Release Date: November 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kodiak Gas Services Inc (KGS, Financial) reported a record quarter with revenues of $325 million and adjusted EBITDA of $168 million.
- The company successfully completed a divestiture of its small horsepower gas jack business, simplifying operations and increasing fleet horsepower.
- Kodiak Gas Services Inc (KGS) increased its trading liquidity by over 100% and reduced shareholder concentration by about 20%.
- The company achieved a high fleet utilization rate of over 96%, with core large horsepower assets at over 99% utilization.
- Kodiak Gas Services Inc (KGS) raised the low end of its full-year revenue and adjusted EBITDA guidance, reflecting strong industry fundamentals and operational efficiency.
Negative Points
- Kodiak Gas Services Inc (KGS) reported a net loss of $6.2 million for the quarter, impacted by non-cash items totaling nearly $41 million.
- The company faces ongoing inflationary pressures, with mid-single-digit increases in the cost of new compression units.
- Lead times for new compression units remain elongated at approximately nine months, potentially impacting future deployments.
- The company is still working through integration challenges, including elevated inventory levels due to operating in two systems post-acquisition.
- Kodiak Gas Services Inc (KGS) has a significant portion of contracts up for renewal, which could impact future revenue if not successfully renegotiated.
Q & A Highlights
Q: Can you provide more color on gross margin expectations for 2025 and where you see margins trending in the near term?
A: John Griggs, CFO, stated that while they are not providing specific 2025 margin guidance yet, they are proud of achieving a 66% adjusted gross margin in the contract services segment. This was achieved through repricing the fleet, setting new horsepower at market rates, realizing transaction synergies, and effective cost management. They aim to continue increasing margins beyond 66%.
Q: How are you balancing buybacks versus increased liquidity in shares, and could we see more buybacks in the future?
A: Mickey Mckee, CEO, mentioned they are open to more buybacks, depending on when EQT comes back to market with additional follow-ons. However, any actions will align with their goal of achieving a 3.5 times leverage target by the end of next year.
Q: What is the status of the divestiture program and high grading of assets?
A: Mickey Mckee explained that they are continuously evaluating their fleet to determine if they want to remain in certain basins or divest certain units. While they have no immediate plans to exit any basins, they are focused on the Permian and other oil-directed basins. They plan to continue pruning the fleet by divesting small horsepower units.
Q: With bullishness in the Permian gas outlook, how might this affect your CapEx next year?
A: Mickey Mckee stated that their capital allocation strategy remains unchanged, focusing on paying a growing dividend, living within cash flows, and reinvesting in fleet growth. They aim to maintain more cash at year-end than at the start, with no significant changes expected due to election results or other factors.
Q: Are you seeing higher costs for new units, and how is this affecting pricing?
A: Mickey Mckee noted that while CapEx costs are not inflating as rapidly as before, they are still seeing mid-single-digit inflationary costs. They have been able to pass these costs onto contracts, ensuring returns on capital remain consistent despite higher equipment costs.
Q: What is driving the demand for electric motor units, and is there an opportunity for Kodiak to get involved in the power side?
A: Mickey Mckee explained that demand for electric motor units is driven by access to reliable power, whether through grid connections or self-supplied generation. While there is potential for Kodiak to explore involvement in power supply, it requires further evaluation.
Q: How did you achieve a 66% segment margin after acquiring CSI, and will this continue?
A: John Griggs highlighted that achieving a 66% margin was due to setting new units at market rates, repricing the existing fleet, and realizing synergies. They aim to continue improving margins through cost management and process optimization.
Q: Can you provide an update on working capital movements and expectations going forward?
A: John Griggs addressed that elevated inventory levels and accounts receivable are due to integrating systems post-acquisition. They expect these to normalize in 2025 as they streamline operations and improve billing processes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
