Archrock, Inc. Q4 FY2025 Earnings Call

Good morning. Welcome to the Archrock Fourth Quarter and Full Year 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, Bella. 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 fourth quarter and full year 2025 as well as annual guidance for 2026. 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 and 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 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 EBITDA, adjusted EPS and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I will now turn the call over to Brad to discuss Archrock's fourth quarter and full year results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. 2025 was an incredible year for Archrock, one that leveraged a multiyear transformation of the business and demonstrated the strength, durability and scalability of our strategy against what continues to be a robust outlook for our business. Before I review our fourth quarter and 2025 performance, I want to thank our employees across the organization for their tireless focus on safety, customer service and execution. This was another extremely busy year, and our team delivered. The results we're reporting today simply do not happen without the commitment and excellence of Archrock's amazing team. We achieved much across the business in 2025. Compared to 2024, we increased adjusted EPS by 68% and adjusted EBITDA by 51%. Importantly, with strong Q4 results, we delivered adjusted EBITDA above the midpoint of guidance after raising our outlook twice during the year. Building on the progress we've made in pricing, efficiency and cost discipline, our contract operations and aftermarket services segments delivered outstanding adjusted gross margins. Contract operations achieved 70% plus adjusted gross margins for the fifth consecutive quarter, underscoring excellent execution in a tight market. We continue to enhance and standardize our fleet through disciplined portfolio actions, completing our second accretive acquisition in 18 months while executing asset sales of 325,000 horsepower for $192 million, which we redeployed into high-return new build investments. Taken together, these actions drove 8% operating horsepower growth compared to 2024. Our high-quality fleet has maintained full utilization of 95% or higher for the last 11 quarters, underscoring the strength of demand for our equipment, our services and the reliability of our operations. We translated this performance into meaningful value for shareholders, returning $212 million through dividends and share repurchases during 2025, up over 70% year-over-year. We also concurrently drove our year-end leverage ratio to 2.7x, demonstrating our cash-generating capacity. Overall, 2025 was a year of exceptional earnings growth, balance sheet strengthening and capital returns, providing a strong foundation as we enter 2026. As we look ahead to 2026, our strategy is grounded in the role natural gas continues to play as a critical component of the global energy mix. Our strategic focus for 2026 centers on three priorities. First, capturing opportunities to invest in our natural gas levered transformed energy infrastructure and compression platform by helping our customers move more gas to market more efficiently, safely and with lower environmental impact. We continue to allocate capital toward large horsepower and electric motor drive compression, where we see durable demand, strong returns and clear benefits for both our customers and our shareholders. Second, maximizing the reliability of our service for our customers. Reliability remains our central value proposition. We're continuing to standardize our field operating model and further enhance adoption of the technology we've implemented across the business. We're deploying advanced digital tools, analytics and machine learning to improve service quality, streamline workflows for our customers, optimize maintenance execution and expand our remote monitoring capabilities. These initiatives are designed to increase equipment reliability and safety, reduce unplanned downtime and drive higher fleet utilization and operating efficiency. Third, maintaining disciplined returns-based capital allocation and prudent financial management. As we reach a higher level of sustained free cash flow generation, our priorities remain balanced and consistent, investing in high-return growth opportunities we see in this durable growth cycle and returning capital to shareholders while also maintaining a strong balance sheet. This approach has strengthened our portfolio, improved our financial flexibility and positioned us to continue delivering superior returns on capital. Importantly, while performance over the last few years, including 2025, has validated the strength of the strategy I just outlined, we believe there is meaningful earnings growth still to be captured as we grow our business and realize the benefits of fleet mix, utilization durability, a more automated platform and disciplined capital allocation, which continue to compound over time. Natural gas production continues to increase steadily, and we expect production to reach record levels for the sixth consecutive year in 2026. In the near term, U.S. natural gas volumes are expected to increase incrementally in 2026. Importantly, for Archrock, our exposure is weighted toward faster-growing gas basins, particularly the Permian, where gas volumes are expected to grow at mid-single-digit rates. In the Permian, oil production is expected to remain relatively flat, while associated gas volumes continue to increase, supporting sustained demand for compression. This growth is being complemented by meaningful additions to takeaway capacity totaling 4.6 billion cubic feet per day, particularly in the second half of the year, which should improve basin economics and support continued producer activity. At the same time, U.S. LNG exports are expected to continue to grow in 2026 with 2 Bcf a day of additional FID project export capacity coming online. LNG remains a key driver of incremental natural gas demand and reinforces the need for investment across natural gas production, transportation and compression infrastructure. LNG projects that have already reached final investment decision represent 14 Bcf a day of additional export capacity expected to come online through 2030 with further projects possible beyond that. These developments support sustained demand and a long runway for natural gas infrastructure investment and growth. In parallel, AI-driven power demand is moving from long-term forecasts into the early stages of infrastructure development, creating another source of incremental demand for natural gas-fired power generation over time. These dynamics support what we believe is a durable multiyear earnings growth opportunity for Archrock. We have a substantial backlog for 2026, which is 85% contracted, and we've already booked units for 2027 delivery. Now moving to our segments. Contract operations delivered outstanding performance, supported by excellent execution and continued high demand for our compression fleet. Our fleet remained fully utilized during the quarter, exiting at 95.5%. Maintaining utilization above 95% for 11 consecutive quarters is unprecedented for our business and reflects continued growth in natural gas demand, the high quality of our fleet and strong operational execution. Stop activity remains at historically low levels, and our equipment is staying on location longer. Based on 2025 data, the average time an Archrock compressor remains on location is now 73 months or more than 6 years. That's up 61% since 2021. When isolating large horsepower compression, time on location extends even further relative to the blended fleet average. Average time on location is 97 months or more than 8 years for units with 1,500 horsepower or more, reflecting their use in midstream applications. As we continue to invest in this highly profitable and sticky segment of the market, we expect time on location to extend further over time. At quarter end, we had 4.6 million operating horsepower. Sequentially, operating horsepower declined by approximately 80,000 as new build deliveries during the quarter were more than offset by the sale of approximately 123,000 horsepower, including 84,000 active horsepower, which we completed at year-end. For the year, compression asset sales totaled 325,000 horsepower, including 175,000 active horsepower, generating $192 million in cash proceeds and net gains on asset sales of $47 million while reducing estimated 2026 adjusted EBITDA by about $18 million. Monthly revenue per horsepower moved higher on a sequential and year-over-year basis. In 2026, we expect to benefit from a full year's impact of rate increases from 2025, and we also expect additional price increases in 2026, though at more modest levels. We achieved a quarterly adjusted gross margin percentage of 78%. Strong pricing and solid cost management drove underlying operating profitability to 71.5% in the quarter, up from 70% in the third quarter of 2025, excluding the impact of prior period cash tax settlements and credits in both periods. Results reflect lower make-ready and lube oil costs and efforts to mitigate inflation in labor and parts through ongoing cost management. Fourth quarter 2025 adjusted gross margin further benefited from $23 million in prior period cash tax settlements and credits, which is the driver of the gross margin percentage increase from the 71.5% level to the reported 78% level. Moving to our Aftermarket Services segment, performance remains solid despite the typical seasonal slowdown in the fourth quarter. Aftermarket services continued to deliver consistent margin performance with adjusted gross margin percentage remaining firmly above 20% and well above historical levels despite normal fluctuations in activity. This reflects our continued focus on higher quality, higher-margin work, disciplined cost management and reliable execution. Turning to capital allocation, our framework remains disciplined and returns-focused with growth investments and shareholder returns as our top priorities supported by a strong and resilient balance sheet. First, on growth investment. We previously stated that we expected 2026 growth CapEx would be a minimum of $250 million. And last night, we refined our guidance to between $250 million and $275 million. This level of CapEx reflects continued strong demand as well as a deliberate and disciplined approach. It also represents a similar level compared to the previous 2 years, especially when factoring in the 2025 growth capital expenditures included acquired new horsepower investment backlog from both the TOPS and the NGCS transactions. At this level of growth capital, we expect to generate substantial free cash flows, both before and after dividends, supporting our strategy of increasing returns to shareholders over time. Most recently, our confidence in the outlook for the business and our financial position supported an increase in the fourth quarter dividend to $0.22 per share. This was up approximately 5% compared to the prior quarter and up 16% year-over-year as we focus on maintaining a well-covered dividend that grows along with the profitability increases in our underlying business. This dividend increase still provides flexibility for additional shareholder returns. This includes $117.7 million of remaining authorization under our share repurchase program as of year-end, which we expect to continue to use as a tool for value creation for our shareholders. Our strategy has been to buy back shares on a regular basis while being more active during periods of market dislocation from the strong fundamentals we see ahead. We've returned over $92 million to stockholders since program inception at an average price of $22.72, including $70 million during 2025 compared to $13 million in 2024. From a balance sheet perspective, we exited the year below our long-term leverage target range of 3 to 3.5x, and we currently expect to operate below 3x in the near term. We're comfortable operating at these levels, which reflect the strength and durability of our cash flows and provide significant flexibility to pursue future organic and inorganic growth opportunities while continuing to return capital to shareholders. In summary, Archrock is delivering standout performance, driven by consistent operational execution and the successful advancement of our strategic initiatives. As we look ahead, we believe we have additional opportunities to continue monetizing our transformed platform with earnings growth driven by disciplined execution and capital allocation and further supported by durable market tailwinds across the natural gas infrastructure. With that, I'll turn the call over to Doug to walk through our fourth quarter and full year financial performance and provide additional detail on our 2026 outlook.

Thank you, Brad, and good morning, everyone. Let's go over a summary of our fourth quarter and full year results, and then discuss our financial outlook for 2026. It's important to note that this quarter's results included a few specific items that I will briefly explain. We have provided supplementary slides on our website with more details, linking the results we reported last night to both the 2025 guidance and our expectations for 2026. For the fourth quarter of 2025, our net income was $117 million, and adjusted EBITDA was $269 million, bringing our full year net income for 2025 to $322 million and adjusted EBITDA to $901 million. The underlying business performance exceeded expectations in the fourth quarter, further benefiting from a $23 million cash net benefit to contract operations cost of sales related to prior period sales and use tax audit settlements and credits, as well as $32 million in net gains from selling compression and other assets at the end of the year. These items were not included in the 2025 annual guidance we provided on our third quarter call. Excluding them, our full year 2025 adjusted EBITDA would have been $846 million, which is above the midpoint of our most recent guidance range of $835 million to $850 million. Looking at our business segments, contract operations revenue for the fourth quarter of 2025 was $327 million, consistent with the third quarter of 2025. Average operating horsepower slightly decreased compared to the third quarter of 2025 due to asset sales, while pricing increased marginally. We improved our adjusted gross margin percentage to approximately 78%. The underlying operating gross profitability was 71.5% in the quarter, an increase from 70% in the third quarter of 2025, excluding the effect of out-of-period cash tax settlements and credits in both periods. Results also benefited from $23 million in prior period cash tax settlements and credits, which explained the increase in the gross margin percentage from 71.5% to 78%. In our Aftermarket Services segment, we recorded fourth quarter 2025 revenue of $50 million, which was lower than the third quarter but higher than the $40 million from a year ago. The sequential decline aligns with typical seasonal patterns. The adjusted gross margin percentage for AMS in the fourth quarter was 24%, compared to 23% in both the third quarter and the prior year. We ended the year with total debt of $2.4 billion and strong available liquidity of $579 million. Long-term debt decreased by $149 million in the quarter compared to the third quarter of 2025 due to robust operating cash flow and additional support from asset sales. We have made significant progress in extending our maturity profile and further reducing risks in our sector-leading balance sheet. Firstly, we redeemed $300 million of our outstanding 2027 notes at par in November. Secondly, in January of this year, we finalized an upsized $800 million eight-year bond issuance at a 6% interest rate. We believe this was the lowest rate ever achieved in the compression sector and one of the tightest yields in energy high-yield deal history. Following this offering, our liquidity exceeded $1.3 billion. This issuance effectively pre-funded the redemption of our 2028 notes, which can be called at par in April of 2026. This gives us added flexibility as our nearest bond maturity would then move to 2032 after the call of our 2028 notes. Our leverage ratio at the end of the year was 2.7 times, calculated by dividing total debt by our trailing 12-month EBITDA. This is an improvement over the 3.3 times ratio from the fourth quarter of 2024. As Brad mentioned, we expect to operate below 3 times in the near term, which greatly enhances our ability to pursue further growth opportunities while still returning capital to shareholders. This strong financial flexibility supported increased capital returns to our shareholders. We recently declared a higher fourth quarter dividend of $0.22 per share, or $0.88 on an annualized basis. This marks a 5% increase from the third quarter dividend and a 16% rise compared to the same period last year. Cash available for dividends in the fourth quarter of 2025 totaled $189 million, resulting in a remarkable quarterly dividend coverage ratio of 4.9 times on the increased dividend. We introduced our full year 2026 guidance in yesterday's earnings release. As I outline this guidance, I want to direct you to the supplementary slides on our website, which bridge 2025 performance to our 2026 adjusted EBITDA outlook and clarify items affecting year-over-year comparability. We announced our 2026 adjusted EBITDA guidance at $865 million to $915 million, with $890 million being the midpoint. In contract operations, this outlook maintains the momentum with growth in horsepower, revenue, and profitability. In aftermarket services, we anticipate performance to remain near historical peak levels, second only to 2025, which saw benefits from some one-time items. This high level of performance is supported by sustained service activity and the durability of margin improvements achieved over recent years. The bridge highlights several items that may complicate our year-over-year comparisons, particularly asset sales and tax-related items, which together impact adjusted EBITDA by $98 million when comparing 2025 to 2026. Firstly, tax-related items. The 2025 adjusted EBITDA included a $33 million benefit from sales and use tax audit settlements and credits. Secondly, asset sales. The comparison from 2025 to 2026 is influenced by the $47 million adjusted EBITDA gains recognized in 2025 and the reduction of related EBITDA in 2026, which we estimate would have been around $18 million. This $18 million is primarily due to the horsepower sold late in the year, which was disclosed alongside our earnings and is not yet considered in analysts' forward estimates. Regarding capital, we expect total capital expenditures for 2026 to be around $400 million to $445 million. Of this, growth CapEx is projected to be between $250 million and $275 million to support investments in new build horsepower, while maintenance CapEx is expected to be approximately $125 million to $135 million, increasing compared to 2025 due to heightened planned overhaul activities. We also estimate around $25 million to $35 million in other CapEx, mainly for new vehicles. Total capital expenditures are expected to be funded by operations, with the possibility of additional modest support from proceeds of nonstrategic asset sales as we continue to enhance our fleet. Before we open the line for questions, I want to emphasize that Archrock begins 2026 with solid momentum and a robust financial foundation. Our performance in 2025 reflects the resilience of our business model, careful capital allocation, and the strong demand for our compression services. Moving forward, our outlook is reinforced by a steady growth capital profile, increasing free cash flow, and an ongoing focus on execution. Our priorities remain distinct: investing in high-return growth opportunities and returning capital to shareholders. As we pursue these priorities, our leverage will continue to decrease naturally, and we are comfortable operating below the midpoint of our target range as a result of strong performance, rather than a shift in strategy. We believe this approach positions Archrock to support growth, maintain a strong balance sheet, and create long-term value through various cycles.

Your first question comes from the line of Doug Irwin with Citi.

Just wanted to start with the growth CapEx guidance here. Just wondering if you could talk about how much organic horsepower you see that translating to being added this year? And then maybe if you could just help fine-tune just the cadence of fleet additions throughout the year.

Yes. Doug, thanks for the question. The CapEx should translate into about 170,000 horsepower that we expect to take delivery of in 2026. And as far as the impact through the year, while it's generally ratable over the four quarters throughout the year, we are somewhat front-end loaded and expect about 60% of that horsepower to start up in the first half of the year, which is beneficial and just shows the strength of continuing demand that we see in the market and that we are receiving from our customer base.

Got it. That's helpful. And as a follow-up, maybe just around lead times. We've heard some peers talk about lead times getting longer here to start the year. Could you maybe just talk about what you're seeing today and then how that maybe impacts the way you're thinking about both build costs moving forward and kind of the balance of your pricing power and where you might see gross margin trending in a tighter environment over the next few years?

Lead times have definitely extended. Right now, the long lead time item, the gating item for gas drive equipment is Caterpillar. And for the large horsepower equipment that is the bulk of what we are investing in, it's out to 110 to 120 weeks. For larger horsepower, it's even further. So lead times have definitely extended as the market is in full pressure and demand for natural gas infrastructure, including compression, which we're very happy and excited to be a part of. As far as the impact on us, fortunately, looking at 2026, we are booked to meet our customers' needs for the year. That horsepower is 85% committed to go to work. So we have only a little bit left in the year that would be available for new bookings. And we've already started booking horsepower into 2027. And we expect that we will fully be able to meet our customers' needs for growth through that period of time. So while the supply chain is definitely extended right now, showing the high demand in the market, we believe we will have access to the equipment to meet our customers' needs in 2026 and 2027. It's way too early to talk about any years beyond that. As far as the impact on pricing, it's an interesting market right now. There's a slight pause in some oil activity, and that's moderated, I think, some of the immediate pressures for the overall industry and for our segment. And so while we expect to see price increases on our installed base in 2026 at a more modest level, as I think I mentioned in my prepared remarks, we do see price increasing in the year. On the current market, it's at a more moderate level for sure, just because we've all caught up with inflation and the current demand in the market is basically well priced. And as you can see, we and we think the industry is operating at a high level of profitability.

Your next question comes from the line of Jim Rollyson with Raymond James.

Brad, following up on your comments on lead times. One would think as far out as they've stretched to for someone like Caterpillar that usually more material price increases on their front come down the road. I'm curious your thoughts there just because as you talk about more moderate price increases from your end in '26, if they obviously hike prices for future deliveries into '27 and beyond, presumably, that affords you the ability to catch up with that to maintain your returns. So I'm just curious your thoughts on that.

We have not observed any major changes in Caterpillar's overall pricing strategy that would impact us. Additionally, there hasn't been a significant shift in the pricing from our packagers for the total compression package. However, the positive aspect is that when we do encounter such changes, we will have the flexibility to incorporate that into our future pricing with our customers. One of the notable impacts from the last five years of significant inflation affecting our fleet is that it has enhanced the value of the existing equipment we previously invested in. A considerable portion of our business returns comes from the value of those earlier investments and the pricing power we currently have due to the strong demand for compression. Therefore, the value generated from our installed base far exceeds any short-term inflationary impacts from Caterpillar or the packagers, all of which we are able to price in and pass on.

That was exactly why I asked the question. I appreciate that answer. Following up, I can't recall a time when you've been in quite this position in terms of leverage and free cash flow generation even after dividends. As you look forward over the next few years, the gas market gives you a strong opportunity for annual organic growth, but it seems like your cash flow will far exceed your ability to spend it. I'm curious, as you consider this, you've somewhat run out of obvious M&A candidates in your main area. Do you plan to return more to shareholders? Or will you look at diversifying into another business line like some of your peers have done to deploy extra capital? I'm interested in how you think about this situation since you're in a very favorable position.

I think you could have asked a bigger question, but I'm not sure how. There's a lot to unpack there. I'm going to try to pick a couple of points to make. The first is that we have had worse problems in the past than having to figure out what to do with a lot of free excess cash flow for the benefit of our investors. So we're excited about the position we're in. We think that it demonstrates the strength of this segment. It demonstrates the strength of the natural gas infrastructure sector overall, which is going to continue to grow, and it generates a lot of cash as we're seeing right now. And right now, it's generating on a sustained basis. A lot of this is the benefit of the capital discipline that we've had in the overall energy sector, we've had in the midstream sector, we've had in the compression space, particularly. And as long as that holds, that level of discipline is going to continue to be rewarded by generating great cash returns for our investors. So we're excited to maintain that. To the M&A question you posed, look, we've demonstrated both the desire and ability to grow organically as well as inorganically. And we've digested in just 18 months, two very nice acquisitions with great equipment and great teams and a great customer base to expand our business. And we were able to do that on an accretive basis and pass that accretion on very promptly to our investors through dividend increases. We will continue to be looking for those opportunities. And to the contrary to maybe what you were thinking, we think that there are more compression companies in the space today that will be available for us to look at and will want to think about changing their platform and/or with ownership that we want to monetize in the coming years. So we do see that as a continuing opportunity. And if we can find assets that align with our desire for large equipment, electric motor drive equipment that are well maintained, we will be in the game and competing hard for those assets. And then I'll close with the last thought, which is that we did note that one of our competitors has entered into the power market. And I'd say a few things about that. The first is that there are some synergies when you think about the supply chains, the equipment, the maintenance practices and the fleet management practices, clearly, there is some overlap and some synergies on how to do this. Second, on how to do that segment. Second, what we've noticed is that we believe the returns are largely comparable to what we can achieve in the compression space. And so there's a lot of, I think, industrial logic to the expansion there. On the other hand, we haven't seen asset packages that have come to market that offer the same level of infrastructure, long-term application investment that we're looking for, whether it's in compression, which we're looking for there or in power, we want to see those longer-term applications and infrastructure position. But when we see those asset packages, we will be working those hard as well.

Your next question comes from the line of Nate Pendleton with Taxis Capital.

Congrats on the strong quarter. Can you provide some detail on the units sold and perhaps some insight into how your team decides what assets are noncore to the go-forward business?

Yes. I have a few thoughts. First, maintaining a disciplined approach to both investing in our fleet and disposing of assets we no longer wish to operate is fundamental to our business. Over the past five years, we’ve averaged around 270,000 horsepower in asset sales annually. Therefore, the level of activity we saw in 2025 is consistent with our ongoing disciplined asset management practices. Additionally, we completed one sale that was entirely nonstrategic involving high-pressure gas lift units, which a buyer already operated in that market, making it a sensible decision for both parties. This contributed to the overall numbers for 2025. There was also a customer who wanted to buy some horsepower as part of their acquisition, preferring to own their horsepower instead of outsourcing it. The horsepower we offered was 17 years old but in excellent condition for maximizing cash generation by selling it. Overall, we continuously seek to enhance the standardization and quality of our fleet and are open to engaging with customers interested in buying or selling horsepower, particularly when it has already generated good returns for us over time.

Got it. And then as my follow-up, Brad, in your prepared remarks, you mentioned continued opportunities that you see in electric motor drive compression. Can you provide more detail on how you see the adoption of the electric compression trending as you look at your 2026 and early '27 order book?

Sure. We still see demand for electric motor drive. It's definitely competing. Our customers are now facing more competition for power, and that is a gating item for electric motor drive. So in the past, we've had electric motor drive, I think, in 2025 was as much as 30% of the equipment that we had on order. We are seeing that moderate to more in the 20% to 30% range, but it's lumpy and it's inconsistent. It really varies not just with power being a gating item, but also with the prioritization of the customer and how well they can get equipment and how well that fits into their overall long-term strategic focus. But on the good news front, we still see nice demand for electric motor drives. We're very proud to be the leader in the industry in that segment, and we expect to see good growth for electric motor drives ahead still.

Your next question comes from the line of Eli Jossen with JPMorgan.

You talked a bit about extended supply chain lead times and tightness there. But maybe just thinking about the growth CapEx figure, if you guys are able to make opportunistic procurement of horsepower or you see kind of swelling demand from your customers, could we see upside to the growth CapEx figure? And what kind of visibility do you have there given strong customer demand?

In a word, yes, but it's going to be tough because shop space is pretty full for 2026. So getting more through the system is going to be a challenge. That said, there are avenues to do so. And if we see the opportunity and the need with our customer base, we will be ambitious in capturing that.

Your next question comes from the line of Selman Akyol with Stifel.

Nice quarter, nice outlook. Two quick ones for me. So in your opening comments, you talked about 11.25 of running at higher utilization, 95%. And then you went on to talk about how your equipment is staying on location longer, especially as you skew towards the higher horsepower. So the question directly is this, '26 probably is another lock for the 95% sounds like '27 is as well. So how far, how long do you see that extending at that high utilization rate?

We appreciate your confidence that we could answer that question. It's nice of you to suggest it. However, the truth is that no one knows for sure, including us. Currently, we observe a strong demand for natural gas to support the LNG market, as I mentioned in our comments, and we present our best market analysis in our deck consistently. The demand for power in the U.S. from data centers and pipeline exports to Mexico suggests that we are in a very durable cycle. It's difficult to predict what might change in the next five years or more. Consequently, we see a significant growth opportunity to expand our infrastructure footprint with our customers over an extended period. However, we do not have the ability to predict when the cycle will turn.

Okay. Appreciate all that. And then just kind of going back to the consolidation, when you talked about it, you sort of referenced other companies, but is there anything out there from potentially buying packages from your customers?

Reflecting on the acquisitions we've done, we've actually had success doing that. Going back pretty far back. There was a time when we acquired what was primarily the compression operations of Chesapeake, which we completed in two separate transactions. When we acquired the Elite assets back in 2018, that was primarily the asset packages that we were supporting and organized by affiliates of Hillcorp, but it was run in a separate company and the primary customers in that were both Hillcorp and Marathon as we discussed at the time. So we've seen success in acquiring packages that were organized for sale in that way. That said, in other instances, we've seen this to be a very hard area to get a lot of traction between the operating teams and the financial teams within our customer base. And so while we've had success in the past and we have those discussions ongoing with our customers, it hasn't fit the mold of a high volume of steady transactions that would be a purchase leaseback machine. So while there are opportunities out there, we think they're going to be structured more like traditional M&A.

Your next question comes from the line of Steve Ferazani with Sidoti.

I was pleasantly surprised by the SG&A guide given the growth in the fleet, given the growth in cash flow, you certainly could be looser on spending, but it looks like you're even getting tighter. And obviously, we're seeing that in your margin guidance on the contract operations where it looks like you're more than offsetting any kind of inflationary pressures. Can you talk a little bit about your actions there and what you're trying to do in a growth market containing those costs?

On the SG&A front and then on OpEx, the advantage of our business and platform is that our SG&A is highly scalable. We can increase our operational activities significantly without a proportional increase in our SG&A. What you are observing is the benefits of a full year from the NGCS acquisition and our organic growth, supported by a robust SG&A platform that allows us to enhance our operations without additional SG&A investments. This gives us a very scalable position which we anticipate will yield future benefits. That's why SG&A as a percentage of revenue continues to decrease. Regarding OpEx, I want to highlight some long-term strategic focuses that are currently yielding benefits for us and our customers. Over recent years, we have concentrated on our fleet mix, moving into larger horsepower and electric motor drive, which are the most profitable segments. This shift has kept our OpEx per horsepower costs stable over a long period, despite inflation, as we've countered inflationary pressures by adopting this new fleet mix. Additionally, we've made significant investments in technology, digitization, automation, and advanced telemetry in our system, which enhance efficiency and optimization in our field activities. These are the core strategies from which we are benefiting, and our customers are as well, since we can concurrently improve customer service and maximize uptime while controlling costs, allowing us to offer them very competitive rates. These are the main factors driving how we are managing costs in this market.

Yes. I would maybe just make one more point on SG&A, which is that, look, '25 levels were elevated just a little bit, candidly, in recognition of the incredible performance delivered by both the management team and also all of the operating team. And so you saw our short-term incentive and longer-term incentives flow through a bit into that, something that we're glad to share up and down throughout the entire company. But with stronger performance comes stronger expectations in '26. So that level for guidance was reset to more of a target level. I think Brad otherwise summed that up well.

That's really helpful. I always try to get a question in about aftermarket, Brad, the guidance there, look, I know '25, you benefited from equipment sales and you pointed out how that can affect margins. I'm just curious about the growth opportunities given that U.S. compression third parties is growing as well. At any point, do you become waiver constrained to meet third-party service demand? Or can you continue to grow that business?

I really appreciate the question about AMS because it has been a strong performer for us over the past few years. The team has done an excellent job in enhancing the profitability of the business. One strategy to improve profitability is being more selective about the jobs we take and the customers we work with. I believe the growth in that business is limited, and access to labor will also be a constraint, similar to our contract operations. Our focus is on ensuring we have the right business that is as profitable and valuable to our customers as possible, and we will grow it carefully. However, I do not expect rapid growth; instead, I anticipate seeing stronger growth in the infrastructure side of the business in contract operations.

Question comes from the line of Elvira Scotto with RBC Capital Markets.

So just a couple of follow-up questions for me. The first one, you talked about your investments in technology over the years, telemetry, big data, et cetera. Can you talk about how much more margin improvement or uptime or what you can drive over time? What inning are we in, if you will? And are there other AI initiatives you can undertake to drive incremental margin improvement or uptime for your customers? Any additional color there?

Yes. Thank you. The overall strategy around our technology investments really had three goals as our top line priorities. Number one, we've got to continue to drive improvement to the uptime, our customers' experience to service quality, and that's all of the above from a communication perspective, speed of response perspective as well as run time. We want those priorities to come through to our customers. Number two, the market has labor challenges. And so ensuring our labor, our mechanics have the access to the best tools, the best information, best communication to make their lives better and to make their work more easier to perform is the second priority around that initiative. And third would be that if we succeed in both of those, we knew we would drive improvements to profitability. So with that lens on how we think about technology, we do believe there is still more to come, especially in driving improvement to the service quality that our customers get to experience, just enhancing the customer experience. We are deploying AI in a couple of ways throughout our business, both to make sure our mechanics have the best information at their fingertips and candidly at their laptop and on their iPhone as they can. So the speed of how they can ask questions and receive information is something we're working on quite a bit. Second, we can also make our machines smarter and tell us more. And so getting great data machine to have great analytics capability and using AI to sort through the noise to identify the most actionable items coming from the alarm system within all of the telemetry and all the sensors we have on the equipment is something we're absolutely working on. And last, there's more ahead of that. We believe that there's also additional sensor technologies, vibration technologies and acoustic technologies that can utilize AI on the equipment, and we're working hard to figure out how to bring those to market. So that's what we are working on. We are really pleased with the progress we've made to date, the improvement it's had to our operations. But I can't even call the inning in this because I think technology is a continuous improvement exercise, and we are going to focus on driving continuous improvement in the operations that we have at the company.

Great. That's very helpful. And then just my quick follow-up. Are you seeing any change in your customers' desire to insource compression more or outsource compression more? Any change to that dynamic?

We have not noticed any change in the trend of insourcing versus outsourcing. We believe that customers primarily decide how to manage their compression based on their capital availability, capital allocation, and an analysis of whether to buy or lease. These factors continue to support a strong inclination towards outsourcing in the current market. For example, our large horsepower equipment typically remains on location for about 8 years. If a customer considers purchasing a unit that they only plan to use for 8 years, it doesn’t make financial sense for them to make a long-term investment like that. Therefore, the decision to buy or lease is influenced by how long a customer expects to use the equipment. In the outsourced sector, we can spread our 30-year investment across a wider geographical area and a larger customer base, which strengthens our value proposition, and we haven’t seen any shift in this.

Your last question comes from the line of Nick Amicucci with Evercore.

Just one quick one from me and actually a follow-up and just a clarification on another one. But just given kind of the significant kind of sentiment shift that we've seen from the hyperscalers and just in the AI complex to more of a behind-the-meter solution, just specifically in West Texas, I mean, we had a couple of companies yesterday kind of call out the Permian as kind of an area of ripe for opportunity just given the lack of regulatory constraint. Just wanted to see like has that kind of come to fruition? Have you guys been seeing that level of demand on your end? Have you seen that kind of true inflection of demand yet? Or is there kind of inevitably more to come on that?

If I understand the question correctly, could you clarify whether you are asking about the demand for power, the provision of power, or its effect on compression?

Translating into compression, the majority of this demand will be powered by natural gas generation. This suggests that we will likely see significant demand in that area.

Thank you, that's very helpful. Overall, we are observing an increase in demand for in-basin gas supply. This is largely due to greater in-basin utilization of natural gas, rather than the need for long-haul pipelines to support other markets. Therefore, we are seeing this reflected in demand, but it's primarily translating into more future demand rather than immediate current demand.

Got it. Perfect. I want to quickly touch on the aftermarket, specifically the AMS segment. I understand that you're taking a more cautious approach. However, considering that we are observing longer-lasting asset runs and supply chain constraints, is there a significant pricing opportunity available, especially since you are being more careful and deliberate in considering unit economics? I’m trying to understand this from a margin standpoint.

We're really pleased with the returns we're achieving right now, and the 24% gross margin from the prior quarter is something we're quite excited about. However, we also see opportunities that we won't detail for various reasons, but they're aimed at further improving the stability, quality, and earnings of that business. It's important to recognize that our industry has very low barriers to entry and significant competition, particularly in aftermarket services. Therefore, finding the right strategy for executing our business effectively with the right customer base and focus remains a top priority for us.

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

Thank you all for joining us today and for your continued interest in Archrock. By nearly every measure, 2025 was a standout year for the company, and we're encouraged by how 2026 is shaping up as we benefit from strong U.S. gas production trends and the returns from our continued investment in a first-class compression platform. We appreciate your support and look forward to updating you on our progress next quarter. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.