AROC Q3 2026 earnings call transcript, November 3, 2026

Welcome to the AARCHROC Third Quarter 2026 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at AARCHROC. I will now turn the call over to Ms. Repine. You may begin. Thank you, Jill. Hello, and we appreciate you joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of AARCHROC, and Mohit Singh, Chief Financial Officer of AARCHROC. Yesterday, we released our financial and operating results for the third quarter of 2026. If you have not received a copy, you can find the information on the company's website at www.artrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, based on our beliefs and expectations, as well as assumptions made by and information currently available. to our trucks management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ securely from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA. Adjusted EPS, adjusted net income, adjusted free cash flow, and adjusted free cash flow after dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release in our Form 8K furnished to the SEC. I'll now turn the call over to Brad to discuss our TROC's third-quarter results and to provide an update on our business.

Thank you, Megan, and good morning, everyone. Turning to the quarter, our strong performance. reflected the quality of our operating platform and disciplined execution. The results reinforce our confidence in the business and our ability to invest for growth while returning capital to shareholders. Before getting into the financial highlights, I want to recognize what matters most, the safety of our employees. Safety remains our first priority, and we're proud to have recorded zero recordable injuries. In the first three quarters of the year. That performance reflects the focus and discipline of our employees across the organization, and I want to thank them for continuing to look out for one another and operating the right way every day. A few highlights from the quarter. We delivered robust net income of $84.5 million, or 48 cents per share, and adjusted EBITDA of 200. and $28.4 million, supported by strong contract operations fundamentals and strong operating performance across the business. Contracts operations utilization remained above 94% and contract operations adjusted gross margin reached 72%. Our eighth consecutive quarter at 70% or higher. The third quarter was our high. Highest bookings quarter since the second quarter of 2023 with year to date bookings 13% above the prior year period. We generated $50 million of adjusted free cash flow and returned $41 million to shareholders through dividends. We ended the quarter with leverage of 2.5 times and dividend coverage of 3.8 times underscoring our financial strength and capacity.

to invest in growth while returning capital to shareholders. Overall, our results, our third quarter results reinforce our confidence in the core business and our outlook for the remainder of the year. Geopolitical volatility continues to underscore the criticality of secure and reliable energy supplies from stable regions and the long-term strategic value of U.S. natural gas. Domestic production is reaching record levels with 2026 volumes expected to grow approximately 2% or 2.3 BCF per day and Permian volumes approximately 6% or 1.4 BCF per day, both from 2025 levels as associated gas production outpaces oil growth. At the same time, new Permian takeaway capacity is coming online. Hugh Brinson Phase 1 entered service in the third quarter, and Blackcomb is currently wrapping. Together, these projects add approximately 4 BCF per day of additional capacity, with another 11 BCF per day planned by 2030. On the demand side, LNG remains the largest and most visible source of long-term growth. Industry forecasts point to LNG-related natural gas demand increasing from approximately 18 BCF per day in 2026 to 34 BCF per day by 2030 and 40 BCF per day by 2035. Beyond LNG, growing power demand from data centers and other industrial users represents another meaningful source of potential upside. Together. These supply and demand trends are driving the need for additional compression capacity. Our customers are preparing to serve growth across LNG, power generation, and other end markets, and we're supporting them through reliable service and disciplined investment in the capacity they need.

That opportunity is evident in contract operations where healthy customer demand is translating into stronger bookings, high utilization, and continued requirements for compression equipment. Bookings increased sequentially, making the third quarter our highest bookings quarter since the second quarter of 2023 and bringing year-to-date bookings 13% above the prior year period. Permian bookings were the highest in a year as rising gas-to-oil ratios and an improving production outlook continued to drive compression demand. We actually did a lot of work. Exited the quarter at a strong 94.3% utilization, reflecting healthy customer demand and the quality of our fleet. Operating horsepower increased approximately 21,000 sequentially. We expect to put additional idle equipment back to work by year-end as we continue to meet customer demand. Contract operations revenue increased approximately 1.5% year-over-year. To $331 million, despite the sale of approximately 112,000 non-strategic operating horsepower since the prior year period. Revenue per horsepower per month increased 4% year-over-year to $24.38. Adjusted gross margin remained excellent at 72%. Higher lube oil prices and make-ready costs associated with the cost of our fleet. Associated with returning idle equipment to service created near-term cost pressure, but through disciplined cost management and our relentless pursuit of operating efficiencies, our operations team was able to offset these headwinds and sustain strong third-quarter margins. CAT engine lead times remain extended at over 180 weeks, reinforcing the importance of securing equipment to support our customers' growth.

Our financial strength and market position allow us to plan for these requirements and deploy new horsepower through a disciplined, returns-based investment program.

Moving to our aftermarket services segment, we continued to see customers defer major maintenance activity during the quarter. The timing of this work can be lumpy and difficult to predict, and our near-term visibility remains limited. Against that backdrop, profitability was a strong point in the quarter, however, reflecting disciplined execution and our continued focus on higher quality, higher margin work. Turning to capital allocation, we remained disciplined and returns-focused, balancing high-return growth investment, durable shareholder returns, and balance sheet strength. For 2026, we remained disciplined and returns-focused, balancing high-return growth investment, durable shareholder returns, and balance sheet strength. We're reaffirming growth capital expenditures of $250 to $275 million to meet customer demand. Looking further ahead, the outlook we outlined last quarter continues to support $1.4 to $1.6 billion of cumulative growth capital investment from 2027 through 2030 to fund the purchase of approximately 1 million horsepower, predominantly. predominantly. in large horsepower and electric motor drive new-built compression. Strong demand fundamentals and attractive returns reinforce our confidence in this investment outlook. We plan to return 25 to 35% of operating cash flow to shareholders through continued dividend growth and opportunistic share repurchases. Our quarterly dividend of 23 cents per share is approximately 10% higher year over year.

Supported by strong dividend coverage. We also retain approximately 113 million of share repurchase authorization, providing flexibility to act opportunistically when we see attractive value in our shares. After funding these growth investments and shareholder returns, we expect to continue to generate free cash flow. Together with leverage of 2.5 times, comfortably below our long-term target of 3 to 3.5 times, that cash flow gives us capacity to selectively pursue inorganic opportunities that complement our core business, strengthen our platform, and meet our disciplined return criteria. In summary, bookings momentum and high utilization reflect durable demand for compression capacity. Our cash flow and balance sheet you're going to be able to do that. This gives us the flexibility to invest alongside our customers while maintaining meaningful shareholder returns. We remain focused on deploying capital at attractive returns, supporting long-term customer growth, and creating sustainable value for shareholders. With that, I'll turn the call over to Moet to walk through our third quarter results in 2026 Outlook.

Thanks, Brad, and good morning, everyone. Thank you for joining us. Let's review our third quarter results and then discuss our current financial outlook for the balance of 2026. Third quarter net income was $84.5 million or 48 cents per share, up from $71.2 million or 40 cents per share in the third quarter of 2025. Excluding transaction related costs and restructuring charges and adjusting for the associated tax impact. Adjusted net income was $84.7 million or 49 cents per share, up from $73.2 million or 42 cents per share in the third quarter of 2025. We delivered adjusted EBITDA of $228.4 million for the third quarter of 2026, up from $220.9 million in the third quarter. This year-over-year increase was driven by lower SG&A expense, which more than offset lower gross margin dollars in contract operations, NAMS, and a lower net gain on the sale of non-strategic compression and other assets. The comparison also includes a $9.9 million sales and use tax audit benefit recorded in contract. operations cost of sales in the prior year quarter that did not recur. In the third quarter, total capital expenditure was $117.9 million, including $78.4 million of growth CapEx, $33.3 million of maintenance CapEx, and $6.2 million of other CapEx. Turning to our business segments, contract operations revenue came in at $331 million in the third quarter, up 1.5% compared to the third quarter of 2025. This year-over-year increase further reflected higher rates, partially offset by active horsepower sales to high-grade our fleet. Contract operations adjusted gross margin percentage was 72% in the third quarter, compared with 73% in the year ago.

The year-over-year decline primarily reflected the previously mentioned absence of the $9.9 million net benefit from certain sales and use tax audit settlements recorded in the prior year period. Along with higher make-ready costs to return idle compression equipment to service and lube oil cost headwinds. Through disciplined cost management and our continued pursuit of operating efficiencies, we offset those headwinds with a lower lube oil purchase volume, parts expense, employee compensation and benefits expense. In our aftermarket services segment, third quarter 2026 revenue was $40 million compared to $56 million in the third quarter of 2025. The decline was driven primarily by reduced customer demand for major maintenance activity as some customers continued to defer work and the timing of plan maintenance remained difficult to predict. As well as lower part sales. Adjusted gross margin percentage was 23% in the quarter unchanged from 23% in the year ago period. Reflecting disciplined execution and our continued focus on higher quality higher margin work even in a challenging market. Turning to the balance sheet, we ended the quarter in a strong financial position with long-term debt of $2.3 billion as of September 30th. Our leverage ratio was 2.5 times at quarter end down from 3.1 times a year ago and comfortably below our long-term target range. That improvement reflects the strength of our earnings growth and cash flow profile, giving us financial flexibility as we continue to invest.

the fleet and explore strategic opportunities. On shareholder returns, our board recently declared a quarterly dividend of $0.23 per share, or $0.92 per share annualized, consistent with our prior quarterly dividend and up approximately 10% from the third quarter of last year. Dividend coverage remains strong at 3.8 times in the third quarter, demonstrating the sustainability of our return. of capital framework. The third quarter dividend is payable November 10th to stockholders of record at the close of business on November 3rd. We ended September with $113.2 million of remaining capacity under our authorization, which gives us meaningful flexibility to be disciplined and opportunistic using buybacks alongside the dividend and growth investments to enhance long-term shareholder returns. When market conditions are attractive. Since the inception of the share repurchase program in April 2023, we have repurchased approximately 4.6 million shares at an average price of $20.91 per share for a total of $96.9 million. Based on our third quarter performance and expectations for the fourth quarter, we are reaffirming our full year 2026 adjusted EBIT. guidance of $865 million to $885 million. Strong contract operations performance and disciplined cost management support this outlook, while we continue to manage customer maintenance deferrals in AMS and near-term lube oil and make ready cost pressures.

We are also reaffirming our 2026 total capital expenditure guidance of $400 million to $445 million. Including $250 to $275 million of growth capital to meet customer demand, $125 to $135 million of maintenance capital, and $25 to $35 million of other capital, primarily for new vehicles. We expect to fund growth investment through operating cash flow, supplemented by proceeds from non-strategic asset sales as we continue to high-grade our fleet.

With that, I'll turn the call back to Jill to begin the Q&A.

Thank you. At this time, we will conduct the question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Eli Jawson with J.

Got it. That's helpful. And then, obviously, you know, some tips. Owens and SG&A this quarter. Just want to get a sense of where we kind of bridge from 3Q to 4Q within the guide and think about, you know, what SG&A might look like sequentially and then, you know, broader any kind of key items we should think about going into year end. Thanks.

Yeah, thanks, Eli. This is Mohit. I'll take that. So, when you look at SG&A, that decline was primarily related. to the stock price driven changes in the long-term incentive program expense. So, there was a large sequential swing as we went from Q2 to Q3, with the Q3 LTI reflecting a credit rather than an expense, as opposed to what happened in Q2. So, absent a significant move in the stock price in Q4, we expect SG&A to increase sequentially and get back to more normal long-term incentive compensation. Expense range. So, the last takeaway I'll leave you with is just Q3 SG&A should not be taken as the ongoing run rate because there were some one-off things that happened there. Appreciate the color. Thanks, guys. Thanks, Gila. One moment for our next question. The next question comes from Jim Rolison with Raymond James. Please go ahead. Your line is open.

In short, no. I do think, you know, we can't address the macro market or all the drivers of the macro market, but as we are engaged as a country in what is going to be just an amazingly large infrastructure buildout, volatility ahead. We should expect there's going to be more volatility as we are figuring out this investment cycle, working through this. And we're on the strong power driving end of the whip a bit when we think about these macro factors. But none of the fundamentals have changed. The largest offtake for natural gas remains LNG. I outlined that growth profile in my prepared remarks all repeated here. And very secondarily, the amount of gas that's going to be required to power data centers is less than a third of that. LNG equivalent. So what we see is strong demand ahead for power, strong demand ahead for natural gas, and really strong demand ahead for natural gas compression. If I were to take the over-under, I still believe the market is more likely to be short of compression equipment than long on compression equipment. Appreciate that. And as a follow-up, you know, AMS, I think last quarter you made a mention. As it was kind of underwhelming with deferred maintenance, that it's a pay-me-now or pay-me-later type of business. And obviously not a material change sequentially, and you kind of head into 4Q and maybe 1Q where seasonally you normally are a little bit softer.

Just curious if conversations or if you guys have done any analysis to kind of figure out, you know, how long can they kind of defer things until they actually have to come back and pay you later?

Jim, it's a really fair question and really hard. I'll just admit, very hard to answer. There's not really analysis that we can do on the customer's equipment to figure that out. But what I'll give you the analogy for is that like refineries and other businesses where pricing can make an impact as to how different operators think about their business, it's a time when the run-to-failure mode in the compression space by some of our customers is preferable so they can maximize their current near-term revenue, knowing that the future oil price is, especially if we have a cessation of hostilities in the Middle East, is likely to return to a lower level. And because of that, they're maximizing now and deferring maintenance. So I don't really have a clock or a calendar that is going to give us that insight. But it what it is, what we have experienced historically, and we expect to see that come back again. Jim, maybe let me build on what Brad said is, I mean, the focus for us just remains on disciplined execution and profitability rather than just chasing volumes. And as you see from the numbers, profitability remains solid. And we are well positioned to capture the maintenance activity as and when it recurrence. Yep. Appreciate that, guys. Thank you. One moment for our next question.

The next question comes from the line of Doug Irwin with Citi.

Go ahead. Your line is open.

Hi, Tim. Thanks for the question. Maybe another one on margins, just on the OPEX side. Could you just talk a bit more about where you were able to offset some of the higher costs that you've talked about, maybe how durable some of those efforts might be? and what that can mean for your gross margin trajectory kind of into 2027 and beyond?

Yes, we can share some. You know, number one, on the lube oil side, we were able to moderate, and we're working very aggressively to moderate lube oil volumes in the face of these cost pressures. That's one opportunity. Another opportunity that we've exercised is, as you've seen the decline in the... AMS business, we've been able to repurpose some of our internal labor to work in our contract operations segment, and that displaces some higher cost external labor that we were bringing in. Those are two of the more substantial opportunities that we've taken advantage of. And I'm just going to say to the operating team listening right now, they just did a great job of responding to the pressures in this environment. It's really just an example of great execution across the board, maximizing every opportunity to offset that blue oil cost headwind that we encountered.

Got it. That's helpful. And maybe a follow-up on horsepower additions. Could you maybe just give an update on where you're trending relative to that 170,000 horsepower target that you talked about back when you gave initial guidance? Feels like maybe fourth quarter's trending. To be a pretty strong quarter here in that regard. So just curious kind of how you're thinking about fleet additions in the context of your annual guide and what might be some pretty strong momentum up to next year here. Doug, you're right. We do expect that the fourth quarter is going to be a strong quarter for deliveries. We've taken delivery of about 125,000 horsepower year to date, leaving approximately 50,000 that will take delivery. of in Q4. Now, we'll start as much of that as is contracted to start in the quarter, but some of that, obviously, is going to impact Q1 in addition to Q4. But we are expecting a strong Q4 for equipment deliveries. Great. Thanks for your time. Thanks. One moment for the next question. The next question comes from the line of Nate Pendleton with Tech

follow up, I want to circle back to the bookings. Can you talk about if those bookings were primarily with existing customers or are there any noteworthy wins within those deals? Given the breadth of our customer base, it's almost always going to be the case that they are primarily with existing customers. And so without going down the list of customers, you know, live. I believe that that's still going to be the right assumption, that it's predominantly with our existing customer base. Understood. Thanks for taking my questions.

One moment for the next question.

The next question comes from the line of Steve Ferrazani with Cidati.

Please go ahead. Your line is open.

This is Michael Matheson sitting in for Steve. I want to come back to the question of... Do you see demand growth growing outside the Permian, or is all the growth still concentrated in the Permian? Do you see growth in other basins is, I guess, what I'm asking. We do see growth outside the Permian. I mean, the Permian is going to remain the attractor of CapEx for the industry for a while. It's a monster basement in size, and it's the most cost-effective basin from a production perspective on cost. But... Fortunately, we saw more growth outside the Permian than we saw in the Permian, including in the Rockies, which was our largest growth area in the quarter. But we also saw incremental growth in the Haynesville and in the Mid-Continent area. So right now, the Permian accounted for between 30% to 40% of the growth we saw in the quarter, more growth outside the Permian in this period. Excellent. Thank you. That's very helpful. Just a follow-up question on bookings. Your bookings are up 13% year-to-date, and you're effectively running at maximum utilization. Do you see customers starting to book further into the future as a result to sort of guarantee access to equipment?

Yes and no. We see a mix of customers that are very driven to secure equipment well in advance, and it's balanced by... the customers that don't. So I can't generalize across the board to say that all the customers are actually behaving that way, but we do see a mix of some that are very good planners and others that are candidly less planful and depending upon us to be there for them when they place their orders. Well, thank you. That's very helpful, and that runs me out of questions. Congratulations on the quarter. Thank you. One moment for our next question.

The next question comes from the line of Elvira Oscoto with RBC Capital Markets. Go ahead. Your line is open.

Thank you. That's helpful. And then my next question is, I mean, I know you talked about margins and what's driving margins, but I'm curious.

You've made investments in technology initiatives. You talk about telemetry, potentially AI. How much of that is playing into margin improvement? And where are we sort of in that process there in terms of like, I don't know if you want to talk in, like what inning are we in in realizing benefits from these initiatives that you've undertaken over the years?

Great question and a fun question to be able to address, Alvaro. Thank you. When we look at the overall gross margin and the improvement you've seen consistently on a year-over-year basis now for several years, it reflects a few dynamics, one of which you cited and I'm going to come back to. Fundamentally, it reflects the transformation of our fleet and focus on large horsepower and electric motor drive. significant drivers in our overall profitability. But the technology investments we've made are absolutely a part of this continuous improvement that we're seeing in our operations, in our customer service, and in our gross margin performance. We do expect to continue to invest in technology. We have deployed both automation, we've deployed great telemetry. We're deploying artificial intelligence in various components of our field organization today, and I'd say that we are probably still in the very early innings of that deployment, which is going to be really beneficial for our customers and for the service quality we offer, and I think it's going to continue to put us in the position of driving improvement in gross margin. And it should have two impacts. One, the more service we can offer our customers, the more we can help them. Maintain the production. In total downtime, I believe the larger revenue share we can earn. And then secondly, it drives great efficiencies for us internally. So for both of those reasons, I remain optimistic, as I have been now for years, that we can continue to drive improving profitability in this business as we improve the overall uptime and throughput and gas.

Compression activities for our customers. Great. Thank you very much. One moment for our next question. The next question comes from the line of Joshua Jane with Daniel Energy Partners. Go ahead. Your line is open.

Lead times have come down. Caterpillar has communicated that, number one, I never speak for Caterpillar, but I will say they've invested in improving their throughput and addressing this high-demand market, and candidly, they're addressing it really well. We've been in the position to be able to obtain equipment that we need, though we have ordered equipment in advance. Lead times are out there, but Caterpillar is making deliveries, and we're receiving them. We do think that the high-demand market that we're in, I think lead times are going to remain extended, but if you place orders and plan your business prudently, you can get equipment, and that's the position that we are in. And my second one, you unpacked a little bit in answering your last question, but I just wanted to follow up on the commentary about investing in automation, AI, etc. Could you maybe discuss what percentage of the fleet do you think is upgradable to some of those components and just how you're thinking about that over the next couple of years and how the responses and the economics that make sense for the customer? would be just helpful to go into a little bit more detail and then i'll turn it back thanks starting off with the fleet 100 of our fleet is uh connected with telemetry that brings us you know lots of lots of data on a daily basis um that comes in in a more centralized system into a large data engine that allows us to sort through see the activity prioritize the activity response

to the activity so it's the entire fleet is is is connected uh communicating and giving us good data and better uh information around which to assess diagnose troubleshoot and respond to our customers uh similarly we have good automation around how we manage our parts business to to part up um our both our locations and our text before they hit location and then we also have good communication technology for our mechanics to access um the uh information regarding that unit um and so all of that is working together it's not just about kind of what the individual units can do it's what the overall process and systems that we've invested in and accomplish and do so it's a high percentage what we're seeing however is just the opportunity to continue to implement and get coordination in the field with that data so that we are constantly smarter because the unit's making us smarter and the mechanic has access to the information parts that the mechanic needs to respond more timely and more fully to address customer downtime so it's it's not just the units it's the entire system and it's working it's working actually really well

thanks i'll turn it back one moment our last question comes from the line of nick amakuchi with evercore please go ahead your line is open hey good morning everyone um just wanted to kind of touch upon if we could too just if we could uh distinguish kind of the the direct uh awards from from the broader market so you guys have kind of cited um lng exports and power generation as uh the long-term natural gas demand drivers um just kind of thinking through like where are those um awards kind of going to be identifiable for for you guys like is it going to be gathering processing transmission you know um on that side of the house if we could just kind of parse that out nick i want to make sure i understand the question um you're you're you're wanting to get it uh on what part of the demand impacts us directly is it gathering is it gas lift um is it transportation on larger pipelines am i understanding your question okay so yeah look our business really comes into into two primary segments uh one is gathering in the oil field with centralized gathering systems that's dominated by large horsepower the equipment that we're primarily investing in and that includes both gas driving as well as electric motor drive and then the second part of our business like 35 to between 35 and 40 percent of our business is directly on gas lift to assist with oil production um so those are the two segments where we see the awards very directly and the activity with our customers very directly that are going to continue to support growth in our business that makes sense um and then if i could just like given your you guys

or somewhat you know more of a picks and shovels type of play play here just as we think about kind of the bookings and the strong bookings within this quarter just uh if we wanted to kind of uh get the get get an idea and just kind of the visibility into 2027 and just kind of how those bookings then translate into um into revenue and and kind of the margin accretion behind it so basically just the timing um from bookings to revenue

and well we're not we haven't guided 2027 we're not yet guiding 2027 um we will do that in our fourth quarter call but when you look ahead at the year and the capex spend that we've projected the primary variables you'll want to think about are going to be our utilization um and then the incremental horsepower that gets added because of the investment in new built horsepower um and both of those are going to end indicate I think the opportunity for us to to grow and to have a very strong delivery of horsepower and horsepower growth in 2027 as far as the timing of the cycle typically between booking it's I'm sorry let me back up and say that right now it's almost impossible to gauge because of the extended lead times that we have for equipment normally speaking if we had a 52 week lead time the timing from booking to revenue would be something like instead of one year it would be a year and a quarter. As soon as we receive equipment it usually goes to work very promptly. It's a very capital efficient business in that regard but with lead times out through 2029 it's the time frame for bookings that booking cycle to first revenues is way extended. Got it makes sense. Thank you. There are no more questions. So now I'd like to turn the call back over to Mr. Childers for final final remarks. Thank you for joining us today everyone and for your continued interest in ARCHROC. We look forward to updating you following our next quarter's results. Thanks everyone. Thank you for your participation in today's conference. This does conclude the program. You may now just connect.