KGS Q3 2026 earnings call transcript, November 9, 2026

Greetings and welcome to the Kodiak Gas Services third quarter 2020.

At this time, all participants are in a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host. Graham Sones, Senior Vice President, Corporate Finance and Treasurer. Thank you. You may begin.

Good morning and thanks for joining us for the Kodiak Gas Services Conference Goal and Webcast to review our third quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs. Executive Vice President and Chief Financial Officer. After my remarks, Mickey and John will share their thoughts on the current industry dynamics, walk through our quarterly results and updated 2026 outlook, and then we'll open the call for Q&A. A replay of today's call will be available by webcast and phone through November 23rd, 2026. Replay details are on the Investors tab of our website at KodiakGas.com. As a reminder, the information discussed today speaks only as of November 9th, 2026. It may no longer be accurate by the time you listen to a replay or read a transcript. The comments made by management during this call may contain forward-looking statements within the meaning of the United States. Federal securities laws. These statements reflect management's current views, beliefs, and assumptions based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties, and contingencies can 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 will also include certain non-GAAP financial measures. Details and reconciliations for the most comparable GAAP measures are included in our earnings release, which can be found on our website. Now I'd like to turn the call over to Kodiak's President and CEO.

Mr. Mickey McKee. Mickey?

Thanks, Graham, and thanks everyone for joining us today. Before I start the call, I'd like to discuss a few changes. At Kodiak, we take great pride in developing our employees, and we are happy to provide opportunities for career advancement. Graham, who's done a tremendous job leading our investor relations over the last four years, is moving into a new role as Senior Vice President of Corporate Finance and Treasurer. Congratulations to Graham, and I have the utmost confidence that he'll be successful in this new role. Kevin Smith will now be leading our investor relations efforts. Kevin is a former research analyst and has over 10 years of investor relations experience. Many of you already know Kevin, and we believe this change will be seamless. I hope you will join me in congratulating both Kevin and Graham. Now, as we do in all meetings at Kodiak, I want to start with safety. Before each job at Kodiak, we require our technicians to perform a job safety analysis, or what we call a JSA. The JSA requires our technicians to review each step of the job, identify potential hazards, determine how to mitigate them, and confirm that they have the right tools, protective equipment, and training. to undertake the work. This process requires our workforce to methodically review the scope of work and plan out how they're going to complete their tasks successfully and safely. I encourage everyone to implement their own JSA process as they are about to undertake a task, whether it is routine or something you've not done.

Meanwhile, take a second to stop and make certain you understand all of the potential risks and that you have the right tools and training to be successful. Over the last six months, there's been an increased focus on the impact that high oil prices, diesel and even lube oil have had on the economy. Creating inflationary pressure and hurting margins. Kodiak is not immune, but as John will discuss later, we've taken steps to partially offset high fuel and lube oil prices to protect our margins and cash flow. However, what is not getting the attention that it deserves is the fact that domestic natural gas prices are down. year-over-year, reducing inflationary pressures and providing the US a tremendous energy cost advantage compared to the rest of the world. Given the step up in natural gas demand from Gulf Coast LNG facilities and gas-fired power demand, the current price environment would not have been possible without investing. and build out of infrastructure assets in the Permian Basin, enabling the tremendous gas production growth. Through the first three quarters, Kodiak has added over 120,000 new horsepower, the vast majority of which went to the Permian to keep up with the strong production. Independent third-party estimate are reporting Permian gas growth of approximately two BCF per day since this spring, and we are encouraged by various E&P industry leaders' outlooks for further natural gas production growth. Just as important, we, and the natural gas industry, have been able to deliver this growth in

a safe and reliable manner, working hand-in-hand with regulatory agencies and the local communities in which we operate. Turning to power, it has been a volatile last few days, so I'd like to take a step back and review some of the benefits of the U.S. leading in the development of artificial intelligence. First, the advancement of this rapidly evolving technology is spurring economic growth throughout the U.S., helping drive construction, power, and manufacturing jobs. At Kodiak, we've been investing in training and have been actively hiring new technicians to help develop our workforce. Last week, the U.S. Bureau of Labor Statistics announced that labor productivity increased at an annualized rate of 3.6% in the third quarter, marking the fastest pace in a year. The step up in labor productivity was largely driven by investments in technology like AI. We are realizing these benefits at Kodiak as our technicians are using AI to improve the efficiency and safety of our operations. Lastly, we are seeing increased commitment by data centers to be good stewards in their communities by sourcing their own power and offering benefits to the local communities, such as donations. to build local community centers, funding for school districts, and funding for trade schools. At Kodiak, we remain committed to positively impacting the communities in which we live and work. Additionally, we focus on power assets that have minimal to no water consumption, which combined with

the state-of-the-art emissions and noise abatement technology, minimizes our environmental footprint. Our goal with power is the same as what the industry has achieved with natural gas compression, increasing supply to meet demand in the most safe and responsible manner. As discussed, by many of the hyperscalers during this earnings season, compute capacity remains in high demand. That demand level continues to be reflected in our commercial discussions. I am extremely excited about the progress our power commercial group is making as we narrow our focus on projects that are in advance. Commercial discussions that are located across multiple states. The projects that we are pursuing have the potential the potential to rapidly put to work our new units and deliver attractive returns. In order to help prepare for the growth and technical challenges that we face today and into the future. I'm excited to say that we recently held a ribbon-cutting ceremony for our new Bears Academy training facility in Midland, Texas. The world-class training facility provides hands-on equipment training for both compression and power assets. The 34,000 square foot facility provides our... technicians with the training and knowledge needed to fully operate and maintain electrical equipment, as well as perform troubleshooting and maintenance on the mechanical equipment. Through the first nine months of the year, Kodiak employees have completed over 67,000 hours of training. This is...

Kodiak is more than just a training facility. It is an investment in the skilled workforce needed to support America's growing energy infrastructure. And we're very proud of it. In fact, we are planning an event next year to host an investor slash analyst day in Midland, so that many of you can visit. And can see Kodiak's industry-leaning training and operational support facility and meet some of the people who run it. The timing of the opening of our new facility could not be better as we ramp up our technician workforce to prepare to significantly grow our power infrastructure business. Recently began site work and started setting equipment at the previously announced data center in West Texas. In total, we will deploy 40 reciprocating natural gas fuel generators with start up expected during the first quarter. The West Texas data center provides some unique opportunities. As we corral reciprocating units from seven different existing sites on short term contracts, as well as layer in some new equipment to help meet the demand. As I previously stated, we're making a lot of progress on our power commercial efforts. Over the last several months, we've been engaged with both hyperscalers. and data center developers working through detailed engineering on several projects. While speed to power remains important, we believe the industry is shifting to focus on the power provider's ability to operate the equipment and deliver a high level of reliability. This is a key selling point for Kodiak.

When one can provide equipment, our advantage is the experience, people, and ability to operate reliably every day. Lastly, John and I can't emphasize enough that the strength of our balance sheet is also a meaningful strategic advantage. Now switching to compression. Demand for contract compression remains. strong as Permian gas production continues to exceed expectations. The compression market remains tight as lead times for new Caterpillar 3600 engine classes have stabilized but remain close to 190 weeks. We continue to find ways to increase our operating efficiency through the use of AI technology. Allowing us to remotely monitor our units, identify potential issues before they disrupt operations, and make certain that our technicians have the right tools and training for the job. We're making great progress on signing the last remaining equipment we have available in 2027, and we have started contracting equipment.

Contract compression continues to be a very, very high margin business for us that generates a tremendous amount of free cash flow. This morning we released our third quarter 2026 financial results. I'll hit a few highlights and then I'll let John go into more detail. In the compression infrastructure segment, we ended the third quarter with 4.5 million revenue generating horsepower. We drove yet another increase in fleet utilization to 98.3%. And for the first time since we closed the CSI acquisition in April of 2024, our average horsepower per revenue generating unit is back over 1,000 horsepower. Both our utilization and our average horsepower remain industry-leading metrics. In Q3, we delivered strong year-over-year growth in compression infrastructure revenue and adjusted gross margin. For the quarter, compression infrastructure revenue increased 7% year-over-year. The strong pricing performance reflects the positive progress we've made in re-contracting our existing fleet and the underlying demand for contract compression in this tight market with highly visible gas growth. Compression infrastructure adjusted gross margin with 70%, marking the third consecutive quarter at or above 70%. This result would not have been possible without our unrelenting focus on large horsepower compression assets combined with our investment in training and technology. This quarter's margin results were especially impressive considering the negative

headwind we faced in the quarter from higher lube oil prices. Our supply chain team continues to do a tremendous job planning ahead and negotiating favorable contracts to help us source cost efficient supplies and reduce price risk. In fact, we just executed a contract to lock in the vast majority. of our lube oil purchases at an attractive fixed price for all of 2027, effectively taking the cost volatility off of our plate. For power infrastructure, we generated a 28% sequential increase in revenue. As we expanded commissioning operations at the data center and short term rental agreements were extended, staying on the site longer than expected. Adjusted gross margin for the quarter was 75%, exceeding our expectations as we were able to extend high margin contracts and reduce our dependence on third parties. Keep in mind, in the fourth quarter, we were pulling back equipment for the West Texas data center project. which will temporarily lower some margins. Overall, our team is doing an excellent job of lowering cost and improving operations, which we expect to be highly visible in our 2027 results. We exited the quarter with a fleet of 413 megawatts. We expect to receive approximately... ...16 new megawatts of reciprocating power in the fourth quarter as some delivery dates for new power equipment have shifted into 2027. The market remains extremely tight. We plan to provide an update on our next earnings call about the timing and outlook for power deliveries in 2027 as we roll out our 2027...

...capital plan and full-year guidance. Strong results from each segment drove adjusted EBITDA of $224.5 million for the quarter, up 29% year-over-year and a new company record. In summary, our large horsepower compression remains in high demand... ...as the industry races to keep up with the rapid natural gas production growth in the Permian. Our operations team continues to do an excellent job increasing operating efficiencies, allowing us to offset the increases in lube oil and maintain high margins. The outlook for the next few years continues to be strong and our... Our commercial team is doing a wonderful job contracting new horsepower. On the power side, over a year ago, we sat around and completed our own form of a JSA, outlined the risks, and listed the tools and strategy that we need to be successful. We've ordered the tools and equipment that we need. We have the training facility to... teach the next generation of technicians to safely and consistently deliver the reliability our customers have come to expect, and we have a commercial team that is making great strides. The demand we see from AI frontier labs, hyperscalers, and data center developers has only increased in the last few months. as our backlog of high quality commercial opportunities is growing by the day. These are very exciting times for Kodiak, and our outlook has never been more energized. In light of the great results in Q3, and as John will discuss, we are raising the midpoint of our full year adjusted EBITDA.

Compression infrastructure gross margin, and discretionary cash flow guidance to reflect our increased visibility for the remainder of the year. We remain excited about the investments we are making today that will drive growth and enhance Kodiak's margins in the years to come. Now I'll pass the call to John to further discuss our financial.

results in our revised outlook for 2026. John?

Thanks, Nicky.

We had yet another standout quarter with particularly impressive segment margins in both compression and power infrastructure. A lot of things came together nicely to produce these results, but significant credit goes out to our operations, HR, training, and IT. We're working together in harmony to continue to execute at a very high level and to continue to deliver further operational efficiencies. Let's review the quarter. We reported revenue of $402 million, about 25% year-over-year. Most of the growth is attributed to the addition of our power infrastructure segment, but our compression infrastructure segment grew nicely as well, driven by continued additions of new horsepower at leading edge rates alongside price increases in legacy equipment. Revenue-generating horsepower increased by approximately $102,000 quarter-over-quarter, including the $43,000 horsepower we bought out of operating leases that we highlighted on our last call. We exited the quarter at $23.51 per inning horsepower, up 3% year-over-year, but down sequentially, an anomaly caused by the aforementioned operating lease buyouts, combined with the termination of a high-revenue, low-margin compression contract early in the quarter. Absent these two events, yet... Given the constructive pricing environment for new horsepower assets and contract renewals, we expect to see that dollar-for-horsepower figure revert back to its steady upward trajectory as we exit the year and beyond.

One of the bigger positives of the quarter was that we continue to deliver on compression segment margins. Compression infrastructure adjusted gross margin... ...margin for the quarter was 70% of 170 basis points year-over-year and flat quarter-over-quarter, despite a meaningful sequential increase in lube wall costs. Our ability to produce consistently strong segment margins while experiencing a roughly 30% cost increase since Q1 on such a significant portion of our variable cost structure... ...wouldn't have been possible without high-quality execution by the teams operating those units. As Mickey mentioned, by virtue of a novel supplier arrangement, we've eliminated nearly all of the month-to-month lube wall price volatility going forward. Now, turning to our power infrastructure segment. For the quarter, we generated revenues of $42 million... ...and an adjusted gross margin of 75%, well above the high end of our annual margin guidance. Revenues for this segment increased sequentially by 28%, given by the expansion of commissioning work at one of our data center projects, as well as the extension of a few of our high-rate short-term contracts. Our power assets remain in high demand as our short-term contracts... ...to continue to be extended. At quarter end, our power fleet stood at 413 megawatts, with 382 revenue-generating megawatts, resulting in utilization of 92.5%. Adjusted EBITDA for the quarter of $224.5 million was yet another company record. Net income was...

...$71.5 million, or $0.70 for diluted share. Let's turn to capital expenditures. Maintenance capex was approximately $21 million in Q3, in line with expectations. Other capex was also in line with expectations at $11 million. Impression infrastructure, drove capex, was... ...$111 million, $34 million of which was associated with the termination of the operating leases. We had our largest quarter of the year for new fleet additions at roughly 64,000 horsepower. Power infrastructure growth capex declined sequentially to $68 million, largely based on the timing of our turbine payment... ...milestones, but also due to some of our 2026 deliveries moving into 2027. Discretionary cash flow for the quarter was $158 million, up 36% year-over-year. Moving to the balance sheet, total debt was approximately $2.8 billion at quarter end. Our primary equity... ...offering in May generated approximately $836 million after expenses, allowing us to pre-fund the equity portion of our growth capital spending plans. Our leverage ratio at quarter end was 3.1 times, and we had approximately $1.6 billion of unused revolver capacity. Going forward... We think that the strength of our balance sheet plus our access to multiple sources of relatively low-cost debt capital provides us with a meaningful competitive advantage as we build out the power lag of our energy infrastructure platform. Finally, our board declared a dividend of $0.51 per share, a 4% year-over-year increase.

that would be paid later this month. Based on our third quarter discretionary cash flow, coverage exceeds three times. I'll wrap things up with some commentary on our updated 2026 guidance. Though we made several adjustments, I'm only highlighting the more meaningful ones. First, we raised the low end of our compression infrastructure adjusted gross market. Resulting in a new range of 69.5% to 70.5%. Given the heavily contracted, take-or-pay profile of our compression business, combined with good visibility in our largest cost items, we're very comfortable with our guidance at this point. Within the power segment, we elected to move up the bottom and bottom to move up the bottom and bottom. End of the adjusted gross margin range. Our performance in Q3 is expected to more than offset the impact of repositioning some of our working fleet to prepare for the Q1 West Texas Data Center project. As a result of these updates, we raised the midpoint of our overall adjusted EBITDA guidance to 850. In terms of growth capex, we increased the midpoint of our compression infrastructure growth capex by 10 million. We've been working with packagers to accelerate new unit deliveries where we can to help us better align with customer development plans and overall demand. We think we'll add around 170,000 horsepower. including the roughly 21,000 horsepower from the Permian purchase leaseback. We closed in the first quarter.

For power infrastructure, we're reducing our growth capex forecast to 350 to 400 million, which reflects some new power unit deliveries moving from 2026 to 2027. As well. as a more firmed up payment schedule for balance of plant items. We now expect to receive approximately 16 megawatts of new receipt generators in the fourth quarter for a total of 29 megawatts for the year. With that, I'll hand it back to Mickey.

Thanks, John.

Our first question comes from the line of Eli Jocelyn with JPMorgan. Please proceed with your question.

Our next question comes from the line of John Mackay with Gold.

Our next question comes from the line of Praneet Satish with Wells Fargo. Please proceed with your question. Thanks.

Our next question comes from line of Doug Irwin with Citi. Please proceed with your question.

Hey, team.

Thanks for the question.

Maybe a bit of a follow-up on the power margin and contracts there. You've already seen some success improving the margin on the existing business. Could you maybe just talk a bit about where market rates might be relative to some of the legacy contracts you inherited and where you see margin trending from here? Once you layer on more contracts, and then if there's still more equipment in the field that needs to be turned out or should we expect most contracts from here to be tied to new equipment?

Yeah, thanks, Doug. I appreciate you joining us today. You know, I think that, you know, as far as legacy... Contracts, they're a little bit all over the board, to be honest with you, that we inherited. Some are underpriced. Some of them are short terms that are kind of overpriced, to be honest with you, just because those were on like three and six month type contracts. And as DPS was looking to... maximize their cash flows in the short term, for sure. But, you know, I think that that margin, you'll see a dip again in the fourth quarter, like I just said, you know, because of the, you know, we don't want to, we may pull back equipment and not be generating as much revenue on it, but we're certainly not going to let go of the people associated with that. So we'll maintain. Some of that cost. But as we, as we put that stuff back to work here in the, in the first quarter, you'll, you'll see that recover a bit. And so, and then I think that going forward, yeah, there is quite a bit, I wouldn't say quite a bit, probably a couple hundred megawatts that we have to put, pull off of. legacy contracts and put back to work and looking for the right places to do that. Around the country right now. Yeah, that's helpful. Maybe a follow up just on the opportunity set beyond data centers for power. Do these opportunities maybe become. a bit more attractive here, given the events of the last few weeks? And if so, how should we be thinking about the potential scale of these types of opportunities relative to some of the data center deals you might be working on? Yeah, I mean, we're always seeing additional opportunities in the microgrid world, especially in around the Permian Basin for oil and.

And we think those are really attractive. And we really haven't changed or shifted the focus at all on those. We're working on a few of those. And as long as they provide the term and returns that we're looking for and comfortable with, then we'll continue to work on those as well. So there. There's multiple of those in the pipeline and are attractive kind of returns and can keep working hard on those and get some of those to fruition. Great.

Thanks, Doug.

Thank you.

Our next question comes from line.

Neil Dingman with William Blair. Please proceed with your question. Neil, your line is live.

Good morning, guys.

Sorry about that. My first question is just on the power contract side, specifically. John or Mickey, just that 76 megawatt of power that you announced, I think that was in September. Has that been deployed? And then remind me how it seems like you continue to have very favorable pricing around this. Maybe just talk about the structures there. Thanks.

Yeah, so the 76 megawatts, that's the West Texas. Data center that we've referenced here, Neil, that is equipment that we are beginning site construction site prep on right now. And will be deployed kind of starting at the end of December and into January and February with with the goal to be energized before the end of the first quarter here. I think as far as the other

Yeah, we are seeing some significant interest there and and opportunities that we're working on. And those are those are a little bit hit and miss that there's that has a lot to do with kind of corporate philosophy and and cash flows of our customers. And so we're looking at a few of those and and hopefully continue to progress on those conversations. But that opportunity definitely still exists out there.

Hey, Neil, this is John.

Our next question comes from the line of Derek Padeiser with Piper Sandler. Please proceed with your question.

Our next question comes from the line of Teresa Chen with Barclays. Please proceed with your question.

Our next question.

Comes from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Hey, thanks and good morning, everyone. So you mentioned it in response to an earlier question, but you've attributed meaningful margin improvement to, I guess, AI, machine learning, technology. Investments that you've made. Can you maybe put a finer point on the ROI from these technology investments? And how much have these investments contributed to margin over the past year? And what are the incremental gains that you think remain to be captured as you roll? as you roll out large language model tools to field technicians? Yeah, thanks, Alara. It sounds like I'm talking to my board right now as well, too, because we get this question all the time. So, and it's the same question we give our board, too, is it's not one thing, it's everything, right? And we're actually spending, if you thought about I'm not going to give like raw dollars, but if we thought about the actual capital that we're spending on machine learning and artificial intelligence, it's quite low relative to, I'll call it the overall size of the business and the incremental dollars that we're generating. But that in and of itself is only like some of the puzzle. The other piece is all the investment. We've made, I'll call it in training, but it's really around people development, attracting, developing, training, and retaining, like these key folks, and then teaching them how to deploy these great technologies. So it's not as simple as saying spend one dollar here, get three dollars back there, but the returns are perfect.

The margins are kind of proof in the pudding, so to speak. We do think that, like I've said it before, pre-CSI in 2024, and really about the time we really hit the afterburner in machine learning AI and all the training stuff that we're doing, we were a 66% gross margin business in our compression business, and CSI was at 55%. We merged the two, we captured some synergies, but today we're punching 70, and that's after about probably one to one and a half percentage points of overhang from higher liberal prices. They call it 71 or so. So I come back and look at a 1.2-ish billion dollar revenue business and think about... the margin enhancement that we're seeing and the payback is really, really significant relative to the total amount of dollars that we spent. In terms of where it can go, we never thought we'd be a 70% gross margin business with our profile. I'll call it a couple years ago. We're not going to say where it's going to go, but it feels like we've got some room to improve kind of going forward. But definitely, you know, will be more difficult every quarter we go forward because we're already at great levels. And then I know that the permit. is driving a lot of the growth in the compression, especially as gas production seems to outpace expectations there. But are you seeing growth in other basins as well? Yeah, Elvira, this is Mickey. Absolutely we are. We've just done some nice.

contracts in 27 and 28 for growth in the Northeast and definitely seeing some opportunities in the Rockies as well as in the Eagleford and down in South Texas as well. Great.

Thank you very much.

Thanks, Elvira.

Thank you. Next question comes from the line of Connor Jensen with Raymond James. Please proceed with your question.

Our next question comes from the line of Julian Dumoulin-Smith with Jeffries. Please proceed with your question.

Our next question comes from the line of Stephen Gengaro with Stifo. Please proceed with your question. Thanks.

Our next question comes from the line of Nate Pendleton with Texas Capital. Please proceed with your question.

Our next question comes online of James Larkin with Bank of America. Please proceed with your question.

All right, thanks for taking my question. I guess quickly just pivoting back to power pricing in the quarter, revenue per month. Megawatt was up 20%. I think we talked about it a little bit, but in your prepared remarks, you had some comments about new data center commissioning and longer time on site for some existing units. So I was wondering if you could just give a little bit more color on those, maybe what you're seeing with pricing there and longer contract. Yeah, I think what you see, right, is a lot of these people had power on short-term contracts. And as they think that the grid will come in to supplement their power and that kind of thing, it's slow to get there. So a lot of people aren't willing to give up the power that they've got under contract. or on location right now. So a lot of them trying to renew and we're obviously weighing renewals for short-term contracts with pricing and bumping that a little bit as we go through that. So we're maximizing the value of that stuff while it's on location. So it's kind of. What you'd expect, that stuff's just staying on location for longer than what the contracts have it set to be. And we're continuing to manage that fleet appropriately and figure out when we can get that stuff off and get it put to work in long-term contracts.

Great, thank you. And just a quick follow-up, I just wanted to confirm, and we talked a little bit about midterm elections and post those, and just wanted to confirm that the West Texas data center site is still on the same timeline and there's no potential for anything shifting to the right there. No, same time frame for that.

Yep.

Thanks, James.

Thank you.

Our next question comes from the line of Zach VanEveren with TPH Research. Please proceed with your question.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. McKee for final comments.

Thanks, operator, and thanks to everyone participating in today's call. We look forward to speaking with you again after we report our results for the fourth quarter. Bye-bye. Thank you.

This concludes today's conference.

Thank you for your participation.