to support that growth. We're excited about that investment opportunity, first and foremost.

Our next question comes from Michael Blum from Wells Fargo.

Just wanted to ask about the $250 million CapEx for 2026. You obviously have very positive comments on the call, both this quarter and the outlook. Just curious if that's just conservatism on your part? Or are there other factors at play that we should be thinking about?

Thanks for the question. It's interesting to think that a $250 million growth CapEx budget would be viewed as conservative. We believe it aligns well with the high-end CapEx levels we've invested in the business in previous years. While it may seem like a reduction from the $350 million midpoint we guided for in 2025, about $70 million of that budget is related to CapEx expenses we inherited from the acquisitions we made. When you consider the overall fleet, the comparison feels more consistent year-over-year, and we are benefiting significantly from the cash flow generated by those acquisitions without needing the same level of CapEx that we had before. We appreciate this capital efficiency resulting from the acquisitions. The year-over-year figures likely show more consistency than is apparent in the CapEx budgets, which gives us substantial growth opportunities with our core customers and in the market. We're excited about that trajectory and consider it a minimum for next year. Additionally, some of our customers are still within budget, so we’ll see how things develop.

Our next question comes from Nataniel Pendleton from Texas Capital.

Congrats on the strong quarter. A lot of commentary has understandably been on the strong outlook for natural gas demand and moving that gas to end markets, but with a large amount of horsepower still dedicated to centralized gas lift, can you speak to how those markets are evolving?

Sure. With, I think, a slowdown in oil drilling and a flattening of oil production possible right now, we're absolutely seeing a bit of a flattening in order activity attributed directly to gas lift, and we're seeing much more of the demand right now on a mix basis toward gathering. I'll point out that the great news is that when these units go out for to support gas lift and production, they remain out. As Doug pointed out, we said in our prepared remarks and Doug highlighted just a minute ago, our stock activity is at absolutely historical low levels. It's a reflection of the strength of this business model that we are leveraged to production, oil for gas lift and natural gas for transportation. Both of those are absolutely at high levels of utilization and incrementally growing going forward. Right now, as you would expect, we are seeing a bit of a pause in the oil-directed gas lift order activity in the mix. It's still there, but it's definitely at a lower level in the mix. We remain, however, optimistic that gas lift has become an absolutely critical component in the oil production system and that, that demand will come back as the market recovers.

Can you provide more color about the MaCH4 natural gas liquid recovery amendment fee mentioned in the release and the progression of a few of those new venture investments?

Sure. For the MaCH4, the joint venture was set up with minimal commitments to purchase equipment, and we wanted to adjust the timing of those commitments, so we essentially bought that out. This was the main reason behind the amendment; we paid an upfront charge to buy out the commitment and change when those commitments will occur. The good news with the MaCH4 is that we conducted a very successful pilot, and we're in the early stages of rolling out the first units to determine if we can establish a sufficient commercial market. Customer enthusiasm for the product is high. This product takes a small portion of the natural gas used in our gas drive engines, removes the heavy liquids, maintaining their value for downstream capture, and provides residue quality gas for the compressor, which greatly aids in compression operations. It also lowers the VOCs emitted from that unit, making it an appealing product. We are currently in the early phases and have received strong support from customers. Regarding our other new venture investments, we are committed to transforming how the industry operates by keeping methane in the pipeline and eventually storing CO2 underground. Our investments in Ecotec, which focuses on handheld devices for methane detection and leak repair support, are thriving. We also discussed the CARBON HAWK, which captures gas that would normally be released to the atmosphere or flared during standard operations. However, we've noticed some slowdown in market acceptance of this product due to regulatory changes following a shift in administration. Despite this, we remain hopeful that it is a valuable tool for the industry to prevent methane emissions. We do not expect either Ecotec or CARBON HAWK to significantly impact our finances, and we have not accounted for them in our forecasts. Nonetheless, we believe these products are exceptionally valuable for promoting sustainable oil and gas operations in the future.

Our next question comes from Joshua Jayne from Daniel Energy Partners.

First one for me. You've talked about the $250 million of CapEx for next year, and then also items like engines having 60-week lead times. I'm just curious, do you see a scenario in the next few years where the market maybe supports you spending, for example, let's pick a round number, $400 million, $500 million in growth CapEx, all supported by contracts? Or is something like that level not really feasible because of supply chain constraints? Maybe you could just talk about that a little bit more.

That level of CapEx is foreseeable. I do believe that while there are constraints out there on equipment lead times and deliveries, I'm going to point out, we were at $350 million last year, inclusive of the CapEx budgets that we took over with the acquisitions of NGCSI and TOPS, and so the gap to get from 350 to 400 is completely foreseeable for the future for this industry. I do believe that while there are supply constraints, that level of CapEx could be achieved even within the existing supply chain.

Then a shorter-term question. You highlighted the full quarter impact of the NGCSI acquisition that hurting some of your metrics in Q3. Could you just speak to when you expect the pricing of that fleet to essentially mirror the rest of your fleet? How long ultimately do you think that takes?

We are optimistic because we understood the pricing when we acquired these units, and they continue to maintain excellent gross margins. We will collaborate with our customer base to implement changes over time, and these units are now part of our fleet. The separation has essentially vanished, and we will manage these operations like any other units in our installed base to increase pricing gradually. Additionally, with the NGCSI acquisition, we acquired units that were mainly with one of our key customers, with whom we have a strong relationship. We expect improvements over time, but honestly, the distinction between those units has disappeared, and while we can see the impact in the quarter, tracking it going forward will be challenging. However, this acquisition gives us more units to help raise prices and enhance profitability in the long run.

Our last question today will come from Steve Ferazani from Sidoti.

I just wanted to ask now that you've successfully integrated NGCSI after the larger TOPS deal. Now that you've flexed those muscles, do you see other opportunities out there? Does it get easier? Or does it really always come down to whether the quality of the compression meets your standards?

Your latter point is correct. It really is driven by whether or not the fleet position and the potential of the acquired fleet fits our strategic position of focusing on large horsepower with the customer base that we've built and the geographic locations that we operate in and are excited about growing in, as well as the quality of the fleet age and the configuration. Those are the primary factors, starting with the strategic and then moving to the operational. That drives our analysis for sure. The other two components though that are interesting is that, the right opportunity has to be in the market at the time, and we have to have a willing seller and in a transaction that makes pricing sense. On the good news front, there remain other compression companies out there that are operating excellent fleets that are operating really well. They're building their own customer base. What you're seeing in our business, which is absolutely supported by this market demand, other people have noticed too that this compression business is an attractive business and can drive great returns. I believe that could and should yield additional opportunities in the future that look something like either TOPS or NGCSI or others. We have a ton of investment opportunities and growth ahead in our compression space. We're excited about investing there right now. That's where we expect to deploy both our capital and keep our focus in the strategically as we look out into the market today.

Our last question today will come from Elvira Scotto from RBC Capital Markets.

Can you talk about what you're seeing in basins other than the Permian? If you've seen any growth as a percentage of your fleet going to some of these other basins? How you see that evolving in the medium and longer term, especially as we see an increase in LNG export capacity? Then does that change any pricing or cost or economic dynamics?

Thank you, Elvira. Sixty percent of our growth is still linked to the Permian. We believe that this percentage will likely stay the same moving forward, with the possibility of an increase. This is primarily due to the breakeven costs and the lower expenses for producers to transport oil and gas in the Permian. We have also observed bookings and incremental growth in other regions, such as Haynesville, the Rockies, and the Northeast in the Marcellus. These areas are definitely being reactivated. However, we have not seen significant reactivation in dry gas basins beyond those mentioned, although incremental growth is occurring in those basins. The Permian continues to be the main focus for the energy industry at this time. Regarding whether this will alter any industry dynamics, it is hard to predict pricing changes, even as equipment and infrastructure shift to other plays, due to the high levels of utilization. These regions must compete for capital expenditures to draw funds away from the Permian. I believe the returns in other plays must match what the industry is achieving in the Permian to attract investment. Furthermore, to support LNG expansion, we anticipate a resurgence in growth in the Eagle Ford, specifically in Eagle Ford Shell, while LNG exports should primarily rely on the Haynesville, Permian, and Eagle Ford in the future. However, the Northeast will also need to see growth to meet data center and power demand, which will necessitate some compression. This is how we foresee developments in other plays and the potential impact on certain dynamics.

I think in your prepared remarks, you noted that you'd finance the CapEx through internally generated cash flow and some potential asset sales. If you look across your portfolio, what is the potential for asset sales?

Thank you for the question. I believe this is an often overlooked aspect of our business and our operations today. Over the past five years, our asset sales have averaged over $95 million annually. Looking back five years prior, our average asset sales were still above $40 million per year. Essentially, in a fleet business like ours, maintaining a fresh and competitive fleet through customer engagement, resource locations, and advancements in equipment is crucial. A sensible approach to asset sales is vital for our business. You could consider the lower end of our asset sales to be around $40 million and the higher end closer to $90 million, with some variations on either side. This gives you a framework for understanding how we strive to keep our fleet young and competitive.

If I can sneak in one more. You mentioned that lead times for the Cat engines are about 60 weeks. How does that compare to maybe where it was 3 months ago or 6 months ago?

I'm not sure I can keep track of all those time frames, Elvira, but 6 months ago, I think we were more in the 42-week time frame, and we've seen that increase out. That's the best collection I can offer on those time frames.

There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks.

Great. Thank you, everyone, for participating in our Q3 2025 earnings call. I look forward to updating you on our progress next quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.