Kodiak Gas (KGS) Q4 2025 Earnings Call Transcript

Date

Thursday, Feb. 26, 2026 at 11:00 a.m. ET

Call participants

• President and Chief Executive Officer — Mickey McKee
• Executive Vice President and Chief Financial Officer — John Griggs
• Vice President, Investor Relations — Graham Sones

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Takeaways

• Total revenue -- $1.3 billion, up 13%, establishing a company record.
• Adjusted EBITDA -- $715 million for the year, an increase of 17%.
• Free cash flow -- $230 million for the year, enabling both debt reduction and shareholder returns.
• Leverage ratio -- Achieved target of 3.5x net leverage by year-end through debt repayment and balance sheet restructuring.
• Dividend -- Q4 declared dividend increased 20% year over year, reaching $0.49 per share and covered at 2.6x for the quarter; $100 million in stock repurchases completed.
• Fleet utilization -- 98%, driven by focus on large horsepower units and exit from non-core operations.
• Core fleet horsepower -- Ended the year with 4,350,000 revenue-generating core horsepower, with average horsepower per unit at 970; added approximately 150,000 new large horsepower units over the year.
• Q4 revenues -- $333 million, up 3% sequentially, driven by recontracting at higher rates and fewer new units set.
• Q4 adjusted EBITDA -- $184 million, up 9% year over year, setting a new quarterly record.
• Contract services adjusted gross margin -- 69.2% for Q4, an increase of 247 basis points year over year.
• Revenue per earning horsepower -- $23.10 at year-end, up 2% sequentially and 55% year over year.
• Undrawn liquidity -- Approximately $1.5 billion, with over three years until first debt maturity.
• Q4 net income -- Nearly $25 million, or $0.28 per diluted share (GAAP); adjusted net income was $35 million ($0.40 per diluted share) after nonrecurring items.
• Q4 free cash flow -- $79 million, a new quarterly record.
• 2026 revenue guidance -- Expected range of $1.37 billion–$1.43 billion, excluding the impact of the DPS acquisition.
• 2026 adjusted EBITDA guidance -- Projected at $750 million–$780 million, with midpoint growth of approximately 8%.
• Compression equipment lead times -- Large horsepower equipment lead times have extended to over 100 weeks, requiring longer-term customer commitments now booked into 2027 and 2028.
• Planned horsepower additions -- Over 750,000 new large horsepower expected to be deployed through 2030; 150,000 horsepower scheduled for 2026, with an average of 1,700 horsepower per unit.
• Pending acquisition -- Distributed Power Solutions (DPS) acquisition announced, with revised financial guidance to be provided after closing, expected at the start of Q2.

Summary

Kodiak Gas Services (NYSE:KGS) executed a strategy of fleet high grading, technology investments, and capital returns, resulting in record-setting financial performance and enhanced operating leverage. Management confirmed the completion of the ERP system rollout and ongoing adoption of AI-driven operational tools to increase efficiency and reduce downtime, citing operational benefits already realized since August. The company reported a shift in revenue composition, with multiyear contract coverage increasing, and only 10% of contracts now on a month-to-month basis, enhancing earnings visibility into 2027 and beyond.

• The company stated, "we are already working to procure additional power generation capacity through our existing network of vendors to deploy this year after we close."
• Management highlighted that integrating Distributed Power Solutions will increase the growth rate above the pre-acquisition upper single-digit percentage target for adjusted EBITDA.
• Long-term macro trends identified by management include anticipated Permian Basin gas pipeline expansions totaling more than 7 Bcf per day by decade-end, supporting compression demand.
• "We have already begun receiving commitments from customers for new compression equipment in 2027 and 2028," signaling forward contract coverage and high visibility into future deployment schedules.
• Pricing discipline is reinforced by the "tight" compression market, with customer demand described as "historically high," and ongoing horsepower price increases referenced.

Industry glossary

• Horsepower utilization: Percentage of available compression fleet horsepower earning revenue, a key capacity and operational efficiency metric.
• Bcf per day: Billion cubic feet per day; a volumetric measure of natural gas flow or capacity used in industry logistics.
• Distributed Power Solutions (DPS): Acquired unit focused on distributed power generation infrastructure for oil and gas industry clients.
• Take-or-pay contract: Agreement obligating customer payment for contracted capacity regardless of actual usage, providing revenue stability.

Full Conference Call Transcript

Operator: Greetings and welcome to Kodiak Gas Services, Inc. Conference Call and Webcast to review fourth quarter and full year 2025 results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I would now like to turn the conference over to your host, Graham Sones, Vice President, Investor Relations. Thank you. You may begin. As a reminder, this conference is being recorded.

Graham Sones: Good morning and thank you for joining, and then we will open the call for Q&A and 2026 outlook. There will be a replay of today's call available via webcast and also by phone for the Kodiak Gas Services, Inc. conference call and 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 then we will open the call for Q&A. Information on how to access the replay can be found on the investors tab of our website at codietgas.com.

Please note that information reported on this call speaks only as of today, 02/26/2026, and therefore, you are 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 United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions Kodiak Gas Services, Inc. is 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. Mickey, I would like to turn the call over to Kodiak Gas Services, Inc.'s President and CEO, Mr. Mickey McKee.

Mickey McKee: Thanks, Graham, and thank you all for joining us today. I would like to begin today's call as we do with all meetings at Kodiak Gas Services, Inc. by discussing safety. I have 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 jobs 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 Gas Services, Inc. We entered the year with a plan to continue to high grade our compression fleet by divesting underutilized nonstrategic small horsepower units into exit operations in non-core areas, allowing us to focus on our core large horsepower operations. I am 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 in 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 have been operating in the new system without issues since August 1, and at year end, we closed our accounting books in record time. An extraordinary execution by Kodiak Gas Services, Inc.

Investing further in AI and machine learning technologies to drive operational excellence and better customer outcomes. We have deployed our custom large language model to help our technicians quickly diagnose issues encountered in the field and are using Agintiq AI to source repair parts across our system. We have deployed our custom large language model to help our technicians quickly diagnose issues encountered in the field and are using Agintiq AI to source repair parts across our system. Our technology roadmap for 2026 includes wearable devices, autonomous solutions to enhance our technicians' capabilities, reduce risk, and allow our people to focus on high-value activities. 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. Also at year end, I am proud to say that we delivered on the promise we made at IPO and achieved our leverage target of 3.5 times, providing us with enhanced balance sheet strength and financial flexibility. 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 $100,000,000 in common stock. By all measures, 2025 was a great year for Kodiak Gas Services, Inc. With the recently announced acquisition of Distributed Power Solutions, we are starting 2026 with a lot of positive momentum.

We have received a lot of inbound interest in our new distributed power offering since the announcement, and we 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 ten-year-plus deals for base power. 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 4,350,000.00 revenue generating core 20 horsepower.

A figure that continues to lead the industry and has increased each quarter since we closed the CSI acquisition. Average horsepower per revenue-generating unit was 970. 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 spending program, which I will discuss later. Yesterday, we released our fourth quarter and full year 2025 financial results. I will hit the highlights and let John provide more details.

For the year, Kodiak Gas Services, Inc. set new records in total revenue, adjusted EBITDA, discretionary cash flow, and free cash flow. Total revenue grew by 13% to $1,300,000,000 and adjusted EBITDA grew by 17% to $715,000,000. The growth was driven by the outstanding execution of our core strategy by Kodiak Gas Services, Inc. personnel. The advances are the result of several years of development, and we are just starting to see the efficiency improvement of our investment.

We have significantly reduced the cost of major repairs to our fleet by using data to identify abnormal operating conditions and address them before they turn into expensive component failures and reduce mechanical failures, driving additional value to our customers and increasing our operating margins. We generated $230,000,000 of free cash flow in 2025 after investing to grow our large horsepower fleets 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. Now diving into fourth quarter results, our contract services adjusted gross margin percentage increased 247 basis points year over year to 69.2%.

We once again delivered year-over-year growth in contract services revenues, exceeding the high end of our guidance. Adjusted EBITDA for the quarter was up 9% year over year to $184,000,000, setting a new company record. Given strong customer demand, historically high industry-wide utilization, and capital discipline in the contract compression industry, the compression market remains tight, and horsepower pricing continuing to increase. We exited the year with only 10% of our contracts on a month-to-month basis with the rest under multiyear contracts. We have a smaller percentage of our horsepower up for re-contracting in 2026.

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 would like to discuss the evolving natural gas market and increasing lead times for large horsepower engines. Over the next three quarters, approximately 4.5 Bcf per day of incremental Permian gas pipeline takeaway capacity is expected to come online. And there is another 2 Bcf per day of in-basin gas consumption for power generation expected by the end of the decade, including distributed power like DPS and major power plants. This is on top of the higher in-basin demand.

What is more, we have seen estimates from research firms of more than 7 Bcf per day of additional Permian takeaway pipelines expected by the end of the decade. Increased takeaway capacity, better pricing, and ever-increasing gas-oil ratios is expected to lead to 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 have already begun receiving commitments from customers for new compression equipment in 2027 and 2028. On the supply chain side, we are using our buying power and leading position in the industry to secure new compression equipment and are confident we will be able to hit our long-term horsepower growth targets despite historically high lead times, as we have 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.

We plan on delivering approximately 150,000 new unit horsepower in 2026, an average horsepower per unit of approximately 1,700 horsepower, further solidifying our position as the industry leader in large horsepower compression. We are 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 have seen for several years continues, and we expect to deliver further margin increases as we capture operating efficiencies.

We are seeing positive signs in the station construction business and our other services segment, driven by operational efficiency and cost part sales. For the year, our adjusted EBITDA significantly exceeded both our initial guidance and our latest update. In summary, we had a great year. We high graded our fleet, exited international operations, and achieved our leverage target of 3.5 times. We have numerous tail winds 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 will pass the call to John Griggs to further discuss our financial results and our outlook for 2026. John?

John Griggs: Thank you. At the risk of sounding like a broken record, 2025 was an outstanding year. There is just no other way to say it. From a financial perspective, we exited the year with the lowest leverage 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 financial performance, giving our company's leaders far better data and insights to ultimately make most liquidity. 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 and the of Blue Horsepower, price increases from recontracting activity and solid operational execution. We reported adjusted net income of $139,000,000 and adjusted EBITDA of approximately $715,000,000, up 5% and 17% respectively from prior year. In the fourth quarter, total revenues were nearly $333,000,000, up 3% sequentially as we benefited from a large amount of re-contract that happened around the beginning of the fourth quarter. Revenue per earning horsepower was $23.1 at year end, a 2% increase from the previous quarter and up approximately 55% on the previous year's quarter.

As we discussed last quarter, the fourth quarter sequential increase in dollars per revenue-generating horsepower was driven by the combination of less overall new horsepower being set in Q4, in conjunction with solid pricing from new units set during the third quarter, plus recontracting during Q4 at ever higher rates. Margin improvement is a reflection of the success we have realized in achieving higher average pricing for horsepower alongside lower operating expense for horsepower, which itself was a function of new technology, process and training initiatives either reduce costs, defer spend, or improve labor productivity, or some combination of all three.

In our other services segment, revenues were just over $31,000,000 in Q3 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. Net income attributable to common shareholders for the fourth quarter was almost $25,000,000, or $0.28 per diluted share, down nearly 6% in the prior quarter. Reported SG&A for the quarter was $38,900,000.0, and after adjusting for non-recurring or non-cash items, was $29,700,000.0. Excluding asset impairment, severance and transaction expenses, and other one-time items, adjusted net income was $35,000,000, or $0.40 per diluted share. Now let us turn to capital.

Maintenance CapEx for the quarter was approximately $22,000,000, and it was $76,000,000 for the year, which was at the low end of our annual guidance range. New unit horsepower in line with previous expectations. Other CapEx was just under $12,000,000 for the quarter, slightly down from the prior quarter. Discretionary cash flow came in at $113,000,000, an increase of approximately $5,000,000 versus the comparable quarter from last year. Free cash flow, which we define as discretionary cash flow less growth and other CapEx plus the proceeds from asset sales, was $79,000,000, a new quarterly company record. For the year, we generated approximately $62,000,000 in discretionary cash flow. Discretionary cash flow is one of our most important business metrics.

It drives our growth and it funds the return of capital to shareholders, and therefore our discretionary cash flow tends to produce growing but stable discretionary cash flow. Even in times of severe commodity price volatility. Under take-or-pay contracts with inflation escalators tend to produce growing but stable discretionary cash flow, even in times of severe commodity price volatility. As a result, we delivered on the promise we made to investors at the time of our IPO. We would get our leverage down to 3.5 times by the time we exited 2025.

With regard to the balance sheet, as Mickey highlighted earlier, we exited the year with the strongest balance sheet we have ever had with approximately $1,500,000,000 in undrawn liquidity and over three years for first debt maturity, which is something we cannot emphasize enough. To recap, in 2025, we termed out $1,400,000,000 of our bank debt in the bond market, including the first issuance of a ten-year bond in the compression sector, and 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 2.6 times. Let us turn to our 2026 guidance. We provided our customary metrics in yesterday's release. For the year, we expect overall revenue to range between $1,370,000,000.00 and $1,430,000,000.00. We expect the adjusted gross margin percentage within the contract service segment to range between 67.5%–69.5%. Keep in mind, our guidance metrics do not 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.

Our 2026 adjusted EBITDA guidance range is around $750,000,000 to $780,000,000, 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 $75,000,000 to $85,000,000, essentially flat with last year, something that would not have been possible having not been investing in the people, process, and systems that have allowed us to meaningfully defer maintenance spend without harming our assets or their long-term performance. We see growth capital expenditures landing between $235,000,000 and $265,000,000.

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 includes fleet upgrades, make rate expenditures, rolling stock, real estate, capitalized aspects of our training programs, are expected to range between $40,000,000 and $50,000,000. In terms of capital allocation, returning capital to shareholders is important to us. Prior to the acquisition of DPS, our stated goal was to invest organically at a level that allowed 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.

We expect to grow our dividend annually and opportunistically repurchase stock. In terms of capital allocation, returning capital to shareholders is important to us. Prior to the acquisition of DPS, our stated goal was to invest organically at a level that allowed 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. We expect to grow our dividend annually and opportunistically repurchase stock. To wrap it up, 2025 was another record-setting year at Kodiak Gas Services, Inc., and have similar or better returns on invested capital. The outlook for contract compression-related services is stronger than ever.

We are extremely proud of all that we accomplished and the work we did to lay the foundation for future growth. By our estimation, it looks like it will remain that way for a while. And we are in the process of further increasing our earnings growth rate with the pending acquisition of Distributed Power Solutions. With that, I will hand it back to Mickey.

Mickey McKee: Thanks, John. It is an exciting time to be a Kodiak Gas Services, Inc. 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 are actively working on finishing 2027 and 2028 as we capitalize on the robust outlook for growth in natural gas. The pending DPS acquisition will further increase our earnings potential.

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, enhancing our ability to return capital and drive ongoing value for Kodiak Gas Services, Inc. shareholders. Needless to say, we are excited about our future.

Operator: We will now open for questions. Our first question comes from Jim Rollyson with Raymond James. Your line is now live.

Jim Rollyson: Hey, good morning, Mickey, John, everyone. Mickey, maybe just starting with the lead time comments. Obviously, all you guys are seeing the same thing. And I am curious where lead times have escalated to here pretty rapidly. You know, how are customers thinking about that? How are you guys planning for that? Because I am imagining that not only impacts your ability to grow on the compression side, but it is also on the power side once you get that closed. So maybe just some color on how you navigate that.

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