Kodiak Gas Services, Inc. (NYSE:KGS) Q3 2025 Earnings Call Transcript

Kodiak Gas Services, Inc. (NYSE:KGS) Q3 2025 Earnings Call Transcript November 5, 2025

Operator: Greetings, and welcome to the Kodiak Gas Services Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Graham Sones. Please go ahead.

Graham Sones: Good morning, and thank you for joining us for the Kodiak Gas Services conference call and webcast to review third quarter 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 discuss our financial and operating results and 2025 guidance, then we’ll open the call for Q&A. There will be a replay of today’s call available via webcast and also by phone until November 19, 2025. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, November 5, 2025, and therefore, you are advised that such information may no longer be accurate as of the time of any replay listening or transcript reading.

The comments made by management during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views, beliefs and assumptions of Kodiak’s management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company’s actual results, performance or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures.

Details and reconciliations to the most comparable GAAP measures are included in yesterday’s earnings release, which can be found on our website. And now I’d like to turn the call over to Kodiak’s President and CEO, Mr. Mickey McKee. Mickey?

Robert McKee: Thanks, Graham, and thank you all for joining us today. I’d like to begin today’s call, as we do with all meetings at Kodiak with a safety topic. As we head into the holiday season and prepare to travel and spend time with friends and family, I want to remind everybody that safety doesn’t stop at the workplace, whether you’re commuting, visiting family or running errands, please avoid distractions while driving. No text or call is worth risking your safety. Please join me in committing to staying focused behind the wheel so we can enjoy the holidays with those who matter most. We had a busy third quarter, delivering solid financial results and executing on several strategic actions to improve the operational and financial outlook of the company while remaining focused on returning capital to shareholders.

Let me begin by discussing some of the strategic actions we have taken over the past few months. First, we went live with our new ERP system in August that was delivered on time and under budget. We consolidated several legacy systems into an integrated platform that will increase our visibility with real-time financial and operational information and enable us to deploy multiple facets of AI technology into our everyday business. The implementation of the new ERP system involved a lot of hard work by the team, and I want to thank everyone involved for their dedication to getting this important project over the line. The new ERP system is a foundational step in our agentic AI initiatives. The team is currently working on multiple AI agents across a broad range of processes, including parts sales, customer order handling and supplier and inventory management.

We’re specifically excited about our tech parts agent, which will assist our field service technicians in locating the right parts for the job in an expedited manner. These agentic AI initiatives complement our operational AI initiatives, which include condition-based preventative maintenance scheduling and predictive failure detection, just to name a few. The next, as a result of the CSI acquisition 18 months ago, we inherited operations in 5 foreign countries. As part of our strategic goal to high-grade our fleet and concentrate capital and efforts on markets with the best combination of growth and returns, we made a decision to exit all of our international operations. I’m pleased to report that during the third quarter, we successfully exited the last of our international operations by divesting our operations and assets in Mexico, which included the sale of approximately 19,000 operating horsepower.

We had great people in those countries, and I wish the buyers well, but we firmly believe that the U.S. is the right place to be for Kodiak in the contract compression business. Relative to the international markets where we previously operated, including Argentina, Canada, Chile, Romania and Mexico, we believe the U.S. offers higher returns, lower operating risk and a superior growth outlook for many years to come. And we successfully divested all of these operating areas in under 18 months from the close of the highly successful acquisition of CSI. The next major initiative in Q3 that I’d like to highlight is the strategic moves we made with our balance sheet. During the quarter, we termed out $1.4 billion of debt through 2 bond offerings at a weighted average cost of debt of 6.6%, including the first ever 10-year term bond issuance in the compression sector.

These offerings were another strategic step in derisking our business and setting us up for continued growth and success by allowing us to stagger and extend our debt maturities and significantly increase our liquidity. We ended the quarter with $1.5 billion of availability in our ABL Facility, giving us ample flexibility to pursue exciting future growth opportunities. Finally, we returned an industry-leading amount of over $90 million to our shareholders in the quarter through a $50 million share repurchase and our dividend. Furthermore, as a result of the underlying strength of our business fundamentals, our strong financial results and our outlook for future discretionary cash flow, we increased our quarterly dividend by another 9% to $0.49 per share, equal to approximately 35% of our discretionary cash flow, our stated goal for return of capital to our shareholders.

Since September 2024, the $110 million in share repurchases we’ve completed, have allowed us to reduce our share count by nearly 3.5 million shares. We have approximately $65 million available under this program, and we expect to use it. Share repurchases are a fundamental and exciting part of our overall shareholder return strategy. We ended the quarter with $4.35 million in revenue-generating horsepower. Average horsepower per revenue-generating unit was $965, a figure that continues to lead the industry and that has increased each quarter since we closed the CSI acquisition. In the third quarter, we deployed approximately 60,000 new horsepower that averaged more than 1,900 horsepower per unit and roughly 40% of those new units were electric motor driven.

We also added about 30,000 operating horsepower through a small purchase leaseback with an existing customer and through the exercise of an early buyout option on some previously leased units. Including the exit from Mexico, we divested approximately 26,000 operating horsepower of nonstrategic units during the quarter. Our investments to grow the fleet, along with strategic divestitures of noncore units drove our fleet utilization to roughly 98% another industry-leading metric. Our large horsepower units remain fully utilized at over 99%, reflecting the continuing strong demand for large horsepower compression, and we expect that to continue. With new or expanded pipelines representing over 4.5 Bcf a day of incremental Permian gas takeaway capacity coming online by the end of 2026, our Permian customers have been very active this fall in ordering new compression to be delivered next year.

In addition to the new pipelines, there’s another 4 Bcf a day of sanctioned pipeline projects that are expected to be online by the end of the decade with numerous other Permian egress projects in the works. Given the recent surge in new compression orders, new pipeline takeaway capacity and forecasted natural gas volume growth, lead times for new compression equipment has significantly stretched out to upwards of 60 weeks. We’ll give you more details on our 2026 capital spending plans next quarter, but as a result of the high level of demand across the industry and our customers’ needs, our capital plan for 2026 is effectively fully under contract. Before we discuss our third quarter financial results, a few thoughts about the macro environment.

Since oil broke below $70 in the first quarter, we have seen the U.S. E&P industry adjust to the lower pricing environment in different ways. Permian operators have high-graded their drilling locations and realized increases in drilling and completion efficiencies, such as reducing days to drill to help offset the decline in oil prices and rig count. The result is that we continue to see oil production growth from the Permian Basin and the U.S., and our customers continue to see accelerating growth in natural gas. So we expect 2026 to be a big year in gas growth from the Permian Basin. Given this backdrop, combined with the strength of our business model, the demand outlook for large horsepower compression remains very strong. Kodiak has continued to deliver top line revenue growth, margin increases and Contract Services segment growth throughout the year.

Also, as I’ll discuss shortly, we have taken several steps to reduce cost and boost our operating efficiencies. We see no reason why this dynamic won’t continue into 2026, driving further revenue growth and margin improvement. Now turning to third quarter 2025 results. We once again delivered sequential growth in contract services adjusted gross margin and set another record in quarterly discretionary cash flow. As John will discuss in more detail, adjusted EBITDA for the quarter of $175 million was negatively impacted by over $5 million of nonrecurring SG&A expenses associated with the divested Mexico business. Given strong customer demand, historically high industry-wide utilization and disciplined decision-making by the contract compression industry, pricing conversations with customers continues to be constructive.

We completed the majority of our planned 2025 contract renewals in the first half. But in Q3, we recontracted just over 200,000 horsepower at above our current fleet average. Contract Services adjusted gross margin percentage matched the high watermark we set last quarter at 68.3%, a 230 basis point increase compared to the third quarter of 2024. In addition to fleet growth, optimization efforts and pricing, we’re seeing margin improvements from setting new large horsepower units and our investments in technology to drive fleet uptime and reliability. Specifically, we’ve reduced lube oil consumption on a per horsepower basis through our AI and machine learning deployment. And our fleet reliability center that monitors our fleet remotely 24 hours a day is helping us identify problems before they become more expensive repairs with longer downtime.

This drives lower engine and compressor repair costs and leads to better uptime for our customers. In our Other Services segment, third quarter results were consistent with our expectations. We’re seeing positive momentum in our station construction business as evidenced by the recent award of a 30,000 horsepower compressor station that will feed supply fuel gas to a power plant located in Texas. This project is expected to kick off soon and will take roughly a year to complete. As Texas and other areas in the country look for additional natural gas-fired power plants to satisfy surging electricity demand, we’re optimistic that more opportunities like this will arise. I’d now like to pivot to a few things that I believe are an underappreciated part of Kodiak’s investment case, our short cash conversion cycle and our industry-leading discretionary cash flow yield.

Unlike other midstream and infrastructure companies with lengthy construction projects that require substantial percentages of total capital expenditures long before revenues are generated, Kodiak has a short time frame between capital outlay and first revenue. The ability to quickly generate cash plus the strong returns on our growth investments allows Kodiak to generate a discretionary cash flow yield that we believe to be among the best in the midstream investment universe. We generated nearly $117 million in discretionary cash flow in the third quarter and over $450 million over the last 4 quarters. That equates to approximately 15% discretionary cash flow yield at our current stock price. We define discretionary cash flow as adjusted EBITDA less cash taxes, cash interest and maintenance CapEx. This represents a starting point for our capital allocation framework.

We continue to use this cash flow to return capital to shareholders, buying back approximately $50 million in stock in Q3 2025 and paying out a well-covered quarterly dividend. Now I’d like to turn to the outlook for the remainder of 2025. Even following the sale of Mexico and the incurrence of extraordinary and nonrecurring SG&A expenses during Q3, we remain on track to hit our annual revenue, margin and adjusted EBITDA guidance, and we’re right where we expected to be with capital spending. At the end of the quarter, we have deployed about 90% of the new units for the year with the remainder expected to be installed in the fourth quarter. Given our reduced outlook for cash taxes, we’re on pace to exceed our discretionary cash flow guidance.

Therefore, we increased our outlook on this metric for the year. In summary, we’re very pleased with our third quarter results. We’re on track to achieve our full year guidance and the steps we’ve taken this year position us for continued margin growth in the future. Our focused large horsepower business model is helping us generate industry-leading discretionary cash flow yields, position us to further strengthen our balance sheet and return cash to shareholders. And now I’ll pass the call to John Griggs to further discuss our financial results and our updated guidance for the year. John?

John Griggs: Thank you. As Mickey made clear, we accomplished some really important strategic objectives during the quarter, actions that serve to set us up well for the next leg of returns-oriented growth in the years to come. Let’s turn to the quarter’s highlights, and I’ll start with our Contract Services segment. We generated solid revenue growth in this segment in Q3 as evidenced by a year-over-year increase of 4.5% and quarter-over-quarter increase of 1.2%. Revenue per ending horsepower was $22.75 this quarter, a nice uplift versus the same quarter last year and effectively flat sequentially. We anticipated this outcome, and we called it out on our last quarterly call because we knew we were adding a lot of revenue-generating horsepower during this quarter, but only a portion of that horsepower’s revenues.

With less new horsepower being set in Q4 and in conjunction with the recontracting rate increases and solid pricing for new units, Mickey already spoke to, we expect to see a nice uptick in the revenue per horsepower metric for Q4. Relative to Q3 of ’24, Contract Services adjusted gross margin percentage increased by 230 basis points to 68.3%. The margin improvement is a reflection of the success we’ve realized in achieving higher pricing per horsepower alongside lower operating expenses per horsepower. We’ve driven these results through a relentless focus on high-grading the fleet through large horsepower, gas and electric additions, combined with the sale of noncore, low-margin units. And we’re habitually rolling out new technology and process initiatives that either reduce costs, defer spend or improve labor productivity or some combination of the 3.

In our Other Services segment, we generated revenues and adjusted gross margin in line with our expectations. We’ve seen a resurgence of contract activity and that, plus our backlog gives us confidence that we remain on track to achieve our annual revenue and margin guidance. Reported SG&A for the quarter was $37.8 million. And after adjusting for nonrecurring or noncash items, it was $31.5 million. As Mickey mentioned, the $31.5 million still includes approximately $5 million in professional expenses associated with the cleanup and sale of our former Mexico operations. With our Mexico operations and assets now sold, we expect SG&A to revert back to a more normalized level during Q4. During the quarter, we booked a noncash charge of $28 million in other expenses that was related to our multiyear negotiation with the state of Texas over the taxability of our compression assets.

We’ve recently made significant progress in gaining clarity on the issue and ultimate potential settlement. The charge takes our reserve to an amount we believe will satisfy this obligation in full. Based on our current discussions, we’d expect to pay the state and close out this accrual in early ’26. By doing so, we’ll eliminate a significant contingent liability that has been with us for many years. And importantly, we believe that our view and the state’s view on taxability of these assets is relatively aligned, and we don’t foresee any changes to our future margins or return on investment associated with the tax structure going forward. Net loss attributable to common shareholders for the third quarter was $14 million or $0.17 per diluted share.

Excluding the loss on the sale of our Mexico business, the Texas sales and use tax charge and other onetime items, adjusted net income was $31.5 million or $0.36 per diluted share. Maintenance CapEx for the quarter was approximately $20 million and trending toward the low end of our guidance range for the full year. Our investments in technology and the insights we’re gaining from that are allowing us to extend preventative maintenance intervals and commensurately associated spending on a major portion of the fleet. We’re increasingly seeing the benefit in our maintenance CapEx and believe we’ll see more of that going forward as well. As expected, growth CapEx more than doubled quarter-over-quarter to approximately $80 million based on the addition of the roughly 60,000 in new horsepower.

Year-to-date, we’ve added roughly 140,000 horsepower, and we’re on pace to slightly exceed our forecast of 150,000 for the year. Other CapEx was $12 million for the quarter. As we previously highlighted, other CapEx was front half weighted in 2025 due to capitalized spend on our new ERP system as well as some residual spend on our CSI-related fleet upgrades, which are now complete. The discretionary cash flow came in at $117 million, an increase of approximately $14 million versus the comparable quarter from last year. Free cash flow for the quarter was $33 million. With regard to the balance sheet, we made great strides in the execution of our finance strategy. We achieved our goal of terming out the majority of our ABL into bonds with staggered maturities, including the first 10-year bond in the compression space.

These actions derisk our balance sheet and add a further element of cash flow stability to our business, which in turn helps us execute on our capital allocation and shareholder return strategies with enhanced confidence. During Q3, we issued $1.4 billion of bonds, exiting the quarter with $521 million drawn on the ABL and leaving us with approximately $1.5 billion in availability. Total debt at quarter end was approximately $2.7 billion. We exited the quarter with a credit agreement leverage ratio of around 3.8x, up from the prior quarter, mainly as a result of debt financing fees as well as our $50 million share repurchase from EQT. We expect to exit the year at about 3.6x. Last, our Board recently declared an increased dividend of $0.49 per share.

Even with 2 increases totaling nearly 20% this year, our dividend is well covered at 2.9x. Briefly on guidance. As we close out the year, we remain on track to hit our segment level guidance for revenues and margins as well as adjusted EBITDA, even after all the extra spend on Mexico during Q3. On CapEx, our prior guidance remains unchanged as the vast majority of 2025’s capital spending is now behind us. We expect the fourth quarter CapEx and new unit growth will decline from Q3 levels. Thanks to our reduced outlook on cash taxes and reduced spend we’re seeing in maintenance CapEx, we’re on pace to exceed our prior guidance for discretionary cash flow. We now expect to generate between $450 million and $470 million in discretionary cash flow for the year.

And with that, I’ll hand it back to Mickey.

Robert McKee: Thanks, John. Our business model, which generates stable and recurring cash flows is performing well in the current market. 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. Additionally, our new unit horsepower order book is essentially fully contracted for 2026 as we capitalize on the robust outlook for growth in natural gas. Besides the top line growth, we are successfully making steps to increase margins by divesting noncore units and investing in technology to reduce costs and increase uptime. These targeted actions have enabled us to reach new financial milestones across several important metrics.

As a result, we delivered year-over-year increases in Contract Services revenue, adjusted gross margin and set a new quarterly record in discretionary cash flow, strengthening our ability to return capital and drive ongoing value for Kodiak shareholders. Thank you for your participation today. And now we’re happy to open up the line for questions. Operator?

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Doug Irwin with Citi.

Douglas Irwin: I just wanted to start with ’26 here. And I realize you haven’t given any explicit guidance, but it sounds like you have a pretty good idea of what bookings are looking like into next year at this point. So just wondering if you could maybe provide a bit more detail about how the backlog is shaping up and maybe just high level, how you’re thinking about fleet additions and pricing power relative to the last few years.

Robert McKee: Doug, this is Mickey. Thanks for being with us today. Yes, we’re not quite ready to give guidance into ’26 quite yet. But like we said in our prepared remarks, we’re effectively fully contracted out for what we plan on spending for next year. We’ve been pretty clear about the fact that our plan is to spend kind of roughly 60% of our discretionary cash flow on our growth capital for any given year. And we think that next year ought to be pretty comparable to that. And we have contracts out into the latter parts of next year that ought to be somewhere in that ballpark. So next quarter, when we give official guidance for ’26, we’ll give that more detail, but we feel pretty good about where we’re at right now and set to have continued growth into next year.

Douglas Irwin: Understood. And then my second question, just around M&A. I think so far this year, you’ve been focused on more kind of smaller acquisitions and divestitures, but it sounds like a lot of the obvious high grading is maybe concluded at this point. So just curious if larger scale M&A is something that’s on your radar? And if so, what kind of deals might make sense? And would you maybe even consider stepping outside of traditional compression if the right opportunity presents itself?

Robert McKee: Yes, Doug, I mean, we definitely would consider that. We don’t comment too much on potential M&A deals. But I will tell you that the strategic actions that we took this year set us up to be in a position to consider some of that stuff for next year. So we went live with our ERP system, which was a huge step for us to dial in technology and utilize AI going forward as well as the bond issuance that we did that’s freed up $1.5 billion worth of availability on our ABL. So as of this quarter, we have a balance sheet that’s in a position to pursue some M&A activity if the right opportunity presents itself.

Operator: And our next question comes from John Mackay with Goldman Sachs.

John Mackay: Last quarter, you — we spent a fair amount of time on some of the initiatives you were working on with your customers, kind of sale leasebacks or other kind of similar types of deals. Can you maybe just catch us up on where those sit and how conversations gone so far?

Robert McKee: John, good to talk to you this morning. So in Q3, we had a small purchase leaseback transaction that we executed on that was really good for us and helped us grow the revenue-generating horsepower by above that 30,000 horsepower mark. So we’ve got good conversations with that kind of stuff going on. Nothing — no big things super imminent right now, but those conversations are happening with customers. And just kind of back to Doug’s question that I just answered, right, like the strategic initiatives that we executed on in this quarter with the ERP implementation that allows us to get that real-time financial and operational data at our fingertips as well as the bond issuance freeing up a lot of liquidity for us is those were 2 really important steps as a prerequisite to executing on some larger type of not only M&A, but also kind of like strategic transactions with our customers.

So we had to get those steps out of the way first before we could take the next one. So we’re excited about the progress we made in the third quarter.

John Mackay: Understood. And then going back to your comment earlier around, I guess, you’re doing some station construction for some power out in the basin. Can you talk a little bit more about what the opportunity set looks like there for you guys and whether Kodiak could get more kind of directly into the power gen side?

Robert McKee: Yes, absolutely. I mean that specific opportunity is one of our station construction deals. We’ve got a ton of backlog that it looks like for opportunities in our pipeline for that station construction business, a lot of interest in the power sector. And so we are doing a lot of work there. We’re gaining a lot of valuable expertise and industry insight there. And if the right entry point presents itself, then we will probably take advantage of it. But nothing to report just yet, but we’re doing a lot of work, and we’re very interested in the segment.

Operator: And we’ll go next to Connor Jensen with Raymond James.

Connor Jensen: I noticed that lead times are back above 60 weeks for equipment, which lines up with what we’ve heard from others. Wondering if this will potentially lead to higher prices down the road on incremental orders that you could maybe capture through higher prices and just kind of how you’re thinking about that dynamic?

Robert McKee: Yes. I mean I think lead times are a function of the demand in the industry, right? And so I think you’re seeing this — the industry see an extraordinary amount of demand from not only takeaway capacity increases in the Permian Basin, but significant volume increases that are being projected for natural gas, not only in the Permian, but in other basins as well. So I think you’re starting to see this LNG capacity come online and you’re starting to see a significant amount of volume increase projections from our customers and others that are saying, man, we need a lot of compression, and we need a lot more of it. So I think that is all going to be positive for pricing going forward, and we expect that we will continue to have positive pricing discussions with our customers.

Connor Jensen: Got it. That makes sense. And then a nice job exiting all the international operations focus on the core U.S. market. Is there any cost savings to be had being an entirely domestic business? And how should we think about divestments following this presumably at a lower pace now that you have all the international businesses sold?

Robert McKee: Yes. I think going forward, the divestitures will come at a lower pace, now that we’ve successfully exited Mexico and Argentina. Those businesses were definitely at a lower margin contribution than the standard large horsepower compression that we have that’s very, very concentrated in the U.S., especially in the Permian Basin. So we’re certainly divesting of lower-margin business there. So I would consider — I would definitely think that it would be helpful to our overall margin. So — but it’s a pretty small contribution. So it’s not going to be a big impact.

John Griggs: And I will add to that, this is John, to — and we called it out in the prepared remarks. It was in our press release. So we explicitly spent about $5 million on professional expenses in the third quarter in SG&A for a business that’s now sold. So that’s kind of all wrapping up. And so there is a bona fide savings you won’t see repeat in the fourth quarter and beyond.

Operator: Moving next to John Annis with Texas Capital.

John Annis: For my first one, with the new horsepower added this quarter, can you talk about how much of that is electric? I think you may have mentioned around 40% in your prepared remarks, if I heard you correctly. And then just more broadly, has there been any recent changes in your customers’ desire to add electric motor drive compression?

John Griggs: Yes. Thanks. This is John. I’ll tackle the first piece and then hand it back to Mickey for the customer kind of feedback. So in the third quarter, we added around 60,000 new horsepower and about 40% of it happened to be electric. We also, over the course of the year, have kind of told everybody that about 40% of the total order book for ’25 was electric. So that was just a coincidence in terms of the third quarter versus the year. In terms of what Mickey is saying in the future, I’ll turn it back to you.

Robert McKee: Yes. I mean I think that you’re definitely seeing a little bit of a pullback away from electric-driven compression orders and inquiries coming in. It’s just a power problem, especially in the Permian Basin. They’re just the lead times for getting power and connecting the grid access is just a problem for people that have aspirations to go to electric. I think those aspirations are still there. They just are looking at shorter-term solutions and that kind of thing that are kind of then the longer-term electric desires that they have. So the power problem is real, and it’s kind of shifting some of those customers’ desire to go electric.

John Annis: Terrific. For my follow-up, you highlighted robust natural gas demand drivers, including power for data centers and LNG. Can you quantify what portion of your new unit deployments or backlog are directly tied to serving these emerging areas versus traditional wellhead production? And then are there any differences in contract terms, duration or equipment requirements for these applications?

Robert McKee: John, it’s really hard for us to quantify what of our — how much of our compression is going to serve LNG versus data center demand and that kind of thing. Once that gas gets into a pipeline, you never know if that certain molecule is going to support fuel for power for a data center or it’s into the Gulf Coast to be liquefied and said to Europe for LNG. So we really can’t tell the difference from our standpoint. We do know that there’s a lot of demand for natural gas and it all requires multiple stages of compression. It’s good for our business. So we see it coming down the pipeline, and we don’t see any differences really from those standpoints of contract terms or duration there. So from where we sit in that value chain, it’s too early to kind of determine.

Operator: Moving next to Zack Van Everen with TPH & Company.

Zackery Van Everen: Maybe just going back to the 60 weeks on new equipment. Does that kind of indicate you’re already starting conversations with customers for 2027? And would you guys be willing to order some on spec just to make sure you have the equipment when it’s needed?

Robert McKee: I would think that the discussions for 2027 will start happening really quickly. We’ve been pretty busy here so in the last month or so. So I haven’t heard about many discussions into ’27, although I do know that they’re starting to happen. We haven’t traditionally ordered equipment on spec, Zach, but — and to the extent that we can avoid doing so, we will for compression. But there’s some things we can do in working with packagers and working with the Cat dealers on making sure that there’s engines kind of in the pipeline coming down and that we can have access to. So there are some things we can do to kind of manage our supply chain there without having to really step out on a limb and order full equipment packages on speculation out with that longer lead times.

Zackery Van Everen: Got you. That makes sense. And maybe related to the same question, have you seen contract duration get extended as we see continued rates increasing for customers is when they renegotiate. Has that gone out from the typical 3 to 5 years? Or are you still within that range for most new contracts?

Robert McKee: Most new contracts are still within that 3- to 5-year range. So we are starting to see some interest from some customers that want to term equipment out for longer than that, but haven’t gotten too much traction there as we’re really more prone to key in on price rather than term for those contracts.

Operator: [Operator Instructions]. And we’ll go next to Selman Akyol with Stifel.

Selman Akyol: I just want to go back to the station construction opportunity that you’re seeing. And you talked about backlog, and I just want to make sure I understand that. Is backlog opportunities that you’ve identified? Or is that stuff you’ve identified and you actually expect to become order and we should expect to see it at some point flow through?

Robert McKee: A little bit of both, Selman. I think that we probably have more opportunities in our pipeline today than we’ve probably had in the last couple of years. Now conversion rate on those, I think we expect to be pretty high, but haven’t signed, sealed the deal on all of those yet, but we feel pretty good about that business model going forward and the contribution that it’s going to have in 2026.

Selman Akyol: And then as we think about margins, you’ve talked about divesting lower contributions. You’ve got your ERP system. You’ve talked about AI. What should we be expecting margins as we kind of go through ’26? Is there still upward pressure to those numbers that you’re putting up?

Robert McKee: I think so. I mean we’re not quite ready to guide on ’26 what margins are going to look like yet, but we would expect those to be higher than they are today.

Selman Akyol: Got it. And one last question, if I could squeeze it in. Can you just talk about what the outlook is for other basins besides the Permian? I know the Permian gets all the attention, but seeing any uplift in any others?

Robert McKee: Yes. Selman, good question. And quite frankly, the bulk of the capital spend by our customers has gone to the Permian Basin, like you said. So we key on the Permian probably more than most people. But I will tell you, there is some uplift in opportunities that we’re seeing in some other basins. We’ve got some really interesting opportunities that we’re taking advantage of up in the Northeast as well as in the Eagle Ford as well as in the Rocky Mountains. So we’re seeing some of those other basins start to have a lot more interest and activity. So it’s a good thing. And we think that certainly from a natural gas standpoint of supporting LNG build-out and data center build-out and that kind of thing, some interest from these other basins is a quality thing for us.

Operator: And we’ll hear next from Eli Jossen with JPMorgan.

Elias Jossen: Maybe just on some of the strong liquidity you guys have and the optionality it creates. I recognize that ’26 is pretty filled out, but can you just talk about what makes the most sense to do with that dry powder? I mean, could we think about something bigger in the Power Solutions realm? I know you guys talked about you’re looking at those, but maybe just stacking that kind of opportunity set versus some of the M&A that’s out there.

John Griggs: Yes, sure. So this is John. I’ll tack it, and I’m sure Mickey will chime in, too. So look, you asked a broader question. I am going to say that our capital allocation framework that we’ve been consistently applying since we went public is still the one that we’re going to stick to, and that’s an algorithm that kind of looks at that 3% to 4% growth in horsepower on a year-over-year basis for several years, generates upper single digits EBITDA growth for several years in a row, and that should translate into a similar, if not slightly higher discretionary cash flow growth rate going forward as well, too. We want to honor the 3.5x long-term leverage target that we’ve kind of set forth. And so we will always want to protect that balance sheet.

But then we’ve got this great pile of discretionary cash flow that we have the optionality and what we’re going to do stuff with. We’re still seeing wonderful returns. We always talk about kind of the new horsepower sets that we see and generating really, I guess, high-quality returns well above our hurdle rates on new horsepower. So we’ll continue to do that. And then as we think about M&A, Mickey answered a lot of those questions at the beginning. So we’ve gotten so many of these things that have kept us pretty focused post going public, post-CSI integration, exiting the international operations, exiting the small horsepower business, implementing the new ERP system that were really real geared up to just take advantage of this kind of, I’ll call it, new management capacity that we have for the next chapter of Kodiak’s growth.

So we’re going to look at all opportunities within compression that fit our kind of pistol, which is going to be the large horsepower, high-quality assets in the right basins. And then as we think about power, how can you not think about power in a world that we live in? Our customers ask us to do it. We’re in the electric power business. We have relationships with all of the people that are buying their own distributed power that are concerned about what’s going to happen to the grid and stability. So it’s conversations that we’ll continue to have going forward. And then the last is that opportunity to work creatively with our customers to potentially do the purchase leaseback type transactions. Those would be wonderful ways to grow our business without growing industry capacity to a degree and can make great financial sense for investors.

So it’s really — it’s — we’re sitting really well for 2026 to try to think about, once again, the next chapter of Kodiak’s growth that is in addition to this awesome long-term business model that we have in large horsepower U.S. compression.

Elias Jossen: Yes. Awesome. Really appreciate the color there. And then maybe just kind of back to some of the 60-week lead times and the contracting that you’re seeing. Can you just talk a little bit about pricing trends, particularly in the Permian? I know those continue to move up and to the right, but just what you guys are seeing on the pricing front and how you expect that to evolve in the future?

Robert McKee: Yes, Eli, we don’t expect things to change that much. I think we’ve still got the ability to command leading-edge pricing that we have for the last couple of years. We’ve repriced a good bit of our fleet, but there is still a significant piece of our fleet that we haven’t repriced. And so we expect kind of the existing price book of the existing fleet to continue to move up over time as we adjust some of the legacy contracts that we had that are 3 or 4 years old. And then we expect to continue to command kind of leading-edge pricing on new unit deployments that we have coming out the door, too, because, quite frankly, with the inflation and increased cost of operations on that stuff, we have to command a higher price to command the same kind of margins that we’ve had. So we’ll be focused — laser-focused on those, but we think that the pricing situation remains pretty status quo, and we think we can still drive pricing on new units and the existing fleet.

Operator: Anything further, Mr. Jossen?

Elias Jossen: I leave it there.

Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Mickey McKee for closing comments.

Robert McKee: All right. Thank you, operator, and thank you to everyone participating in today’s call. We look forward to speaking with you again after we report our results for the fourth quarter.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines, and have a wonderful day.