Kodiak Gas Services, Inc. Q4 FY2023 Earnings Call

Greetings, welcome to the Kodiak Gas Services Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the conference over to, Graham Sones, Investor Relations. Thank you. You may begin.

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review fourth quarter and full year 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, fourth quarter and full year financial results and our 2024 outlook before opening the call for Q&A. Before I turn the call over to Mickey, I have a few housekeeping items to cover. There will be a replay of today's call available via webcast and also by phone until March 14, 2024. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, March 7, 2024, and therefore, you're advised that such information may no longer be accurate as of the time of any replay or transcript reading. In addition, 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. And management can give no assurance that such statements or expectations will prove to be correct. Listeners are encouraged to read Kodiak's prospectus, quarterly reports on Form 10-Q, our Annual Report on Form 10-K, that we expect to file later today. All of which can be found 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 want to kick things off by highlighting several monumental events in 2023, before recapping our record financial results. Then I'll provide some commentary on our outlook as well as the compression industry as a whole. Before turning it over to John to provide additional details about our financial results, as well as discuss our financial guidance for 2024. For the year, I want to start by thanking Kodiak's amazing employees. Their hard work, operational proficiency, dedication to detail, and focus on safety is what enables Kodiak's continued operational and financial success. In June of 2023, we took Kodiak public and became listed on the New York Stock Exchange. I'm extremely proud of our team because, as you all know, it is a huge feat to complete a successful IPO and to transition to being a public company. Since that time, we have delivered multiple sequential quarters of record results. We've maintained our industry-leading 99.9% utilization rate. We initiated a meaningful quarterly dividend and we announced a definitive agreement to acquire CSI Compressco in a transaction that will make Kodiak the largest contract compression provider in the industry, with 4.3 million revenue generating horsepower. Throughout this incredibly eventful year, we stayed true to who we are, what we do, and the goals we set for ourselves as a public company. And I am extremely proud of that. An important priority for Kodiak as a public company was to establish a capital allocation framework that allows us to grow our core contract compression business and return capital to shareholders through a well-covered dividend, while strengthening our balance sheet. I'm happy to report we accomplished all of these priorities in 2023. We organically increased our compression fleet by almost 130,000 horsepower, primarily adding capacity to our industry-leading position in the Permian Basin. We executed on our shareholder return plan by initiating a $0.38 per share quarterly dividend, with our second dividend being paid last month. In our opinion, this dividend represents an attractive yield and offers a compelling total return potential for Kodiak shareholders. Finally, we achieved a milestone debt to EBIT leverage ratio of under four times at the end of 2023, the lowest in the history of our company and a mark we expect to continue to be able to push down. Now turning to yesterday's earnings release. We are very pleased with our fourth quarter and full year results, which reflect the continued execution of our strategy. During the quarter, we increased our revenue generating horsepower by nearly 50,000, as we delivered new compression units predominantly to the Permian Basin. The compression market remains tight as strong demand has absorbed idle capacity and pushed utilization rates across the industry to all-time highs. Delivery times for large horsepower Caterpillar engines have improved slightly since our last earnings call, but remain elongated at 40 to 45 weeks. 2024 new unit deliveries are fully contracted, with known delivery dates, known customers, known revenue rates and will once again be focused on the Permian Basin, further strengthening our position in the most important basin in the U.S. We are currently in discussion with our customers related to new equipment orders into the second quarter of 2025. The pricing and returns on new horsepower additions remain attractive. Next, I want to touch on a few highlights from the quarter. Our focus on customer service and the fact that we have the youngest, most emissions-friendly fleet, specifically built to operate in liquids-rich environments like the Permian Basin, allow us to maintain our industry-leading utilization rate. New compression additions and superior utilization led to compression operations revenues of $190 million and consolidated adjusted EBITDA of $114 million. Both are the highest in Kodiak's history. We ended the fourth quarter with about 7% of our horsepower on month-to-month contracts, driving predictability in our revenues and illustrating the confidence customers have in Kodiak to deliver reliable compression services. We've discussed many times that the methodical and intentional deployment strategy of our equipment and contracts generates highly visible steady cash flows. We remain excited about the pending CSI transaction for all of the reasons discussed when we announced the deal. The assets fit nicely into our portfolio and will meaningfully enhance our discretionary cash flow, giving us optionality within our capital allocation framework to enhance our shareholder returns. Now, I would like to discuss some of the recent macro trends in the energy sector. First, there has been and continues to be a tremendous amount of consolidation in the upstream space. This has several positives for Kodiak; it leads to financially stronger customers and increased large-scale sophisticated infrastructure developments that tend to favor centralized gas lift applications. This in turn creates more visibility and certainty for companies like Kodiak that specialize in large horsepower compression. Next is the recent decision by multiple leading natural gas producers in the U.S. to curtail natural gas production out of the Marcellus and the Haynesville Shales in response to low natural gas prices. This once again reinforces why our strategy of focusing our compression footprint on liquids-rich associated gas basins like the Permian and the Eagle Ford has been so successful. As you know, producer economics in the Permian Basin are driven by oil and NGLs with the lowest production cost per barrel in the U.S. For this reason, we believe the Permian will be the primary supplier of incremental gas volumes to Gulf Coast LNG projects coming online in the next 24 months. U.S. LNG feed gas demand is expected to more than double by the end of 2030, requiring a significant expansion of compression infrastructure. Every incremental cubic foot of gas produced out of liquids-rich basins like the Permian will need to be compressed multiple times over. In fact, using the historical relationship between gas production and compression horsepower, we estimate the industry will need to add roughly the combined horsepower of the top four contract compression providers by 2030. Coupled with the ongoing capital discipline that is being shown by Kodiak and its peers, the compression market looks to have many years of tightness ahead of it with very little relief in sight. So, I would like to point out that the recent politically motivated moratorium on LNG permitting is not expected to have any impact on the natural gas demand growth through the rest of the decade. Longer term, the world needs the U.S. to further increase LNG capacity. Europe has been the largest beneficiary of U.S. LNG as a U.S. source of natural gas to help meet its environmental goals and reduce its dependence on Russia. The next wave of U.S. LNG projects is likely to supply Asian markets, many of which are largely dependent on coal and are struggling with energy security and reliability. Without a doubt, the fastest and most cost-effective way to reduce ongoing worldwide emissions is to unleash low-cost U.S. LNG exports to allow Asian economies to displace their use of coal-fired power to fuel their growth and increase the quality of life for their people. Supplying the world with affordable, reliable, and clean natural gas is not only good for the U.S. economy, but it will also help the environment and humanity. Now I'll hand the call over to John, to discuss our financial results for the fourth quarter and full year, and the 2024 outlook. John?

Thanks, Mickey. It was truly a historic year for Kodiak, and we look to continue building on our positive momentum in '24. In my remarks, I'll review our fourth quarter and full year results and then I'll turn to our outlook for the year. Total revenues for the fourth quarter were approximately $226 million, up about 26% when compared to last year. Revenues for the full year increased 20% to approximately $850 million in '23. Adjusted EBITDA for the quarter was $114 million, up 4% from Q3 and up over 10% versus the same quarter of last year. Our fourth quarter adjusted EBITDA excludes $2.5 million of non-cash stock compensation expense and $4.3 million related to non-recurring items, such as transaction-related fees. I'd be remiss to not point out that included in the quarters and years adjusted EBITDA specifically within SG&A was about $5 million and $7 million respectively, in reserve for bad debts associated with the challenged customer. We've talked about this before; record low gas prices put them in a tough spot. And it's a clear reminder of why we have strategically positioned 95% plus of our assets and revenues in liquid-rich associated gas basins. In line with our expectations, adjusted EBITDA for the full year increased nearly 10% to over $438 million in 2023. Looking at our segments, compression operations, revenues for the quarter were nearly $190 million, up about 11% when compared to the same quarter a year ago. Compression operations revenues for the full year '23 total approximately $736 million, an increase of 12% over '22. Revenue generating horsepower increased by over 48,000 sequentially, and 127,000 for the year. Consistent with prior periods, revenue growth in this segment was a function of mid-single digit percentage growth in revenue generating horsepower alongside higher overall fleet pricing. In our other services segment, fourth quarter revenues were approximately $36 million, up substantially compared to approximately $9 million in last year's fourth quarter, but now nearly $8 million sequentially. This segment's revenues and margins are positively impacted by the award and accelerated progress of two large projects in the second half of '23. Finishing the year well in excess of what we originally forecast. From an overall adjusted gross margin perspective, our operations team continues to focus on the smarter application of people, processes, and systems in order to contain costs and offset inflationary pressures. We saw the benefits of that in Q4, as evidenced by compression operations costs declining sequentially by $1.6 million while revenues grew. The focus on cost and efficiency allowed our compression operation segment to generate a 66% plus margin, a nice bump in the prior quarter. From the dollar basis for the quarter, our adjusted gross margin in the other services segment was approximately $8.5 million, up substantially sequentially and over the fourth quarter of last year. On a percentage basis, the quarter came in at 23%. As we've highlighted previously, our fourth quarter reflects what we believe to be an abnormally strong, realizing above-average margins as we completed in advance on a few meaningful projects and better than expected markets. The other services segment is lumpy but a valuable segment. Station construction projects are synergistic with our compression business and require no capital. Every dollar of incremental cash flow adds to both our overall return on capital employed and discretionary cash flow, which in turn allows us to pay more dividends and invest in high return growth capital projects. Over the medium term, we continue to expect to realize gross margins for this segment between 15% to 20%. In terms of CapEx, for the quarter, our maintenance CapEx was about $9 million. For the full year, maintenance CapEx was $37 million, which was approximately $11 million less than what we had spent in '22. As a reminder, our maintenance is a function of the hours and age of our equipment, and will vary by year depending upon when units were added to the fleet. Growth CapEx was $60 million for the quarter and $15 million of that was non-new unit CapEx. We mentioned in Q3 that we had some opportunistic real estate purchases, and those closed in Q4. Going forward, we expect more normalized levels of non-unit growth CapEx. Overall, growth CapEx for '23 totaled approximately $184 million. As we previously mentioned, CapEx was expected to be back-loaded and you saw that in the fourth quarter. Moving to the balance sheet. As of year-end, we had debt of $1.8 billion consisting entirely of borrowings on our ABL facility. Our credit agreement leverage ratio was just shy of four times and we exited the year with approximately $355 million of availability on the facility. As most of you know, last month, we issued $750 million of 7.25% senior unsecured notes due 2029. As a debut issuer, we were very pleased with both the credit ratings we achieved and the pricing. It's clear that ratings agencies and debt investors wholly subscribed to the current strength and future outlook of the U.S. compression market, as well as the durability and quality of Kodiak's cash flows. We issued a notice in advance of the CSI closing to capitalize on the strength in the credit markets and derisk the transaction. We used the proceeds to pay down our ABL and pay debt fees. At the time the CSI deal closes, we will redraw on our ABL to pay off CSI’s debt as well as transaction expenses. When it's all said and done, we'll wind up with roughly $60 million plus of incremental liquidity on the ABL by virtue of issuing more notes than we needed to close the transaction. With our IPO, the recent financing-related activities and the benefits of that accretive and leverage-neutral CSI transaction, we remain on track to return to achieve our long-term leverage target of 3.5 times or less by year-end 2025. Moving to our 2024 outlook. For the year on a standalone basis, we estimate total Kodiak revenue will range between $855 million and $905 million. We estimate that adjusted EBITDA will range between $460 million and $490 million. I’ll now break that down by segment. In our core compression operations segment, we're forecasting full-year revenue of $795 million to $825 million and segment adjusted gross margins between 64% and 66%. Given constructive market dynamics, attributes of our contracts, and our solid execution, we're confident in our segment outlook and laser-focused on growing long-term high-quality cash flows. In our other services segment, we're forecasting full-year revenue of $60 million to $80 million and segment adjusted gross margins between 15% and 20%. We view '23 results for this segment as being an outlier to the high side. Our '24 guidance reflects more normalized revenue and margin levels. Turning to CapEx. Due to timing and customer demand, our '24 capital spending program is front-half loaded, with approximately 60% of spending happening in the first six months of the year. We expect maintenance CapEx to come in between $40 million and $50 million for the year. On the growth side, we're forecasting net CapEx of between $165 million and $185 million for the year. Included in our forecast is approximately $12.5 million in non-new unit related CapEx. At the midpoint of that guidance, we will grow our fleet horsepower in the low to mid-single digit percentage range. For modeling purposes, and to give you something to look forward to, CSI provided its '24 outlook in its fourth quarter earnings release on March 1. Shortly after the transaction closes, we plan to issue updated guidance for the combined companies as well as a refined view on transaction synergies and any modifications to our capital allocation framework. To wrap things up, as Mickey noted earlier this year, our Board declared our second quarterly dividend payment of $0.38 per share, which was paid last month. This equates to an annualized dividend of $1.52 per share, yielding about 5.5% to 6% at recent prices. Dividends are a key aspect of our overall capital allocation framework, which I'll remind you encompasses measured growth alongside an attractive return of and return on capital while living within cash flow and deleveraging.

Our first questions come from the line of Jim Rollyson with Raymond James, please proceed with your questions.

Hey, good morning, Mickey, John, Graham. Nice quarter, obviously nice businesses that continue to press on. But just one thing just to clear something up here just based on the stock price reaction. So your guidance for $460 million to $490 million of EBITDA that is just for Kodiak. And obviously, CSI Compressco, I think it was last Friday, you gave guidance of $135 million to $145 million of EBITDA. So, when you guys put these together, assuming it happens around the beginning of the second quarter, it's going to be taking the guidance you're giving today, plus roughly three quarters of that guidance to get to a number. I'm assuming maybe the stocks off just because people are looking at some of the street numbers that already have this combined but just wanted to 100% confirm that?

Hey, Jim. That's an important question. It's one that's going to trip folks up. This is John, by the way. So, if you just looked at guidance today, and I looked this morning, because the question has come up, like the mean guidance for Kodiak is for 2024 is $523 million. But obviously, that includes some analysts that have updated their models and turned them in. And you know, we don't really control when they're counting the CSI transaction is closed. So to come back to your question, our guidance is on a standalone basis. But if you did assume the transaction closed, say, for example, April 1, then you would take that math 75% of the guidance that CSI had put out sum it with ours, add in synergies, you are kind of off to the races, but it has created some confusion. So I'm glad that you've got to ask that question.

Perfect. That's what I thought. But I just was making sure just given the reaction of. And then as a follow up, Mickey, you talked about the fact that you're already sold out for '24, you're actually already working into the second quarter and '25, with known customers, known contract pricing, maybe a little color. You know, when I look at this as a revenue per horsepower per month basis on the compression operation side, and you guys were kind of in the 19.5 ratio in that this quarter. Maybe some sense or some color, just how much higher when you look at where those new contract rates are, are we above what the average realized is for the entire fleet, is it 5%, 10%? Are we talking 20%, 30%, or is that even bigger than that?

Yes, this is Mickey speaking. I want to be cautious about sharing sensitive information, but I believe that spot pricing related to the fleet is likely in the 20% to 25% premium range compared to current fleet pricing. This is driven by increased operating expenses and capital costs we are currently experiencing. This aligns with our approach to pricing our equipment, where a higher capital cost necessitates a higher rate to achieve the same return on capital.

Right. However, over time, the equipment that you delivered two or three years ago and that cost you less will eventually adjust in price, assuming that the overall economic conditions continue to function as we believe they do.

Yes, I think that's right. And I think that you heard on the call, we're pretty bullish on the macro environment around LNG and natural gas right now, even despite low gas prices today.

Yes, notice that. Great. Well, thanks, guys. I'll turn it over to everyone to ask questions.

Thank you. Our next question comes from the line of John Mackay with Goldman Sachs. Please proceed with your questions.

Good morning, everyone, and thank you for your time. Let's discuss the compression market and pricing. Can you provide some insights on the lead times you mentioned, specifically how they have changed from about a year to 40 to 45 weeks? Has this affected your discussions with customers as you work towards the second quarter of 2025? Additionally, I would like to hear about Caterpillar's plans to increase capacity on some of their engine lines and what information you are receiving about that. Thank you.

Yes. John, good to talk to you this morning. Appreciate the question. So, let's just address the Caterpillar issue up front. They've pulled in their delivery times on large horsepower gas compression engines to 40 and 45 weeks. Most notably, the reason for that is, from hearing from Caterpillar to alleviate some of their supply chain constraints they were experiencing; it's not necessarily an increase in capacity on that engine line. When you heard on their last earnings call about some investments they're making in increased engine capacity, from our understanding, that's mostly in their power engine line of engines, which are going to support data centers and AI, which is a tremendous amount of demand for power, today all fueled obviously by natural gas. So that's an interesting point there.

That's good. Yes, fair. Go ahead.

What was the second part of your question there? You're talking about pricing? Is that right?

No that was really, so if you've come into, you know, 40 to 45 weeks, I guess it sounds more on their supply chains, alleviating versus new capacity coming to the market. But does that 10-week or so better lead time has that had any impact on pricing when you're talking to your customers?

No, not at all. I mean, quite frankly, to our customers at this point, we've been taking care of our existing customer base for the last year and two years out and not going out and soliciting new business per se. So all the customers that we're talking about for first and second quarter type business of 2025, they understand that capital is precious, and they need to get in line to get their allocation of that capital going forward. So I think the backlog that we're seeing here has probably is more related to the precious allocation of capital rather than directly involved with Caterpillar lead times.

That's very clear. Thanks for clearing that up. Maybe just as a follow up. If we're not seeing a ton of new capacity from Caterpillar or others coming into this, when do we have to start worrying about the amount of engines we can bring into this market, and how we get the market overall lined up for how much gas is going to be flowing in 2025?

Good question, John, and I don't have a great answer for it. I think that we're just going to be a pretty significant shortage of compression capacity, whether these customers and the GNPs decide to buy it on their own or decide to outsource it to people like us. I think everybody is capital discipline right now. I think there's more gas to be compressed than I think anybody realizes as a function of the compression intensity of that gas that's coming out of the Permian Basin, requiring four or five times more compression than a standard conventional type of a well for dry gas, natural gas production. Compression required for gas lift in the Permian is required for basically all of the oil production coming out of the Permian Basin. And then, couple on top of that, relatively no additional idle capacity amongst Kodiak or peers. I think that for the last several years, it's been a great market in compression. If that idle capacity hasn't gone back to work now, it's probably relatively difficult to reapply in this situation right now. So, with no idle capacity and spare capacity in the market, it's going to be very, very tight and I don't see additional sources of equipment coming through to be able to take that capacity on. And I think that, you know, we're the beneficiary of that because we’re sitting here in the seat of being able to drive pricing and drive utilization and that kind of thing. And so I don't foresee anything changing in this market for at least the foreseeable future.

It's going to be interesting. Thanks for all that, McKee. Appreciate it.

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

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

Good to talk to you this morning, Neel. As a Caterpillar distributor, we hold a unique contractual relationship with Caterpillar that not only allows us but also mandates that we purchase a specific percentage of our engines from them each year to access preferred pricing. This relationship provides us with significant discounts from both Caterpillar and Ariel for our compressor frames that work with the engines. We have been a major purchaser of Caterpillar engines for many years, building up a fleet of nearly 3.5 million horsepower, primarily consisting of Caterpillar engines. Our longstanding partnership with Caterpillar and the fabrication facilities necessary for this equipment have solidified our position in the industry. Given our deep connections and history with these companies, they are motivated to continue working with us, which positions us favorably in managing our supply chain and planning deliveries well in advance for our customers.

Got it. I'm assuming some of these companies might not fully anticipate the field pressure or the type of compression they'll require. Do you have a way to deploy any spare backlog to help address the constraints these companies are experiencing that they wouldn't typically expect?

No, we really don't Neel, I mean, 100% of our capital allocation that is going towards new horsepower growth is for contracted customers that are required basically throughout 2024 and into 2025 now. So, we don't have excess capacity at 99 plus percent utilization. There’s now and then some churn within the fleet that we can make things happen a bit faster than the 40 to 45 week lead time requires. But there's really not a lot of that going on either when you talk about production in the Permian Basin where the majority of our assets are allocated. So, you know, historically in this industry, people kind of manage that excess capacity and they needed it for changes in pressures and flows and changes in drilling programs with the idle capacity that sits in the industry that just doesn't exist today. So, I think that the winners throughout this cycle are going to be the ones that can really plan ahead and look into the crystal ball and be accurate with what their production profiles are going to look like a year out.

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

Got it. Appreciate it. Thank you.

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

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

Yes, I’ll take it. Jeremy, it’s great to speak with you. The discussion really centers on utilization as it currently stands. You won’t see company utilization in '24 from a growth capital expenditure perspective and new units; we’ve indicated it’s essentially sold out since going public. There might be some acceleration in equipment deliveries, but we don’t anticipate that. However, if it happens, it could potentially boost revenues and margins, though delays could occur too. We believe we’ve moved past the worst of it. Ultimately, it’s about the fundamentals of pricing compared to costs in our primary operations, particularly in the compression operation segment. We are very focused on ensuring we charge appropriately for the value we provide to our customers. As I mentioned earlier, we’ve always prioritized cost control, especially considering the inflation of costs over the past couple of years driven by industry-wide post-COVID activities. We are implementing automation and artificial intelligence to enhance unit maintenance and labor productivity. Our commitment to this area is strong. There’s also the services segment to consider. In '23, we had an exceptional year in other services; however, we’ve guided toward more average performance for '24, anticipating between 60 to 80 with normalized margins of 15% to 20%. If '23 were to replicate in '24, especially since we secured some large contracts later in the year and performed well on them with high margins, there’s potential for some upside there too. I believe I’ve addressed all the aspects that could influence the business.

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

Yes, Jeremy, I think that, obviously, emissions and being a better steward of compression and emissions overall, is at the top of everybody's mind. And that's why Kodiak is very successful in what we do with the youngest cleanest fleet out there and emissions-friendly fleet out there. The customers are talking about it all the time. I think that, in a perfect world, our customers would love to electrify everything. But the reality is, that's just not doable from a grid standpoint. So there will always be a balance of gas versus electric-driven compression in this industry. There is some drive for electric demand for electric-driven compression, looking out into 2025. And I told you earlier that works effectively fully sold out for Q1 of '25. And there's a good portion of that is electric motor-driven compression for that first quarter. So, 2024 is mostly gas engine-driven with our growth capital that we're spending because these customers are trying to get ahead of and get in line to get grid access and that kind of thing. So there's going to be some electric motor-driven compression. But I kind of look at it; I've said this before. I look at it the same way as renewable energy sources that there's a market for those and they're going to gain some market share, but I think that the overall growth of the market is going to be, maybe its gas engines might have a lower percentage of overall but on a total basis, there's it’s going to be a continued growing market. So there'll be some portion of our fleet that goes electric and we're going to be paying attention to what the right allocation is between gas and electric and, and as we do with anything we do, we're going to be the best at that if we're going to get into it. So we want to be well off to the best service to our customers and be their first provider of choice when they decide they want to go to electric compression.

Got it. That's very helpful. I'll leave it there. Thanks.

Thank you. Our next question comes from the line of Neal Dingmann with Truist Securities. Please proceed with your questions.

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

It does, I mean, it's relatively the same. If we deploy assets into Eagle Ford or somewhere that isn't the Permian, we're going to kind of command that we want to have the same kind of return on capital over the course of that contract that primary contracts, to kind of de-risk the spent that capital spend. So you know, all in all, it's pretty similar no matter what basin we go into. Basically, 100% of our capital for 2024 that was going to the Permian Basin because that's where the most significant demand is, and the highest growth areas with our kind of core customer base. I will say, though, that we have seen a little bit of contract tenor extension over this kind of past cycle. But it's really not something that we're pushing tremendously because now if you kind of recall, some of the things that we've said in the past is, I can have a three-year contract on a 3606 engine, and if it's sitting on top of 25-year production, then I feel like that unit is going to generate cash flows for 25 years as we go through multiple renewal cycles. So because of the quality and the production that we're looking at, that we're putting this equipment on, I feel good about contract tenor and our ability to renew contract within at the end of those cycles.

It seems like you have a strong position. For my second question, I wanted to follow up on regional demand. Specifically, you mentioned earlier that outside the Permian, demand isn't very strong. What trends are you observing? You brought up LNG, and I would assume that larger LNG companies would be actively trying to partner with you to ensure they are positioned well as new projects come online next year and into 2026. I'm curious about the volume and nature of your ongoing discussions outside the Permian.

The typical conversations regarding LNG supply feed gas are not ones we're having directly; those discussions are happening between our customers and the LNG facilities. Our role is to support our customers in ensuring they can transport the gas as needed. While we are involved in facilitating the delivery to LNG facilities, we are not directly negotiating with those terminals for gas availability. A significant factor here will depend on natural gas prices. The current low prices, influenced by the LNG moratorium from this administration, suggest that as long as gas prices remain low, there will be an increasing need for feed gas from the Permian Basin compared to other regions like Haynesville.

Thanks, Mickey. Well said.

Thank you. Our next question comes from the line of Zack Van Everen with TPH. Please proceed with your questions.

Hey, guys, thanks for taking my question. Just one on the fleet age, I know your guys’ core fleet is relatively new, I think some of the newest out of all your competitors. Can you give average, I guess, age of the CSI fleet once that comes into your guys’ belt?

I believe our fleet's average age is around five to six years. When CSI introduces their equipment, they've significantly increased their horsepower with new gear in the large horsepower categories over the past few years, and they have upgraded by removing much of the older equipment from their fleet. So, their average fleet age is approximately nine to ten years, while ours is six. The overall average will likely fall somewhere between those figures. However, we don't place much importance on fleet age because if you follow a rigorous maintenance schedule, you essentially overhaul and bring the equipment back to zero hours every eight to ten years. Therefore, an eight to ten-year-old piece of equipment that has a new engine will operate and perform similarly to a brand new piece of equipment.

Okay, got it. So a lot of theirs have already been rebuilt at the age that they're sitting at right now.

Yes.

Perfect. So then one last quick one, you mentioned rates are still coming in well above kind of the base rate of the full fleet. Can you remind us, maybe how many of those legacy two to three-year-old contracts are rolling off in 2024 and 2025?

Yes, absolutely. We have, at the end of the year, we had about 7% of our fleet was on month-to-month contracts, and you can expect kind of with our fleet will roll over about 30% of our contracts every year. So because we have such a heavily contracted fleet and we have so few month-to-month contracts in that fleet, our fleet kind of turnover for contracts is a little slower than some of the other guys. So you won't see kind of the spikes in revenues that you see in other prices. But like I said, we should be able to reprice kind of 30% of the fleet as those contracts roll over this year.

Got it. Perfect. Thanks, guys.

Thank you. Our next question comes from the line of Selman Akyol, with Stifel. Please proceed with your question.

Thank you. Good morning. First of all, just high level, we've seen some capacity additions in the storage market. And I'm just wondering, is that a market for you guys at all that you could play in, had an opportunity?

Yes, good morning, Selman. You know, that's another word. It's kind of like the LNG terminals. We don't really control where the gas goes after we compress it and put it in a pipe for our customers, especially on the midstream side after post-processing and gas lift and that kind of thing. So that obviously, increased capacity for storage and cycling gas in storage is definitely a demand driver for our industry. And it's definitely something that requires additional compression on the front end. So again, that's something as our customers are determining where they're going to take their gas, whether it be due to residential use, or LNG terminals, or just storage is negotiations that they have in place. But they require companies like Kodiak to provide compression for all of those demand drivers.

Understood. And then just a smaller question. In your guidance, you talked about 12.5 million for non-unit compression for capital. I'm just kind of curious to what that was, or what that will be.

Yes, that’s kind of ropes open dove. Selman, this is John. It's the trucks, it's crane trucks, it's software that's capitalized leasehold improvements, things of that nature. And we're always going to have it every single year just to kind of take care of older equipment that's kind of aging out or else just keep up with the growth in the business.

Got it. And then the last one for me just on the other services. You talked about how '23 was skewed by a couple of large contracts. Is there any thoughts or guidance around just sort of the cadences we should think about our model going forward on that?

Great question. I would say it's divided into four parts. That's probably the best way to look at it right now. The nature of these contracts means that some may be awarded 9 to 10 months before they are completed. The revenue will be irregular since some work will occur at the beginning, while the main fieldwork might happen four weeks at the end when the majority of revenue is realized. Additionally, some contracts may have a focus on field-related tasks and may be shorter in duration. This makes prediction challenging because a contract could be awarded in the third quarter and completed by the end of the fourth quarter. That's what occurred in 2023.

Got it. Thank you so much.

We have reached the end of our question and answer session. I would now like to turn the floor back over to management for closing remarks.

Thanks, operator. In summary, I could not be more pleased with our record-setting results in 2023. We believe Kodiak's brightest days are in front of us, and we look forward to continued profitable growth in 2024 and beyond. As we look forward to speaking with everybody again on our next earnings call. Thank you.

Thank you; that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.