Kodiak Gas Services Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 8 speakers on the call.

Operator

Greetings and welcome to the Kodiak Gas Services Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Graham Sones, Vice President, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review Q2 2024 results. Participating from the company today are Mickey McKean, President and Chief Executive Officer and John Griggs, Chief Financial Officer. Following my remarks, Mickey and John will provide high level commentary on the company, our Q2 financial results and our updated 2024 outlook before opening the call for Q and A. There will be a replay of today's call available via webcast and also by phone until August 27, 2024.

Speaker 1

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, August 13, 2024, and therefore, you are advised that such information may no longer be accurate as of the time of any replay listing or transcript reading. The 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 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.

Speaker 1

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. Additionally, during the call, we may reference our earnings presentation that was posted this morning on our website. And now I'd like to turn the call over to Kodiak's CEO, Mr. Mickey McKee.

Speaker 1

Mickey? Thanks, Graham, and thank you all for joining us today. I want to begin first by talking about safety. As we always discuss at Kodiak, our first and most significant priority is the health and safety of our employees and making sure that every employee goes home safe and sound to their families every night. The focus of each and every Kodiak employee on this topic truly embodies the philosophy that we have adopted at Kodiak, safety first all the time.

Speaker 1

We recently passed our 1 year anniversary as a public company and I want to take a minute to thank our over 1400 employees whose relentless focus on safety, customer service and drive to improve margins has helped make Kodiak the industry leader in the contract compression space. I want to take a minute to talk about what this company has accomplished over that time period since going public. We organically increased our contract compression fleet by over 150,000 horsepower while living within cash flow. We've completed the highly accretive acquisition of CSI, making Kodiak the largest contract compression provider in the U. S.

Speaker 1

We strengthened our balance sheet, driving leverage down to 3.9x, well on our way to our goal of 3.5x by the end of 2025. And we have returned capital to our shareholders through a well covered and compelling dividend. We think this balance between disciplined growth and shareholder return is being rewarded in the market. An investment in Kodiak at our IPO has generated a 91% total return through last Thursday, significantly outperforming the broader market. And we're not done.

Speaker 1

Given the strong operating environment and highly accretive acquisition, we were pleased to announce that our Board recently approved an 8% increase to our quarterly dividends to $0.41 per share And we'll continue to invest to grow our compression fleet given the strong demand and attractive returns we see in the market. The closing of the acquisition gave us a chance to evaluate the combined fleet for opportunities to make safety and emissions upgrades, identify non core assets and further high grade our customer base. We currently have multiple initiatives in place to begin redeploying or disposing the vital assets that we acquired with CSI. However, that takes some time to execute. Our utilization currently sits at 94%.

Speaker 1

However, the core large horsepower group of assets that was the focus of the legacy Kodiak fleet and the target of the CSI acquisition remains at effectively full utilization in excess of 98%. In fact, the entire industry utilization in this large horsepower group remains at historically elevated levels continuing to contribute to the tightness in the market. Going forward, we plan to opportunistically refurbish and upgrade idle assets and look to redeploy them. We also plan to constantly evaluate the fleet for opportunities to high grade our operations, consistent with our core operating philosophy and strategic direction. As noted in our press release, we recently entered into an agreement to sell a significant portion of our small horsepower units in the U.

Speaker 1

S. And Canada. These units represent only about 1% of our revenue generating horsepower, but significantly reduces our unit count and simplifies our operations both domestically and internationally. Divesting these assets is also consistent with our focus on U. S.

Speaker 1

Large horsepower compression. Next, I would like to discuss the integration process. We've been operating as one company for 4 months now. And what's clear is that we will greatly exceed our initial cost synergy estimate. We now expect our combined cost synergies to be north of $30,000,000 versus our initial $20,000,000 forecast.

Speaker 1

Based on these synergies and the underlying strength in the contract compression market, we are raising the low end of our full year adjusted EBITDA guidance and now guiding to a range of $590,000,000 to $610,000,000 for the full year 2024. John will discuss the acquisition synergies and our revised outlook in more detail. Now let's discuss our 2nd quarter results. Yesterday, we released Q2 2024 financial results, including another record quarter with revenues of $310,000,000 and adjusted EBITDA of $154,000,000 as we have only just begun to realize the combined earnings power of our fleet and the synergies that I mentioned. Turning to our reporting segments.

Speaker 1

As detailed in our Q2 earnings presentation, we now classify our revenue streams into 2 buckets, contract services and other services. As the name implies, contract services encompasses our contracted recurring revenue services like contract compression, contract operations and contract trading. These highly visible, stable contracted cash flows make up the core of the company. Demand for contract services remained strong. During the Q2, we added over 41,000 horsepower of new units to our fleet.

Speaker 1

All were large horsepower, averaging over 2,000 horsepower per unit and were deployed at rates above the fleet average. And we also had tremendous success in re contracting units that came up for renewal during the quarter at closer to current spot rates, also significantly above our current fleet average. One thing I want to point out is through the CSI acquisition, we acquired a compression business with a historical margin in the low to mid-50s. In just 90 days, after integrating the assets, cutting costs and returning idle equipment back to the market, for the quarter Kodiak was able to deliver a combined adjusted gross margin of 64% for contract services, matching what we did as a company in the comparable quarter in 2023. This is an impressive feat.

Speaker 1

As I stated earlier, we believe there are additional synergies to be captured and opportunities for further margin expansion. Switching to our other services segment, this segment primarily consists of our station construction and aftermarket sales business that are less predictable, but help support our customers, require minimal capital investment and generate significant free cash flow that we can invest back into our core compression business. We're excited about our newly expanded service offerings allowing us to provide additional service to our high quality customer base. Looking into 2025, we have effectively already contracted our entire CapEx spend for next year as customers have aggressively signed contracts for new horse will be electric motor driven large horsepower units and we are also selectively converting units to electric to meet customer demand. While we are increasing our electric motor driven fleet, I should remind you that given grid constraints in the Permian Basin, electric compression for large horsepower applications is not always a feasible solution.

Speaker 1

We're investing now to ensure that we're well positioned to meet our customers' needs for gas engine or electric motor driven compression in the future without losing focus on our core strategy. In summary, we are pleased with our 2nd quarter results in a busy quarter that included closing the CSI acquisition. The integration is going extremely well and we're on track to significantly exceed our original synergy goal. Our commercial team has been actively repositioning our fleet, while evaluating opportunities to high grade our fleet and service offerings. We increased our dividend and our revised guidance indicates that we see continued momentum into the second half of twenty twenty four and beyond.

Speaker 1

Whether it's capacity prices increasing 9 fold in PJM or ERCOT forecasting electricity used to more than double by the end of the decade. It's clear the U. S. Needs to add electric generation capacity and that natural gas will be the most reliable and affordable fuel of choice. And that's on top of the wave of LNG export terminals expected to enter service in the coming years.

Speaker 1

The increase in gas production required to meet this demand is going to require significant incremental compression horsepower and we continue to believe that Kodiak is well positioned to be the compression infrastructure partner of choice. Our focus on customers and employees, industry leading mechanical availability and our market position will continue to separate us from our peers. And now I will pass the call to John Graves to review 2nd quarter financial highlights

Speaker 2

and our updated guidance. John? Thank you. I'll echo what Nicky said. After factoring in the unique things that impacted the quarter, the underlying results were strong and the outlook for the remainder of the year is solid.

Speaker 2

I couldn't be more proud of my team in this company. Needless to say, we've had a lot going on around here for the past year and in particular in the last few months. It's no small feat combining 2 public companies and getting everyone singing from the same hymnal. I'd be lying if I said it was easy or over because it's not, but we think the hardest parts are behind us. We're right on track and the future is bright.

Speaker 2

Before I dive into our quarterly results, I'd like to touch a bit more on our integration success. We initially identified and communicated more than $20,000,000 of annual cost synergies. Now that we're a few months in, which Mickey mentioned, we're offering that figure to $30,000,000 Probably the simplest way to explain the math is this. During calendar 'twenty four, we expect to realize about $20,000,000 in net cost synergies. But remember, that only includes 3 quarters of combined results.

Speaker 2

So the implication is that the majority of the ultimate cost synergies we expect to garner from the deal have already been realized and we think we capture the rest in 2025. Now I'll highlight a few aspects of our 2nd quarter results. Given that the acquisition closed on April 1, year over year comparisons in many cases are not all that in cycle. So I'm going to avoid doing that. Total revenues for the quarter were $310,000,000 with the step change increase from last year largely driven by the CSI acquisition, but also from organic growth in the fleet and continued rate increases from recontracting activities.

Speaker 2

Adjusted EBITDA was $154,000,000 and it came in at a 50% margin. Included in that figure are $3,300,000 in contract services cost of operations charges spanning several years on potential sales and use taxes related to parts consumption for home compressors and about $4,500,000 in AR reserve charges in SG and A stemming from a comprehensive review post acquisition troubled accounts. Excluding those two particular items, adjusted EBITDA for the quarter would have been almost 162,000,000 dollars a figure and margin that are more in line with where we see things as we move forward. Looking at our segments, as Mickey discussed, we have changed our 2 reporting segments. In contract services, revenues for the quarter were $276,000,000 with an adjusted gross margin percentage of 64%.

Speaker 2

As Mickey mentioned, the market remains tight for large horsepower compression, And we expect to see margin expansion in that part of our business as we roll forward through a combination of price improvement and cost management. In our other services segment, revenues were $33,000,000 in Q2 with an adjusted gross margin of 16%. Most of the revenues in this segment come from Kodiak's legacy station construction business and CSI's aftermarket field and shop services and parts sales. Revenues from the other services segment will continue to have some variability from quarter to quarter, but this business allows us to better serve our customers, requires minimal capital and generates incremental cash flow. In terms of CapEx for the Q2, maintenance capital expenditures came in at 19,000,000 dollars Our maintenance spend is a function of the hours and age of our equipment and will vary by year depending upon when units were added to the fleet.

Speaker 2

But we view the quarter as being generally representative of the run rate for the next several quarters. Net growth CapEx was $90,000,000 for the quarter, but that includes a couple of unique items and is not representative of the run rate going forward. First, it's roughly $20,000,000 in non cash accruals with potential sales and use taxes on compressor equipment that was placed into service in Texas over the past several years. 2nd is a portion of the transaction related CapEx that we called out last quarter that represents a variety of CSI equipment and mission system upgrades and safety related items that we need to make to get the fleet up to Kodiak standards. For the second half of the year, we're guiding to between $110,000,000 $130,000,000 in growth CapEx, which includes new units, the aforementioned upgrades and safety related spend, non unit related spend and some real estate optimization activity.

Speaker 2

As part of this growth CapEx, we expect to take ownership of an incremental approximately 70,000 horsepower before year end. Moving to the balance sheet. As of June 30, we had debt $2,500,000,000 consisting of the $750,000,000 in 20.29 senior unsecured notes we issued in February and borrowings under ABL facility. Our credit agreement leverage ratio was 3.9 times and we ended the quarter with approximately $411,000,000 of availability on the revolver. Let's turn to the updated 2024 outlook.

Speaker 2

For the full year, which includes 12 months of Kodiak, but only 9 months of CSI and synergies, we expect revenue will range between $1,120,000,000 $1,180,000,000 And we estimate that adjusted EBITDA will range between $590,000,000 $610,000,000 Let me break that down by segment. In our contract services segment, we are forecasting full year revenue of $1,000,000,000 to $1,040,000,000 with segment adjusted gross margins between 64% 66%. Given the constructive market dynamics, our focus on increasing utilization, expense management and our progress on synergies, we're confident in our segment outlook and our ability to increase long term high quality cash flows. In our other services segment, we are forecasting full year revenue of $120,000,000 to $140,000,000 and segment adjusted gross margins between 14% 17%. Turning to CapEx.

Speaker 2

We expect full year maintenance CapEx to come in between $60,000,000 $70,000,000 a bit higher than our prior guidance now that we've owned the CSI assets for a few months. In terms of growth CapEx, we're forecasting between $210,000,000 $230,000,000 for the full year, excluding the roughly $50,000,000 related to the sales tax accrual and transaction related CapEx I discussed previously. We're presenting it this way to give a sense for a more normalized level of growth capital spending for the combined company without items that we don't expect to repeat in the future. To wrap things up, as you know, our Board approved an 8% increase in our quarterly dividend, dollars 0.41 per share, which will be paid this Friday, August 16. This equates to an annualized dividend of $1.64 per share or a yield of 5.7% based on Friday's closing stock price.

Speaker 2

That's it for my prepared comments. Thank you for your participation and support. I'll hand it back to Mickey.

Speaker 1

Thanks, John. To wrap up, I'm very proud of what this company has accomplished in the years since going public. I want to thank the extraordinary women and men of Toniad Gas Services for their hard work on integration, while staying focused and delivering great results. Each team member's dedication to safety and our customers are what makes Kodiak special and we would not be an industry leader without this commitment to excellence. I'm happy we're in a position to further reward our shareholders for their investment in Kodiak by increasing our dividend.

Speaker 1

We have great momentum as we head into the second half of the year. At this point, we will open up the line for questions. Operator?

Operator

Thank you. And our first question comes from John McKay with Goldman Sachs. Please state your question.

Speaker 3

Hey, guys. Good morning. Thanks for the time. I wanted to start a little bit on the forward outlook for the business. I understand you're not giving 25 guidance here.

Speaker 3

Yes, I would love to hear your thoughts on maybe like a medium term outlook for EBITDA growth going forward. And then very specifically as part of that, we haven't talked about potential revenue synergies from the CSI deal. So maybe you could frame that as part of that growth outlook?

Speaker 1

Yes. Hey, John, this is Mickey. Thanks for listening this morning. Look, I mean, I think the forward outlook is really positive. I think that the way we kind of framed it up for EBITDA growth for the year is minus the one time kind of transactional type of EBITDA adjustments for the year.

Speaker 1

If you look at that kind of where we think we'd be on a run rate perspective of $162,000,000 in a quarter of EBITDA is pretty representative of where I think we'll be going forward. And then you can kind of layer on that what our kind of standard growth has been over and above throughout the years on a pretty standard amount of growth CapEx. So I think you can kind of our business is pretty easy to predict and set quarterly EBITDA and annualize that out and layer on some growth from the growth CapEx that we're investing in the business. And I think you've got a pretty good idea of where we think we'll be. I think that to get to the question about revenue synergies, John, I mean, we really only have 90 days of data to evaluate right now.

Speaker 1

We've only owned this business for a quarter now. So we're not really ready to quantify revenue synergies and kind of give any guidance there. I will tell you that we've had some good wins early on here, but it is really kind of too early to tell and too early to give any forward looking kind of outlook there.

Speaker 3

I appreciate that. Maybe switching gears a little bit just to the electrification side. You guys, Mikael, your comments on the prepared remarks, what we saw to your competitors kind of talking up this a little bit, Archrock with their deal, USSC in a different direction. I'd just be curious on what this trend looks like from maybe a run rate CapEx needs? What are you hearing from your customers in terms of how important this is to them?

Speaker 3

And high level, I mean, does this shift at all in how we're thinking about the industry's overall current capital discipline? Thanks.

Speaker 1

I don't think it changes the capital discipline in the industry at all, John. I think that the electrification process going forward is going to have some pockets where it makes sense and some other pockets where it doesn't make sense. We're looking at, as I said in the prepared remarks, about half of our CapEx in 2025 is going to be spent on electric driven motor machines. Those are for projects that are highly specialized and for our existing customer base that has access to power on those locations. We can tell you that there is kind of a mixed view of electrification coming from our customer base.

Speaker 1

Some are pushing forward with electrification, others are really pulling back from electrification. I think that when you look at some of the other things in the industry that are going on, we're going to continue to driven equipment is a very different animal than small horsepower motor driven equipment is a very different animal than small horsepower type of electric motor driven type of on what we're doing and what we're looking at going forward and we're going to be participating in the electric motor driven type of realm. We want to be really good at it. We're going to be focused on it. And we think that's part of the future, but we don't think it's going to dominate and be the whole future.

Operator

Our next question comes from Jim Rallison with Raymond James. Please state your question.

Speaker 4

Hey, good morning, Mickey and John.

Speaker 1

Hey, again.

Speaker 4

Mickey, maybe you could just you got the first batch of some of the smaller horsepower stuff that you were looking to sell kind of in process. And then obviously, that's going to be ongoing for a period of time. But maybe just a reminder, at the end of the day as you kind of look at the fleet you acquired and the horsepower that kind of is maybe non core, a reminder of how much capacity you think ultimately over the next handful of quarters you're likely to sell and what you think the range of kind of proceeds of that would be and even maybe what you do with the proceeds?

Speaker 1

Yes. I think, look, it's going to be pretty hit and miss there. I think like this first fax that we've got that we're selling is going to be kind of give you a little better framework to think about is, it's going to be probably $15,000,000 between $15,000,000 $20,000,000 of annual revenue at sub it's something some kind of a margin that's less than what our fleet, the large horsepower fleet type of a margin is contributing. And so I think that you're looking at a multiple less than what we trade at that we get for that equipment. And so you're not talking about big dollars, you're talking about $15,000,000 of revenue on a company that we're guiding to be north of $1,000,000,000 of revenue already and those the numbers are already baked into those guidance numbers.

Speaker 1

So that's we already expect that. So again, I think that overall in the fleet from a horsepower perspective, we're probably looking at 150,000 to 200,000 horsepower worth of total horsepower that we look to kind of divest ourselves of that are non core to what we're trying to do, which is domestic, U. S, large horsepower, oily basin type of liquids rich basin type of equipment that we can create densification and drive higher margins and have really sticky long life type of cash flows for our investors.

Speaker 4

Yes, makes sense. Stitch, what you said before, I was just trying to get a magnitude, so that helps. And Mickey, you

Speaker 1

guys have

Speaker 4

done some interesting math in your presentation, kind of on the incremental compression horsepower needs relative to the growth outlook for gas volumes. And we can now that between you USA and Archrock and even consolidating Archrock, we can obviously track what a large share of the outsourced side of that equation is doing in terms of orders and how we're keeping up with that demand. Do you have any view or any color from your customer owned orders and how those have been tracking? Just curious relative to this kind of mid-fifty million horsepower fleet that we've got today, we can kind of track what the outsource side is, but I'm just curious if you have any view or color on are your customer orders keeping up from a pace perspective to match where that demand seems to be headed?

Speaker 1

Yes, I think it is, Jim. I mean, we don't have any real data, but if you ask me what my hunch is, I think that we're, as an industry, losing market share to the in source market today. And that's driven by the DAC discipline in our industry. And we're sitting here today saying, hey, we're only going to spend X amount of dollars a year on our growth CapEx. We have well in excess of that in opportunities to grow, but we're not going to deploy that capital and outspend our cash flows in that kind of meaningful way.

Speaker 1

And I think that you're seeing that with the big public guys in this industry pretty considerably. So if you had asked me today, I'd say that us as an outsourced industry collectively, that we're losing market share to the insourced industry today. Yes, sir. Thanks, Jim.

Operator

Our next question comes from Theresa Chang with Barclays. Please state your question.

Speaker 5

Morning. Thank you for taking my questions. I'd love to dig in a little bit more on the supply and demand outlook for compression over the medium and long term. And Mickey, just how long do you think this tightness will persist?

Speaker 1

Hey, good morning, Theresa. Thanks for joining us. I don't know. I think we've got many, many years of this tightness, Theresa. We've got you look at the demand side of the business and LNG plants coming on, that supply of gas has to come from somewhere.

Speaker 1

You talk about AI data center driven demand for power. I think that people are probably underestimating the power demand profile that's coming towards us too with all of that demand. There's some really interesting stats out there that really are eye opening and you get estimates for what that power demand is going to be from anywhere from 10 to 18 Bcf a day. And even if you're on the low side of that kind of demand profile, the supply of natural gas to feed that is going to be just extraordinary. And so it's we've been saying it for a year even before the AI and data center type of conversation has kind of become a buzzword in the industry.

Speaker 1

And I'm not an expert to be able to predict power demand, but at the same time, what I do know is it's going to require a lot of natural gas and more natural gas than what the U. S. Is producing today. And that requires compression. I think at lower natural gas prices, it's a $2 range where they're at today, Doesn't feel like it's economical to drill Haynesville wells.

Speaker 1

So the majority of that natural gas in the short term is going to have to come from oily basins like the Eagle Ford and the Permian Basin where we're in have a great position and it's going to create long term kind of stickiness of our revenues. We talk about the supply side, it's we looked at you look at what's happened in our industry over years past and some industries made mistakes before of overbuilding equipment and having an oversupply in a time where you didn't need it. This industry is not acting like that today. It's a very well behaved industry where I mean some people have increased their CapEx guidance for the year. That's fine.

Speaker 1

That's a prerogative, but it's still not putting us into a situation as an industry where we're overbuilding. I mean, that's it's again, I go back to the comments I made with Jim's question that we are we have many, many more opportunities to grow than what we're committing CapEx to. And I have a feeling that that's consistent with our competitors as well. And so, we're in a position where we're really restricting the supply from the discipline we're all showing collectively. And I think that we're in an environment where demand is continually ramping up and I think that we're probably underestimating what future demand looks like.

Speaker 1

And I think that this dynamic is set to have a runway that could last for a decade or 2, which seems odd for me to say that, but it's an amazing sort of dynamic today.

Speaker 5

Got it. And thank you for that nuanced answer. And maybe going back to your comments about the many different avenues and projection of growth. So with the CSI assets under your belt for 4 plus months at this point, What is your view on the M and A landscape from here, given your position and fragmentation or lack thereof in the industry? What do you view as your role and position within the market in terms of M and A?

Speaker 1

I think that we've got plenty to say grace over right now and probably not in the short term going to be active in the M and A market. Probably a lot of hardworking employees at Kodiak that are breathing a sigh of relief to hear that right now. But we've got a lot of work left to do. I know that we've owned the CSI business for a quarter now. We've made tremendous progress.

Speaker 1

We're really excited about the synergy potential there. But we have lots to do, quite frankly. And we're a newly public company and our focus right now is inward looking, making sure that we deliver for shareholders, making sure that we're focused on our business and that we're building a strong foundation to continue to build on for the to take advantage of that multi decade runway that we talked about a minute ago.

Speaker 5

Thank you very much.

Speaker 1

Thank you, Theresa.

Operator

Our next question comes from Zach Van Averin with TPH and Company. Please state your question.

Speaker 6

Hey guys, thanks for taking my question. Just going back to the comment on idled compression that you guys can refurbish and bring back to the market. Do you have a rough estimate of kind of timeline and the amount of horsepower that might be?

Speaker 1

Yes. Good morning, Zach. Probably roughly, I you're talking about like I said before, we're very highly utilized in the large horsepower type of segment of not segment, but kind of portion of the fleet. So I think the opportunity is probably maybe 30,000 or 40,000 horsepower over the next 6 to 9 months. And so pretty low impact of dollars, but there is some opportunities to get some wins there and put some equipment back to work and we're focused on doing that.

Speaker 1

Probably a little less sure about kind of the medium horsepower that kind of 400 to 1000 horsepower range, there might be another 40,000 or 50,000 horsepower available there that we might be able to redeploy. Those opportunities are going to be a little bit fewer and farther in between. But I think that opportunity over the next year could present itself and we'll have to that we'll be able to take advantage of. And right now in the small horsepower range, which was where the bulk of the units are that are idle in the legacy CSI fleet, it's probably there's not a ton of demand in that range today. So I think you've got some opportunities continue to deploy in large and the medium horsepower side.

Speaker 6

Got you. That's super helpful. And then maybe one on the compression side. We saw rates go up to close to $22 on a monthly base from just below $20 in Q1. I guess, was this all just the kind of noise around CSI or were there also a decent amount of contract renewals that happened in Q2 that kind of brought this number up?

Speaker 1

Yes. I mean, I think there was it was both, to be honest with you, Zach. There were some good renewals that we had some success on renewing contracts and that kind of thing. I don't have the numbers in front of me, but we did kind of executed as expected there. And on the same side, CSI as a blended average, as everybody kind of knows, the smaller horsepower equipment has a higher dollar per horsepower average revenue rate.

Speaker 1

And so blended in with our fleet, because it's a smaller kind of horsepower average per unit, it drives our revenue per horsepower up a little bit. And just to finish that thought,

Speaker 2

this is John too, on that smaller horsepower, it has a higher revenue per horsepower because it carries a lower margin because labor and parts and pieces will be more expensive than in the small horsepower. The best returns will always come from that large horsepower business.

Speaker 1

Perfect. Very helpful. Thanks guys. Yes. Thanks Zach.

Operator

Thank you. Our next question comes from Selman Akyol with Stifel.

Speaker 7

Thank you. Good morning. So with deployments for 2025 pretty well set and you look out into 2026 and you talked about sort of half being electric today. Would you expect that number to continue to move higher as you go into 2026?

Speaker 1

I would expect it to minimally stay the same. Yes, I think it might drive up a little bit, but I would expect that it 2026 deployments probably at least that much on the electric side.

Speaker 7

Understood. And then just kind of going back to the opportunity to refurbish some of the CSI fleet. Again, electric doesn't work everywhere. It works better on the smaller horsepower. Is there an opportunity to take those units and convert those over to electric and redeploy them?

Speaker 1

There could be. Potentially, that's going to be a capital allocation decision that we want to that we're going to have to make if we want to spend the capital on converting small horsepower to electric or spend that capital on deploying large horsepower stuff. So there is an opportunity, I think, that we'll probably explore the whether or not we want to be in that small horsepower electric type of business. I think there is a market out there, but I think that that's not traditionally been our focus and traditionally been our strategy. So we need to discuss that going forward.

Speaker 2

Got it.

Speaker 7

And then I guess just one last one and then thinking about this losing market share to the companies themselves. And I guess in part of that, just they're also seeing this longer runway that you're referring to in terms of the need for compression. And therefore, they're willing to commit the capital and think that they're going to own those units for 20 plus years?

Speaker 1

Well, I think that if they had access to outsource a lot of that equipment, they would. But they're just sitting the companies out there spending the capital to buy it to that they can outsource it to. This is a I've talked about it before pretty extensively that I think everybody in this industry has drastically underestimated the amount of compression it takes to produce Permian oil and gas. And it takes traditionally 3 to 4 times more horsepower than it takes to produce conventional reservoir type of of basin resources. And that's what a lot of what is causing this tremendous tightness in our market.

Speaker 1

We've got the highest kind of combined utilization that we've ever had, especially in the large horsepower segment here industry wide. And so I'm thinking a lot of it is, man, it just takes more horsepower. Horsepower is more expensive today. So everybody's dollar of CapEx doesn't go as far as it used to and buys less horsepower. So all these things kind of translate into producers and midstreamers are kind of forced to in source more than they probably traditionally would like to.

Speaker 1

And it's taken a tremendous amount of horsepower to produce what this country is producing in the oil and gas market because of the Permian effect.

Speaker 2

I'll also finish that thought too. It's very easy to track the public companies in terms of what we're adding to the market and we all are talking about capital discipline. We said a lot in our presentations and in our meetings on the private side, you've seen in our slide where we kind of list a lot of the competitors. It's a capital intensive business. That's more expensive and harder to come by than ever.

Speaker 2

The industry, the customer base is consolidating. It's very difficult for startups to get business with the large majors and large independents that now control the majority of the acreage in the Permian. It's just a different calculus. And so we do believe that that 75%, 80% of the public companies control is really where most of the growth is coming from in the industry too, which again leads us back to the operators out of necessity, the customers out of necessity are investing in their own horsepower.

Speaker 7

Got it. Thank you very much.

Speaker 1

Thanks, gentlemen.

Speaker 5

Thank you.

Operator

And there are no further questions at this time. I'll hand the floor back to management for closing remarks.

Speaker 1

Thank you, operator, and thanks to everyone today participating in our call. We look forward to speaking with you again after we report our results for the Q3. Bye.

Operator

This concludes today's conference. All parties may disconnect. Have a good day.

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Earnings Conference Call
Kodiak Gas Services Q2 2024
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