KGS - Kodiak Gas Services, Inc.
Price:
--
--
|
CONSENSUS:
Buy
DETAILS
|
PRICE TARGET:
$75.20
DETAILS
HIGH:
$88.00
LOW:
$44.00
MEDIAN:
$84.00
CONSENSUS:
$75.20
UPSIDE:
2.02%
← Back to Transcripts
Q1 2026 Earnings Call
2026-05-11Operator: Greetings, and welcome to the Kodiak Gas Services, Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Graham Sones, Vice President of Investor Relations. Thank you. You may begin.
Graham Sones: Good morning, and thanks for joining us for the Kodiak Gas Services, Inc. conference call and webcast to review our first quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Executive Vice President and Chief Financial Officer. After my remarks, Mickey and John will cover recent market developments, share an update on our power strategy, and walk through our results and updated 2026 outlook, including our new power segment. Then we will open it up for Q&A. A replay of today's call will be available by webcast and phone through May 25, 2026. Replay details are on the Investors tab of our website at codietgas.com. As a reminder, the information discussed today speaks only as of 05/11/2026, and may no longer be accurate by the time you listen to a replay or read a transcript. The comments made by management during this call may contain forward-looking statements within the meaning of U.S. federal securities laws. These statements reflect management's current views, beliefs and assumptions based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies 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 will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in our earnings release, which can be found on our website. Now, I would like to turn the call over to Kodiak Gas Services, Inc.’s President and CEO, Mickey McKee.
Mickey McKee: Thanks, Graham. Thanks to everyone for joining us today. I want to start like we do in all meetings at Kodiak Gas Services, Inc. with safety. We head into the summer driving season, it is a good reminder that driving is one of the riskiest things many of us do every day. That is why we have all Kodiak Gas Services, Inc. employees complete a safe driving program and we rolled out telematics last year to help reduce distractions when behind the wheel. Thank you to our safety and training teams for equipping our people with these valuable tools, and to everyone at Kodiak Gas Services, Inc. for living our safety-first mindset every day. Recent geopolitical events have served as a stark reminder that energy security and reliable energy infrastructure are critical to our daily lives. The energy landscape keeps evolving, with rising demand for natural gas tied to LNG exports and power generation, including data centers as the AI race accelerates. This step change in demand is straining supply chains, pushing equipment lead times to records, and increasing the need for highly trained technicians to keep large horsepower equipment running. Kodiak Gas Services, Inc. is well positioned to meet this challenge. Our supply chain team has been proactive in sourcing new equipment for both compression and power, and our highly skilled workforce is ready to keep delivering the service our customers expect. The natural gas compression market is in uncharted territory. Lead times for new large horsepower equipment keep extending and now sit at over 180 weeks for 3.6 thousand inline gas compression engines—over three years. Through our strong vendor relationships, we have secured new large horsepower compression packages for 2027 and 2028, and we are working to secure additional units for 2029 delivery. We remain confident in our ability to achieve our targeted annual horsepower growth of 150 thousand horsepower per year, resulting in a compression fleet of at least 5.2 million horsepower by the end of the decade. While supply is limited, compression demand is building across both our E&P and midstream customers as they now have increased visibility into the next wave of natural gas volumes. Permian operators are starting to pick up activity with higher oil prices and record U.S. oil export volumes. And with more than 5 Bcf per day of Permian gas takeaway capacity expected online by year-end, several customers have asked whether they can accelerate their 2027 equipment orders. This has manifested itself in our pricing, as we have demonstrated continued pricing power we expect to continue into 2027 and beyond, given the tightness in the market. One thing to keep in mind is that Kodiak Gas Services, Inc. has consistently high-graded our fleet over the last couple of years, strategically divesting some of our noncore small horsepower compression that commands a higher dollar-per-horsepower revenue rate, but at a lower margin. We have increased our average horsepower per unit in our fleet from 943 horsepower per unit at the end of Q1 last year to 977 horsepower per unit currently, while also driving up the average dollar-per-horsepower revenue rate, effectively overcoming industry dynamics for revenues per horsepower while our peers' horsepower per unit has collectively gone down over that time period. Another dynamic we are seeing is customers signing longer-term compression contracts to lock in equipment availability. During the quarter, we entered into a 10-year compression services contract extension with one of our top customers, and we are in the process of finalizing another 10-year extension with another top customer, further demonstrating the infrastructure nature of the large horsepower compression business. Also in the first quarter, we purchased a package of large horsepower compression units from a Permian producer and signed a 7-year contract to provide compression services. This was important for a few reasons: it is an accretive way to grow market share and generate immediate cash flow in this long lead time environment, and it also reinforces what we hear from customers—Kodiak Gas Services, Inc. can operate units efficiently and cost effectively. Next, I want to talk about our Distributed Power business, now going to market as Kodiak Power Solutions. We closed the DPS acquisition on April 1, and we have been moving quickly on integration. We are already operating on the same ERP platform, and we have realigned our commercial and operations teams to support the business. DPS brought a strong commercial team with deep distributed power experience, including one of the first islanded primary power data center contracts, which is now in its third year of operation and has capably delivered on its 99.9% reliability guarantee to its customer. I will touch on a few reasons we are excited about the long-term growth in distributed power. The power market is evolving quickly. Texas leads the nation in data centers under development with over 150 currently in development as hyperscalers prioritize low-cost energy, available land, and a constructive regulatory environment in the site selection process. One recent estimate says there are over 30 gigawatts of planned data centers in Texas over the next two years. Speed to power also matters. The AI world is moving fast; delays can put projects at a disadvantage. Behind-the-meter solutions are not just short-term solutions; they are increasingly cost competitive with grid power, often with similar or better reliability. We are currently in discussions with a number of data center customers about long-term contracts at high-quality returns to provide primary power. The opportunity set is significant, and we expect it will keep growing as hyperscalers expand their CapEx plans. Recent estimates indicate the hyperscalers’ AI-related CapEx spending between now and 2030 may exceed $5 trillion. Given the significant level of digital infrastructure and microgrid demand that we are currently experiencing, and our focus on moving quickly to capture the opportunity, we have been very active in sourcing additional power generation capacity. As noted in this morning's press release, we have sourced additional power generation capacity to add to what we acquired with DPS. We have currently placed orders for more than 260 megawatts, with about 61 megawatts to be received in 2026 and the remainder between 2027 and 2029, and we are in advanced discussions with multiple counterparties for an additional 1.3 gigawatts to be delivered on a relatively ratable delivery schedule through the end of the decade. The equipment we are buying is a mix of recip engines and industrial gas turbines that are purpose built for data center and microgrid applications. This is consistent with our power growth strategy targeting growth of 300 to 500 megawatts per year through the end of the decade, equating to a distributed power fleet of around 2 gigawatts by year-end 2030. Based on the discussions we are having today, we expect our investment in power equipment to generate unlevered returns greater than 15% and EBITDA build multiples around 5x, competitive with our compression business after factoring the added benefit of increasing the average duration of our contracted cash flow with high-quality customers. As we invest to grow both our contract compression and distributed power assets, we are committed to maintaining financial flexibility and having a strong balance sheet. Our contract compression business is generating highly resilient free cash flow, which will help fund our power growth. Plus, we have ample liquidity on our ABL, and a variety of financing options available to us as we undergo this period of strong infrastructure growth. The investments we make today will help build a stronger, more profitable company in the future. This morning, we released our first quarter 2026 financial results. I will hit a few highlights, and I will let John go into more detail. We ended the first quarter at 4.4 million revenue-generating horsepower. Average horsepower per revenue-generating unit was 977, the highest among our contract compression peers, and a figure we expect to keep moving higher given our large horsepower focus. Our investments to grow the fleet, along with divestitures of noncore units, drove fleet utilization to 98%, another industry-leading metric. In Q1, we delivered strong year-over-year growth in contract services revenue and adjusted gross margin. Contract services adjusted gross margin was 70.6%, a seventh consecutive quarterly increase and a new high for Kodiak Gas Services, Inc. Margin gains continue to be driven by strong operational execution and returns on our technology investments. Real-time equipment monitoring is helping us catch issues earlier, reduce failures, increase operational efficiency, and lower parts spend. In our Other Services segment, first quarter results reflected a sequential pickup in station construction activity along with better margins on AMS services. Strong results from each segment drove adjusted EBITDA to $190 million for the quarter, up 7% year over year and a new company record. Looking ahead to the rest of 2026, we see continued strong momentum in compression. We are fully contracted for our 2026 new unit compression deliveries, and are making strong progress on our 2027 deliveries with over 40% already contracted. Our updated guidance reflects both the incremental contribution we expect from Power and the investment we are making to scale that business and drive growth for years to come. Now, I will pass the call to John Griggs to further discuss our financial results and our revised outlook for 2026. John?
John Griggs: Thanks, Mickey. You summed it up well. Kodiak Gas Services, Inc. has a lot of positive momentum. Our compression business continues to set new records in both revenues and margins, and the growth and return potential for our new power business is extremely compelling. Now let us turn to the quarter's results. We reported total revenue of $346 million, up 5% year over year. The growth was primarily driven by new horsepower, price increases, and strong operational execution. In Contract Services, revenues increased 6% year over year and 2% sequentially. Revenue-generating horsepower increased by approximately 35 thousand sequentially. We realized a 3.7% year-over-year price increase to $23.31 per ending revenue-generating horsepower. This uptick was impressive considering that approximately 20 thousand of this quarter's horsepower increase came at the end of the quarter via the purchase-leaseback transaction Mickey mentioned and therefore had no meaningful impact on revenues. A real bright spot was our Contract Services adjusted gross margin of 70.6%, up 138 basis points sequentially and 286 basis points year over year. This high watermark is further proof to us that the significant investments we have been making in our training and operational technology over the last couple of years are generating real returns. During the quarter, we realized a reduction in compression parts expense as our investment in telemetry technology and data analysis has allowed us to monitor equipment more closely, leading to a reduction in failures and spend. We are also gaining efficiencies through the connectivity of our technology platforms, making information more rapidly available to our skilled technicians. All of this leads to more informed, real-time field-level decisions, which then tends to result in improved run time and even better customer service. In Other Services, revenues rose 25% sequentially as we saw increased station construction activity during the quarter. We realized a sequential margin increase to around 16% as we saw a greater portion of activity this quarter in higher-margin revenue streams. Adjusted EBITDA for the quarter was up 7% versus the prior-year quarter, landing in a new company record of $190 million. We reported adjusted net income of $52 million, or $0.59 per diluted share. Let us turn to capital expenditures. Maintenance CapEx was approximately $18 million in Q1, in line with our expectations. Other CapEx was $7.5 million, also in line. Growth CapEx of $86 million included $24 million for the compression purchase-leaseback transaction and $18 million related to new power generation equipment. We will break out the power growth CapEx in future quarters. The power gen equipment orders we are making average about $1.1 million to $1.2 million per megawatt. We would expect to spend an additional roughly 30% for balance-of-plant equipment. That BOP figure could vary depending upon the setup required by customers. After backing out the purchase-leaseback and power-related figures, compression growth CapEx was around $44 million, which included the delivery of 18 thousand new-unit horsepower during the quarter as well as a variety of other items, including fleet revamps and deposits on long-lead-time engines. Discretionary cash flow was $126.5 million, up 9% year over year, driven by the higher adjusted EBITDA and lower cash taxes. Moving to the balance sheet, net debt was $2.7 billion at quarter-end. In February, we issued $1 billion of senior notes due in 2031 at an attractive rate of 5.75%. We used the proceeds to redeem our 2029 senior notes and pay down our ABL. Our credit agreement leverage ratio was 3.6x as of March 31. Finally, our Board declared a dividend of $0.49 per share that will be paid later this month. Based on our first quarter discretionary cash flow, our dividend remains well covered at 2.9x. Let us turn to our updated 2026 guidance, which we split into the three segments we intend to report going forward. Contract Services will become Compression Infrastructure and continue to include the same items it did previously. We are creating a new segment called Power Infrastructure, which will include the vast majority of our new power business. A small portion of DPS’ historical and future revenues—mainly things like fleet mobilization and logistics—will be reported in our Other Services segment. We will guide and report growth CapEx separately for compression and power to increase visibility. As a reminder, our 2026 guidance reflects just three quarters of contribution from the DPS acquisition. In terms of changes, we increased the low end of Compression Infrastructure revenue guidance to reflect the progress we have made recontracting units and the increased visibility on new unit growth. We moved up our adjusted gross margin estimate to 68.5% to 70%, up from our original guidance, taking into account the recent rise in oil prices and its impact on our lube oil and fuel expenses in the second half of the year. For Power Infrastructure, we are guiding to full-year revenues of $95 million to $125 million and an adjusted gross margin range of 60% to 70%. We are keeping those ranges wide given the newness of the acquisition, as well as to maintain commercial flexibility to meet the timing needs of longer strategic deployments. While we expect to take delivery of 61 megawatts of additional power equipment in 2026, we do not expect to realize any material increase in revenue for these units until early 2027. We increased the top end of our Other Services revenue guidance range to account for the addition of the nonrecurring revenues from the power business I previously mentioned. Putting that all together, our 2026 adjusted EBITDA guidance is now $820 million to $860 million, and our discretionary cash flow guide is $520 million to $570 million. We bumped up each of maintenance and other CapEx by $5 million based on the addition of the power fleet. Compression growth CapEx of $245 million to $275 million is consistent with the March press release announcing the purchase-leaseback transaction, and we remain on pace to add approximately 170 thousand horsepower over the course of the year. As for power growth CapEx, as Mickey highlighted, in light of the strong demand signals we are seeing, we are embarking on an investment cycle in power designed to meaningfully increase our earnings power over time. That translates into the addition of roughly 300 megawatts to 500 megawatts per year from 2027 through 2030. To hit those targets, we expect power growth CapEx this year to range from $400 million to $500 million, with approximately $90 million related to gensets and balance of plant to be delivered in 2026. The remainder is for equipment scheduled for delivery in 2027 and beyond. I will echo Mickey's comment that we are going to use the strength of our extremely resilient and highly creditworthy compression business to help us fund our initial growth in Power. You should expect us to guard the balance sheet while doing so. With that, I will hand it back to Mickey.
Mickey McKee: Thanks, John. I will wrap up by reiterating that 2026 is off to a great start. Q1 adjusted EBITDA exceeded our expectations; contract compression market fundamentals remain compelling, with highly visible demand. We are extremely excited about our distributed power business offerings and the opportunities to grow that business. Thanks for your participation today. We will now open the call for questions. Operator?
Operator: Thank you. To allow for as many questions as possible, we ask that you please limit yourselves to one question and one follow-up. Our first question comes from the line of Elias Jossen with JPMorgan. Please proceed with your question.
Elias Jossen: Hey, good morning, everyone. Just wanted to start on the contracting framework for the backlog. I know that you have provided some incremental color on long-term contracts that you have executed, but how should we think about contracting within the sort of 2 gigawatt backlog target that you have outlined? And should we think about incremental updates as we move forward on that 300 to 500 megawatts of annual capacity that you plan to add? Thanks.
Mickey McKee: Yes. Hey, Elias, thanks for the question. Good morning. We have only owned this business now for five weeks and we are pretty hyper-focused right now on making sure that we have the supply in place to get the contracts put in place. So we are really focused on making sure that we have the equipment coming to us right now. On top of that, we have a tremendous amount of inbounds and conversations that are happening right now both on the data center side and on the microgrid side as well. There will be more updates on those contracts as we go along and as they come in. We will get those frameworks put together for you, and we will be able to update probably on a quarterly basis going forward from here.
Elias Jossen: Awesome. And then I think the competitive edge that you have demonstrated from an execution standpoint on equipment procurement is definitely differentiated. Can you talk to us about how you are able to procure in this increasingly challenged supply chain and get this equipment versus others? Any color would be great. Thanks.
Mickey McKee: Yes, absolutely. It is a challenge right now. This equipment is in short supply and is difficult to come by. We are leveraging all the relationships that we have both within the compression industry and with our current suppliers, along with some new ones. We have some things that are in the works to develop long-term frameworks around some supply agreements, and we are working hard on those and will update more as we get those finalized.
Elias Jossen: Great. Thanks, guys.
Mickey McKee: Thanks, Elias.
Operator: Thank you. Our next question comes from the line of John Ross Mackay with Goldman Sachs. Please proceed with your question.
John Ross Mackay: Hey, team. Thank you for the time. I will pick up on the theme you touched on a bit, but I want to ask it a little more directly. If we are thinking about the CapEx per megawatt here, John, I know you touched on it a little bit. Could you give us more color on how you are thinking about that balance-of-plant spend, maybe frame that up around different customer types, and then any comments on what you are targeting for that customer-type mix?
John Griggs: Yes, sure. Thanks for the question. As we said, and I think consistent with what others have said as well, for the base power equipment since we are already purchasing some and are in deep discussions with OEMs about purchasing more, let us call it $1.1 million to $1.2 million per megawatt. It could vary a little between recips and turbines, but that is what we are modeling in. From a balance-of-plant perspective, we are using about $1.5 million per megawatt. It can vary, and people in the business know this well. If a data center wanted all the bells and whistles around their project, you could very easily be at least 2x what you were in your original equipment purchase. If you had something that was a less sophisticated application and perhaps you had some of that kit in-house as well, it could be much smaller—1.2x or so. We think $1.5 million is the right number to be using all-in.
Mickey McKee: On the customer mix, we have a tremendous amount of conversations happening right now in the data center space that are a mixture of regular digital infrastructure as well as AI compute-type loads. There is going to be a mix of those different data center customers, and that is the bulk of what we are looking at right now for customer mix.
John Ross Mackay: Appreciate that color. Second one from me, probably a quick one. Given those different types of customers and different types of balance-of-plant build-outs, are you confident in the return framework you lined up earlier on the call and when you first announced the DPS acquisition?
Mickey McKee: Yes, absolutely. We will model in those costs as we do the engineering up front on these projects and make sure the returns meet the expectations and thresholds that we have already put in place.
John Ross Mackay: Great. Appreciate the time. Thank you.
Mickey McKee: Thanks, John.
Operator: Thank you. Our next question comes from the line of James Michael Rollyson with Raymond James. Please proceed with your question.
James Michael Rollyson: Hey, good morning, everyone. Mickey, maybe switching to the competitive landscape. If we look at your history in compression, you started the business basically trying to build a better mousetrap from an uptime perspective and customer service perspective, and have been very successful in doing so. As you now venture into the power space, it is obviously a different landscape of people chasing this business. I am curious how potential customer conversations go, and how you win that business over the half dozen other guys that are chasing this as you go forward? And then switching gears to your core business: with the long lead times stretching out, you are generally on top of it, but how are you planning ahead to ensure engines? Are you looking even outside of CAT to make sure all your customer needs get met, and how are you planning for all that?
Mickey McKee: Hey, good morning, James. There are a lot of similarities in these businesses. There are nuances and differences in the type of equipment and such, but we are going to approach it the same way. That starts with the customer-service mentality that we are going to be a total solutions provider, and we are going to back that with run times and reliability. What we liked about DPS when we bought the business is the fact that they have a data center contract that is totally islanded already, with over two years of operating history at over 99.9% reliability. The service mentality really lines up with what Kodiak Gas Services, Inc. has always brought to the table in the compression business. We are confident that we can be a provider of a differentiated solution that really focuses on our customers and their needs. On the supply chain and engines, we are certainly looking out into the future and making sure that we have engines and shop space—really the two biggest commodities—locked up. We have 2027 and 2028 completely lined up, and we are working on 2029 right now. That really coincides with what our customers are looking forward to, with highly visible natural gas demand from LNG and power demand coming on. We feel like we are staying ahead of it, paying close attention to the supply chain, and making sure there are no gaps in deliveries.
John Griggs: And James, I would just chime in and say the 170 thousand incremental horsepower that Mickey called out last quarter is totally doable given how we manage the supply chain and the demand signals.
James Michael Rollyson: Great to hear. Not surprising, and thanks for all the color, guys.
Mickey McKee: Thanks, James.
Operator: Thank you. Our next question comes from the line of Douglas Baker Irwin with Citi. Please proceed with your question.
Douglas Baker Irwin: Hey, team, thanks for the question. I wanted to start with the 260 megawatts you have already procured. Can you provide more detail around what that initial mix of equipment looks like—turbines versus recips? And then any more detail around the timeline beyond 2026 for taking delivery and where you might stand on contracting discussions so far, understanding it is still very early days? And as a follow-up, can you talk about how the funding requirements for this power equipment might compare to traditional compression? I am wondering how ratable that $400 million to $500 million of CapEx from this year might be if some of this power capacity requires more upfront payments or deposits for larger turbines, and any implications for cash flow if spending is more front-end weighted?
Mickey McKee: Yes. Good morning, Doug. Still very early days and we are working through a lot of those details. What we have already procured is a mix of recips and turbines. That is going to be our strategy going forward. We think there is a market and demand for both, and we think having a quality mix is the way we want to go. The 260 megawatts we have already procured is probably in the ballpark of 50/50 recip versus turbine. Going forward, I would think it will be more heavily weighted toward turbines—roughly 25% recip and about 75% turbine—as we think those turbines, from a real estate standpoint, take up a lot less space, have much more power density, and are really good fits for the data center contracts we are chasing and already in conversations on, which are typically in the ballpark of 200 to 300 megawatts at a time.
John Griggs: On funding and cadence, a couple of points. The 300 to 500 megawatts per year that we call out from 2027 through 2030 is not a straight line, but it is pretty tight within that range given what we have already bought or are advancing with OEMs. In the turbine world in particular, there are more upfront or progress payments relative to our compression business. In the recip world, it remains to be seen where it lands—those are key variables we are working through with OEMs and channel partners. In terms of paying for it, protecting the balance sheet—and therefore the overall franchise—is really important to us. We have our 4x leverage target; we are about there right now. When we went public, we were 4.2x and committed to get to 3.5x by 2025, and we did, on target. As we commence this investment cycle, we have been transparent that you should expect us to drift above our 4x long-term leverage target, but only periodically. As the contracts come in across both compression and power, we will delever quickly and get back into target and below. We also have an incredible compression business that is extremely resilient with limited exposure to near-term commodity moves and performed really well in stress tests like COVID. We have a wonderful ABL and terrific bank groups that support us, and we have executed well on three bond offerings in the last couple of years, including the first 10-year bond in the compression business. Summing it up: we have a great business, experienced team, and a multitude of options to fund the business going forward.
Mickey McKee: And Doug, you hit on the fact that there are some advanced progress payments due on some of these bigger turbines. We are highly focused on that and are leveraging our existing relationships with OEMs and vendors to minimize the impact of those progress payments.
Douglas Baker Irwin: Got it. Thanks for the time.
John Griggs: Thanks, Doug.
Operator: Thank you. Our next question comes from the line of Neal Dingmann with William Blair. Please proceed with your question.
Neal Dingmann: Good morning, guys. Nice update and great quarter again. My first question, Mickey, maybe for you or John, on compression M&A. Could you talk to future compression horsepower purchase-leaseback potential? Based on my E&P conversations, it sounds like several E&Ps would be willing to transfer ownership to you given your service record. How active are those discussions and what potential do you see there? Secondly, on the services side, would the existing workforce service both compression and power, and do you have enough folks in place today or are you continually adding?
Mickey McKee: Good morning, Neal. I think there is a lot of opportunity there. We are in the middle of this investment cycle in power and will be very focused on that, but we will also take advantage of opportunistic things that pop up on the compression side, including purchase-leasebacks. We executed one last quarter of just over 20 thousand horsepower, which was a really nice, bite-sized deal for us, and it has gone very smoothly with us taking over operations on April 1. We love those deals and will look at more of them as opportunities arise. On workforce, we are always adding folks and putting them through our world-class training program. We are opening our new facility in Midland and will move in the June timeframe. It will be a great resource to continue to train our people and also our customers' people to be around our equipment safely. We focus on training as much or more than anybody in our industry, and it is a differentiator. We are pretty fully staffed and are continuing to add to handle our growth. We are adding new training programs into our Bears Academy for power and electrical topics, working with several OEMs and equipment providers to deliver training at our facility. We are also arming our technicians with our technology—we are rolling out large language models and agentic AI that will help with parts location, troubleshooting, and more. We expect that to be fully rolled out in the second half of the year, and it will be a tremendous asset to our employees.
John Griggs: Thanks, Mickey. Thanks, Neal.
Operator: Thank you. Our next question comes from the line of Analyst with Bank of America. Please proceed with your question.
Analyst: I was wondering if we could go back to the contracts and how you are securing contracts for the incremental megawatts you are purchasing. Is it mostly pre-contracted, or is there some on-spec ordering for future megawatts? And as a follow-up on the Compression Infrastructure margins, you are already above 70% in the first quarter. The new guide is up a little bit, but could you talk about the rest of the year and whether that 70% could creep higher given where Q1 has been?
Mickey McKee: Good morning. We are having to go out and look for this equipment on the power side and make commitments. I would not characterize it as speculative CapEx as much as educated commitments based on our backlog of opportunities that DPS brought to the table as well as additional inbounds since we closed. We are in advanced conversations on a lot of items for contracts to be put in place over the next several months. We are ordering some equipment based on how educated we are on the pipeline, and we should be talking about contracts rolling in, hopefully pretty quickly.
John Griggs: On margins, we are really happy to see that number. 70.6% in the first quarter was gangbusters for us. The compression business is hitting on all cylinders. We attribute that to three things: first, the investments we have been making in our people and technology over the last two years—they are paying off. Things are breaking less, we are spending more smartly, and we are more productive. Second, we continue to drive toward larger horsepower. Third, pricing. The guide being a little below where we came out in the quarter has an element of conservatism. With oil price being high, that drives lube oil and fuel prices higher, which are inputs in our cost of goods sold. Given the unpredictability, we felt our guide is the right place to be.
Operator: Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Theresa Chen: Good morning. Thank you for taking my questions. On the base business, Mickey, now that you are seeing over three years of lead time and that metric has only moved one direction since your IPO, when you think about pricing power—and to your earlier comments about pricing power continuing into 2027 and beyond—what are you seeing in terms of price increases across the industry, and what do you anticipate over the next couple of years as a result of the supply tightness? Taking a step back, is this situation sustainable? How does the industry solve this supply crunch, if it does, and how do you see the landscape evolving? On the power infrastructure side, separate from contract duration and structure, how do you think about counterparty credit risk in these contracts, and how much terminal value is embedded in your 15% unlevered return targets?
Mickey McKee: Good morning, Theresa. On pricing, I think pricing on our equipment will continue to move up. How much and how far depends on external factors like the price of oil and the competitive landscape. We think we have the opportunity to continue the strong pricing we have seen over the last several years. New units are coming out at spot rates that are very constructive for us, and we continue to reprice the base fleet as contracts roll. Producers and midstreamers are willing to lock in equipment for longer periods now, which is great for our base business. On the supply crunch, demand is going to continue to outstrip supply. Lead times continue to extend. There is an increasing amount of compression moving away from electric because of access to grid power, and I think there will continue to be a supply shortage for the foreseeable future, especially with increasing GORs in the Permian, increasing volumes, and more takeaway capacity enabling growth. We are excited about the Permian and other basins, and we think there will be continued, incredible demand for our services and equipment.
John Griggs: On counterparty risk and returns, on terminal value it depends on the project and duration. If we are penciling a 15-year contract, we will have zero terminal value in the model; even if you put a lot in, it will not move the math much over that timeframe. If it is a 7-year contract, you get a different answer. We need to feel we will be in the upper teens dynamic when entering into any contracts. On counterparty quality, it is mission critical. In compression, we have seen counterparties get acquired by some of the largest players in the energy complex, yielding more investment-grade customers. We think the opportunity set is there on the digital infrastructure side too, though it is a wider marketplace with more participants. Each contract will be a little different, and we will bake that into our decision-making on which contracts to pursue and which to let others grab.
Theresa Chen: Thank you.
Graham Sones: Thanks, Theresa.
Operator: Thank you. Our next question comes from the line of Sebastian Erskine with Rothschild & Co. Redburn. Please proceed with your question.
Sebastian Erskine: Good morning, and congrats on the developments today—very exciting. First, on your conversations with the data center customers: one advantage with compression has been that equipment tends to stay on for many years beyond the initial term. Are your customers thinking about this as a bridging solution until the grid catches up, or is there scope for this to be used as a permanent turnkey utilities-type offering for hyperscalers? And on the margins, 60% to 70% adjusted gross margins for the Power Infrastructure business is a wide range. Could you talk through the drivers behind that and the scope for margin progression over the medium term? Is the focus predominantly on just getting the top line?
Mickey McKee: Good morning, Sebastian. Typical contract terms we are discussing with data centers are 10 or 15 years, and many want the option to extend at the end of those terms. The business has evolved from being viewed as a bridge to interconnection to increasingly a permanent power supply. Depending on regulatory developments, but we are hearing timelines shift from six to eight years to interconnection to now outside a decade, to maybe never. We view this as permanent digital and power infrastructure that will be there for a very long time.
John Griggs: On margins, it is always going to be focused on return on capital. We guided wide for a couple of reasons. First, we have only owned the business for five weeks and just migrated it into our ERP, so we wanted to protect against surprises. Second, DPS was somewhat capital-starved. They had a long-term primary power contract with a data center and were getting traction on a second, but they did not have access to power equipment. The team purposefully kept many contracts shorter term with the idea that, once they landed a 100 to 200-plus megawatt long-term quality contract, they could roll off the short-term power into that. That is what we inherited. As we invest to build our power foundation, we will keep some power on short-term contracts so that we can pull it off once we grab the longer-term contracts. We would not adjust our cost structure for what would be a temporary move. As we get to scale and have more power, the range should narrow and look more similar to the compression business.
Sebastian Erskine: Really appreciate that, and congrats on the results.
John Griggs: Thanks.
Operator: Thank you. Our next question comes from the line of Analyst with RBC Capital Markets. Please proceed with your question.
Analyst: Hi, good morning. On the power side, can you talk a little about the cash conversion cycle? What are the timelines from when you sign a contract, assuming you have the equipment, to when you start generating revenues? And are most of the discussions you are having on the power side in Texas? Can compression and power share technician pools or operations to drive efficiencies?
Mickey McKee: Good morning. Timelines will depend on the contract. For less sophisticated installations, you could see three to six months from equipment procurement to revenue. For larger plants, it could be six to twelve, maybe eighteen months. On geography, we are seeing a lot of inbounds and opportunities in Texas, but also across the United States. On operations, right now we are keeping the operations groups separated so they can focus on either power or compression. As we develop projects in close proximity to our compression operations, there will definitely be overlap and support, particularly on supply chain and safety. There will be some shared efficiencies, but for now we are building out each capability deliberately.
Analyst: Got it. Great. Thank you very much.
John Griggs: Thanks.
Operator: Our final question this morning comes from the line of Analyst with Daniel Energy Partners. Please proceed with your question.
Analyst: Good morning. Thanks for squeezing me in. First, on the purchase-leaseback transaction, could you talk through that a bit more and whether there is more interest in transactions like that today on both your side and the operator’s, given the tightness in the market and that, for a lot of operators, compression is not really a core operation? And in addition to engine lead times, you highlighted the importance of capacity where units are packaged. How tight is that shop space today and what are your thoughts there?
Mickey McKee: Good morning. The purchase-leaseback we executed was a really good deal for us and for the customer. It is not a core competency for many customers to own and operate their own compression, and we have the back office and infrastructure to focus on service every day. There are advantages for customers to execute those transactions, and we think there are additional opportunities like this. On packaging capacity, we have to pay close attention to shop capacity and the ability to assemble units once you get the engine and compressor. We marry the two—securing engines and ensuring our packagers have ample shop space and capacity. Lead times are similar to engines; packagers are booking shop space as they get engines and orders. Lead times are in excess of three years with shop space allocated. We are making sure we have that supply procured, as well as the engines, so all long-lead, critical-path items are covered.
Analyst: Understood. Thank you for taking my questions.
John Griggs: Thanks.
Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the floor back to Mr. McKee for any final comments.
Mickey McKee: Thanks, Melissa, 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 second quarter.
Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Graham Sones: Good morning, and thanks for joining us for the Kodiak Gas Services, Inc. conference call and webcast to review our first quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Executive Vice President and Chief Financial Officer. After my remarks, Mickey and John will cover recent market developments, share an update on our power strategy, and walk through our results and updated 2026 outlook, including our new power segment. Then we will open it up for Q&A. A replay of today's call will be available by webcast and phone through May 25, 2026. Replay details are on the Investors tab of our website at codietgas.com. As a reminder, the information discussed today speaks only as of 05/11/2026, and may no longer be accurate by the time you listen to a replay or read a transcript. The comments made by management during this call may contain forward-looking statements within the meaning of U.S. federal securities laws. These statements reflect management's current views, beliefs and assumptions based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies 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 will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in our earnings release, which can be found on our website. Now, I would like to turn the call over to Kodiak Gas Services, Inc.’s President and CEO, Mickey McKee.
Mickey McKee: Thanks, Graham. Thanks to everyone for joining us today. I want to start like we do in all meetings at Kodiak Gas Services, Inc. with safety. We head into the summer driving season, it is a good reminder that driving is one of the riskiest things many of us do every day. That is why we have all Kodiak Gas Services, Inc. employees complete a safe driving program and we rolled out telematics last year to help reduce distractions when behind the wheel. Thank you to our safety and training teams for equipping our people with these valuable tools, and to everyone at Kodiak Gas Services, Inc. for living our safety-first mindset every day. Recent geopolitical events have served as a stark reminder that energy security and reliable energy infrastructure are critical to our daily lives. The energy landscape keeps evolving, with rising demand for natural gas tied to LNG exports and power generation, including data centers as the AI race accelerates. This step change in demand is straining supply chains, pushing equipment lead times to records, and increasing the need for highly trained technicians to keep large horsepower equipment running. Kodiak Gas Services, Inc. is well positioned to meet this challenge. Our supply chain team has been proactive in sourcing new equipment for both compression and power, and our highly skilled workforce is ready to keep delivering the service our customers expect. The natural gas compression market is in uncharted territory. Lead times for new large horsepower equipment keep extending and now sit at over 180 weeks for 3.6 thousand inline gas compression engines—over three years. Through our strong vendor relationships, we have secured new large horsepower compression packages for 2027 and 2028, and we are working to secure additional units for 2029 delivery. We remain confident in our ability to achieve our targeted annual horsepower growth of 150 thousand horsepower per year, resulting in a compression fleet of at least 5.2 million horsepower by the end of the decade. While supply is limited, compression demand is building across both our E&P and midstream customers as they now have increased visibility into the next wave of natural gas volumes. Permian operators are starting to pick up activity with higher oil prices and record U.S. oil export volumes. And with more than 5 Bcf per day of Permian gas takeaway capacity expected online by year-end, several customers have asked whether they can accelerate their 2027 equipment orders. This has manifested itself in our pricing, as we have demonstrated continued pricing power we expect to continue into 2027 and beyond, given the tightness in the market. One thing to keep in mind is that Kodiak Gas Services, Inc. has consistently high-graded our fleet over the last couple of years, strategically divesting some of our noncore small horsepower compression that commands a higher dollar-per-horsepower revenue rate, but at a lower margin. We have increased our average horsepower per unit in our fleet from 943 horsepower per unit at the end of Q1 last year to 977 horsepower per unit currently, while also driving up the average dollar-per-horsepower revenue rate, effectively overcoming industry dynamics for revenues per horsepower while our peers' horsepower per unit has collectively gone down over that time period. Another dynamic we are seeing is customers signing longer-term compression contracts to lock in equipment availability. During the quarter, we entered into a 10-year compression services contract extension with one of our top customers, and we are in the process of finalizing another 10-year extension with another top customer, further demonstrating the infrastructure nature of the large horsepower compression business. Also in the first quarter, we purchased a package of large horsepower compression units from a Permian producer and signed a 7-year contract to provide compression services. This was important for a few reasons: it is an accretive way to grow market share and generate immediate cash flow in this long lead time environment, and it also reinforces what we hear from customers—Kodiak Gas Services, Inc. can operate units efficiently and cost effectively. Next, I want to talk about our Distributed Power business, now going to market as Kodiak Power Solutions. We closed the DPS acquisition on April 1, and we have been moving quickly on integration. We are already operating on the same ERP platform, and we have realigned our commercial and operations teams to support the business. DPS brought a strong commercial team with deep distributed power experience, including one of the first islanded primary power data center contracts, which is now in its third year of operation and has capably delivered on its 99.9% reliability guarantee to its customer. I will touch on a few reasons we are excited about the long-term growth in distributed power. The power market is evolving quickly. Texas leads the nation in data centers under development with over 150 currently in development as hyperscalers prioritize low-cost energy, available land, and a constructive regulatory environment in the site selection process. One recent estimate says there are over 30 gigawatts of planned data centers in Texas over the next two years. Speed to power also matters. The AI world is moving fast; delays can put projects at a disadvantage. Behind-the-meter solutions are not just short-term solutions; they are increasingly cost competitive with grid power, often with similar or better reliability. We are currently in discussions with a number of data center customers about long-term contracts at high-quality returns to provide primary power. The opportunity set is significant, and we expect it will keep growing as hyperscalers expand their CapEx plans. Recent estimates indicate the hyperscalers’ AI-related CapEx spending between now and 2030 may exceed $5 trillion. Given the significant level of digital infrastructure and microgrid demand that we are currently experiencing, and our focus on moving quickly to capture the opportunity, we have been very active in sourcing additional power generation capacity. As noted in this morning's press release, we have sourced additional power generation capacity to add to what we acquired with DPS. We have currently placed orders for more than 260 megawatts, with about 61 megawatts to be received in 2026 and the remainder between 2027 and 2029, and we are in advanced discussions with multiple counterparties for an additional 1.3 gigawatts to be delivered on a relatively ratable delivery schedule through the end of the decade. The equipment we are buying is a mix of recip engines and industrial gas turbines that are purpose built for data center and microgrid applications. This is consistent with our power growth strategy targeting growth of 300 to 500 megawatts per year through the end of the decade, equating to a distributed power fleet of around 2 gigawatts by year-end 2030. Based on the discussions we are having today, we expect our investment in power equipment to generate unlevered returns greater than 15% and EBITDA build multiples around 5x, competitive with our compression business after factoring the added benefit of increasing the average duration of our contracted cash flow with high-quality customers. As we invest to grow both our contract compression and distributed power assets, we are committed to maintaining financial flexibility and having a strong balance sheet. Our contract compression business is generating highly resilient free cash flow, which will help fund our power growth. Plus, we have ample liquidity on our ABL, and a variety of financing options available to us as we undergo this period of strong infrastructure growth. The investments we make today will help build a stronger, more profitable company in the future. This morning, we released our first quarter 2026 financial results. I will hit a few highlights, and I will let John go into more detail. We ended the first quarter at 4.4 million revenue-generating horsepower. Average horsepower per revenue-generating unit was 977, the highest among our contract compression peers, and a figure we expect to keep moving higher given our large horsepower focus. Our investments to grow the fleet, along with divestitures of noncore units, drove fleet utilization to 98%, another industry-leading metric. In Q1, we delivered strong year-over-year growth in contract services revenue and adjusted gross margin. Contract services adjusted gross margin was 70.6%, a seventh consecutive quarterly increase and a new high for Kodiak Gas Services, Inc. Margin gains continue to be driven by strong operational execution and returns on our technology investments. Real-time equipment monitoring is helping us catch issues earlier, reduce failures, increase operational efficiency, and lower parts spend. In our Other Services segment, first quarter results reflected a sequential pickup in station construction activity along with better margins on AMS services. Strong results from each segment drove adjusted EBITDA to $190 million for the quarter, up 7% year over year and a new company record. Looking ahead to the rest of 2026, we see continued strong momentum in compression. We are fully contracted for our 2026 new unit compression deliveries, and are making strong progress on our 2027 deliveries with over 40% already contracted. Our updated guidance reflects both the incremental contribution we expect from Power and the investment we are making to scale that business and drive growth for years to come. Now, I will pass the call to John Griggs to further discuss our financial results and our revised outlook for 2026. John?
John Griggs: Thanks, Mickey. You summed it up well. Kodiak Gas Services, Inc. has a lot of positive momentum. Our compression business continues to set new records in both revenues and margins, and the growth and return potential for our new power business is extremely compelling. Now let us turn to the quarter's results. We reported total revenue of $346 million, up 5% year over year. The growth was primarily driven by new horsepower, price increases, and strong operational execution. In Contract Services, revenues increased 6% year over year and 2% sequentially. Revenue-generating horsepower increased by approximately 35 thousand sequentially. We realized a 3.7% year-over-year price increase to $23.31 per ending revenue-generating horsepower. This uptick was impressive considering that approximately 20 thousand of this quarter's horsepower increase came at the end of the quarter via the purchase-leaseback transaction Mickey mentioned and therefore had no meaningful impact on revenues. A real bright spot was our Contract Services adjusted gross margin of 70.6%, up 138 basis points sequentially and 286 basis points year over year. This high watermark is further proof to us that the significant investments we have been making in our training and operational technology over the last couple of years are generating real returns. During the quarter, we realized a reduction in compression parts expense as our investment in telemetry technology and data analysis has allowed us to monitor equipment more closely, leading to a reduction in failures and spend. We are also gaining efficiencies through the connectivity of our technology platforms, making information more rapidly available to our skilled technicians. All of this leads to more informed, real-time field-level decisions, which then tends to result in improved run time and even better customer service. In Other Services, revenues rose 25% sequentially as we saw increased station construction activity during the quarter. We realized a sequential margin increase to around 16% as we saw a greater portion of activity this quarter in higher-margin revenue streams. Adjusted EBITDA for the quarter was up 7% versus the prior-year quarter, landing in a new company record of $190 million. We reported adjusted net income of $52 million, or $0.59 per diluted share. Let us turn to capital expenditures. Maintenance CapEx was approximately $18 million in Q1, in line with our expectations. Other CapEx was $7.5 million, also in line. Growth CapEx of $86 million included $24 million for the compression purchase-leaseback transaction and $18 million related to new power generation equipment. We will break out the power growth CapEx in future quarters. The power gen equipment orders we are making average about $1.1 million to $1.2 million per megawatt. We would expect to spend an additional roughly 30% for balance-of-plant equipment. That BOP figure could vary depending upon the setup required by customers. After backing out the purchase-leaseback and power-related figures, compression growth CapEx was around $44 million, which included the delivery of 18 thousand new-unit horsepower during the quarter as well as a variety of other items, including fleet revamps and deposits on long-lead-time engines. Discretionary cash flow was $126.5 million, up 9% year over year, driven by the higher adjusted EBITDA and lower cash taxes. Moving to the balance sheet, net debt was $2.7 billion at quarter-end. In February, we issued $1 billion of senior notes due in 2031 at an attractive rate of 5.75%. We used the proceeds to redeem our 2029 senior notes and pay down our ABL. Our credit agreement leverage ratio was 3.6x as of March 31. Finally, our Board declared a dividend of $0.49 per share that will be paid later this month. Based on our first quarter discretionary cash flow, our dividend remains well covered at 2.9x. Let us turn to our updated 2026 guidance, which we split into the three segments we intend to report going forward. Contract Services will become Compression Infrastructure and continue to include the same items it did previously. We are creating a new segment called Power Infrastructure, which will include the vast majority of our new power business. A small portion of DPS’ historical and future revenues—mainly things like fleet mobilization and logistics—will be reported in our Other Services segment. We will guide and report growth CapEx separately for compression and power to increase visibility. As a reminder, our 2026 guidance reflects just three quarters of contribution from the DPS acquisition. In terms of changes, we increased the low end of Compression Infrastructure revenue guidance to reflect the progress we have made recontracting units and the increased visibility on new unit growth. We moved up our adjusted gross margin estimate to 68.5% to 70%, up from our original guidance, taking into account the recent rise in oil prices and its impact on our lube oil and fuel expenses in the second half of the year. For Power Infrastructure, we are guiding to full-year revenues of $95 million to $125 million and an adjusted gross margin range of 60% to 70%. We are keeping those ranges wide given the newness of the acquisition, as well as to maintain commercial flexibility to meet the timing needs of longer strategic deployments. While we expect to take delivery of 61 megawatts of additional power equipment in 2026, we do not expect to realize any material increase in revenue for these units until early 2027. We increased the top end of our Other Services revenue guidance range to account for the addition of the nonrecurring revenues from the power business I previously mentioned. Putting that all together, our 2026 adjusted EBITDA guidance is now $820 million to $860 million, and our discretionary cash flow guide is $520 million to $570 million. We bumped up each of maintenance and other CapEx by $5 million based on the addition of the power fleet. Compression growth CapEx of $245 million to $275 million is consistent with the March press release announcing the purchase-leaseback transaction, and we remain on pace to add approximately 170 thousand horsepower over the course of the year. As for power growth CapEx, as Mickey highlighted, in light of the strong demand signals we are seeing, we are embarking on an investment cycle in power designed to meaningfully increase our earnings power over time. That translates into the addition of roughly 300 megawatts to 500 megawatts per year from 2027 through 2030. To hit those targets, we expect power growth CapEx this year to range from $400 million to $500 million, with approximately $90 million related to gensets and balance of plant to be delivered in 2026. The remainder is for equipment scheduled for delivery in 2027 and beyond. I will echo Mickey's comment that we are going to use the strength of our extremely resilient and highly creditworthy compression business to help us fund our initial growth in Power. You should expect us to guard the balance sheet while doing so. With that, I will hand it back to Mickey.
Mickey McKee: Thanks, John. I will wrap up by reiterating that 2026 is off to a great start. Q1 adjusted EBITDA exceeded our expectations; contract compression market fundamentals remain compelling, with highly visible demand. We are extremely excited about our distributed power business offerings and the opportunities to grow that business. Thanks for your participation today. We will now open the call for questions. Operator?
Operator: Thank you. To allow for as many questions as possible, we ask that you please limit yourselves to one question and one follow-up. Our first question comes from the line of Elias Jossen with JPMorgan. Please proceed with your question.
Elias Jossen: Hey, good morning, everyone. Just wanted to start on the contracting framework for the backlog. I know that you have provided some incremental color on long-term contracts that you have executed, but how should we think about contracting within the sort of 2 gigawatt backlog target that you have outlined? And should we think about incremental updates as we move forward on that 300 to 500 megawatts of annual capacity that you plan to add? Thanks.
Mickey McKee: Yes. Hey, Elias, thanks for the question. Good morning. We have only owned this business now for five weeks and we are pretty hyper-focused right now on making sure that we have the supply in place to get the contracts put in place. So we are really focused on making sure that we have the equipment coming to us right now. On top of that, we have a tremendous amount of inbounds and conversations that are happening right now both on the data center side and on the microgrid side as well. There will be more updates on those contracts as we go along and as they come in. We will get those frameworks put together for you, and we will be able to update probably on a quarterly basis going forward from here.
Elias Jossen: Awesome. And then I think the competitive edge that you have demonstrated from an execution standpoint on equipment procurement is definitely differentiated. Can you talk to us about how you are able to procure in this increasingly challenged supply chain and get this equipment versus others? Any color would be great. Thanks.
Mickey McKee: Yes, absolutely. It is a challenge right now. This equipment is in short supply and is difficult to come by. We are leveraging all the relationships that we have both within the compression industry and with our current suppliers, along with some new ones. We have some things that are in the works to develop long-term frameworks around some supply agreements, and we are working hard on those and will update more as we get those finalized.
Elias Jossen: Great. Thanks, guys.
Mickey McKee: Thanks, Elias.
Operator: Thank you. Our next question comes from the line of John Ross Mackay with Goldman Sachs. Please proceed with your question.
John Ross Mackay: Hey, team. Thank you for the time. I will pick up on the theme you touched on a bit, but I want to ask it a little more directly. If we are thinking about the CapEx per megawatt here, John, I know you touched on it a little bit. Could you give us more color on how you are thinking about that balance-of-plant spend, maybe frame that up around different customer types, and then any comments on what you are targeting for that customer-type mix?
John Griggs: Yes, sure. Thanks for the question. As we said, and I think consistent with what others have said as well, for the base power equipment since we are already purchasing some and are in deep discussions with OEMs about purchasing more, let us call it $1.1 million to $1.2 million per megawatt. It could vary a little between recips and turbines, but that is what we are modeling in. From a balance-of-plant perspective, we are using about $1.5 million per megawatt. It can vary, and people in the business know this well. If a data center wanted all the bells and whistles around their project, you could very easily be at least 2x what you were in your original equipment purchase. If you had something that was a less sophisticated application and perhaps you had some of that kit in-house as well, it could be much smaller—1.2x or so. We think $1.5 million is the right number to be using all-in.
Mickey McKee: On the customer mix, we have a tremendous amount of conversations happening right now in the data center space that are a mixture of regular digital infrastructure as well as AI compute-type loads. There is going to be a mix of those different data center customers, and that is the bulk of what we are looking at right now for customer mix.
John Ross Mackay: Appreciate that color. Second one from me, probably a quick one. Given those different types of customers and different types of balance-of-plant build-outs, are you confident in the return framework you lined up earlier on the call and when you first announced the DPS acquisition?
Mickey McKee: Yes, absolutely. We will model in those costs as we do the engineering up front on these projects and make sure the returns meet the expectations and thresholds that we have already put in place.
John Ross Mackay: Great. Appreciate the time. Thank you.
Mickey McKee: Thanks, John.
Operator: Thank you. Our next question comes from the line of James Michael Rollyson with Raymond James. Please proceed with your question.
James Michael Rollyson: Hey, good morning, everyone. Mickey, maybe switching to the competitive landscape. If we look at your history in compression, you started the business basically trying to build a better mousetrap from an uptime perspective and customer service perspective, and have been very successful in doing so. As you now venture into the power space, it is obviously a different landscape of people chasing this business. I am curious how potential customer conversations go, and how you win that business over the half dozen other guys that are chasing this as you go forward? And then switching gears to your core business: with the long lead times stretching out, you are generally on top of it, but how are you planning ahead to ensure engines? Are you looking even outside of CAT to make sure all your customer needs get met, and how are you planning for all that?
Mickey McKee: Hey, good morning, James. There are a lot of similarities in these businesses. There are nuances and differences in the type of equipment and such, but we are going to approach it the same way. That starts with the customer-service mentality that we are going to be a total solutions provider, and we are going to back that with run times and reliability. What we liked about DPS when we bought the business is the fact that they have a data center contract that is totally islanded already, with over two years of operating history at over 99.9% reliability. The service mentality really lines up with what Kodiak Gas Services, Inc. has always brought to the table in the compression business. We are confident that we can be a provider of a differentiated solution that really focuses on our customers and their needs. On the supply chain and engines, we are certainly looking out into the future and making sure that we have engines and shop space—really the two biggest commodities—locked up. We have 2027 and 2028 completely lined up, and we are working on 2029 right now. That really coincides with what our customers are looking forward to, with highly visible natural gas demand from LNG and power demand coming on. We feel like we are staying ahead of it, paying close attention to the supply chain, and making sure there are no gaps in deliveries.
John Griggs: And James, I would just chime in and say the 170 thousand incremental horsepower that Mickey called out last quarter is totally doable given how we manage the supply chain and the demand signals.
James Michael Rollyson: Great to hear. Not surprising, and thanks for all the color, guys.
Mickey McKee: Thanks, James.
Operator: Thank you. Our next question comes from the line of Douglas Baker Irwin with Citi. Please proceed with your question.
Douglas Baker Irwin: Hey, team, thanks for the question. I wanted to start with the 260 megawatts you have already procured. Can you provide more detail around what that initial mix of equipment looks like—turbines versus recips? And then any more detail around the timeline beyond 2026 for taking delivery and where you might stand on contracting discussions so far, understanding it is still very early days? And as a follow-up, can you talk about how the funding requirements for this power equipment might compare to traditional compression? I am wondering how ratable that $400 million to $500 million of CapEx from this year might be if some of this power capacity requires more upfront payments or deposits for larger turbines, and any implications for cash flow if spending is more front-end weighted?
Mickey McKee: Yes. Good morning, Doug. Still very early days and we are working through a lot of those details. What we have already procured is a mix of recips and turbines. That is going to be our strategy going forward. We think there is a market and demand for both, and we think having a quality mix is the way we want to go. The 260 megawatts we have already procured is probably in the ballpark of 50/50 recip versus turbine. Going forward, I would think it will be more heavily weighted toward turbines—roughly 25% recip and about 75% turbine—as we think those turbines, from a real estate standpoint, take up a lot less space, have much more power density, and are really good fits for the data center contracts we are chasing and already in conversations on, which are typically in the ballpark of 200 to 300 megawatts at a time.
John Griggs: On funding and cadence, a couple of points. The 300 to 500 megawatts per year that we call out from 2027 through 2030 is not a straight line, but it is pretty tight within that range given what we have already bought or are advancing with OEMs. In the turbine world in particular, there are more upfront or progress payments relative to our compression business. In the recip world, it remains to be seen where it lands—those are key variables we are working through with OEMs and channel partners. In terms of paying for it, protecting the balance sheet—and therefore the overall franchise—is really important to us. We have our 4x leverage target; we are about there right now. When we went public, we were 4.2x and committed to get to 3.5x by 2025, and we did, on target. As we commence this investment cycle, we have been transparent that you should expect us to drift above our 4x long-term leverage target, but only periodically. As the contracts come in across both compression and power, we will delever quickly and get back into target and below. We also have an incredible compression business that is extremely resilient with limited exposure to near-term commodity moves and performed really well in stress tests like COVID. We have a wonderful ABL and terrific bank groups that support us, and we have executed well on three bond offerings in the last couple of years, including the first 10-year bond in the compression business. Summing it up: we have a great business, experienced team, and a multitude of options to fund the business going forward.
Mickey McKee: And Doug, you hit on the fact that there are some advanced progress payments due on some of these bigger turbines. We are highly focused on that and are leveraging our existing relationships with OEMs and vendors to minimize the impact of those progress payments.
Douglas Baker Irwin: Got it. Thanks for the time.
John Griggs: Thanks, Doug.
Operator: Thank you. Our next question comes from the line of Neal Dingmann with William Blair. Please proceed with your question.
Neal Dingmann: Good morning, guys. Nice update and great quarter again. My first question, Mickey, maybe for you or John, on compression M&A. Could you talk to future compression horsepower purchase-leaseback potential? Based on my E&P conversations, it sounds like several E&Ps would be willing to transfer ownership to you given your service record. How active are those discussions and what potential do you see there? Secondly, on the services side, would the existing workforce service both compression and power, and do you have enough folks in place today or are you continually adding?
Mickey McKee: Good morning, Neal. I think there is a lot of opportunity there. We are in the middle of this investment cycle in power and will be very focused on that, but we will also take advantage of opportunistic things that pop up on the compression side, including purchase-leasebacks. We executed one last quarter of just over 20 thousand horsepower, which was a really nice, bite-sized deal for us, and it has gone very smoothly with us taking over operations on April 1. We love those deals and will look at more of them as opportunities arise. On workforce, we are always adding folks and putting them through our world-class training program. We are opening our new facility in Midland and will move in the June timeframe. It will be a great resource to continue to train our people and also our customers' people to be around our equipment safely. We focus on training as much or more than anybody in our industry, and it is a differentiator. We are pretty fully staffed and are continuing to add to handle our growth. We are adding new training programs into our Bears Academy for power and electrical topics, working with several OEMs and equipment providers to deliver training at our facility. We are also arming our technicians with our technology—we are rolling out large language models and agentic AI that will help with parts location, troubleshooting, and more. We expect that to be fully rolled out in the second half of the year, and it will be a tremendous asset to our employees.
John Griggs: Thanks, Mickey. Thanks, Neal.
Operator: Thank you. Our next question comes from the line of Analyst with Bank of America. Please proceed with your question.
Analyst: I was wondering if we could go back to the contracts and how you are securing contracts for the incremental megawatts you are purchasing. Is it mostly pre-contracted, or is there some on-spec ordering for future megawatts? And as a follow-up on the Compression Infrastructure margins, you are already above 70% in the first quarter. The new guide is up a little bit, but could you talk about the rest of the year and whether that 70% could creep higher given where Q1 has been?
Mickey McKee: Good morning. We are having to go out and look for this equipment on the power side and make commitments. I would not characterize it as speculative CapEx as much as educated commitments based on our backlog of opportunities that DPS brought to the table as well as additional inbounds since we closed. We are in advanced conversations on a lot of items for contracts to be put in place over the next several months. We are ordering some equipment based on how educated we are on the pipeline, and we should be talking about contracts rolling in, hopefully pretty quickly.
John Griggs: On margins, we are really happy to see that number. 70.6% in the first quarter was gangbusters for us. The compression business is hitting on all cylinders. We attribute that to three things: first, the investments we have been making in our people and technology over the last two years—they are paying off. Things are breaking less, we are spending more smartly, and we are more productive. Second, we continue to drive toward larger horsepower. Third, pricing. The guide being a little below where we came out in the quarter has an element of conservatism. With oil price being high, that drives lube oil and fuel prices higher, which are inputs in our cost of goods sold. Given the unpredictability, we felt our guide is the right place to be.
Operator: Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Theresa Chen: Good morning. Thank you for taking my questions. On the base business, Mickey, now that you are seeing over three years of lead time and that metric has only moved one direction since your IPO, when you think about pricing power—and to your earlier comments about pricing power continuing into 2027 and beyond—what are you seeing in terms of price increases across the industry, and what do you anticipate over the next couple of years as a result of the supply tightness? Taking a step back, is this situation sustainable? How does the industry solve this supply crunch, if it does, and how do you see the landscape evolving? On the power infrastructure side, separate from contract duration and structure, how do you think about counterparty credit risk in these contracts, and how much terminal value is embedded in your 15% unlevered return targets?
Mickey McKee: Good morning, Theresa. On pricing, I think pricing on our equipment will continue to move up. How much and how far depends on external factors like the price of oil and the competitive landscape. We think we have the opportunity to continue the strong pricing we have seen over the last several years. New units are coming out at spot rates that are very constructive for us, and we continue to reprice the base fleet as contracts roll. Producers and midstreamers are willing to lock in equipment for longer periods now, which is great for our base business. On the supply crunch, demand is going to continue to outstrip supply. Lead times continue to extend. There is an increasing amount of compression moving away from electric because of access to grid power, and I think there will continue to be a supply shortage for the foreseeable future, especially with increasing GORs in the Permian, increasing volumes, and more takeaway capacity enabling growth. We are excited about the Permian and other basins, and we think there will be continued, incredible demand for our services and equipment.
John Griggs: On counterparty risk and returns, on terminal value it depends on the project and duration. If we are penciling a 15-year contract, we will have zero terminal value in the model; even if you put a lot in, it will not move the math much over that timeframe. If it is a 7-year contract, you get a different answer. We need to feel we will be in the upper teens dynamic when entering into any contracts. On counterparty quality, it is mission critical. In compression, we have seen counterparties get acquired by some of the largest players in the energy complex, yielding more investment-grade customers. We think the opportunity set is there on the digital infrastructure side too, though it is a wider marketplace with more participants. Each contract will be a little different, and we will bake that into our decision-making on which contracts to pursue and which to let others grab.
Theresa Chen: Thank you.
Graham Sones: Thanks, Theresa.
Operator: Thank you. Our next question comes from the line of Sebastian Erskine with Rothschild & Co. Redburn. Please proceed with your question.
Sebastian Erskine: Good morning, and congrats on the developments today—very exciting. First, on your conversations with the data center customers: one advantage with compression has been that equipment tends to stay on for many years beyond the initial term. Are your customers thinking about this as a bridging solution until the grid catches up, or is there scope for this to be used as a permanent turnkey utilities-type offering for hyperscalers? And on the margins, 60% to 70% adjusted gross margins for the Power Infrastructure business is a wide range. Could you talk through the drivers behind that and the scope for margin progression over the medium term? Is the focus predominantly on just getting the top line?
Mickey McKee: Good morning, Sebastian. Typical contract terms we are discussing with data centers are 10 or 15 years, and many want the option to extend at the end of those terms. The business has evolved from being viewed as a bridge to interconnection to increasingly a permanent power supply. Depending on regulatory developments, but we are hearing timelines shift from six to eight years to interconnection to now outside a decade, to maybe never. We view this as permanent digital and power infrastructure that will be there for a very long time.
John Griggs: On margins, it is always going to be focused on return on capital. We guided wide for a couple of reasons. First, we have only owned the business for five weeks and just migrated it into our ERP, so we wanted to protect against surprises. Second, DPS was somewhat capital-starved. They had a long-term primary power contract with a data center and were getting traction on a second, but they did not have access to power equipment. The team purposefully kept many contracts shorter term with the idea that, once they landed a 100 to 200-plus megawatt long-term quality contract, they could roll off the short-term power into that. That is what we inherited. As we invest to build our power foundation, we will keep some power on short-term contracts so that we can pull it off once we grab the longer-term contracts. We would not adjust our cost structure for what would be a temporary move. As we get to scale and have more power, the range should narrow and look more similar to the compression business.
Sebastian Erskine: Really appreciate that, and congrats on the results.
John Griggs: Thanks.
Operator: Thank you. Our next question comes from the line of Analyst with RBC Capital Markets. Please proceed with your question.
Analyst: Hi, good morning. On the power side, can you talk a little about the cash conversion cycle? What are the timelines from when you sign a contract, assuming you have the equipment, to when you start generating revenues? And are most of the discussions you are having on the power side in Texas? Can compression and power share technician pools or operations to drive efficiencies?
Mickey McKee: Good morning. Timelines will depend on the contract. For less sophisticated installations, you could see three to six months from equipment procurement to revenue. For larger plants, it could be six to twelve, maybe eighteen months. On geography, we are seeing a lot of inbounds and opportunities in Texas, but also across the United States. On operations, right now we are keeping the operations groups separated so they can focus on either power or compression. As we develop projects in close proximity to our compression operations, there will definitely be overlap and support, particularly on supply chain and safety. There will be some shared efficiencies, but for now we are building out each capability deliberately.
Analyst: Got it. Great. Thank you very much.
John Griggs: Thanks.
Operator: Our final question this morning comes from the line of Analyst with Daniel Energy Partners. Please proceed with your question.
Analyst: Good morning. Thanks for squeezing me in. First, on the purchase-leaseback transaction, could you talk through that a bit more and whether there is more interest in transactions like that today on both your side and the operator’s, given the tightness in the market and that, for a lot of operators, compression is not really a core operation? And in addition to engine lead times, you highlighted the importance of capacity where units are packaged. How tight is that shop space today and what are your thoughts there?
Mickey McKee: Good morning. The purchase-leaseback we executed was a really good deal for us and for the customer. It is not a core competency for many customers to own and operate their own compression, and we have the back office and infrastructure to focus on service every day. There are advantages for customers to execute those transactions, and we think there are additional opportunities like this. On packaging capacity, we have to pay close attention to shop capacity and the ability to assemble units once you get the engine and compressor. We marry the two—securing engines and ensuring our packagers have ample shop space and capacity. Lead times are similar to engines; packagers are booking shop space as they get engines and orders. Lead times are in excess of three years with shop space allocated. We are making sure we have that supply procured, as well as the engines, so all long-lead, critical-path items are covered.
Analyst: Understood. Thank you for taking my questions.
John Griggs: Thanks.
Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the floor back to Mr. McKee for any final comments.
Mickey McKee: Thanks, Melissa, 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 second quarter.
Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.