Kodiak Gas Services, Inc. Q4 FY2025 Earnings Call

Greetings, and welcome to Kodiak Gas Services Conference Call and Webcast to review fourth quarter and full year 2025 results. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Graham Sones, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for the Kodiak Gas Services webcast to review fourth quarter and full year 2025 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will review recent developments, discuss our financial results and 2026 outlook, and then we'll open the call for Q&A. There will be a replay of today's call available via webcast and also by phone until March 12, 2026. 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, February 26, 2026, and therefore, you're advised that such information may no longer be accurate as of the time of any replay listening or transcript reading. Comments made by management during this 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. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. And now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I'd like to begin today's call, as we do with all meetings at Kodiak, by discussing safety. I've said this before, but our goal is for each of our employees to return home safely to their families at the end of every day. We made great strides in our safety performance in 2025, but our goal remains zero work-related injuries. I want to thank our safety and training teams who work hard to equip our employees with the knowledge and tools to do their job safely, our customers for embracing our safety culture; and lastly, our technicians who embody our safety-first mindset. 2025 was another record-setting year for Kodiak. We entered the year with a plan to continue to high-grade our compression fleet by divesting underutilized non-strategic small horsepower units and to exit operations in non-core areas, allowing us to focus on our core large horsepower operations. I'm proud to say that we ended 2025 with 100% of our operations located in the U.S. and with the largest average horsepower fleet in the industry. The work we did high-grading our fleet also allowed us to deliver strong increases in fleet utilization, adjusted gross margins, and free cash flow. Given the high margins and stable operations, our core compression business generates predictable, growing contracted cash flows that we reinvest both in our compression fleet and in tools and technologies that set us up for future success. Some of our highlights from the last year include: successfully implementing a new ERP system to provide us enterprise-wide, real-time information in order to make more informed business decisions. Our team did an amazing job with the rollout of the new software. We've been operating in the new system without issue since August 1. And at year-end, we closed our accounting books in record time, an extraordinary execution by Kodiak. Investing further in AI and machine learning technologies to drive operational excellence and better customer outcomes. We've deployed our custom large language model to help our technicians quickly diagnose issues encountered in the field and are using agentic AI to source repair parts across our system. Our technology roadmap for 2026 includes wearable devices and autonomous solutions to enhance our technicians' capabilities, collect more data on our fleet, reduce risk and allow our people to focus on high-value activities. And we also broke ground on a new state-of-the-art training and operations facility in Midland. The new industry-leading facility is expected to be the largest of its kind, allowing us to continue to train and develop the best workforce in the industry. We plan to move in, in May. Financially, we successfully managed the exit of our former private equity sponsor, eliminating any perceived equity overhang. As a recap, EQT owned approximately 76% of our shares after we went public in 2023. Over the last 1.5 years, through a series of secondary offerings, EQT completely exited its Kodiak investment much earlier than originally expected. We appreciate everyone who participated in the stock offerings. Additionally, we overhauled our balance sheet, terming out a large portion of our ABL. This further reduced our reliance on secured bank debt, increased liquidity, and extended our weighted average debt maturity, providing us with enhanced balance sheet strength and financial flexibility. Also at year-end, I'm proud to say that we delivered on the promise we made at IPO and achieved our leverage target of 3.5x. Lastly, we maintained our commitment to return capital to shareholders. We increased our dividend with Q4's declared dividend up 20% year-over-year, and we bought back over $100 million in common stock at an average price of $33.79 per share. In total, we returned over $260 million to our shareholders this year. By all measures, 2025 was a great year for Kodiak. And with the recently announced acquisition of Distributed Power Solutions, we're starting 2026 with a lot of positive momentum. We'll give more details after we close, but I can say that we've received a lot of inbound interest in our new distributed power offerings since the announcement and are already working to procure additional power generation capacity through our existing network of vendors to deploy this year after we close. We think the market will continue to move in our direction as large power consumers are increasingly looking to lock in 10-year plus deals for base power. On to Contract Services, as we have said before, we are really excited about compression. Compression and power are very synergistic and align well for our customers and ongoing relationships. We ended 2025 with $4.35 million revenue-generating horsepower. Average horsepower per revenue-generating unit was 970, a figure that continues to lead the industry and has increased each quarter since we closed the CSI acquisition. For the year, we added approximately 150,000 new large horsepower to our fleet. Our investments to grow our fleet, along with strategic divestitures of non-core units drove our fleet utilization to 98%, another industry-leading metric. As we will discuss later in our outlook for 2026, despite slowing oil production growth, the outlook for natural gas supply growth remains highly visible. Last year, Permian natural gas production grew 10% or roughly 2 Bcf per day. Keep in mind, this production growth happened in a limited takeaway environment with negative pricing in West Texas for most of the year. Given the increasing gas-to-oil ratios, we expect sustainable gas growth out of the Permian Basin even in a flat oil environment. This favorable backdrop is driving strong compression demand, one of the many reasons why I'm excited about our 2026 capital spending program, which I'll discuss later. Yesterday, we released our fourth quarter and full year 2025 financial results. I'll hit the highlights and let John provide more details. For the year, Kodiak set new records in total revenue, adjusted EBITDA, discretionary cash flow, and free cash flow. Total revenue grew by 13% to $1.3 billion and adjusted EBITDA grew by 17%, $715 million. The growth was driven by the outstanding execution of our core strategy by Kodiak personnel and our ongoing investment in organic large horsepower growth and the deployment of our technology and AI initiatives. Our technology advances are the result of several years of development, and we are just starting to see the efficiency improvement of our investment. We've significantly reduced the cost of media repairs to our fleet by using data to identify abnormal operating conditions and address them before they turn into expensive component failures. These early wins give us confidence to continue to invest in technology, allowing us to increase equipment availability and reduce mechanical failures, driving additional value to our customers, and increasing our operating margins. We generated $230 million of free cash flow in 2025 after investing to grow our large horsepower fleet and high grading our overall fleet. Our strong free cash flow led to an industry-leading free cash flow yield and allowed us to reduce outstanding debt and achieve our stated leverage ratio goal of 3.5x at year-end. Now diving into fourth quarter results. We once again delivered year-over-year growth in contract services revenues and adjusted gross margin. Impressively, our Contract Services adjusted gross margin percentage increased 247 basis points year-over-year to 69.2%, exceeding the high end of our guidance. Adjusted EBITDA for the quarter was up 9% year-over-year to $184 million, setting a new company record. Given strong customer demand, historically high industry-wide utilization, and capital discipline in a contract compression industry, pricing conversations with customers continue to be constructive. During 2025, we recontracted approximately 40% of our fleet and exited the year with only 10% of our contracts on a month-to-month basis with the rest under multiyear contracts. While we have a smaller percentage of our horsepower up for recontracting in 2026, the compression market remains tight with horsepower pricing continuing to increase. In our Other Services segment, fourth quarter results reflected a sequential pickup in activity as we had a positive uptick in shop services and station construction revenues. Overall, this segment generates free cash flow with minimal capital investment. Next, I'd like to discuss the evolving natural gas market and increasing lead times for large horsepower engines. Over the next 3 quarters, approximately 4.5 Bcf per day of incremental Permian gas pipeline takeaway capacity is expected to come online. And there's another 7 Bcf per day of additional Permian takeaway pipelines expected by the end of the decade. What's more, we have seen estimates from research firms of more than 2 Bcf per day of in-basin gas consumption for power generation by the end of the decade, including distributed power like DPS and major power plants. This is on top of the highly visible increase in feed gas required for U.S. LNG. After ramping up by roughly 3 Bcf per day in 2025, LNG export capacity is set to increase by another 2 Bcf per day in 2026, with an additional 13 Bcf per day of LNG export capacity expected by the end of 2035. These developments will have a resoundingly positive impact on gas pricing and production in the Permian Basin. A combination of higher in-basin demand, increased takeaway capacity, better pricing, and ever-increasing gas-to-oil ratio is expected to lead to substantial Permian gas volume growth in the back half of this decade. The significant step-up in midstream and compression capacity needed to support the gas growth in the Permian Basin, in addition to the rapidly growing demand for distributed power generation has driven lead times for new large horsepower compression equipment to greater than 100 weeks. The combination of extended lead times and highly visible compression demand has required our commercial team to engage with customers about longer-term plans. We've already begun receiving commitments from customers for new compression equipment in 2027 and 2028. On the supply chain side, we're using our buying power and leading position in the industry to secure new compression equipment and are confident we'll be able to hit our long-term horsepower growth targets despite historically high lead times as we've already secured engine deliveries and shop space into 2028. In total, we expect to deploy over 750,000 new large horsepower compression between now and the end of 2030. Now turning to our outlook for 2026. We have a lot of positive momentum heading into the year. Despite the increased lead times for new equipment, we plan on delivering approximately 150,000 new unit horsepower in 2026 with an average horsepower per unit of approximately 1,700 horsepower, further solidifying our position as the industry leader in large horsepower compression. We're also in discussions with a handful of our customers about purchase leaseback opportunities and expect to announce one soon. We view purchase leaseback transactions as low-risk acquisitions; they have the benefit of accelerating our growth and compelling returns on invested capital without adding additional compression capacity to the market. The strong pricing environment we've seen for the last several years continues, and we expect to deliver further margin increases as we capture operating efficiencies. And we're seeing positive signs in the station construction business, part sales, and our Other Services segment. In summary, we had a great year. Our adjusted EBITDA significantly exceeded both our initial guidance for the year and our latest update, driven by operational efficiency and cost management. We high-graded our fleet, exited international operations and achieved our leverage target of 3.5x. We have numerous tailwinds heading into 2026 as demand for contract compression remains strong and utilization rates continue to be at record highs. We're extremely excited to add distributed power to our business offerings and believe the outlook for that business will allow us to increase our underlying growth rate and drive higher margins. And now I'll pass the call to John Griggs, to further discuss our financial results and our outlook for 2026. John?

Thank you. At the risk of sounding like a broken record, 2025 was an outstanding year. There's just no other way to say it. From a financial perspective, we exited the year with the lowest leverage, most liquidity, and highest EBITDA free cash flow and contract services adjusted gross margin in our company's history. Our new enterprise-wide business system meaningfully reduces SOX-related risk and is increasingly providing us with enhanced visibility into our operating and financial performance, giving our company's leaders far better data and insights to ultimately make faster and better business decisions. Our financial strength has never been better equipped to capture all of the growth opportunities that are in front of us today. Before I tackle the financial highlights, I'd like to give a shout-out to my team. I am so proud of everything they've accomplished over the past couple of years, an IPO and all of that entails, the CSI acquisition and integration, several capital markets transactions, more than $2 billion in bond issuances and ERP implementation, and more recently, moving to full SOX compliance. It's been a big, big, big lift, but they've risen to the occasion time and time again. I'm privileged to lead them, and I look forward to seeing them continue to do great things as we move forward. Let's turn to the financial highlights. For the year, we reported total revenue of approximately $1.3 billion, a 13% increase over 2024. The growth was primarily driven by the addition of new horsepower, price increases from recontracting activity, and solid operational execution. We reported adjusted net income of $139 million and adjusted EBITDA of approximately $715 million, up 51% and 17%, respectively, from the prior year. For the fourth quarter, total revenues were nearly $333 million, up 3% sequentially as we benefited from a large amount of recontracting that happened around the beginning of the fourth quarter. Revenue for ending horsepower was $23.10 at year-end, a 2% increase from the previous quarter and up approximately 5% from the previous year's quarter. As we discussed last quarter, the fourth quarter sequential increase in dollars for revenue-generating horsepower was driven by the combination of less overall new horsepower being set in Q4 in conjunction with solid pricing for new units set during the third quarter plus recontracting during Q4 at ever higher rates. Our Contract Services adjusted gross margin percentage for the fourth quarter exceeded 69%. That's up 90 basis points sequentially and 247 basis points year-over-year. The margin improvement is a reflection of the success we've realized in achieving higher average pricing for horsepower alongside lower operating expenses for horsepower, which itself was a function of new technology, process, and training initiatives that either reduce costs, defer spending, or improve labor productivity or some combination of all three. In our Other Services segment, revenues were just over $31 million in Q4 with an adjusted gross margin percentage of 13%. The sequential increase in revenues was driven primarily by an increase in shop services and station construction revenues. Reported SG&A for the quarter was $38.9 million, and after adjusting for nonrecurring or non-cash items, it was $29.7 million, down nearly 6% in the prior quarter. Net income attributable to common shareholders for the fourth quarter was almost $25 million or $0.28 per diluted share. Excluding asset impairment, severance, and transaction expenses and other one-time items, adjusted net income was $35 million or $0.40 per diluted share. Now let's turn to capital expenditures. Maintenance CapEx for the quarter was approximately $22 million, and it was $76 million for the year, which was at the low end of our annual guidance range. The same investments in technology and the insights we're gaining from them are also allowing us to extend overhaul intervals and thereby defer associated spend on a major portion of our fleet. As expected, growth CapEx declined sharply this quarter to approximately $25 million. For the year, we added approximately $150,000 in new unit horsepower, in line with previous expectations. Other CapEx was just under $12 million for the quarter, slightly down from the prior quarter. Discretionary cash flow came in at $113 million, an increase of approximately $5 million versus the comparable quarter from last year. Free cash flow, which we define as discretionary cash flow less growth in other CapEx plus the proceeds from asset sales, was $79 million, a new quarterly company record. For the year, we generated approximately $462 million in discretionary cash flow. Our discretionary cash flow is one of our most important business metrics. It drives our growth and funds the return of capital to shareholders. The long-term growth of our core compression business, and therefore, our discretionary cash flow is directly correlated with the nearly irrefutable secular growth in domestic natural gas production, and our cash flows are heavily contracted under take-or-pay contracts with inflation escalators. As a result, we tend to produce growing but stable discretionary cash flow, even in times of severe commodity price volatility, which is something we can't emphasize enough. With regard to the balance sheet, as Mickey highlighted earlier, we delivered on the promise we made to investors at the time of our IPO that we get our leverage down to 3.5x by the time we exited 2025. We exited the year with the strongest balance sheet we've ever had with approximately $1.5 billion in undrawn liquidity and over 3 years before our first debt maturity. To recap, in 2025, we termed out $1.4 billion of our bank debt in the bond market, including the first issuance of the 10-year bond in the compression sector when we amended our ABL to reduce interest rate spreads and enhance financial flexibility. Last, our Board declared and we paid last week a dividend of $0.49 per share, even with two increases totaling nearly 20% in 2025, our dividend was well covered for the quarter at 2.6x.

Let's turn to our '26 guidance. We provided our customary metrics in yesterday's release. Keep in mind, our guidance metrics don't include the recently announced DPS acquisition. We plan on revising our guidance for the inclusion of that business after we close the transaction, which we would expect to occur around the beginning of the second quarter. For the year, we expect overall revenue to range between $1.37 billion and $1.43 billion. We expect the adjusted gross margin percentage within the Contract Services segment to range between 67.5% and 69.5%. Our 2026 adjusted EBITDA guidance range is around $750 million to $780 million, with the midpoint representing annual growth of approximately 8%, directly in line with the upper single-digit percentage annual growth rate that we believe is possible in our core compression business for the foreseeable future. We expect maintenance CapEx to be in the range of $75 million to $85 million, essentially flat with last year, something that would not have been possible had we not been investing in the people, processes, and systems that allowed us to meaningfully defer maintenance spend without harming our assets or their long-term performance. We see growth capital expenditures landing between $235 million and $265 million. The vast majority of our growth CapEx goes towards buying and installing new units, while the balance gets invested in things like fleet-oriented enhancements and conversions, emissions-related projects, and operation-centric technology. Other capital expenditures, which include fleet upgrades, maintenance expenditures, rolling stock, real estate, and capitalized aspects of our training programs are expected to range between $40 million and $50 million. In terms of capital allocation, returning capital to shareholders is important to us. We expect to grow our dividend annually and opportunistically repurchase stock. Prior to the acquisition of DPS, our stated goal is to invest organically at a level that allows us to deliver long-term annual growth in adjusted EBITDA in the upper single-digit percentage range. Following the acquisition of DPS, we believe we can grow faster than that and have similar or better returns on invested capital. To wrap it up, 2025 was another record-setting year at Kodiak. We're extremely proud of all that we accomplished and the work we did to lay the foundation for future growth. The outlook for contract compression-related services is stronger than ever. By our estimation, it looks like it will remain that way for a while, and we're in the process of further increasing our earnings growth rate with the pending acquisition of Distributed Power Solutions. With that, I'll hand it back to John.

Thanks, Mickey. It's an exciting time to be at Kodiak. Our business model, which generates highly visible, stable, and recurring cash flows is performing well. The demand outlook for contract compression remains robust, demonstrated by our ability to maintain strong pricing and continued growth in our industry-leading horsepower utilization. Our new unit horsepower order book is fully contracted for 2026 and into 2027, and we're actively working on finishing 2027 and 2028 as we capitalize on the robust outlook for growth in natural gas. Besides the top-line growth, we took steps to increase margins by divesting non-core units and investing in technology to reduce costs and increase uptime. The pending DPS acquisition will further increase our earnings potential and growth outlook, enhancing our ability to return capital and drive ongoing value for Kodiak shareholders. Needless to say, we're excited about our future. Thanks for your participation today, and now we're happy to open up the line for questions.

Our first question comes from Jim Rollyson with Raymond James.

Mickey, maybe just starting with the lead time comments, obviously, all you guys are seeing the same thing. And I'm curious, it's great to see the CapEx commitment on the compression side that just underscores, I think, your view there. But as you think about 2027, 2028 and where lead times have escalated to here pretty rapidly, how are customers thinking about that? How are you guys planning for that? Because I'm imagining that not only impacts your ability to grow on the compression side, but it's also on the power side once you get that closed. So maybe just some kind of color on how you navigate that.

Jim, thank you for being here today. It's been quite challenging lately, and the environment is very dynamic. We have been working diligently over the past few weeks to secure our supply chain. As I mentioned earlier, we have already secured shop space and engines through 2027 and into 2028, and we are doing our best to stay proactive and ensure we have enough supply to support our growth in the compression segment. Most of our customers own some compression equipment within their fleets, so they are aware of the tight supply in the market and are open to discussions ahead of time to ensure their needs are met. Our commercial team is effectively staying on top of this situation, and we are continuously monitoring it, as it is changing frequently.

Understood. And the other thing, you guys have had a slide in your deck since you IPO-ed kind of about the cost of equipment up 50%, let's say, pre-COVID to relative today. And obviously, that's driven a lot of pricing growth over time as you price new units and mark your fleet up over time. Curiously, with recent conversation with Caterpillar, given their lead times today, are they talking about more material pricing increases? And if so, wouldn't that allow you over time to kind of reap the same benefits going forward at some point?

Yes. I mean two parts to that question, right? I mean, I would expect that going forward that we'll have some pricing power and to be able to have constructive conversations with our customers there because the cost of replacement equipment, naturally, I would think with 100-plus lead times with Caterpillar, would increase. So like I said, our customer base is all very cognizant of what's going on there in that pricing dynamic there. So we haven't heard of significant price increases coming out of Caterpillar yet, but it's something that I would probably expect.

Our next question comes from John Mackay with Goldman Sachs.

Maybe I'll pick up on that first question from earlier. Could you talk a little bit more about what is driving the tightness in the market right now kind of specifically? I think we understand some of the broader trends, but would love to hear a little bit more from you on kind of why we've gotten so tight so quickly here.

John, thanks for joining us this morning. Yes, it's really a pretty interesting discussion that we've had with Caterpillar over the last several months on what's driving the tightness in the market here. And I think a lot of people would assume that it is power that is driving kind of the increased lead times here. And it really is a power discussion. But a lot of the Permian power processing plants for rich natural gas that are going in, in the Permian Basin right now, which there's a lot of them being built, they don't have the access to grid power. So traditionally, in those power plants, you'd see 75,000 horsepower worth of electric motor-driven units for inlet compression for propane compression for residue compression in those plants within the four walls because of the limited access to power that these guys have out there, specifically in the Permian. They're having to turn those electric motors within the four walls of those plants into large horsepower natural gas-driven engines to drive that compression within those plants. So I think that, that's a dynamic that really nobody saw coming towards us and is really a driver from the limited access to grid power that people have today and the extended lead times to get hooked up to the grid, which we've heard can be 7 to 8 years at some point in time. So like I said, these midstream guys and the people that are building these plants are having to turn to gas-driven engines versus electric motors in those plants. So it's creating a kind of a new level of demand that we haven't seen previously.

That's interesting. It sounds like a good time to get into the power business, but we can talk about that more in April. Second one for me is just on gross margins. Fourth quarter is really strong. You guys have been generally doing very well on that front. I think the '26 guide points to it being a little flatter. Would love just to hear your general comments on the trajectory there, maybe some conservatism baked in maybe some of the cost savings you've talked about in the past on the AI side. Can you walk us through that?

Yes, sure. So John, I'll take it. This is John Griggs. So we thought a lot about that as we put the guide out, we anticipated we'd get some questions. And one thing that we know is the fourth quarter was a really clean quarter. Our business is highly predictable, but you're always going to have some gremlins that happen within your cost of goods sold, and we really just didn't see many of those, whether that's a lot of hard work, a lot of technology, a lot of planning, great operations, and a little bit of luck, we're not exactly sure, but it happened. And when I look at everybody kind of focusing on our dollar per ending horsepower, we also study our dollar per our Contract Services cost of operations for ending horsepower. And it's been really flat until the fourth quarter would have dropped meaningfully. So I think we probably have a little bit of conservatism in case it gets back on trend to where it was for the prior three quarters. Now with that said, I think you hit the nail on the head in that pricing continues to be strong and all the investments we've made in, let's say, two big buckets, technology and the operational technology, we're starting to see a return on those investments during '25, and we expect to continue to see it in '26. And all the investments we've made in our people around training absolutely have an impact on that cost of goods sold, and we expected to see it. So hopefully, as the year goes on, we'll be able to walk that number up. But that does explain kind of where we guided.

Our next question is from Doug Irwin with Citi.

Maybe to add one more on lead times to start. Great to hear that customers are already having conversations out into 2028. But curious just in the context of potential 2-year lead times, if that changes just your general risk appetite to potentially look to maybe orders and capacity on spec, just to be able to make sure you're able to secure it in advance.

Mickey here. The conversation we’re having with our Board today is different than it was six months ago. At that time, we were looking at capacity and lead times within a year and having contracts in place. Now, we’re doing more spec ordering and ensuring we have shop space and engines secured, which means we’re taking on some additional risk. However, this is somewhat balanced by not needing to commit to the full CapEx cost two years in advance. We might have some extra engines available in case the demand doesn’t meet our expectations, allowing us a little more willingness to order equipment on spec further out. But again, this does not apply to the entirety of that cost; it's just a part of it.

I want to emphasize the importance of our long-term outlook regarding production levels. Since our IPO, we have consistently communicated our belief that we can achieve a volumetric fleet growth of 3% to 5% annually. We have sophisticated customers with long-term development plans, and we maintain close communication with them, treating them as partners. Therefore, everything we are purchasing that goes beyond our commitments aligns with our expectations for the market and our customers. This makes it feel like a very low-risk opportunity for us.

Got it. That's helpful. And then maybe a quick one on Power. Realize you haven't given guidance there, but just curious in the context of the guidance you just gave for the base business, just how you're thinking about your capacity to invest in power here over the near term?

Yes, Doug. I mean, look, we bought the DPS platform because we've been looking at the power business for over a year now looking for the right entry point. We want to make sure that we could pair up our operational expertise with high-quality commercial and engineering expertise on the power side, and we settled on the DPS acquisition because they really checked all those boxes. It's a really high-quality platform that we think we can put a strong operational platform behind as well as a strong balance sheet behind. And our full intention is to grow that business. And we'll come back after we close and give a little bit better guidance on kind of what we think the growth opportunity looks like. But we fully intend to grow that business, and we think that there's some opportunities to acquire some megawatts of power even this year to be able to deploy this year. And we're leveraging our relationships that we have with existing vendors and our Caterpillar network to make sure that we can secure some of that equipment and put it to work this year and then come back to you after close with kind of a more fulsome view of what we think the long-term growth outlook looks like for that business. But we fully plan on growing it starting this year and putting some significant growth capital behind that side of the business as well.

Our next question comes from Neal Dingmann with William Blair.

Can you discuss your focus on external growth? Given the current backlog and compression, are you considering a more aggressive approach with some of your customers to drive additional growth?

Yes, Neal, we lost you for a moment there. Could you repeat your question? It seemed that you were asking about our approach to customers concerning their compression and power needs. We see this as a significant opportunity moving forward. Many of our customers, particularly in the Permian region, are interested in microgrid development and creating their own power sources, and we are already discussing this with them. We believe we can leverage our relationships and operational expertise to expand this business with our current customer base.

That was exactly it, Mickey. Secondly, regarding the LNG, you've always mentioned a formula for potential LNG demand. Does that formula still exist? Can you remind me about the potential around the LNG upside demand?

Yes, we believe there will be a significant demand for LNG feed gas across the United States. While we often discuss the Permian, we maintain a presence in all major oil and gas producing areas in the country. This positions us well to provide compression regardless of the gas source. We anticipate considerable gas production for both behind-the-meter power and LNG destocking. We're confident in our position. We're heavily involved in the Permian Basin, which relates to the compression intensity metrics we often discuss. The robustness of our business over the past five years can be attributed to the high level of compression required to produce natural gas from the Permian Basin, involving gas lift and the operations within processing plants. We firmly believe that with oil prices remaining above $60, there are strong economics for our customers. This will allow them to sustain oil production levels, and due to increasing gas-to-oil ratios, we expect significant gas output from the Permian, necessitating substantial compression, especially with new takeaway capacity lines being developed. We're excited about the potential for natural gas growth over the next several years into the 2030s, and we are well-positioned to capitalize on this opportunity in both the compression and power sectors.

Our next question comes from Elias Jossen with JPMorgan Chase.

Maybe just wanted to start on the visibility you're seeing in the contract compression business. You talked a little bit about seeing 750,000 horsepower through 2030. Maybe just the conversations you're having with customers that kind of support that? And then it seems that would support sort of this mid-single-digit EBITDA growth in just the contract compression business alone based on your historical execution. Is that a fair way to think about it, just continuing the strong growth that we've seen?

Elias, good to hear from you this morning. Yes, that is absolutely our intent is to continue that up into the right trajectory in the compression business and then layer the power business on top of that. We've got very high visibility into our growth. Like I said, we're engaging in conversations with customers right now for 2028 capacity. And there's a very large appetite for multiple of our customers that we're in discussions with right now for multiyear contracting and renewals of the existing equipment that we're seeing elongated types of renewal timeframes right there. We're in discussions with multiple customers about 7- and 10-year renewals on that stuff, which is a really great development for our business and the visibility of our existing asset base and the growth of that over time. So we've never really given multiple year kind of guidance or indications of what we expect for horsepower growth, but we feel pretty good about it right now, and that's why we brought it into this call in our prepared remarks today that we really do see a multiyear growth case that is going to underpin kind of our cash flows and stable earnings for a long, long time.

That's awesome. And maybe just sticking with the Contract Services business. I know you guys talked a bit about sort of operational execution driving gross margins higher, and you did give us a guide there. But maybe just on the overall pricing outlook. I think previously, you've talked about exiting this year at around $24 per horsepower per month. Any reason to think that would be different or higher or just high level, what you're seeing right now on the overall sort of fleet pricing?

Yes. As we said, conversations with customers have been very constructive and continue to be. We're not seeing any significant change in pricing on equipment going forward. I think John did mention it in his prepared remarks, we do have less of a percentage of our fleet that's up for recontracting this year. I think last year, we recontracted 40% of the fleet. This year, it's kind of in the low 20%. So I would say that our ability to raise prices on the existing fleet is just as strong as it ever has, albeit it might be a little bit more muted of a contribution this year because of the limited amount of equipment that we have kind of coming up for recontracting. That being said, our goal is still to reach that $24 of horsepower by the end of the year, and we feel pretty good that we're going to get there by the end of the year and feel good about that target.

Our next question comes from Nate Pendleton with Texas Capital Bank.

Congrats on the quarter. I wanted to dive a bit deeper into your prepared remarks regarding applying AI and machine learning to improve the business. Can you provide your view on how these developments can further improve financials from here? And perhaps how well those technologies can apply to the newly acquired power assets?

Nate, thanks for joining us. We're really excited about our advancements in technology. We believe we have some first mover advantages in this area. Our technology and operations teams have excelled in adopting these innovations. We've implemented condition-based maintenance, allowing the equipment to signal when it needs oil changes based on current operating conditions and oil sampling, rather than adhering to standard schedules. This approach helps us identify when equipment operates outside its optimal range, significantly improving our gross margins by extending maintenance intervals based on the machine's health instead of time alone. Just as cars now go 10,000 miles between oil changes, informed by the vehicle's needs, we’re transitioning to similar practices. We're also extending our major maintenance cycles, contributing to fleet growth while keeping our maintenance capital expenditures steady over the past couple of years. The potential for further growth remains, as we haven't yet implemented these advancements throughout our entire fleet. We've tested them in '24 and '25, and we are now deploying them to a larger segment of the fleet, which we expect will yield continuous benefits. Looking at the power sector, we have significant experience operating Caterpillar equipment and are acquiring a business with substantial power demands driven by 3516 Caterpillar engines. We believe we can apply the same metrics there, making us one of the first companies with extensive operational history using Caterpillar equipment to leverage that expertise in power generation rather than just gas compression. We are enthusiastic about this opportunity and are confident it will have a positive impact on our operations.

Thanks for the detail there. And then as my follow-up, I guess, going to the DPS acquisition. I know there is limited you can say at this point, but can you provide any high-level details about the inbound interest since announcing the deal that you alluded to in the prepared remarks?

I can't discuss too much for now, but we need to maintain some distance from DPS on the commercial side due to antitrust concerns. I believe everyone is aware of that. Nonetheless, outside of our conversations with DPS, we've received inquiries from various data centers and customers who have acknowledged our operational expertise in a highly competitive landscape. This competition lacks the extensive experience we have with large horsepower equipment. Our potential customer base is increasingly recognizing our capability to leverage that operational expertise in the power sector. Earlier, I mentioned that we were looking for a company with strong commercial and engineering expertise in the power division. DPS stands out as one of the few companies with a multiyear contract and experience in executing a data center project. They are knowledgeable about the AI load management required to tackle challenges in powering a data center. We see a significant opportunity to make a substantial impact in this business by merging DPS's commercial and engineering know-how with Kodiak's operational experience.

Our next question comes from Selman Akyol with Stifel.

Two quick ones for me and just more little follow-ups. In your previous question, I think you referenced sort of 40% of contracts recontracted and then 10% in your opening comments for '26. The question is this, how much of recontracting for 2027?

That's a good question. I haven't run those numbers yet, but I appreciate your joining us. To be honest, I don't have that information readily available. However, we typically expect around 25% to 30% of our fleet to recontract each year, and we anticipate that will hold true for our 2027 outlook. That said, we are currently having productive discussions with customers about accelerating some of those recontracting efforts. As mentioned earlier, we are in talks regarding some 7- and 10-year renewals, including contracts that are not even due for recontracting in 2026, with some possibly being moved up from 2027 and 2028. We are quite excited about this progress. So, it's dynamic at the moment, but our expectation remains that around 25% to 30% of our contracts will be due in any given year, including for 2027.

Okay. Great. I mean repricing into a stronger environment. Then the other one, just real quick. So you talked about potentially ordering some engines on spec and then you said you wouldn't have to commit 100% of the capital. But could those engines be swapped over to DPS if you didn't have a need for them?

Yes, we believe they can. We will definitely explore how to manage that supply chain, and we should be able to acquire some of those slots and potentially manage whether they support compression or power.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Kodiak's CEO, Mickey McKee.

Thank you, operator, and thank you for everyone participating in today's call. We look forward to speaking with you again after we report our results for the first quarter.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.