Kodiak Gas Services, Inc. Q2 FY2023 Earnings Call

Hello, and welcome to the Kodiak Gas Services Second Quarter 2023 Conference Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Graham Sones, Vice President of Investor Relations. Please go ahead, Graham.

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review second quarter 2023 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Chief Financial Officer. Following my remarks, Mickey and John will provide a high-level commentary on the company, our market, second quarter financial results, and our 2023 outlook. Before opening the call for Q&A, I have a few housekeeping items to cover. There will be a replay of today's call available via webcast on the Investors tab of our website at kodiakgas.com. There will also be a replay you can access by phone until August 17, 2023. Information on how to access the replays can be found in yesterday's earnings release. Please note that information reported on this call speaks only as of today, August 10, 2023. Therefore, you're advised that such information may no longer be accurate as of the time of any replay or transcript reading. Additionally, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties, and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management. Management can give no assurance that such statements or expectations will prove to be correct. Listeners are encouraged to read Kodiak's prospectus available on our website or sec.gov to understand those risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most comparable GAAP measures are included in the quarterly press release, which can be found on our website. And now I'd like to turn the call over to Kodiak's CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I'm extremely proud of what Kodiak has accomplished as a company that was founded just 13 years ago, including pricing our IPO on June 28. I want to start our first earnings call by thanking the extraordinary women and men of Kodiak Gas Services for their hard work in getting Kodiak where it is today. It has been no easy task. Becoming a publicly traded company, Kodiak is one of six energy IPOs since the beginning of the COVID-19 pandemic, and the first contract compression IPO in ten years. It's quite a milestone, and I'm thrilled that through this IPO process, we were able to make each and every Kodiak employee a shareholder of the company. I'll begin our first public conference call by discussing a few highlights from the second quarter, and then I'll provide some commentary on the industry and our company. When I'm finished, John will provide additional financial details from the second quarter and discuss our 2023 outlook. To address the 8-K released yesterday, Kodiak identified an error in accounting for unrealized gains on our interest rate hedges that appeared in the Q1 '22 comparable financial statements in our S-1 filing. The error understated our net income for Q1 of '22, was noncash in nature, and did not affect the annual audited financials for 2022 or any non-GAAP measures such as adjusted EBITDA, adjusted gross margin, or discretionary cash flow. Kodiak is taking appropriate steps to ensure this doesn't happen again, and John will go into more detail in his section. We're happy to take any questions about it in Q&A. Now turning to yesterday's earnings release, to touch on a few highlights from the second quarter, we maintained our industry-leading utilization rate, ending Q2 at 99.9%. This allowed us to deliver record revenues of over $203 million and an all-time high adjusted EBITDA of almost $108 million in the quarter. As we look to the remainder of '23, our new unit deliveries are completely contracted and are exclusively large horsepower units, which we define as over 1,000 horsepower. We know the cost of the equipment the customer will be deployed with and the contract rate at the time of ordering. And because equipment lead times remain extended at over a year, we're already busy firming up new equipment orders and customer contracts into the back end of 2024. This provides further support for what we believe will be an exciting 2023 and beyond as Kodiak continues to deliver exceptional results. We're also very excited to issue our first public guidance for the full year 2023 that shows record adjusted EBITDA of $425 million to $440 million, indicating what we believe will be a compelling annualized dividend of between $1.40 and $1.60 per share, subject to the approval of our Board, with the first payment scheduled for the fourth quarter. Many of you are new to the Kodiak story, so I want to take a few extra minutes to discuss our company, our role in the industry, and what makes Kodiak different. Kodiak is a leading provider of critical energy infrastructure, enabling the reliable flow of natural gas and oil to meet growing global demand. As the world searches for a clean, affordable, and secure energy source to fuel the energy transition, the U.S. is poised to supply the world with clean-burning natural gas through the development of Gulf Coast LNG export capacity. Kodiak is uniquely positioned to take advantage of this trend, as we have intentionally focused on deploying our assets predominantly in the Permian Basin, with the right partnership-based customers and employing the hardest working and most loyal workforce in the industry. At Kodiak, we have a purpose-built fleet of nearly 3.2 million horsepower of predominantly large horsepower compression equipment that is the youngest, most technologically advanced, and emissions-friendly fleet in the space, specifically engineered and built to operate in rich gas environments like the Permian Basin, where over 70% of our horsepower is deployed. The demand for large horsepower compression, specifically in low-cost-to-produce basins like the Permian, has grown significantly due to the development of unconventional resources. Improvements in drilling technology have allowed our customers to centralize wells and design systems for field-wide oil lift and gas gathering infrastructure that are more efficient, utilizing large horsepower compression to lower their production costs and emissions footprint. These large infrastructure investment decisions made by our customers require extensive horsepower compression for longer time spent on location, which leads to more stable and predictable cash flows for Kodiak. We also charge a fixed monthly revenue rate for our services, meaning our business is largely insulated and has shown extreme resiliency across multiple commodity price cycles. In fact, spot Henry Hub prices averaged $2.16 per MMBtu in Q2, down over 70% from the same period last year, yet our fleet continued to be effectively fully utilized. We generated record revenues and adjusted EBITDA, and our customers continued to contract with us for future horsepower deployments into 2024. Though the energy transition is well underway, we believe that natural gas and oil demand will continue to grow for many decades to support global population and GDP growth. Last year was a wake-up call to the world regarding the importance of secure and affordable energy. Global geopolitical events and the resulting price spikes of 2022 initiated a race by energy-importing countries to secure ample supplies of LNG to fuel their respective economies. As the world's number one exporter of clean-burning natural gas, the U.S. stands ready to grow production and continue to supply that gas for the benefit of the world. As evidence of that growth, approximately 14 Bcf a day of LNG liquefaction capacity is currently under construction, with roughly an additional 12 Bcf a day of projects approved and pending final investment decision. What’s more, the new LNG plants are positioned at the Gulf Coast from the southern tip of Texas to the eastern border of Mississippi. Added together, these new LNG export facilities represent approximately 26 Bcf a day of additional liquefaction capacity requiring a stable source of feed gas and associated compression to deliver it to the Gulf Coast. To put that in perspective, that's a 25% increase in domestic natural gas production. That LNG feed gas has to come from somewhere. Despite an abundance of reserves, it's very challenging to get new transportation pipelines permitted to move gas from the Northeastern United States to the Gulf Coast, which means that gas will likely need to come from the Permian, the Eagle Ford, or the Haynesville. Most forecasters predict that Permian gas volumes will grow substantially from now until the end of the decade. Here’s the important point for Kodiak and our investors: in order for Permian and Eagle Ford gas to be processed and moved from the point of production to the point of demand, it must be compressed multiple times. This includes additional compression required for gas lift and oil production, lower field pressures from unconventional resources, and rising gas-to-oil ratios for new and existing wells. Given that roughly 2.7 million, or about 84% of Kodiak's existing horsepower is currently operating in the Permian and Eagle Ford, we feel optimistic about the demand outlook for compression services and think we're well positioned to take advantage of expected market growth. We believe that the continued capital discipline in our industry, increasing desire to outsource compression by producers and midstreamers, and elongated delivery times for new engines support a continued constructive market. Finally, I want to touch on what I believe is another true differentiator for Kodiak in our industry, which is our focus on sustainability and ESG. Our goal is to be the most responsible and sustainable company in our industry. As you may know, many energy companies, including some of our customers, have announced significant GHG emissions reduction initiatives; we're actively working on solutions to help them achieve these goals. One example is ecoView, our proprietary data acquisition and emissions monitoring system that was awarded patent protection earlier this year. EcoView is in the early stages of commercial deployment and will help our customers manage their emissions footprint while giving Kodiak real-time operational visibility to optimize our fleet’s performance. We’re proud to have received the Top Workplaces USA Award earlier this year with cultural excellence honors for employee appreciation and professional development. Kodiak is a great place to work, with competitive pay and benefits that help us attract and retain the best talent. We’re also very focused on employee safety, and we have a culture that produces exceptional safety results alongside our superb financials. I say it all the time: ensuring that our employees get home safely to their families every night is the most critical part of my job. In summary, we believe the broader energy market is highly supportive, with a multi-decade runway for conventional energy, particularly for large horsepower compression to feed the growing LNG export base on the Gulf Coast. Our strategy is to continue to provide compression services safely and sustainably in the best basins with the best customers while providing investors with an attractive return on their investment through steady growth in cash flows and a compelling dividend. Now I'll hand the call over to John to discuss our financial results for the quarter and 2023 outlook, and I'll return with some additional closing comments before we move into Q&A. John?

Thanks, Mickey. To start, I want to provide more color on the 8-K Mickey highlighted earlier. During Q1 of last year, we incorrectly recorded the journal entry related to the unrealized gain on our interest rate hedges, understating Q1 2022 net income by about $22 million. There was no impact on cash or our non-GAAP measures, including adjusted gross margin, adjusted EBITDA, or discretionary cash flow. We identified the error in Q2 of last year and corrected it by adjusting the Q2 2022 financials rather than restating the Q1 2022 results. Obviously, we were private at the time and not publicly reporting quarterly results. Unfortunately, those numbers were presented in the quarterly comparable financials in our S-1 filing. As a result, we will restate the impacted line items in our soon-to-be-released 10-Q. Notably, there is no change to the full year 2022 audited figures. We've taken action to mitigate the possibility of something like this happening again, including strengthening our accounting team, retaining a big four accounting firm to lead our ongoing SOX implementation, and upgrading certain business systems. We set high standards at Kodiak, and we take great pride in all aspects of our work. We view challenges as opportunities for improvement, and that's how we’re approaching this one. Now back to the quarter. As Mickey emphasized, it’s a great time to be in the contract compression industry and an even better time to be at Kodiak. Here are some results from the quarter: total revenues for the second quarter of '23 were a bit over $203 million, up about 7% sequentially and about 15% compared to the second quarter of '22. Adjusted EBITDA for the quarter was almost $108 million, up modestly from Q1 and up 11% versus the same quarter of last year. Both metrics were consistent with our expectations. Looking at our segments, Compression Operations revenue for the second quarter of '23 was nearly $182 million, up about 12% year-over-year. Revenue-generating horsepower grew by about 103,000 from last year at this time, or a little over 3%. We grew overall compression operations revenue at a faster rate than we grew revenue-generating horsepower while utilization remained effectively flat at 99.9%. This growth can be explained by higher overall fleet pricing driven by a combination of: one, new contracts on new horsepower with compelling unit economics; two, renewed contracts on existing horsepower at higher rates; and three, the annual PPI inflators included in about 84% of our contracts. In our Other Services segment, 2023 second quarter revenues were up 51% compared to last year's second quarter. Our station construction revenues were generally in line with our expectations during the quarter, and we've got a substantial backlog of 2023 business in this segment, plus multiple new opportunities that we're working on that would impact results in the back half of this year and into '24. From an adjusted gross margin perspective, our Compression Operations segment generated a 64.2% margin, flat versus the year-ago quarter and down slightly on a sequential basis. However, it was higher than our expectations for the quarter, which we attribute to the team's continued focus on optimizing key cost drivers like fleet repair and maintenance, lubricants, and labor. On an absolute dollar basis, the adjusted gross margin in our Other Services segment was about $3.6 million, up a bit from last quarter but up nearly 40% from the same quarter of '22. From an adjusted gross margin percentage standpoint, the margin for Q2 of this year was about 16.5%. Each project is different, but generally speaking, we expect the Other Services segment to produce adjusted gross margins ranging from 15% to 20%. The percentage can vary from quarter to quarter based on the mix and status of particular projects, but overall, the Q2 margin percentage is in line with our expectations. Turning to SG&A, we continue to invest in the people, processes, and systems that will allow us to achieve our growth goals. Excluding nonrecurring expenses and stock compensation expense, SG&A dollars increased from about $10.1 million in the same quarter of last year to about $12.3 million this quarter. In terms of the efficiency of those dollars, both figures translate to about 6% of revenues. Turning to CapEx, for the quarter, our maintenance CapEx was about $11 million. Of the $33 million in overall growth CapEx, roughly $5 million went towards things other than fleet additions. Moving to the balance sheet, the timing of our IPO relative to the end of the quarter, plus all the balance sheet activities completed in conjunction with the IPO, requires further explanation. While we priced the IPO on June 28, we didn't officially close it and receive the proceeds until July 3. Thus, the balance sheet as of June 30 still shows the $1 billion term loan that was removed because of the IPO. After adjusting for the transaction on the first business day of Q3, we had roughly $1.85 billion drawn on our ABL and about $350 million in borrowing capacity. A few weeks later, the underwriters exercised their green shoe overallotment of 2.4 million shares, resulting in $36 million in incremental net proceeds that we immediately applied to the ABL. Taking that into account, plus normal working capital movements, our ABL balance is now closer to $1.8 billion, leaving us about 4.1x leverage, moving us even closer to our long-term leverage target of 3 to 3.5x. We expect to hit that leverage target in 2025. Lastly, regarding our debt, we have a policy of hedging between 50% to 80% of our floating interest rate risk. Today, we're hedged at just under 70% of our outstanding debt balance, and we expect to remain in that general vicinity through 2024. Let's move on to our 2023 outlook. We included full year '23 guidance in our earnings release. For the year, we estimate adjusted EBITDA will range between $425 million and $440 million. In our Compression Operations segment, we expect full year '23 revenue to range from $730 million to $740 million, which at the midpoint would result in a year-over-year increase of about 12%. This increase can largely be explained by approximately a 4% year-over-year increase in revenue-generating horsepower alongside higher overall fleet pricing while maintaining consistent utilization. We also expect to see some strong growth this year in our customer-owned contract operations business, but that business line comprises less than 5% of revenues for the overall segment. Regarding segment margin, we expect to maintain roughly the same percentage we achieved this quarter for the remainder of the year. In our Other Services segment, we forecast full year revenue of $70 million to $90 million. We have a solid backlog of contracts as well as some high probability projects that will get us through the year into '24. Although the margins on these projects can vary, overall they fall within the 15% to 20% range mentioned earlier. The biggest determinant of the ultimate margin for 2023 will depend largely on the timing of individual project completions. We anticipate full year adjusted SG&A to be between $52 million and $56 million. Adjusted SG&A as a percentage of revenues will be higher post-IPO due to our ongoing investment in our infrastructure to support growth. Turning to capital expenditures, on a full year basis, we expect maintenance CapEx of between $32 million and $36 million. We anticipate growth CapEx of $165 million to $175 million, which will allow us to add around 140,000 incremental horsepower to our fleet. Most of the large horsepower projects are geared towards the Permian Basin. Given the roughly one-year lead times on new orders, the CapEx for 2023 new horsepower is fully contracted. The unit economics are compelling and better than historical paybacks and returns. Approximately $15 million of full-year growth CapEx is associated with non-fleet-related items. We're committed to creating and returning value to our shareholders through a disciplined capital allocation approach. Our Board has recently approved our dividend policy. We expect to begin returning capital to shareholders by paying a regular quarterly dividend, starting with the third quarter, distributed in Q4. The specific dollar per share amount will require Board approval, but our intention remains to pay out approximately 35% to 40% of our annual discretionary cash flow for the foreseeable future. In our guidance, we’ve utilized a range of $0.35 to $0.40 per share per quarter or $1.40 to $1.60 annualized. At the midpoint, this would represent just over an 8% yield on our closing share price as of Tuesday. The dividend coverage ratio at that level would be in excess of 2x. To clarify, our Q2 non-GAAP measure of discretionary cash flow included nearly $26 million related to the realized gain from the termination of interest rate hedges that were used to pay down the term loan at the IPO close, which we won’t factor into our dividend math for the year. That concludes my prepared comments. Thanks again for your participation and support. Now I’ll turn it back over to Mickey.

Thanks, John. To quickly recap, we are very pleased with our second quarter results and look forward to continued profitable growth in 2023 and beyond. So what have we built here at Kodiak? We've built a market leader in contract compression infrastructure focusing on large horsepower compression and its critical role in the energy value chain. We've concentrated our purpose-built fleet in the most economically advantageous basins with the best customers under long-term fixed revenue contracts that are resilient to short-term commodity price cycles. We've assembled an experienced leadership team that is honored to support the best employees in the business, every one of whom is now a fellow shareholder. And we've built Kodiak with a commitment to sustainability. With that, I'd like to close by thanking everyone who has worked hard to get us to this point, including all of our stakeholders who share in our vision as we continue our role as mission-critical infrastructure for the future of domestic energy production. At this point, we'll open up the line for questions. Operator?

Our first question today is coming from John Mackay from Goldman Sachs.

Mickey, team, congrats on the first release here. I wanted to start on pricing trends. I would just be curious to hear what you're seeing in the market now, where you think trends will go from here, and acknowledging your high utilization level and high contracting level, just any thoughts on how long it could take to turn the overall fleet up to some of these higher numbers we're seeing?

John, this is Mickey. Thanks for joining us today. On the pricing trends, it's pretty obvious between our calls and several others that we're in one of the tightest markets we've ever seen in the compression industry, and it's a really good time to be in the market. We are signing contracts into the second half of 2024 right now, and they're at a significant premium to where the current fleet is priced today. We're excited about those rates. Everything’s looking good and trending upward. As you mentioned, we have a highly contracted fleet; only about 5.5% of our fleet today is under month-to-month contracts. Essentially, our fleet is effectively fully contracted. With an average primary contract term of 3 to 5 years, I would expect that around 25% to 30% of our fleet will be available for recontracting and repricing each year to provide some context.

That's great. As a follow-up, John, you made some comments here. But just on gross margins in the core compression business, you talked about some positive trends, I guess, cost efforts tracking ahead of schedule. Acknowledging that the guidance for the rest of the year is kind of in line with or maybe slightly above what you saw in the second quarter, where could gross margins go from here? What would higher pricing that Mickey mentioned mean for gross margins going into '24 or beyond?

Yes. Thanks, John. To touch on the overall topic, I'm not going to speculate too much about what's going to happen in '24 at this point. However, cost optimization is an area that gets a ton of focus here at Kodiak. Our compression operations margin was consistent with where it was last year, just a slight decrease from a quarter ago. That doesn't raise much concern for us because we understand what drove that small decrease. Internally, we're focusing on our needs and optimizing every dollar spent. The guidance we provided indicates where we think we'll be, but rest assured we are actively working to achieve operating leverage and margin expansion as we move beyond 2023.

Yes, and I'll add that we've observed some initial signs of relief in inflationary pressure concerning items like lube oil. I think we can expect some upward momentum in margins going forward.

Next question is coming from Jeremy Tonet from JPMorgan.

Thank you for the color with the release, discussing the potential for the initial dividend. I am curious to hear more details on capital allocation, the company's thought process going forward. In light of the energy sector shifting to live within cash flows, how do you bring everything together today regarding capital allocation, considering the tremendous growth outlook you mentioned?

Yes, we certainly have more growth opportunities than the capital we are willing to invest in those opportunities. I met with some members of our leadership team from commercial just this morning, and frankly, there are probably 2 to 3 times more opportunities than the capital we are comfortable investing right now as we look to 2024. We have a really tight market. From a capital allocation standpoint, we've committed to our investors that we will operate within our free cash flow. Although everyone defines free cash flow differently, we define it as our discretionary cash flow after growth CapEx and dividend payments. This is our commitment, and we want the public to understand it clearly in our first call. For our discretionary cash flow, we calculate it as our EBITDA minus cash taxes, interest, and maintenance capital. We allocate around 35% to 40% of that to our dividend currently. And given the compelling opportunities ahead with strong returns on capital deployed, our focus is on maximizing growth from that context. Thus, we plan to spend 60% to 65% of our discretionary cash flow on growth capital while ensuring we do not borrow money to pay a dividend in essence.

Jeremy, I want to add that we will achieve this while protecting the balance sheet, preserving financial flexibility, and ultimately moving towards our long-term leverage target of 3 to 3.5x, which we aim to hit by 2025.

That's quite helpful. So given the focus on that capital discipline, could you elaborate more on where the capital will be deployed? It seems to be largely Permian-based, but are there key customers you're growing alongside, or is the focus primarily on expanding your portfolio?

Yes. As it stands, we can't keep up with what our core customers need from us right now from a capital allocation perspective. We are trying our hardest to meet the bulk of their needs, ensuring that we remain aligned with the customers that brought us to this point. I don't foresee us making a concerted effort to expand the portfolio unless a particularly compelling opportunity arises. Most of the dollars will be directed towards the Permian Basin.

Next question is coming from Neal Dingmann from Truist Securities.

Great first quarter. My first question is for you, John, regarding the EBITDA guidance. You're obviously positive about the $730 million to $740 million outlook for Compression and $70 million to $90 million for Other. I just want to inquire if you could elaborate on any major assumptions behind this guidance. Are there any changes we should be aware of, or is it essentially steady as we proceed toward achieving those stellar numbers?

Yes. Thank you, Neal. For Compression Operations guidance, it aligns closely with everything we've discussed previously. I provided context earlier on the expected horsepower increase of about 140,000. I will mention that approximately two-thirds of this is back-end loaded for 2023, meaning we anticipate an increase in CapEx and revenue potential when these additions come on board. The remainder of our guidance is fairly straightforward regarding margins.

Great to hear. It's obviously fantastic margins on contracts. Last for you, on the prepared remarks, it's always exciting to hear about LNG opportunities. I'm wondering if you have any updates on developments or any progress being made, as the potential for compression required is considerable.

The LNG build-out we are observing on the Gulf Coast is somewhat beyond our typical market scope concerning long-haul pipelines and liquefaction processes. Therefore, our benefit from this trend will stem primarily from the increased need for upstream infrastructure to support the feed gas for all of that functionality. Currently, it seems likely that Permian and Eagle Ford gas will have to support much of this increase since the conditions for gas prices do not yet favor the Haynesville. As we look at the need to add several BCF a day of additional capacity, there needs to be gas lift for oil compression and compression for gas that will enable the processing capacity to meet the growing demand. Essentially, for each molecule of gas extracted, it must be compressed several times across multiple stages, which leads to a large demand for compression services now and in the future. The situation indicates an under-supplied market in compression, which we believe will benefit us and others in our space significantly.

Your next question is coming from Jim Rollyson from Raymond James.

Mickey, circling back on Neal's point in your comments, how aware are your customers of the current tightness in the market and what it might imply for future contracts prices? Considering everything being essentially sold out today and the lead times for equipment along with the capital discipline by you and your larger peers, do you believe we have a long-term challenge in terms of adding enough capacity quickly to satisfy LNG export growth? What's your perspective on this?

I think customers are becoming increasingly aware of market tightness, and they are recognizing the urgency of securing horsepower commitments as we see core customers already approaching us now for commitments into 2025. They are planning their businesses up to two years in advance, and that allows us to forecast better than in the past. This current environment likely won’t get any less tight soon, as supply chain constraints and equipment delivery issues persist. Customers understand that they need to plan ahead to secure their position.

That makes sense. In terms of pricing for contracts you’re currently pricing for '24 or '25, how much higher will that be compared to what you averaged in Q2?

I'm not sure of the exact percentages right now, but we have established capital return hurdles that ensure we obtain the returns necessary from all deployed growth capital. If pricing increases and units change, we'll still achieve our return targets.

Your next question is coming from indiscernible.

Returning to '25 in your outlook, are you setting expectations with customers that prices will trend higher for contracts, given your discussions?

Indeed, as it stands, we are experiencing a significant degree of tightness in the market, and if customers wish to secure allocations for capital, we must set pricing in accordance with the anticipated returns from the capital we deploy.

In terms of the revenues for this quarter, you mentioned three drivers: the additional fleet, renewing contracts at higher prices, and inflation adjustments. Can you specify which driver contributed the most to the revenue increase?

I would guess the largest contributor would be the deployment of new horsepower, followed by the recontracting efforts we engaged in during the second quarter, with the PPI adjustments being the smallest contributor.

Lastly, with labor tight across the board, I'm curious about how Kodiak is handling this situation.

It certainly is a challenge. Being so heavily focused on the Permian means we are dealing with a significant portion of our workforce pressures in that region. We're addressing this issue constantly, and we emphasize training and mentoring within our operations team. As for the fluctuations in margins noted earlier, a 50-basis-point variation is fairly normal. We made a determined effort in Q2 to strengthen our operations team to ensure we can adequately train new hires and enhance their contributions safely as we deal with the limited availability of experienced personnel.

Your next question is coming from Theresa Chen from Barclays.

Mickey, I want to revisit your earlier comments about investment shortages in compression and the overall market tightness. Do you believe this will impose limitations on feed gas growth and potentially delay the pace of liquefaction for projects that have already passed FID? How might the market address this situation?

Thanks for reaching out, Theresa. It will be interesting to see how the situation develops. The LNG capacity discussions indicate a need for optimization and movement of compression horsepower within the U.S. Upstream infrastructure must be enhanced to meet these evolving demands. Meanwhile, there may be both winners and losers in this scenario, as those willing to plan ahead will be better equipped. There are indications of reduced rig counts and rigs laid down in the Permian Basin, but we haven't yet seen a corresponding drop in demand for our compression services. Pipeline, takeaway, and processing capacity in the Permian will be crucial in supporting LNG capabilities. Overall, I see the market remaining tight, and a shortage in investment could present challenges for several years.

Have your conversations with producer customers changed as they prepare their 2024 CapEx budgets? What's your overall expectation for revenue growth across the basins you operate in?

We haven't yet released our official guidance, but given our capital allocation strategy and intention to allocate 60% to 65% of discretionary cash flows to growth capital, I think it's reasonable to expect high single-digit growth in both top-line revenue and EBITDA for 2024.

If I can squeeze in one more question: the 2 to 3 times more opportunities than your willingness to allocate capital—are those exclusively in contract compression, or do they include downstream opportunities as well?

Those figures originate strictly from our existing customer base in contract compression. We're not even pursuing new customers at this point, but only focusing on our core contract compression opportunities.

Thank you. We’ve reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further comments.

Thank you for joining us for our inaugural Kodiak quarterly earnings call. It was an enjoyable morning for us, and we look forward to updating you again in our November earnings call. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We appreciate your participation today.