Kodiak Gas Services, Inc. (NYSE:KGS) Q4 2023 Earnings Call Transcript

We issued a notice in advance of the CSI closed in order to capitalize on the strength in the credit markets and derisk the transaction. And we use the proceeds to pay down our ABL and pay debt fees. At the time the CSI deal closes will redraw on our ABL to pay off CSI’s debt as well as transaction expenses. When it’s all said and done, we’ll wind up with roughly $60 million plus of incremental liquidity on the ABL by virtue of issuing more notes that we needed to close the transaction. With our IPO, the recent financing related activities and the benefits of that are creative and leverage neutral CSI transaction, we remain on track to return to achieve our long term leverage target of 3.5 times or less by year end 2025. Moving to our 2024 outlook.

For the year on a standalone basis, we estimate total Kodiak revenue will range between $855 million and $905 million. We estimate that adjusted EBITDA will range between $460 million and $490 million. I’ll now break that down by segment. In our core compression operations segment, we’re forecasting full year revenue of $795 million to $825 million and segment adjusted gross margins between 64% and 66%. Given constructive market dynamics, attributes of our contracts, and our solid execution, we’re confident in our segment outlook and a laser focus on growing long term high quality cash flows. In our other services segment, we’re forecasting full year revenue of $60 million to $80 million and segment adjusted gross margins between 15% and 20%.

We view ’23 results for this segment as being an outlier to the high side. Our ’24 guidance reflects more normalized revenue for margin levels. Turning to CapEx. Due to timing and customer demand, our ’24 capital spending program is front half loaded. With approximately 60% of spending happening in the first six months of the year. We expect maintenance CapEx to come in between $40 million to $50 million for the year. On the growth side, we’re forecasting net CapEx of between $165 million and $185 million for the year. Included in our forecast is approximately $12.5 million in non-new unit related CapEx. At the midpoint of that guidance, will grow our fleet horsepower in the low to mid-single digit percentage range. For modeling purposes, and to give you something to look forward to, CSI provided its ’24 outlook in its fourth quarter earnings release on March 1.

Shortly after transaction closed, we plan to issue updated guidance for the combined companies as well as a refined view on transaction synergies in any modifications to our capital allocation framework. To wrap things up, as Mickey noted, earlier this year, our Board declared our second quarterly dividend payment of $0.38 per share, which was paid last month. This equates to an annualized dividend of $1.52 per share, yielding about 5.5% to 6% at recent prices. Dividends are a key aspect of our overall capital allocation framework, which I’ll remind you encompasses measured growth alongside attractive return of and return on capital while living within cash flow and deleveraging. Operator, we’re now ready to take questions.

Operator: [Operator Instructions] Our first questions come from the line of Jim Rollyson with Raymond James., please proceed with your questions.

James Rollyson: Hey, good morning, Mickey, John, Graham. Nice quarter, obviously nice businesses that continues to press on. But just one thing just to clear something up here just based on the stock price reaction. So your guidance for $460 million to $490 million of EBITDA that is just for Kodiak. And obviously CSI Compressco, I think it was last Friday, you gave guidance of $135 million to $145 million of EBITDA. So, when you guys put these together, assuming it happens around the beginning of second quarter, it’s going to be taking the guidance you’re giving today, plus roughly three quarters of that guidance to get to a number. I’m assuming maybe the stocks off just because people are looking at some of the street numbers that already have this combined but just wanted to 100% confirm that?

John Griggs: Hey, Jim. That’s a — that is an important question. It’s one that’s going to trip folks up. This is John, by the way. So, if you just looked at guidance today, and I looked this morning, because the question has come up, like the mean guidance for Kodiak is for 2024 is $523 million. But obviously, that includes some analysts that have updated their models and turn them in. And you know, we don’t really control when they’re counting the CSI transaction is closed. So to come back to your question, our guidance is on a standalone basis. But if you did assume the transaction closed, say, for example, April 1, then you would take that math 75% of the guidance that CSI had put out sum it with ours, add in synergies, you are kind of off to the races, but it has created some confusion. So I’m glad that you’ve got to ask that question.

James Rollyson: Perfect. That’s what I thought. But I just was making sure just given the reaction of. And then as a follow up, Mickey, you talked about the fact that you’re already sold out for ‘ ‘ ’24, you’re actually already working into second quarter and ’25, with known customers, known contract pricing, maybe a little color, you know, when I look at this as a revenue per horsepower per month basis on the compression operation side and you guys were kind of in the 19.5 ratio in that this quarter. Maybe some sense or some color, just how much higher when you look at where those new contract rates are, are we above what the average realized is for the entire fleet, is it 5% 10%? Are we talking 20% 30%, or is that even bigger than that?

Mickey McKee: Yes, I think kind of where, — James, this is Mickey, to talk to you this morning. I think that I don’t want to put out too sensitive information here. But I think spot pricing as related to the fleet is probably in that 20% to 25% premium range based on kind of where existing fleet pricing ranges today. And that’s obviously based on you know, higher operating expenses and higher capital costs that we’re paying today, too. So really, it’s a along the same lines from a return on capital standpoint, that’s how we price our equipment, that commands with a higher capital cost commands a higher rate for — to get the same amount of return on capital.