Flowco Holdings Inc Class A Stock

Good morning, and welcome to Flowco Holding, Inc. conference call to discuss its acquisition of Lifting Solutions Energy Services, Inc. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. Now I'd like to turn the conference call over to Andrew Leonpacher, Vice President of Finance, Corporate Development and Investor Relations at Local. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss Flowco's acquisition of Lifting Solutions. Before we begin, I'd like to remind you that today's call will include forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks include risks described in the press release we issued this morning announcing the transaction, the investor presentation that is available on our website and our SEC filings, which are also available on our website.

We undertake no obligation to update these forward-looking statements, except as required by law, and we caution you not to place undue reliance on them. We will also reference certain non-GAAP financial measures during today's call. These measures should not be considered alternatives to or more meaningful indicators of financial performance as determined in accordance with GAAP. Our methods of determining these measures may differ from the methods used by other companies and may not be comparable. Additional information regarding these non-GAAP measures is included in the investor presentation that accompanies today's webcast. For those joining by phone or via the live webcast, the presentation is available on the webcast and for download from our website and you can reference it throughout the discussion.

Joining me on the call today are our President and Chief Executive Officer, Joe Bob Edwards; and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to our President and Chief Executive Officer, Joe Bob Edwards.

Thank you, Andrew, and thank you to everybody for joining us this morning. Earlier this morning, we announced our acquisition of Lifting Solutions Energy Services, a vertically integrated manufacturer of artificial lift technologies based in Edmonton, Alberta. This transaction is an important step forward in our strategy to build a differentiated production optimization platform. Today, we'll walk through the details of the transaction, the strategic rationale for making the acquisition and why we believe lifting solutions is the right fit for Flowco.

Let's start on Slide 3 with an overview. We acquired Lifting Solutions for approximately $113 million, which we expect to fund with borrowings under our existing ABL. At approximately 5x Lifting Solutions expected 2027 adjusted EBITDA, we expect the acquisition to be accretive to earnings and free cash flow. Following the acquisition, we expect net leverage to remain conservative at approximately a turn of EBITDA, which is consistent with our disciplined approach to capital allocation. And importantly, Lifting Solutions management team will remain with Flowco, providing continuity and retaining the expertise and entrepreneurial spirit that has helped drive the company's success. The transaction also includes a small potential future contingent payment tied to 2027 financial performance, further aligning management's incentives with Lifting Solutions continued growth. Today, we're going to walk through the merits of the transaction throughout this presentation, but strategically, the rationale is straightforward and compelling.

Earlier this year, we acquired Valiant, expanding our portfolio and creating a meaningful cross-selling opportunity across our customer base. Lifting Solutions builds upon that strategy by adding differentiated rod lift and progressing cavity pump technologies and further expanding the range of artificial lift solutions we can provide our growing customer base. Additionally, Lifting Solutions presence in Canada and other international markets extends our reach into attractive new geographies outside the U.S. Let's turn to Slide 4 and talk about the company and what attracted us to this opportunity. Lifting Solutions is a leading provider of 2 artificial lift technologies, continuous rod and progressing cavity pumps, or PCPs. I'll explain more about these technologies in a minute, but one of the most compelling qualities of this opportunity is the fact that Lifting Solutions is vertically integrated with research and development, engineering, manufacturing and field services all performed in-house. This investment in being a solutions provider has driven continued innovation across the portfolio, including proprietary coated rod technologies designed to improve performance in demanding environments, as well as differentiated PCP designs engineered for greater reliability and longer run life.

The company's manufacturing footprint spans 2 critical geographies, Canada and the Middle East. Additionally, Lifting Solutions maintains an expansive service network throughout Canada, the U.S. and Oman, allowing it to provide an integrated offering from product selection through installation and ongoing field service. That combination of technology, manufacturing and service capabilities has helped Lifting Solutions build long-standing relationships with blue chip operators and established strong positions across its core markets. Approximately 77% of Lifting Solutions' 2025 revenue was generated outside the U.S., providing Flowco with added geographical diversity to our largely U.S. onshore business today. Financially, we expect Lifting Solutions to generate approximately $23 million of adjusted EBITDA in 2027. Importantly, this is a highly cash-generative business with free cash flow conversion rates similar to our own.

With that background, let's turn to Slide 5, where I want to spend a little more time on the core technologies that Lifting Solutions provides. The first is known in the industry as continuous rod, which is a continuous single rod string installed inside of production tubing that can be used in both reciprocating rod lift and PCP applications. Continuous rod or the Lifting Solutions branded product known as Endless Rod, is truly a differentiated form of rod-lift technology. Its jointless design reduces common failure points in jointed rod applications, such as excessive friction, which often leads to tubing failures, downtime and costly well interventions. The company's Endless Rod designs can be installed more quickly, operated more efficiently and can provide the company's customers with an overall lower cost of ownership for their producing wells when compared to wells produced via the competitive technology of jointed sucker rod strengths.

The second core technology that we are acquiring is PCP, which is particularly well suited in heavy, viscous and solids latent production applications. PCP is the leading artificial lift technology in Canada, where Lifting Solutions has built a strong position through differentiated pump designs and proprietary elastomer technology. PCPs are also widely adopted in other heavy oil markets such as Venezuela, where Lifting Solutions has a presence through local distribution partners. Together, these technologies broaden our production optimization portfolio, giving us a wider range of solutions to address the specific production requirements and reservoir conditions of each well for our customers. In addition to technology, Lifting Solutions brings an established international footprint in markets where Flowco has significant room to grow. That starts with Western Canada, which we'll detail on Slide 6.

The company gives us an immediate and scaled entry into Western Canada, which is North America's second most prolific oil-producing region behind only the Permian Basin, producing approximately 5 million barrels a day of crude oil. With crude oil egress being solved through infrastructure build-out, industry analysts predict Western Canada to grow crude oil production by as much as 1 million to 2 million barrels a day over the next decade. From its Edmonton headquarters and 11 service bases, Lifting Solutions has the ability to provide broad coverage across every major Western Canadian oil play, serving more than 100 active customers last year alone. Importantly, this is a market where the use of ESPs, gas lift and rod lift is already well established. With a dedicated team, field service infrastructure and customer relationships already in place, Lifting Solutions provides a natural platform to introduce Flowco's broader portfolio, including HPGL, ESP, gas lift, plunger lift and VRU to Canadian clients that we do not currently service. The geographic opportunity with Lifting Solutions extends well beyond Canada.

Let's turn to Slide 7, and we'll look at the company's already established international footprint. Today, Lifting Solutions provides its solutions across 16 countries, supported by an established distributor network and manufacturing presence not only in Canada but also in Oman. For Flowco, that footprint and customer base provide an established network of relationships and infrastructure that we can build on over time as we introduce our broader artificial lift portfolio internationally. We've been quite open about our efforts to increase our international exposure as we believe the artificial lift opportunity outside the U.S. is comparable in size to the U.S. market. This transaction represents a meaningful step in that direction. Following the combination with Lifting Solutions, we expect that Flowco will generate approximately 10% of our revenue outside the U.S., a significant step forward for our company.

Turning to Slide 8. I will conclude with the key strategic benefits of the transaction. To state again, Lifting Solutions is a highly strategic addition for Flowco and builds upon the portfolio expansion that we began earlier this year with the acquisition of Valiant. The transaction adds differentiated continuous rod and PCP technologies, and it enhances our ability to participate more fully across the wells producing life, and it increases our addressable market at the same time. This deal establishes a scaled presence in Western Canada and adds a meaningful international footprint that we can build upon over time. We see extensive opportunities to cross-sell across both customer bases and pair our technologies to provide customers with the right solution in each well every time. We're also gaining an experienced entrepreneurial management team that will remain with Flowco and who share our focus on technology, service and growth. And importantly, we're accomplishing all of this at an attractive valuation, underscoring our disciplined approach to inorganic growth within production optimization.

We believe Lifting Solutions makes Flowco a broader, more diversified production optimization company with enhanced growth opportunities ahead. We are pleased to welcome the Lifting Solutions team to the Flowco family and look forward to what we can accomplish together. With that, I'll turn it to the operator for Q&A.

[Operator Instructions]

Our first question comes from the line of Phillip Jungwirth with BMO Capital Markets.

Just focusing on Lifting Solutions core market in Canada. The map on Slide 6 is pretty helpful. But could you help us understand just the company's revenue weighting across light, heavy oil developments, also conventional versus unconventional and maybe also just touch on specifics as it relates to Venezuela and the opportunity there, leveraging any heavy oil capabilities?

Phillip, thanks for the question. And I want to credit you the Canadian analysts for asking such a detailed question right out of the box. Candidly, I don't have that level of detail for you today. What I can tell you is that the Lifting Solutions team has done a great job penetrating really every specific geography within the Western Canadian market that is applicable for their product lines. It's a good mix of both light and heavy, given the products that they offer. It's an extensive customer list led by some of the brand names that you would know.

So we're really, really excited about the footprint that they provide. We also think that some of the forms of -- not we think, we know that some of the forms of lift that we provide that they don't can be distributed installed, maintained through their extensive Western Canadian service network. On the Venezuelan side, listen, like Canada, Venezuela is a good mix of light and heavy oil production and through their historical presence in Venezuela as well as newly recreated local distribution partners. The product name is well known in the Venezuelan market. And so we're -- at Flowco, even before the Lifting Solutions acquisition, we're making baby steps down there ourselves. So we're very excited about how this is going to help us penetrate the Venezuelan market now that it's open for business for U.S. customers. So excited about this, Phillip, and thanks for the question.

That's helpful. And then I was also just hoping you could talk about the Middle East presence here and maybe provide some history or background as to how that was established, and it looks like there's a large facility in Oman that manufactures Endless Rod. Is the benefit here you think more leveraging assets on the ground like that? Or having a more -- just an established workforce in place, customer relationships that can really accelerate the company's international ambitions?

Yes, it's both. Listen, they did a great job under previous ownership, establishing presence in the country, building the facility and the reputation, the customer base that you see in the presentation, and we're going to benefit from that from that previous legwork. Look, the Omani market has a handful of customers, several of whom are household names. They tend to bid out work on multiyear contracts. The company is well positioned with an existing contract that they are continuing to service the Omani market, for those of you following along, is extremely robust at the moment, given everything that's going on in the neighborhood and the competitive pricing that Omani crude is trading for on the open market.

So we're excited about the footprint, about the local exposure and about the customer, not concentration, but the customer relationships that are brought to the table for Flowco, I think we can do more there. So yes, stay tuned there. We hope to do more over the coming quarters in that region.

Our next question comes from the line of Arun Jayaram with JPMorgan.

Joe Bob, I was wondering if you could talk a little bit about the moat that you see in the technologies that you're acquiring today relative to offerings that are in the market today in terms of continuous rod and PCP?

Yes, certainly, Arun. Listen, this management team, this company, they've got extensive history in both of these products dating back to previous lives and certainly under the current construct of what we are buying. The entire reason to start the business was a belief that these existing legacy products could be improved upon, could be incrementalized and could actually through technology and importantly, field service quality they could develop a moat in the Canadian market first and extend from there. And they are very proud of and we are very fortunate to now be the owners of the #1 market share in each of those products in Canada. And that was done organically, one customer at a time over the last 10 years under this management's quite capable leadership. So we're thrilled to have that now part of Flow co.

It fits from a D&A standpoint, Arun, it fits quite nicely with the way that our business was built over the last 10 to 15 years as well. Specifically in terms of competitive edge and moats built around the technology, the business does have a robust IP portfolio around key components within both PCP as well as within continuous rod. On the continuous rod front, specifically, they've developed a very unique coating capability that improves the efficiency of continuous rod as it's operating. Enables it to be installed in harsh environment wells that would suffer from failure rates that increased the cost of ownership for certain wells. That coatings technology, I think, is important not just in Canada, but also in certain markets within the U.S. where the company has done more than just experiment. They've actually penetrated nicely a couple of accounts in the Bakken as well as starting to make great progress in the Permian, which we hope to accelerate. So I'd say really the coatings that are inherent to the manufacturer of the coated rod -- excuse me, of the coiled rod is probably far and away, the biggest moat that the company has been able to build.

On the PCP side, listen, the machining capability to actually make a PCP is in and of itself quite specialized, quite unique. It requires a lot of tribal knowledge to understand how to not only design but manufacture a functional efficient PCP and not to get too far into the -- into how it works. But there are multiple pieces of PCP, the 2 most important one being the rotor and the stator, but the elastomer technology that makes up the sort of that critical interface between the functional parts of the pump is really the most important incremental technology development that the company has made. So again, we're going to be the beneficiaries of that. Customers have voted with their wallet that they like this company's technology development, and we hope to leverage it going forward.

Great. And just a follow-up. Can you help us think about -- I appreciate the outlook comments on 2027 with the EBITDA forecast. What type of growth rate, Joe Bob, has this business historically been able to achieve? Obviously, a lot of the market is in Canada. And then just along that side, I'm just getting a couple of questions on the U.S. Lower 48 opportunity for growth? And alongside that, are there any impacts from some of the tariffs between the U.S. and Canada, given the vertical integration in Canada?

Yes. Look, taking them into reverse order, as you would expect, we've done a deep dive on the company's tariff exposure. We're very comfortable that not only is the historical impact minimal, but even the prospective impact going forward is minimal. That's really a result of the way that they've diversified their supply chain, the way that they can source raw material from various suppliers and the specifics around not only were they source raw material, but where they sell finished goods. So I feel really good about the tariff exposure more specifically lack thereof.

On the growth that this company has experienced, listen, they've gone from a dead cold start-up 10 years ago to where they are today, just done an amazing job building the business and then taking share from those that were in the business before. The business itself, as you know, the Canadian market has grown nicely, but this company has grown at a faster pace than the market. And if you look historically, low double-digit growth has been the norm for this business. We hope to continue that trajectory. Obviously, as the business gets bigger, it's harder to compound at that level. But we think with the pull-through that we can provide into this market, I think Canada is going to be a nice growth market for Flowco.

Our next question comes from the line of Keith Beckmann with Pickering Energy Partners.

I just wanted to ask a little bit around -- we saw the Valiant acquisition. We now have this acquisition. Do you guys feel at this point that a lot of the product portfolio as far as an offering standpoint is relatively rounded out? Or do you think there's anything else to do, obviously, early into this one, but just trying to see if this fills on a lot of the product portfolio that you guys have been looking to build or not mostly in totality?

Yes. Keith, this goes a long way. We're getting us exposure to forms of lift that we were not in before. And yes, excited about not just the product extension that it provides us, but also the geographic expansion opportunity. Look, there's more to do. Certainly, there are more interesting pieces within the production phase of the well's life cycle that I think could be additive to what Flowco does well today. We call those product adjacencies. We look at them all the time. We've got a nice M&A pipeline that we evaluate. But you know, as well as I do that you've got to have the stars aligned to make these things happen.

So we're going to continue to evaluate these things and be very selective just because that's sort of in our nature. But no, this acquisition goes a long way toward getting its exposure specifically to wells that are either require a specialized type of lifting solution, no pun intended, like PCPs, wells that are flowing on PCP, candidly, can't flow or can't flow optimally on any other form of lift. And then we think the continuous rod business is just very unique. It's a very specialized, candidly high impact, high-returning part of a rod lift installation. So we think we've picked our spot within the rod lift business that provides us a lot of confidence getting into that market. And so really pleased with the deal.

That's really helpful. And then my second question, we talked a decent amount about obviously expanding the geographic footprint. I kind of noticed in there that you guys are talking about 11 countries and development or tender discussions. I'm just wondering maybe what are some of the ones that are potentially further along and could add a good value? And then I guess, sort of on the flip side of that, what potentially from North America that you guys have right now? Do you think product-wise, could make the most sense moving into some of these markets internationally?

Yes. When you look at the lift market, I think you dissect it, Keith, by form of lift, listen, the single largest form of lift in the world is ESP and so there's a lot of ESP opportunity that we can pursue outside the Permian Basin, where we have a wonderful start with our Valiant product line. So not only in other markets within the U.S., but now Canada, you've got a growing ESP market for U.S. companies in Venezuela. You've got a very large market in the Middle East. So these geographies are now unlocked for Flowco.

We now have the ability to leverage existing, not only footprint and customer relationships but people that have experience in these markets. Customers that have comfort and familiarity with the newly acquired business that just helps with the extension of a product line like ESP and to some of these other international markets. Gas lift also in each of those geographies is going to have a big part to play. So we're -- yes, we're having some great, great early conversations and hope to put some wins on the board in the coming quarters.

Our next question comes from the line of Derek Podhaizer with Piper Sandler.

I guess I wanted to just continue on that last question because I think before the deal, I think you were targeting the international expansion to Latin America, Middle East, you mentioned that you need these agents or sponsors to really get into those countries. It would be just a very modest growth into a very disciplined -- but does now like with Lifting Solutions, just given their footprint in these international markets that you're targeting, really accelerate that as far as like how they've been qualified in those regions, and it just really opens the doors a lot quicker for you. I just want to make sure that's the right read, and that's one of the things that Lifting helps you at least pull through some of those gas lift and then obviously, the ESP market as well.

Yes. Derek, you hit the nail on the head. Absolutely. And look, Canada is obviously the largest of their markets and one that we are best positioned to sell into given their history with operators in the Western Canadian market. The Middle East footprint is not to be taken lightly either. I do want to highlight one potential opportunity in the Middle East. There's been a lot of discussion about the Gefyra field in Saudi, rightfully so. It's a very exciting unconventional developed by Aramco in Saudi. Flowco has an historic relationship in Saudi with a local partner known as Sawafi.

We've announced this publicly that we are through our plunger lift offering partnered with Sawafi to and very well positioned in the country to help with the artificial lift technology selection for Aramco in that development. The benefit of being partnered with Sawafi and now having purchased Lifting Solutions, is that the Lifting Solutions coiled rod product has also been selected by Sawafi and by Aramco, importantly, as one of the preferred vendors for the Gefyra field artificial lift selection. So we now have 2 of the methods of lift that Aramco has said to the market that they would like to embrace as they bring online wells in the Gefyra field.

So I think this really positions us well in Saudi specifically, in particular, given that we have in-region manufacturing capability now right across the -- a couple of orders in Oman. So look, it's -- again, it's early, but we're continuing to position ourselves into that market for continued growth. And yes, we could go around the world, Derek and talk about other spots as well. But Canada, Middle East, those are the 2, I think, nearest term exciting potential pull-through opportunities for us.

Great. That's super helpful, and it does sound very exciting. Maybe just shifting a little bit more towards the numbers. If you can maybe expand and kind of talk towards the free cash flow conversion of Lifting Solutions, maybe their capital intensity versus yours, talk about the EBITDA margins, how they compare with legacy Flowco? And also maybe what their model is, I don't know, I'm sorry, if you mentioned about as far as rental versus sales for the Lifting Solutions versus what you have on the legacy business as well, that would be great.

Yes, Derek, this is all going to fall under our downhole components business within our Production Solutions segment. So that's where it will show up. It is 100% product sales. It comes at a margin profile that is similar to, almost right on top of the margin profile for other downhole products that we sell into the market. The capital intensity here is about the same of Flowco as a company. So call it, a roughly 50% free cash flow conversion from EBITDA to free cash flow. The capital profile here largely goes into the service installation requirement that the business needs to help customers actually install endless rod products into their wells.

If you think about it, when you install a jointed rod string, you have a workover rig, do that work for you. To install continuous rod, it requires a specialized installation capability. And so those -- you can't handle that installation or the maintenance of the installed product with a traditional workover rig, you have to have a specialized piece of equipment. So we have a fleet of those in Western Canada as well as throughout the U.S. And that's really where most of the capital goes in this business to help maintain that field service capability.

Our next question comes from the line of Jeff LeBlanc with TPH & Co Equity Research.

Can you talk about the repeatability of revenue related to the Endless Rod? Is the expectation that it's a service? Or does the rod string still need to be replaced at some point in the well's life?

Yes. The joy of owning a well for 20 years, as you know, is that it requires maintenance. It requires -- we're replacing equipment as it wears out. And it's from an equipment provider. It's the gift that keeps giving. And there's really no difference here with PCP and continuous rod. The benefits of these products is they last longer. They operate more efficiently. They provide, as we said earlier, a lower total cost of ownership for the operator. but they definitely have an aftermarket component to them. Because operating in such harsh conditions equipment does wear out. It needs to be replaced. It needs to be optimized.

As the well matures, the production profile changes, as you know. And so what's right in year 5 is not right in year 10. So this later life solution that coiled rod provides us, I think, gives us that sort of razor blade business model that we're used to having in the rest of Flowco and it fits really hand in glove. So yes, it's a little bit of both based on kind of the way you phrased your question.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Edwards for final comments.

Well, thank you all for dialing in, and I appreciate this, and we'll be back to you in roughly a month with Q3 earnings. So thank you all.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Welcome to Flowco Holdings, Inc.'s Second Quarter 2026 Earnings Call. Today's call is being recorded. We have allocated 1 hour for prepared remarks and questions and answers. At this time, I would like to turn the conference over to [ Andrew Leopak ], President, Finance, Corporate Development and Investor Relations at Flowco. Thank you. You may begin.

Everyone, and thanks for joining us to discuss Flowco's second quarter results. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at [ ir.gov ]. We undertake no obligation to revise or update any forward-looking statements or information except as required by law.

During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. Presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliation of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings. Joining me on the call today are our President and Chief Executive Officer, Joe Bob Edwards, and our Chief Financial Officer, John Byers. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Joe Bob.

Thank you, [ Andrew ]. Good morning, everybody, and thank you for joining us today. I'll begin today's call with a review of our second quarter performance and key highlights. John will then discuss our financial results, segment performance, capital allocation, and balance sheet in more detail. I'll conclude with our perspective on the current market environment and our outlook for the third quarter. Flowco delivered solid results in the second quarter, generating adjusted EBITDA of approximately $94 million while maintaining our top-quartile adjusted EBITDA margins of roughly 40%. Revenue increased 13% quarter-over-quarter, while adjusted EBITDA grew 10%, reflecting solid execution across the business.

These results were supported by better-than-expected performance from recently acquired Valiant, continued growth in rental revenue across our surface equipment and vapor recovery businesses, and a stronger quarter in downhole components product sales. Flowco generated $50 million of free cash flow during the quarter, further enhancing our balance sheet and reinforcing the strength of our business model. 56% of our revenue in the quarter was generated from rental revenue, which provide a high degree of revenue visibility, while our asset-light sales businesses continue to generate attractive returns and strong cash conversion. This balanced model enables us to consistently generate meaningful free cash flow while we invest in Flowco's long-term growth prospects.

Overall, I am very pleased with our execution during the quarter. While we experienced the cost headwinds discussed in our mid-quarter update, which John will discuss in greater detail, our team remained focused on the factors within our control: superior service quality, efficient execution, and delivering the solutions that help operators generate more attractive returns from their existing assets. This disciplined approach enabled us to deliver results within our original expectations. Our second quarter performance reflects the demand for Flowco's production optimization technologies and the critical role they play throughout the productive life of the well.

Whether we are enhancing production through our broad artificial lift portfolio, capturing high-value hydrocarbons through our vapor recovery solutions, or providing the surface equipment that enables more efficient production of oil and natural gas, our objective is the same: helping customers optimize production with the right solution for each well, every time. As operators continue to prioritize production optimization to drive their performance, we believe our differentiated platform is well positioned to support our customers throughout the lifecycle of the well. Looking ahead, we see opportunities to further leverage our platform and deliver even greater value to our customers. Valiant is an excellent example of this strategy in action.

The acquisition of Valiant's ESP capability broadened our production optimization platform while enhancing our ability to better serve customers across the life of the well. By leveraging the operational data generated through platforms like Optimus, Valiant's ESP monitoring and optimization software, we are better positioned to identify customer opportunities earlier and deliver more integrated solutions. We believe this data-driven, collaborative approach is applicable across our platform and will continue to strengthen customer relationships, identify new commercial opportunities, and enhance the value we deliver. In summary, the second quarter demonstrated our ability to deliver profitable growth, generate meaningful free cash flow, and continue executing on our long-term strategy. With that, I'll turn it over to John.

Thanks, Joe Bob. Turning to our financials, second quarter performance was within our original guidance range, driven by growth in our high-margin rental businesses and a full quarter of contribution from Valiant. Total revenue increased 13% sequentially to $236 million, primarily driven by growth within production solutions. Adjusted EBITDA increased approximately $8 million from the first quarter to approximately $94 million. While higher operating and maintenance expenses within production solutions created modest margin pressure during the quarter, we continue to deliver approximately 40% adjusted EBITDA margins, highlighting the strength of our operating model and customer demand for our technologies.

In our production solution segment, second quarter revenue increased 22% sequentially to $171 million, while adjusted segment EBITDA increased approximately 16% to $71 million. The increase was primarily driven by downhole components, including the contribution from Valiant, which is performing ahead of our expectations. Integration activities for Valiant are substantially complete, and our focus has shifted towards capturing incremental commercial opportunities across the combined platform as we continue to invest in the business. Turning to margins, adjusted segment EBITDA margin decreased 229 basis points quarter-over-quarter, reflecting a revenue mix shift towards downhole components following the inclusion of Valiant, as well as higher operating and maintenance expenses within the segment, including increased lubricant and fuel expenses.

We expect these cost pressures to continue into the third quarter and have reflected them in our third quarter guidance. We are actively focused on mitigating these cost pressures through disciplined cost management, improving the efficiency of our rental fleet maintenance program, optimizing overtime, and reducing fuel and lubricant costs where possible. In our natural gas technology segment, second quarter revenue and adjusted segment EBITDA each decreased 6% sequentially to approximately $65 million and $28 million, respectively. The decline was primarily driven by lower vapor recovery system sales, which more than offset continued growth in our vapor recovery rental business.

Turning to corporate costs, second quarter corporate expenses decreased to $5 million from approximately $5.6 million in the prior quarter, primarily due to lower professional fees. Overall, second quarter adjusted EBITDA came in at $93.9 million, underscoring the durability of our operating model and building on the momentum we outlined last quarter. In the second quarter, we generated approximately $50 million of free cash flow while investing $45 million of capital, primarily to expand our surface equipment and vapor recovery rental fleets and support the continued growth of Valiant. Our annualized adjusted return on capital employed for the quarter was approximately 18%.

Capital investment was elevated during the quarter with the inclusion of Valiant and continued expansion of our rental fleet, but our full-year capital outlook remains unchanged and continues to support meaningful free cash flow generation. Our vertically integrated manufacturing model and 6-month lead time on equipment provide flexibility to respond efficiently to customer demand while focusing our capital on high-return opportunities. Turning to our balance sheet, liquidity, and capital allocation, we continue to strengthen our financial position during the second quarter and into the third quarter, increasing available liquidity while reducing leverage further below 1x.

We had approximately $274 million of borrowings outstanding under our credit facility with a borrowing base of $722 million. We had approximately $446 million of available capacity. Our conservative balance sheet and consistent cash flow generation provide the flexibility to invest organically, pursue strategic acquisition opportunities that strengthen the business, and consistently return capital to shareholders through dividends and opportunistic share repurchases. Subsequent to the quarter, our board approved a 14-cent-per-share one-time special dividend to Class A shareholders only. This is in addition to our quarterly discretionary dividend of 9 cents declared on July 30th.

As a result of our ownership structure, we've accumulated cash on our balance sheet and are returning this cash to our shareholders. We do not anticipate similar special dividends in the future. In summary, we delivered another strong quarter, strong free cash flow, disciplined investment and high-return growth, and a stronger balance sheet that provides strategic flexibility. We're well positioned for the opportunities ahead. Back to you, Joe Bob.

Thanks, John. Let me close by sharing our perspective on the current market environment, Flowco's positioning, and our outlook for the quarter. We believe we continue to benefit from our North American positioning, where reliable domestic energy production is playing an increasingly important role in meeting global energy demand. We continue to see an uptick in activity across portions of our customer base, which we expect will increasingly accrue to Flowco's benefit over time. With U.S. production expected to remain near record levels, operators must continue working to offset natural decline across a large and growing base of producing wells.

This requires an increasing focus on production optimization, operating efficiency, and recovery, and consistent demand for our solutions. Against this backdrop, we anticipate third quarter adjusted EBITDA of $92 million to $98 million. We will continue to drive incremental efficiencies across our organization and further integrate our platform. Increasingly, that means putting our operational data and deep industry expertise to work, not just to identify cross-sell opportunities and the right solutions for each customer, but to run our broad-spectrum rental fleet more efficiently through condition-based maintenance powered by AI and machine learning.

We also remain disciplined in evaluating strategic opportunities that complement our existing technologies, broaden our platform, and enhance the value that we deliver customers. Together, we believe this positions us to deepen customer relationships and drive profitability over time. We believe Flowco is the leading pure-play production optimization platform positioned to benefit from our customers' non-discretionary spending patterns in what has become an increasingly industrialized production base in North America. We believe our margins, returns on capital, consistency of our free cash flow generation, and capital-efficient growth are differentiated within our industry segment. As we continue to execute quarter after quarter, we believe these qualities will increasingly become evident, leading to long-term value creation for our shareholders.

[Operator Instructions] Our first question is from Arun Jayaram with JP Morgan. Please proceed.

I was wondering, Joe Bob, if you could elaborate a little bit more on what you're seeing with the Valiant project. You know, kind of acquisition, you appear to be ahead of plan. I know when you guys got Valiant, they had about 30 to 35 customers. This compares to, you know, Flowco, I think you have over 300 customers. And then you'd highlighted expectations to deliver around $52 million of EBITDA, you at kind of 40% margins. Can you maybe give us an updated view on what you think Valiant can deliver and opportunities to further scale this part of your business?

Yes, absolutely, Arun, and thanks for the question. Listen, as we said in our prepared remarks, we are very pleased with how well the Valiant integration has gone and how well the culture that the Valiant team built has integrated into the Flowco culture. As it relates to customers, you've just highlighted exactly what we are doing, which is expanding the Valiant customer base through deliberate, intentional conversations with customers that we have a deep history with on the Flowco side, where Valiant might or might not have done work with in the past. But really using that platform and the integrated approach to business development to expand that customer base.

Not quite ready to give you specifics on how much ahead of plan we are, but yes, the guidance that we provided looks eminently achievable, and we will report back once we have a little more visibility through the end of the year on kind of what our expectations are for Valiant on a full-year basis. But rest assured, things are going well and hope to have more space for you potentially next quarter.

Great. My follow-up, Joe Bob, just digesting the guide that you gave, call it $92 million to $98 million for Q3, which would be up slightly from Q2 on a sequential basis. Could you or John just provide a little bit more segment-level detail on your expectations for Q3, including thoughts on what would frame maybe the upper end of the guide versus the lower end, but maybe just a little bit more segment-level detail would be appreciated.

Yes, John can certainly dive into some specifics there, but look, at a high level, our capital deployment across really all segments is really unchanged. You'll see some quarter-by-quarter variation here and there just given the natural ups and downs of delivery times. But there's really no change in our expectation on a full-year basis for capital deployment. So that really at a high level will inform the guide and the range of outcomes. And before John goes into detail, what I'll also remind you is that our downhole components business, which now does include Valiant, is more variable on a quarter-by-quarter basis than our rental businesses.

So I think the wide end of the range reflects that variability. We had a couple of months during COVID and Q2 that were behind expectations and a month that was ahead of expectations for downhole components. So I expect that variability will continue, but I also expect maybe slightly better-than-expected results as compared to history because of the inclusion of Valiant in the downhole components segment. John, did I say all that right?

Yes, I think you got it. I mean, kind of directionally, we expect surface equipment to be, you know, relatively flat quarter-over-quarter. We expect a little bit of an uptick in NGT driven by an increase in business at NGS, which is our packaging business that we use internally and externally.

Okay, great, gentlemen. Thanks.

Our next question is from Derek Podhaizer with Piper Sandler. Please proceed.

I just want to stick on the Valiant conversation. I appreciate, you know, we're not giving out too many details yet, but have you seen any immediate wins now that you had a few months with the company on the Flowco platform, as far as cross-selling opportunities? You know, obviously you have the starting artificial lift solutions in HPGL and ESP, but then as you kind of move towards that conventional gas lift into plunger lift, have you had a conversation around those or have seen any sort of immediate wins when it comes to cross-selling opportunities?

Derek, we have. It's off to a great start. A couple of examples. Recall that within legacy Flowco, we have what we refer to as our cap and spooling business. This is the actual service where an operator will really unbundle the installation of an ESP. They will choose a vendor to actually buy the ESP, and they'll choose a different vendor to run the cable and the capillary string downhole to optimize the performance of the ESP. Valiant historically had gone to market in two ways, on a limited basis themselves, but actually to a larger degree externally. Flowco, before the acquisition of Valiant, was one of the larger players in the Permian Basin on that specific product line, even though we did not offer an ESP product prior to our acquisition of Valiant.

The low-hanging fruit is actually starting to come our way, which is on every Valiant installation, we are increasingly relying on our own internal capability to install the cap string and the ESP cable. So that's an immediate uplift, kind of a no-brainer, if you will. More broadly, on the customer-by-customer intentionality that I described earlier in Arun's question, yes, we're starting to see some good results there. Going to hold off on talking about, again, specifics around customers, but some household names are starting to engage with us on a more holistic approach to the early days' first form of artificial lift installation. That's been very promising.

And then also, again, we're starting to see some very interesting signs internationally coming out of our Valiant acquisition. Not only does the team there have deep experience in international markets, many of which are very large ESP markets, but they're going to dovetail nicely with some of the organic efforts that we've had historically. So our ambition is to talk more openly and more specifically about some international wins in the coming quarters. Still a bit early though, but I think more broadly, Derek, the last thing I'll mention here is the Valiant acquisition and integration really, I think, the playbook for Flowco has been written. Okay, we've proven to ourselves, and hopefully this is demonstrated in our commentary to you, we've been very successful, I think, identifying and integrating acquisitions that make sense. And so keep an eye on that for us in the coming quarters. We hope to add more as our business progresses.

My follow-up, I just wanted to go back to some of the cost inflationary pressures that you felt during the quarter. It sounds like these will come up. What remains the lube oil side? I know your compression peers are also navigating and facing these pressures as well. Maybe can you help us understand how you expect or potentially lock in or de-risk some of these longer-term swings when it comes to lube oil and what you're able to do with your supply chain as we think about how much of an overhang this could potentially be for the business over the next, you know, 6 to 18 months or something like that? Just maybe a little bit more education and help as we try to think about lube oil's effect on your business.

Yes, so we procure a lot of lube oil for our fleet of compressors, over 5,000 units in our fleet. We have choice among suppliers, but we also try to manage that supply chain by locking in prices periodically. And just so you know, the suppliers of that commodity, it's tied directly to crack spreads. So everything you're seeing in the refining space with crack spreads being really at an all-time high, directly impacting the pricing of that product for us. We have very limited potential ways to pass that through. You know, contracts don't contemplate our ability to actually share that risk with customers, unfortunately. So we have to get more creative.

And we're actively trying to manage that. The contract that we are currently living under, the most substantial one, is priced 90 days in advance. So I think for Q3, the cake is baked. I'm looking at John, he's nodding, I think that's right. But we're actively looking for ways to help there. Anything to add there?

No, I don't think so on the lube oil side. I do want to highlight, you know, operations and maintenance has been a part of the cost increase as well, probably a bigger part than lube oil. And that's something where, you know, I think I don't expect anything in the short term, but I think over the medium term, that's something, you know, we've got real expertise in operating fleets across the two segments. And so I think that's something that, you know, more to come in the next 6 months where we can make some progress.

Great. Thanks, Joe Bob and John. Appreciate all the comments. We'll turn it back.

Our next question is from Phillip Jungwirth with BMO Capital Markets. Please proceed.

Free cash flow is really strong in the quarter, and you've been above 50% EBITDA conversion for the last five quarters now, I think. I know this can bounce around a bit, but just how are you viewing medium-term free cash conversion now for the business? And maybe go into a little bit more detail on the thought process behind the special dividend in the quarter, although I know you said don't expect that to continue in the future.

Yes, Phil, look, free cash flow, return on capital. These aren't just buzzwords that we talk to you guys about. These are our North Stars within Flowco. Okay, we talk every day with the folks on the front line running businesses on every lever they can pull to impact those two key areas, metrics. Okay, so we are laser-focused on generating not just high EBITDA margins or not just, you know, revenue growth, but real free cash flow, cash-on-cash returns. Every quarter compounded over time should yield increased equity value, right? That's kind of finance 101. So those are our North Stars. We're going to continue to emphasize that. Yes, we're very pleased with the conversion this quarter, are happy that this is sort of a quarter-over-quarter continuing story, and really hope to continue that story in the back half of the year.

Yes, and then on—to address this special, if you want me to, we're an Up-C, that's our corporate structure, and historically we've paid tax distributions at the individual tax rates of 40%. Flowco pays taxes at 22%. But when distributions are made, it's done pro rata. So everybody gets the same amount per share, per unit. That resulted in accumulation of cash on the balance sheet. And what the board has said is, look, we're going to return that to our shareholders. And going forward, we have the option just to pay tax distributions at the corporate tax rate. And so that's the plan. We don't expect another one-time special dividend in the future.

Got it. Appreciate that. Then on the production optimization platform with Valiant added, could you expand on the technology integration point and specifically what you're doing here? And then, just separately, we've heard a lot from the E&Ps talking about utilizing AI to manage artificial lift systems. Are there ways in which Flowco is able to implement this technology in its own products and services? And I know you referenced this earlier as far as condition-based maintenance, too.

Yes, so the Valiant technology that they've developed in-house is really something special. Okay, so we have a fleet of ESPs installed in customer wells, and we are able to capture real-time operating data on every one of those ESPs, and that data is monitored in real time remotely. And it's actually today monitored with human beings that look at data and actually predict when wells will require a change. The changes could be, let's adjust the operating parameters of the ESP, or this well is about to go down and we might need to get out there and do something about it in terms of an intervention and potentially even change the form of lift that's being used to lift that well.

Okay, so you can imagine that where there's a human being looking at data today, there presents the potential for AI to not only provide predictive analytics on when wells will go down, but also autonomously intervene in the operation of those wells with, you know, obviously with the permission of the customer. We've certainly seen the successes that others have had in this area. I would say that it's still early in the U.S. onshore where we currently operate. Customers are on their own AI journey and customers are to varying degrees embracing it and resisting it. And I'll quote more than a handful of customers when I say they will not today. They are very uncomfortable eliminating the human being from the operation of, you know, thousands of wells in the field.

Now, will we get there one day? Maybe. Will it be a straight line up and to the right? Absolutely not. It will be fits and starts. Customers will have varying opinions on this because it impacts not only their operations, but also, you know, potentially thousands of employees. So we're in the middle of it. We are making progress at our own pace. We also see a lot of opportunity to take the early success of the ESP technology that we are today using for remote monitoring and intervention to help with that commercial collaboration as operators change the phase of lift over time. So, from ESP to gas lift to plunger lift.

And you use the same technology platform to help the customer not only monitor the well, but also have predictive analytics on when a well needs to have a lift change out. So that's our ambition. That's the effort that we're on internally. And we've got some very interesting case studies with customers where we're seeing success there. So stay tuned for our version of this, but we're really happy with the progress that we're making.

That's great color. Thank you.

Our next question is from [ Keith Beckman ] with Pickering Energy Partners. Please proceed.

I just wanted to get a sense around, you know, we've seen VRU sales tick down a little bit here, I think over the last quarter. I just wanted to get a sense maybe on what the upcoming catalyst could be for growth in that business. I think a little bit about pipeline capacity takeaway increasing is potentially one of them, but anything shorter term or longer term around, you know, potential growth in natural gas technologies.

Yes, Keith, the growth story, they're still very much intact. Okay. Almost to a pad, well pads, particularly in the Permian Basin, have VRUs as standard equipment spec'd into the facilities design before any pad gets constructed and certainly before it gets turned on. So we're seeing that continue in the Permian. I think you mentioned pipeline takeaway capacity. That has been a concern of some customers that we've talked to about longer-range plans for installation of VRU. We are starting to see that be alleviated with more takeaway capacity, so that's good.

I think the in-basin power theme that a lot of oil companies and service companies are starting to highlight is going to be a tailwind as well for increased VRU adoption. Every molecule that you can capture that you can send, even if it's just in-basin, to in-basin generation, is one less molecule you have to go find. So yes, I think that the tailwinds for VRU are very much intact. Any kind of slowdown you see in VRU sets or sales, I'd say is really just consistent with the lumpiness of the quarter-by-quarter growth trajectory. But we have continued confidence in our ability to deploy more VRUs, either by the way of selling them to customers who want to own them or building them and putting them in our rental fleet.

Awesome. No, it's really helpful. And then my second question is a little bit twofold. So I think about kind of the 6-month look ahead, I'll do for CapEx and just wanted to get a sense into if you guys have a good feel for operators' plans into early next year and what that could mean for growth for you guys in the early next year. And then the second one, just thinking about, I think we've seen a lot of private operators kind of start to ramp here. I think of you guys as having more of a blue-chip customer base, larger customers, but I wanted to get a sense on if you're seeing any adaption of any of your technologies onto some of these smaller privates here at all?

Listen, to answer the second one first, yes, absolutely. The small private operator is still near and dear to Flowco's customer base. We work with a wide range of operators. Just by the law of big numbers and what's happened to the customer base via consolidation, sure, our top customers are the blue-chip customers, but there are a plethora of either private family-backed businesses or private equity-backed businesses that Flowco works with. As it relates to your first question around longer-dated growth expectations, look, we've seen, as you have, rig counts increase, right? I think we're up 50-somewhat off the bottom, which is great.

Every one of those rigs is being put to work to make new wellbores, and the question is, are operators building DUCs or are they turning those on? And at some level, we don't really care because every one of those wellbores that gets constructed needs to be produced for 20 years. And so we view the current uptick among our customer base and drilling activity as really just fueling the fire for future growth for us. So hard to put a number on it for '27 at this point, Keith, but we're feeling pretty good about the early signs of growth that customers are starting to lean into.

Awesome. I really appreciate it. I'll turn it back.

There are no further questions at this time. I would like to turn the conference back over to Joe Bob for closing remarks.

Thank you all for tuning in and look forward to talking to you in 90 days. Appreciate it. Have a good summer.

Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.

All right. Let's get this thing started. Good morning, everybody. My name is Jason Kim.

I'm Sowmya Vemulapalli.

And we are the equity research associates on JPMorgan's oilfield services and equipment team. Today, we have the pleasure of hosting Flowco and its President and CEO, Joe Bob Edwards, we're very honored to have him. Since its IPO a year ago, Flowco has quickly established itself as a pure-play leader in production optimization, artificial lift and emissions management solutions for the North American oil and gas industry. Joe Bob, thanks for joining us. I'll hand it over to Joe Bob for some opening remarks, and we'll proceed with a Q&A fireside chat.

Excellent, thank you. Well, good morning, everybody, and thank you for coming. It's great to see some familiar faces, some new faces, and it's great to tell you about my favorite subject, our company, Flowco. As Jason said, we IPO-ed just over a year ago and are really pleased with our young life as a public company. We have, I think, a very unique story to tell. I'm thrilled to share it with you, and tell you a little bit more about what makes Flowco unique. I want to leave plenty of time for Q&A. We've got some interesting current events to talk about, some interesting geopolitical current events to address, and yes, tell you a little bit about how the future looks for us.

But just to set the stage, Flowco is the only public company that is purely focused in the production phase of the oil and gas industry. Once a well in the United States is drilled, you all know this, it has to be fracked. And then the oil company has to manage that production for, in some cases, up to 20 to 30 years. So our revenue, our very reason for being begins when a well gets turned in line. Every well in the United States has to have some kind of help in order for it to maximize its production, that type of help is typically referred to as artificial lift. And that actually describes what is done. We are helping a well lift its fluid to the surface by providing various techniques to lift the fluid out of the well to the surface so that the oil company can then move it to market.

So the way that we actually go to market is through the various methods of lift, and it's best seen really on Slide 8. I'd love to start all my presentations on Slide 8. For some reason, it makes sense to flip all the way there. So our business is organized in 2 segments: Production Solutions, Artificial Lift, Natural Gas Technologies, which is another form of production optimization. We have several brands that we have acquired over the years, and our customers procure their products through these brands, but we go to market as one Flowco.

So within Production Solutions, we have various ways of addressing the early production in the life of the well. There are 2 main forms of production, high-pressure gas lift and electrical submersible pumps. We have both forms of lift for the early life of the well. Typically, when a well matures, you go through a decline curve as seen here on Slide 9. And the appropriate form of lift early in the life of the well needs to be handed over to something else. That typically is conventional gas lift. We also lead the market in that. And then as a well gets out to years, 8, 9, 10 and beyond, we have a late life solution called plunger lift that is fit for purpose for a large portion of the addressable market in the United States.

On the Natural Gas Technology side, we have a vapor recovery system, which leads the market. Vapor recovery, again, is what it sounds like. We help oil companies capture fugitive emissions that are escaping from tank batteries. These emissions have BTU content, so they have economic value. Our vapor recovery systems allow oil companies to capture this production or this lost production and actually monetize it. So yes, it's an environmental solution. But above all else, this is a moneymaker for our clients. So our oil company clients actually deploy this environmental solution to help their bottom line.

All along the way, we have various digital solutions, which help oil companies actually manage their production systems remotely. And we are well down the path toward autonomous control of some of our systems through advancements in AI. We can talk more about that in the Q&A. But we are thrilled with the position that we hold in the market. We have a growth plan that is, I think, very clearly demonstrated. We had very nice growth last year. We're projected to continue to grow this year at what I think is industry-leading rates, that's both organic and inorganic. Our M&A pipeline is full. But my commitment to you guys is that we are going to stay true to what we know, right?

We understand the production phase of a well's life inside and out. We understand the adjacent technologies that are required by our clients to help manage that production. We have strategies to round out our product portfolio, both organically and inorganically, and I'm excited and honored to lead the company.

So with that, maybe an appropriate time to maybe pause for some Q&A.

Yes, absolutely. We'll get started. That's a great introduction, Joe Bob, thank you very much. So you mentioned your company is very uniquely levered to the production phase side of the activity. But let's just take a step back and start with the macro. It is our Natural Resources conference after all. So given the first half of '26 has been marked by significant geopolitical volatility, you have commodity prices going higher. North America is starting to see some early signs of increased short-cycle investment, but Flowco is levered to production phases. So it tends to be more stable. How has the recent Middle East conflict and resulting supply disruptions shaped customer conversations and activity levels in North America for your company?

So we generate very little revenue from the Middle East. Obviously, it's a big world out there. We'll talk about international expansion for Flowco in a minute. But this disruption that is taking place in the Middle East has definitely impacted us in the U.S. And it's net-net, a very positive development. No one likes conflict, no one likes the violence that comes with armed conflict. But when you think about what emerges on the other side of this conflict, the security that the United States Energy conflicts enjoys is going to be at a premium.

The production that the North American shale business, in particular, has provided to the world stage, should have a higher call on it. So we're thrilled with, I think, the new normal on the other side of this, there should be a sort of a permanent geopolitical bid in the market for what our clients are selling, which is net-net and good for us. Specifically related to activity, yes, you alluded to it, Jason. The -- our clients are starting to add rigs. They're starting to add frac spreads. So these are great early leading indicators for more activity for us. But you also nailed it. It's -- there's a definite lag. We see really good early green shoots for later this year and into next year. And we're yes, gearing up for that with our CapEx programs and with our forecast that we've put out to the Street.

Wonderful. And we'll get to a little bit of the CapEx plans later on today as well. Flowco delivered a strong 1Q, just posted some updated thoughts on guidance for the second quarter, earlier this week, reflecting already a full quarter of Valiant contribution and continued rental growth, but recognize you're seeing some margin compression in the current environment within a particular subset of your business? So as we move into the second half, investors are focused on the sustainability and margins, the cash flows that you have. Can you walk us through some of the main factors driving your updated thoughts on that updated guidance and how this sets up for the second half of the year?

Yes. And to be clear, and we will reiterate the growth story that we are telling the revenue that we are generating is in line with expectations. So the demand for what we do is incredibly solid. And if you look on a full year basis, our growth story leads the industry. It's going to -- we're going to be up somewhere in the 15% to 20% range year-over-year, which we're thrilled about. But yes, we are seeing some margin pressure in the short run. We put out some updated guidance for Q2. We think we're going to come in at or slightly below the low end of the range, 100% driven by some cost issues. Really, it's in a couple of big buckets.

We've got some increased pressure on lube oil, and we are a large consumer of lube oil. We run over 5,000 compressor packages and they consume lube oil as just to run. So we've seen a definite cost pressure there. We think that's going to persist into Q3. We've also seen some maintenance expenditure -- maintenance expenditures that are a little higher than we had forecast, and that's a mix of parts and people and timing candidly. We're digging into both of those as aggressively as we can, but we estimate a couple of hundred basis point margin pressure in Q2, which might persist longer into the year.

We also suffered from some mix -- unfortunate mix shift during the quarter, which we think is not permanent. So yes, look, again, to reiterate, the outlook for the year is solid. We just think here in Q2, we're going to suffer some things that are a little -- that need our attention, some of which are transitory, some of which we're digging into and make sure they're not structural.

That's very helpful. And you mentioned some of these are shifting maintenance CapEx, working capital. What are some of the key puts and takes to think about free cash flow conversion for the rest of the year as working capital normalizes?

Yes. We are very proud to have a very strong cash flow story, okay? So if you think big picture, even after a healthy dose of growth capital, and for the last several years, we've invested around $100 million a year of growth CapEx, even after that we're on a 50% free cash flow conversion from EBITDA to true free cash flow. That speaks to our very appropriately leveraged balance sheet, speaks to some excellent work by the team on working capital management and our discipline around capital expenditures. We have -- we're a very returns-driven organization.

And if I may, I'm going to go back to the presentation, [ Gaby ], what slide is the money slide? The end, thanks. Okay. There we go. Back one. We make capital allocation decisions based on this graph. We have a number of very specific products that we invest the vast bulk of our growth capital in. High-pressure gas lift, conventional gas lift and vapor recovery being the 3 that we've talked about most substantially since IPO. Most recently, we added a new product line in ESP through our Valiant acquisition. Each one of these areas has a clearly defined growth effort behind it, and we allocate capital based on ROCE, okay? So what is it, right? Return on capital employed, everybody knows that. Everybody has a different calculation about it, for it. But we look at true full-cycle returns on every dollar of incremental capital we deploy.

So we are thrilled with the result of that capital allocation strategy between these 4 main areas leads to industry-leading ROCE and industry-leading growth. And last I checked, any textbook will tell you, that's a path to superior equity returns. So we're thrilled with this result, and this is the way we make decisions every day.

We always love a good call back to our valuation textbooks with the McKinsey book. So really appreciate that. I think that's a good segue into some of the business models and the commercial models that Flowco deploys, and I'll hand it off to Sowmya.

Definitely, thank you. So Joe Bob, turning to your rental platform. I think we've seen Flowco position its rental platform is a core driver of visibility, especially as rental revenue represented around 60% of total revenue as of the first quarter, and it's increased 9% sequentially, supported by steady demand you're seeing across surface equipment and vapor recovery rental specifically, plus your newly added ESP offering through the Valiant acquisition. So can you help us understand the main advantages of Flowco's rental model for both customers as well as the company? And how do you see this rental versus sales mix evolving over the rest of the year and going forward?

So for our customers, they've got a very challenging business model right? They've got to go find the hydrocarbons, drill for them, frac the wells and then manage the production. They are really, really good at the subsurface analysis and the technical skills that go into finding and producing oil and gas. What they're not good at by their own admission, is running surface equipment to help make all that a reality. So the business has evolved over the decades into a rental model for things that need to be maintained and moved around.

And so within our business we have over 5,000 pieces of surface equipment that every day are helping maximize production on site for an oil and gas company. So that's our rental fleet. It's a mixture of high-pressure gas lift, conventional gas lift and also within our rental line item of revenue on our GAAP financials, we have our vapor recovery business. So that's -- and that's what's growing most aggressively is our investment in each of those 3 categories. The newly added ESP product line interestingly, has a little bit of both rental and sales revenue. So we respond to our customers' demand and look at maintaining that rental equipment to the best possibility. We win business based on the service quality that we provide, the mechanical uptime of the rental items that we have on site, and we're with them for the life of the well as the wells mature.

That's helpful. And Flowco has really highlighted continued investment alongside these customers' activity increases in 1Q '26. And we've seen Flowco report investing $26 million of growth capital specifically, primarily to expand this rental fleet across surface equipment and vapor recovery, right? So what is the capital deployment strategy for further rental fleet expansion? And how do you manage lead times in your supply chain?

Sorry, I'm going to go back to Page 8. And if you look at our rental opportunities. It's in the high-pressure gas lift business, the ESP and conventional gas lift, as we said. And the rates of return on those are well north of our cost of capital, okay? Without getting into specifics, without giving away a little bit of what makes us truly unique. We have a really kind of hard and fast 20% to 25% minimum ROCE expectation before we deploy $1 of growth capital. Some of our high-returning opportunities are well into the 40s.

So you compare that to other oilfield service companies that don't enjoy the contract cover that we do, don't enjoy just the visibility of the free cash flow stream that we do. And I'd say we're sitting in a pretty good spot. So I'd say the vast bulk of our growth capital for this year, and I would expect it to be somewhere in that $80 million to $100 million range for the year is going to be in those 3 key areas with vapor recovery being a #4 as well. So we constantly look at where to deploy capital. We have a vertically integrated manufacturing model. So we make all of our own stuff which is, I think, a competitive advantage.

We have about a 6-month lead time if we want to build new kits, if a customer asks today for any kind of additional rental expansion upsize, it'd be about 6 months. That compares very favorably to some of our brethren and other sectors of the oil field that are competing for engine availability, for instance, from the likes of Caterpillar and then maybe 3 or 4 years out. right? So with our supply chain, with our vertically integrated model, we can respond much more favorably to customer demand.

Great. Turning to production systems and solutions specifically, Flowco reported first quarter segment revenue increasing 10% sequentially and adjusted EBITDA rising to $61 million, and this was driven by strong growth in surface equipment and contribution from Valiant, of course, and the company has noted Valiant is now reflected within downhole components as Flowco's ESP offering. So how has the addition of Valiant's ESP offering change your approach to production optimization and customer engagement. And if you could help us understand the early integration wins of this and how quickly you expect to capture cross-selling opportunities, especially between Valiant and the legacy model that Flowco offered?

Yes. The punchline is, it's going great. So what did we do, right? We truly took a big step to round out the product portfolio we can offer our clients. So we now can go to an oil company and say, Mr. Customer, we have both of the preferred early forms of artificial lift in our product portfolio. We want to be a solutions provider to you. We've done the analysis on your production -- on your expected production from this next pad that you're going to turn on -- turn in line. We think that this is a high-pressure gas lift application. But Mr. Customer, if you disagree with that technical analysis and would like to put an ESP in the well, we've got that, too. So we can truly be a solutions provider now, which is a big difference for them being just another product vendor.

Now that's where it starts, but it doesn't end there because the well will decline and that production technique will not -- will stop being the right technique as the well declines. When you get into about year 2 or 3, the first early form of lift needs to be switched out to something else. That's where I think the true revenue synergies from the Valiant acquisition are going to be realized because we lead the market in conventional gas lift and plunger lift. These are the 2 most widely deployed techniques when a well comes off either high-pressure gas lift or ESP. So again, we can go into that customer preemptively, proactively, before the lift solution needs to be switched out and give them a proposal for the well handover.

Now in the North American market, it's very competitive. So the customer is not just going to say, okay, they're going to make sure that we're offering them a fair price. They're going to make sure there's not a better mouse trap out there, but 9 times out of 10, particularly in this day and age, the customer is going to hit the easy button and say, sounds great. go ahead and change it. So that's the real benefit we see from this first strategic acquisition of Valiant. We think that, that's going to yield -- bear a lot of fruit over the coming years. Just specifically, we did put out some guidance when we bought Valiant, very pleased to say we are on track to ahead of plan on what we conveyed to the Street. So I'm very optimistic about the rest of the year, having more opportunities to realize additional revenue synergies there.

That's great to hear. And I think giving an equal run for its money, you have a very unique offering with natural gas technologies. And as part of the segment for more of our generalist investors in the room, we've seen Flowco emphasize VRUs as both an emissions and economic solution, right? Capturing gas that might otherwise be vented or flared and monetizing it. Across the segment, you've reported consistent revenue and in-line EBITDA, and you're only expecting more growth as you go ahead. So the company attributed performance to growth in vapor recovery rental revenue and increased natural gas systems. So heading into 2Q and the rest of the year, what are the main drivers of VRU demand?

The VRU business is great. If you think about it, when an oil well is produced, it goes -- the fluid that comes out of the ground goes into a tank battery. And the tank battery is there to allow the fluid that comes out of the ground to settle to a point where it can be moved to market. As it settles, as it comes out of the ground at a deep pressured situation into atmospheric pressure and sort of ambient temperature, you'll have certain parts of the hydrocarbon chain turn from liquid to gas. And historically, these would be flared, right?

Everybody has seen on TV or in the movies, the big flare stack that is there to get rid of the harmful and dangerous methane emissions. Well, you're burning free cash flow, if you're an oil company. And so what has happened over the years, particularly in the Permian, as wells have become gassier. You have pipeline infrastructure that is built to move gas to market. right? In the Permian, it's an oil basin, but it has massive amounts of associated gas. So the gas infrastructure has now caught up to a point where every new pad that is being designed in the Permian Basin, in particular, has a VRU application specified into the design of the pad. So we see this continued demand for additional VRUs as more pads in the Permian get built to handle not just the oil production, but now increasingly large amounts of associated gas production.

One important point there that we get a lot of questions about from investors is, okay, natural gas pricing is terrible in the Permian. Sometimes it turns negative. Well, yes, that's true. So doesn't your VRU application become uneconomic at low gas prices? And the answer to that is no. Definitively no. And why is that? Because we are not just capturing methane. Methane may trade at 0 at Waha, but guess what else comes out in the vapor recovery application, you've got butane, pentane, propane that the heavier ends of the natural gas stream that are tied to oil prices. So what we like to describe given the typical composition of gas in the Permian, $2 Henry Hub 0 at Waha is $10 equivalent to a customer's bottom line. And that's because of the NGL value that comes out of the VRU application.

So we don't see an end in sight for the vapor recovery demand. We lead the market there with a roughly 50% market share. We've got some great technology around our systems that make us a premium provider in that space, and I'm thrilled with the outlook there.

That's very helpful. And speaking of the Permian, could you elaborate further on the current adoption of VRUs in other basins, including the Permian as well? And what is that runway for adoption going forward?

The EPA actually puts a statistic out that based on public data, the percentage of pads in every basin that have vapor recovery deployed. And I'm super proud of the industry in the Permian in particular, the adoption rate, if you look at every pad in the Permian, roughly half the pads have VRU on them. And that's been the fastest-growing adoption -- adopter of VRU is the Permian. Other basins are lagging, not because the systems don't work there, it's because the gas infrastructure hasn't caught up to do anything with the gas after you capture it. Take the Bakken for instance. You still see large amounts of flaring activity in the Bakken. And that's because there just isn't the gas takeaway capacity to handle the associated gas that comes out of that basin.

We are really proud to have led the way in the DJ Basin, which is not one that people talk about much, but Colorado has some of the strictest environmental rules in the country. And we worked hand-in-hand with government officials in Colorado to make sure that they understood the value of our vapor recovery systems and we are thrilled that the DJ represents our second largest footprint of vapor recovery. They've invested in the gas takeaway capacity. They've invested in the environmental regulations that drive a lot of the decision-making in that basin in particular, and that's an additional tailwind for us.

Super helpful color. I'll turn it over to Jason to quickly cover the capital allocation strategies.

Yes. So it looks like Flowco sort of hitting on different cylinders across the 2 segments. You have the Valiant integration. We've touched upon a little bit about growth CapEx, invested $26 million in 1Q for reference. Full year outlook of $150 million for the legacy business and $20 million to $25 million for the incremental value in CapEx. So there's a lot of things going on in terms of deleveraging, growth investments, M&A. How do you think about balancing all of that as well as capital returns potentially going into '26 and '27?

Our M&A pipeline is robust. We've been very clear with the market that we want to continue to round out the product portfolio. Look at adjacent product technology offerings that make sense with what we currently do. What else do our customers rely on for production optimization and how can we integrate it with what we currently have. So we've got a very active dialogue going across a number of potential opportunities inorganically. But we balance that with our organic growth story, which is very intact. In fact, it's getting better.

So between high-pressure gas lift adoption rates increasing the ability to deploy additional growth capital in ESP and the ability to build more conventional gas load systems as well as vapor recovery systems. I think the ability to continue to invest $100 million to $125 million of growth capital organically, is very achievable this year and certainly as we move into a more constructive environment next year. So that's exciting. We expect to pay down roughly half of our debt balance by the end of the year, assuming no additional M&A -- attractive M&A gets across the line. That will get us down to around half a turn of leverage, that's very manageable on a business such as ours with visible levels of free cash flow coming from our rental fleet.

And yes, we did execute on an opportunistic buyback of our stock tail end of last year and early this year, whenever that got to a range that made sense for us. But we are going to continue to commit to an appropriately levered balance sheet and be very good stewards of capital across both organic and inorganic opportunities.

May I ask if some of that M&A opportunity or maybe some of the Valiant synergies that you're looking to get, what are some of the international expansion addressable markets that you're thinking about? Or is the immediate near-term focus squarely on North America right now?

There's a lot to do in North America. But as you point out, Jason, there's a big world out there. And we are looking to help our customers with international shale development because that's what we feel like we're really good at is the -- is managing production from unconventional resources. So where do we see applicability there? Certainly, Argentina, where the Vaca Muerta has gone beyond a science project into a true productive basin. The Middle East is beginning their shale expansion, and we've got very specific strategies across the GCC.

And one that's not in the unconventional area, but I wouldn't sleep on is Venezuela. You've got a market there that is different today than it was a year ago. In fact, today and our expectation moving into next year, in particular, it's going to look a lot more like what it did [indiscernible]. So the Venezuelan market at one point was a very attractive market for artificial lift technology deployment. We happen to have a lot of Venezuelans on staff, and we're very excited about hopefully getting back down there. Closer to home, Canada. The Montney has become economic in a nice way. Some other basins up there are showing promise, so we're hopeful for some Canadian opportunities as well.

Hopefully. I don't know if you've been to any World Cup games, but there's some soft football diplomacy. I'm sure you may be up too. Anyway, I digress. I do want to use our remaining time to see if there's any Q&A in the audience for Joe Bob. No?

Not everybody wants now.

Yes. Please.

You were talking about kind of initially when customers are looking between ESPs and high-pressure gas lift. Do they need to make that decision before the well starts producing? And can they get that wrong? And what -- I guess, what's the impact of that?

Yes, great question. So typically, in particular in the Permian, which is -- by the way, that's about half of our business, as it also is about half of the nation's production, right? So typically, in the Permian, a company will do what they did last time, right? Okay, I'm turning a new pad online. It's a couple of miles away from the previous pad. What worked, what didn't work last time, let's deploy the stuff that did and think about the stuff that didn't, right? So no, we've gotten pretty good at being able to tell in advance what's going to be required on this next location. So that's part of our planning process with our customers is preparing.

No. Are there ever surprises? Sure, right? Geology is complicated, stuff goes wrong. So you're surprised sometimes to the upside, sometimes to the downside. But most of the time, you know well in advance so we can plan our supply chain well in advance when you need to stock up for the next leg of growth for a customer. We have about a 3-, 6-month visibility in some cases with some of our best customers as to what's going to be required.

Wonderful. I think that's all the time we have today. Thank you so much.

Good morning, and welcome to the Flowco Holdings, Inc.'s First Quarter 2026 Earnings Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q&A.

At this time, I would like to turn the call over to Andrew Leonpacher, Vice President, Finance, Corporate Development, and Investor Relations at Flowco. Please go ahead.

Good morning, everyone, and thanks for joining us to discuss Flowco's first quarter results. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at ir.flowco-inc.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law.

During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings.

Joining me on the call today are our President and Chief Executive Officer, Joe Bob Edwards; and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we'll open the call for your questions.

With that, I'll turn the call over to Joe Bob.

Thank you, Andrew. Good morning, everyone, and thank you for joining us today. I'll start today's call with a review of our first quarter performance and key operational highlights, followed by an update on how our recent acquisition of Valiant Artificial Lift Solutions is progressing after we closed the transaction in early March. Jon will then cover our financials, including segment performance and provide additional detail on capital allocation and on the balance sheet. I'll close with our perspective on the current market environment as well as our outlook for the next quarter.

Flowco delivered a solid start to 2026 during the first quarter, generating adjusted EBITDA growth and consistent execution across both operating segments. We generated $85.5 million of adjusted EBITDA during the quarter, at the upper end of our guidance range. We sustained our industry-leading margins, driven by the strength of our rental platform and modest sequential improvement in gross margins quarter-over-quarter.

During the first quarter, we generated $52 million of free cash flow, enabling us to reduce debt while continuing to return capital to shareholders through dividends and share repurchases. Pro forma for the Valiant transaction, we remain conservatively leveraged with ample liquidity to continue executing on our strategic priorities.

Turning to operational performance. Our rental platform continued to build momentum during the quarter. Rental revenues increased approximately 9% sequentially, driven by steady demand across our surface equipment and vapor recovery rental solutions as well as our newly added ESP offering acquired with Valiant. Customers continue to adopt these technologies to maximize production and optimized returns across the life cycle of the well.

Spending a moment on each. Within surface equipment and in particular, high-pressure gas lift, we are seeing incremental demand in the early part of the year as operators increasingly deploy this technology to accelerate production in a constructive commodity price environment. Given its high uptime and ability to operate efficiently at elevated GORs, HPGL enables operators to bring on production earlier and sustain higher output, ultimately improving well-level economics.

Our vapor recovery units are becoming increasingly ubiquitous in pad development as operators use this capital-efficient solution to capture and monetize gas that would otherwise be vented or flared, thereby turning emissions into incremental revenue with minimal additional investment. Importantly, these captured vapors include not just methane, but also the heavier hydrocarbons that are significantly more valuable, often resulting in gas stream values multiple times higher than dry gas, particularly in the current NGL pricing environment.

As announced in March, we completed the acquisition of Valiant Artificial Lift Solutions, a leading pure-play provider of ESP systems with an established Permian Basin presence. This transaction expands our capabilities into the largest addressable segment of the artificial lift market, allowing us to offer ESPs where they are the optimal solution for a given well.

Valiant performed slightly ahead of expectations in March and the integration is off to a very strong start. We are encouraged by the early alignment across the organization as we begin to identify incremental opportunities from the combination.

Let me highlight 2 early examples. First, the Valiant team is now utilizing Flowco's in-house ESP cable installation capabilities, reducing reliance on third-party providers. Second, we are leveraging insights from ESPs on Valiant's well monitoring platform, Optimus, to better identify follow-on gas lift candidates as wells mature and become better suited for alternative forms of lift. Opportunities like these give me confidence in our ability to drive significant revenue synergies as we integrate Valiant's operations with ours.

Across all 3 of these rental-oriented product lines, HPGL, VRU, and ESP, rental revenue is largely contracted and recurring in nature, supporting strong visibility and consistency in our financial profile. As a company, rental revenue represented nearly 60% of total revenue during the quarter.

Shifting to product sales. We delivered another solid quarter with sequential growth driven by performance within our downhole components offerings. Within Natural Gas Technologies, we saw consistent demand in vapor recovery sales as well as third-party sales and natural gas systems. Our sales-focused businesses remain a key contributor to free cash flow given their minimal incremental capital requirements quarter-over-quarter.

Overall, I'm very pleased with how the team executed during the first quarter. We delivered disciplined results, generated strong levels of free cash flow while returning capital to shareholders. And we successfully closed on the Valiant acquisition. We are very well positioned to build on this momentum as we move through 2026.

And with that, I'll turn it over to Jon.

Thanks, Joe Bob. Turning to our financials. First quarter performance was at the higher end of our guidance range, driven by ongoing expansion in our high-margin rental business and 1 month of contribution from Valiant.

Total revenue increased 6% sequentially to $209 million, primarily driven by growth within Production Solutions. Building on this revenue growth and supported by margins underpinned by our high-return rental model, adjusted EBITDA increased by $2 million quarter-over-quarter.

As Joe Bob mentioned, we maintained our industry-leading margins in the quarter, achieving adjusted EBITDA margins of 40.8%, even while absorbing some incremental corporate costs in the quarter, which I'll touch on later. This performance reflects disciplined execution and strong operating leverage as customers continue to recognize the value of our differentiated solutions.

In our Production Solutions segment, first quarter revenue increased 10% sequentially to $140 million, while adjusted segment EBITDA increased approximately 7% to $61 million, driven by growth in Surface Equipment and the contribution from the Valiant acquisition. Within the segment, Valiant is now reflected in downhole components as our ESP offering. Adjusted segment EBITDA margins decreased 125 basis points quarter-over-quarter, primarily driven by a revenue mix shift towards downhole components following the inclusion of Valiant.

In our Natural Gas Technologies segment, first quarter revenue was consistent with the prior quarter at $69 million, while adjusted segment EBITDA was also in line at approximately $30 million. The segment benefited from growth in vapor recovery rental revenue and increased sale of natural gas systems, which were offset by a modest decline in vapor recovery unit system sales quarter-over-quarter.

Turning to corporate costs. First quarter corporate expenses increased to $5.6 million from approximately $4 million in the prior quarter. This increase was driven by incremental filing and legal expenses associated with our S-3 filing on February 4, 2026, and subsequent secondary offering. Costs we do not expect to recur on a regular basis. Looking to the remainder of 2026, we expect corporate expenses to normalize to approximately $5 million per quarter.

Overall, consolidated first quarter adjusted EBITDA was $85.5 million, reflecting continued execution and the resilience of our operating model. In the first quarter, we invested $26 million of growth capital, primarily to expand our rental fleet across surface equipment and vapor recovery and our annualized adjusted return on capital employed for the quarter was approximately 18%.

Looking to the remainder of 2026, our capital outlook is unchanged from last quarter, supporting meaningful free cash flow generation. We will continue to pace investment alongside customer activity, focusing on high-return opportunities. With a 6-month lead time on our equipment, combined with our vertically integrated manufacturing model, we retain meaningful flexibility to adjust capital deployment as conditions evolve in the current market backdrop.

On March 2, we closed the acquisition of Valiant Artificial Lift Solutions for approximately $200 million in total net consideration. Integration is progressing well with teams working closely across the organization to align operations, systems and commercial activities.

Looking to the remainder of the year, we remain confident in Valiant's ability to generate approximately $52 million of adjusted EBITDA for the full year 2026, consistent with the expectations we previously outlined. As integration progresses, our focus is on executing a disciplined plan to capture incremental revenue opportunities. And we have the capacity and flexibility to support additional activity as those opportunities develop.

Turning to our balance sheet, liquidity, and capital allocation. We ended the quarter in a strong financial position and have continued to build on that momentum. As of May 1, 2026, we had $333 million of borrowings outstanding under our credit facility. With a borrowing base of $722 million, this represents approximately $388 million of available capacity.

On a pro forma basis for the Valiant transaction, leverage remains at a conservative level below 1x. Our balance sheet strength and cash flow profile provide flexibility for both reinvestment and shareholder returns. During the quarter, we utilized $16.5 million of cash flow to repurchase 780,000 shares in connection with the secondary offering by selling shareholders.

As a related note, our average daily trading volume has more than doubled year-to-date following the secondary offering. And with our increased public ownership, we have emerged from controlled company status.

Shifting to the dividend. On May 1, our Board of Directors unanimously approved a 12.5% increase to our cash dividend, raising the first quarter dividend to $0.09 per share. This decision reflects our confidence in our growing and sustainable free cash flow profile, which enables us to execute on our long-term growth plans while also returning capital to shareholders.

In conclusion, we delivered a strong quarter with results at the high end of our adjusted EBITDA range. We've entered 2026 with a durable earnings foundation and strong cash flow generation, supported by our positioning within production optimization and a constructive market environment.

Back to you, Joe Bob.

Thanks, Jon. Let's turn now to the market outlook. Recent geopolitical and military developments in the Middle East have heightened the world's focus on energy security and have reinforced the need for reliable, diversified sources of supply to satisfy energy demand.

With the Strait of Hormuz closed and the U.S. Navy blockading Iranian oil exports, industry experts estimate that approximately 10% of global crude oil supply and 20% of global LNG supply is effectively offline. Emergency inventories are being depleted at a rapid rate. Approximately 60 days into this conflict, industry sources estimate that up to 15% of strategic petroleum reserves globally have been consumed to satisfy this supply disruption. And the longer this conflict endures, the tighter the supply chains that rely on this supply will become.

Of course, we are all hoping for a swift conclusion to the current situation. But whatever the new normal looks like on the other side of this conflict, we believe the world will increasingly look to North America to produce the most reliable and secure energy to drive economic activity.

So with that backdrop, what are we hearing from our customers? As others have reported, we are not seeing material activity increases as of yet. Rather, those with access to short-cycle opportunities to increase production, thereby taking advantage of today's improved pricing environment are selectively pursuing high-return investments. More broadly, though, our customers are increasingly focused on existing production.

How do I optimize what I'm currently operating? How do I improve recovery factors? How can I manage my artificial lift system more efficiently to drive more production? Flowco's product and service offerings sit at the epicenter of these conversations. And I would expect us to contribute meaningfully to our customer success over the coming quarters.

Against this backdrop, we are forecasting another quarter of profitable growth in the second quarter of 2026 with adjusted EBITDA expected to be in the range of $93 million to $97 million. We will benefit from a full quarter of contribution from Valiant. And we anticipate continued growth across our surface equipment and vapor recovery rental businesses.

We remain focused on building our position as a leading provider of production optimization solutions for our customers. The addition of Valiant significantly strengthens our platform. Throughout the balance of 2026, we expect to identify additional revenue synergy opportunities as we integrate our commercial efforts. And of course, we will continue to look for creative and accretive ways to round out our product portfolio as we strive to deliver on our aim to offer our customers the right solution in each well every time.

With that, I'll turn it back to the operator for Q&A.

[Operator Instructions] Your first question comes from Derek Podhaizer from Piper Sandler.

So I totally appreciate you're not necessarily seeing material activity increases as of yet. But obviously, we've had a lot of news flow over the last couple of days, players like Diamondback given the green light, Conoco adding another rig. So maybe just if you can help us understand the opportunity set as we work through the year, that call on short-cycle barrels, your ability to optimize production for your big customers. So how do you think about that when you're looking out, especially when we're hearing some of these larger E&Ps, the publics coming back to work along with the privates?

Yes, Derek, certainly, you've nailed it. Some of the larger and more nimble companies are starting to get -- to increase activity. And those are green shoots for us. As you know, our production-oriented business will follow incremental rig activity, incremental frac spread deployment. Companies that are accessing their DUC inventory to turn wells in line more aggressively to take advantage of this environment. All that is beneficial for us.

So when we say we're not seeing material activity increases as of yet, we're certainly seeing the early days of what we think is sustained higher activity, which will drive business for us. I think it's a back half of the year kind of phenomenon for us and shaping up for a very strong 2027.

And then maybe switching to VRUs. I mean, very interesting comments as far as how the VRU side can also benefit from more of this call on short cycle just given the elevated commodity price, especially NGL versus dry gas. Anything to read into as far as more rentals for VRUs versus more sales? I think that was one of your initial investment thesis where you wanted more of the rental market to pick up versus sales. But is this just an in-quarter phenomenon? Is this just more idiosyncratic to this quarter? How should we think about VRU, the rental versus sales mix as we move through the remainder of the year and into '27?

Yes. Listen, on VRU, we are listening to our customers' preferences and through commercial activities on our end. We are incentivizing them to rent more than they buy. But look, certain customers like to have these assets as a permanent installation in their production infrastructure.

So if customers would like to buy them and rely on our aftermarket and our technology to help run them as an owned asset on their balance sheet, we'll certainly go that way as well. But we do see incremental demand for more rental units. Customers like the ability to size down the units over time as the pad matures. And so as you know, we've got every size of VRU imaginable.

So we can work with customers along the way with rental terms that incentivize them to size these units down over time. But yes, we're seeing incremental rental demand from customers. I think you'll see that reflected in our CapEx estimates for the rest of the year.

Your next question comes from Arun Jayaram from JPMorgan.

Joe, I was wondering if you could and Jon could maybe characterize kind of the growth opportunities you see over the balance of the year in natural gas technologies and perhaps compare and contrast that to what you're seeing on the Production Solutions side.

Yes, Arun, thanks for the question. I'll start in reverse order on the Production Solutions side. With the acquisition of Valiant, we now are having much more constructive conversations with customers around the right lift solution for the early stage of a well's life as newly completed wells get turned online. There are really only 2 choices that an oil company has.

You can produce that well with a high-pressure gas lift system or with an ESP. And we've got both. So I would anticipate to the extent CapEx may be biased to the upside in this environment, I would anticipate those dollars flowing into our highest return investment opportunities, which are high-pressure gas lift and ESP. So I think that's going to be the priority for us is to look for ways to deploy incremental capital there.

On the NGT side, mainly our vapor recovery offering, it's steadier. As I just said in Derek's question, we are incentivizing customers to rent more than to buy. And so yes, we'll see incremental demand there, but it's going to be a little steadier, a little later stage. But yes, we're very pleased with the market backdrop setting up for an incremental investment from us throughout the balance of the year.

And my follow-up is just your thoughts on scaling your business opportunities within the Valiant assets, ESPs. Jon, you guys reiterated your outlook for, call it, $52 million of annualized EBITDA from there. But Joe Bob did mention that things were trending perhaps a little bit better than you expected in March.

But just wanted to talk about the scale because you did mention on the last call that the supply chain is a little bit longer than what you're seeing on the HPGL side. And maybe just an updated thought on CapEx because I think last quarter, you highlighted $115 million of CapEx for the full year. But I don't think you gave us an estimate on CapEx related to Valiant.

That's right. That $115 million did not include Valiant. For Valiant, we're expecting around $20 million to $25 million in incremental CapEx over the 10 months that we'll own it in the course of the year.

And Jon, just thoughts on scaling that business.

Yes. Arun, look, we are very optimistic. And I tried to convey this in our prepared remarks. This is a revenue synergy story. We're seeing some very early, very positive indications that we're going to be able to grow that business with customer overlap.

And I'll highlight really 2 key areas there. Valiant's customer base consists of about 30 to 35 customers, Flowco's customer base more broadly consists of over 300 customers. In high-pressure gas lift alone, we work for over 65 individual oil companies.

So you can understand the playbook when we say we're going to approach key accounts with a truly agnostic offering, whereas before, we were trying to convince customers for every one of their newly drilled and completed wells to use a high-pressure gas lift system. Now we can go in and actually be more thoughtful about the right solution for that well. So that's sort of point one.

And then point two, it can't be emphasized enough. After you have a high-pressure gas lift system or now an ESP in a well for a period of time, call it, anywhere from 1 to 3 years, that well has to be handed over to another form of lift. And now that we have the ESP data that we're collecting every day in our proprietary digital technology that we can monitor remotely well conditions with each of the ESPs that we have in the well. We can get ahead of well handovers, failures that occur when a well gets out of spec for an ESP production.

So we can be in a customer's office proactively with a gas lift solution or a plunger lift solution before a well goes down, before that customer goes out for bid on the well for the next phase. So that's a synergy opportunity that I think very few can have. And we're unlocking with the Valiant acquisition and our disciplined integration efforts.

Your next question comes from Phillip Jungwirth from BMO Capital Markets.

When you talk about rounding out the product portfolio, could this at all involve going deeper into ESPs just given how large a market it is? Or are we more talking about unrelated production optimization areas that you're not currently in? And just the creative comment, was that meant to imply that you could look at avenues beyond just normal M&A?

So yes. We're -- we have a very active M&A pipeline, as you would expect. And I would hope that we can have the stars aligned on incremental M&A throughout the balance of this year and heading into 2027. We're in most every form of artificial lift. We are missing a couple of specific products that we've been pretty candid. We'd love to add to the portfolio. And there are some complementary services that go along with artificial lift that we evaluate similarly.

What are adjacent to the lift systems that we are selling to our clients? What else does the customer procure as they think about the optimum lift solution for a well? So yes, we're evaluating how to enter these adjacencies, both organically and inorganically.

Obviously, the easiest way is to buy a business that is already in those markets that comes with a group of people and a management team and a built-in book of business from clients. But we certainly are not afraid of standing something up from scratch. So we're going to continue to listen to our customers of what they are looking to us to do for them and try to add value as we look at our M&A pipeline and our organic efforts as well.

And then Flowco was never really impacted by tariffs, but I believe Valiant was as an ESP provider. Just curious what's the ability to recoup any past payments here? And if so, what's that process look like?

Yes. There is an opportunity to recoup the tariffs. That's a process that's underway. The portal, I believe, is open. And so we're in the process of trying to recoup those tariffs. Some of those may end up going back to customers. We'll see. But right now, the process is still a little bit murky. So time will tell on that.

Your next question comes from Keith Beckmann from Pickering Energy Partners.

I wanted to ask, you kind of talked about the rental nature of high-pressure gas lift, VRU, and ESP. I mean, obviously, ESP and high-pressure gas lift go on the wells for a little while. I wanted to get a sense of maybe is there a typical or average contract term length for kind of each of those 3 between high-pressure gas lift, VRU, and ESP? Just trying to get a better sense on how the contract terms work there for the rentals.

Yes, Keith, it's all over the map, candidly. Customers on each of those have their own objectives they're trying to solve and it's complicated. So there's not a one size fits all. On the high-pressure gas lift product line, some customers are shorter term in nature. Some are multi-years. On the VRU, it's a shorter term by intent. We want to work with customers on the sizing down project that I described earlier.

So a shorter-term contract is desired there. But we've done some extensive analytics, as you would expect. And the average time on location for a given VRU extends well beyond what the contract term is.

And then for ESPs, look, it's even more complicated. Some customers prefer to own their fleet of ESPs. They view it as a CapEx item. Some prefer to rent and some prefer a hybrid model where they rent the surface drive unit that helps power the ESP and they buy the downhole. So hard to give you a one-size-fits-all answer. It's a pretty dynamic commercial model.

Then my second question I wanted to ask was just around the really strong free cash flow quarter. How should we kind of be thinking about free cash flow conversion for EBITDA through the rest of the year, obviously, as potentially increased CapEx with things getting stronger here in the back half of the year?

That's right. I think with $25 million of -- or $26 million of CapEx in the quarter, you can do the math and see that we expect to ramp into Q2 and Q3. So obviously, that's going to have an impact on free cash flow. Second, even though we added Valiant, that added about $50 million of working capital, the underlying kind of pre-Valiant business actually had a reduction in working capital that we don't think is sustainable into Q2. We'll see some of that come back. So I think we would expect to see free cash flow moderate a little bit in Q2.

Your next question comes from John Daniel from Daniel Energy Partners.

As the market begins to inflect here, can you guys just speak to how that impacts your pricing strategies over the next several quarters?

Yes. Good question, John. Listen, we've -- being in the production phase, we're not subject to the big swings in utilization and the supply-demand imbalances that come with businesses that are levered to drilling and completion like rigs or frac spreads, right? So we don't suffer the pricing decreases on the way down. And we don't get the benefit as much on pricing increases on the way up. It's much, much more stable.

So we would anticipate pricing to be pretty consistent with where we've been. We will, of course, look for ways to drive price where we can, where we can still be constructive with our customer base. But I wouldn't say that pricing on any particular one of our products is going to be a particular driver for the back half of this year.

And then going back to the growth opportunities from an organic perspective. If you were to feed some money to some guys to go start up something new, Joe Bob, like how much grace period will you give them to get it going? Like what's an expectation for time?

Yes, it's a good question. Within a business of our size and given the focus that we have and the discipline we have around free cash flow generation, John, the answer is very little. We want something to be immediately accretive to both earnings, free cash flow and returns. So if we don't see an immediate path to something earning its keep, we're likely not even going to hit the go button.

[Operator Instructions] Your next question comes from Jeff LeBlanc from TPH.

You referenced the increased interest in artificial lift. But can you talk about regional trends and how prominent outside of the Permian?

Yes, Jeff, you're a little faint on your question. I think you were asking about regional trends on specific lift techniques across the U.S. onshore, not just the Permian. Is that right?

Well, more broadly, just the inflection in demand and activity outside of the Permian specifically.

Got it. So look, I think you'll see it in some of the oilier basins, okay, the Bakken, South Texas, parts of the DJ. But everything is dwarfed by the Permian, as you know. It produces half of the barrels that come out of the U.S. It's where most of the short-cycle inventory is located. So I think you'll see the vast bulk of activity increases there. But the other basins, I think, will -- they'll be there as well. But I think most of what we are seeing is going to be bound for Texas and New Mexico.

And there are no further questions at this time. I will turn the call back over to Joe Bob Edwards, CEO, for closing remarks.

Thank you all for tuning in. And we'll talk to you in 90 days.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

Good morning, and welcome to Flowco Holdings Inc.'s Fourth Quarter and Full Year 2025 Earnings Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Andrew Leonpacher, Vice President, Finance, Corporate Development and Investor Relations at Flowco. Thank you. You may begin.

Good morning, everyone, and thanks for joining us to discuss Flowco's fourth quarter and full year results. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at ir.flowco-inc.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law.

During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings.

Joining me on the call today is our President and Chief Executive Officer, Joe Bob Edwards; and our Chief Financial Officer, John Byers. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Joe Bob.

Thank you, Andrew. Good morning, everybody, and thank you for joining us today. I'll begin today by reviewing our fourth quarter and full year performance, including operational details and then provide an update on the Valiant acquisition we announced earlier this month. John will follow up with more details on our financials, capital allocation and balance sheet as well as the mechanics of the Valiant transaction. I'll wrap up with our perspective on the current market environment, our outlook for next quarter and key strategic priorities for the coming year before we open up the line for your questions.

Flowco ended the year with a very strong fourth quarter, underscoring consistent execution and differentiated growth across both operating segments. In the quarter, we generated $83.5 million of adjusted EBITDA, exceeding expectations. For the full year, adjusted EBITDA grew 11% versus pro forma consolidated 2024, even after absorbing approximately $15 million of incremental public company cash costs. This performance demonstrates the strength and durability of our business model in a market environment that remained dynamic throughout the year. Importantly, in the fourth quarter, we maintained our industry-leading margins, driven by the continued strength of our resilient high-margin rental business.

We generated $63 million of free cash flow in the quarter, reducing leverage to levels below where we stood prior to the August acquisition of HPGL and VRU assets from Archrock. This reflects our disciplined approach to capital allocation and reinforces the strength and flexibility of our balance sheet.

Turning to operational performance. Our rental platform continued to build on strong momentum in the quarter. Rental revenues grew approximately 4% quarter-over-quarter, driven by steady demand for our HPGL and VRU solutions. Customers continue to value these technologies for the reliability and production uplift they deliver as well as the attractive economics they generate across the life of the well. Importantly, our rental fleet generates contracted recurring revenue, adding durability and visibility to our overall business. We continue to see meaningful runway for these technologies as operators expand deployment across their asset bases, and we are already seeing incremental demand early in 2026 activities.

Shifting to sales. We had a solid quarter of growth as anticipated. Within the Natural Gas Technologies segment, we saw healthy activity in vapor recovery sales, along with a notable rebound in natural gas systems. We were also pleased with the performance at downhole components, where we experienced less seasonality than expected. Particularly within conventional gas lift and plunger lift, operators remained focused on deploying these solutions to enhance existing production as they closed out the year, driving better-than-anticipated results and reinforcing the value of our differentiated offerings.

Earlier this month, we announced our agreement to purchase Valiant Artificial Lift Solutions at an attractive valuation. Valiant is a leading pure-play provider of ESP systems with an established presence in the Permian Basin. This transaction expands our suite of artificial lift solutions, meaningfully broadens our addressable market and allows us to support customers with both primary early life lift techniques deployed across the industry.

Strategically, this combination strengthens our production optimization platform. Bringing ESP together with HPGL, conventional gas lift and plunger lift creates meaningful cross-selling opportunities at key transition points over the life of the well, while enhancing our ability to deliver the right solution in each well every time. We believe our expanded offering will enable us to deliver improved customer outcomes while generating attractive returns and durable free cash flow.

The transaction remains subject to customary regulatory approvals, and we expect to close in the first week of March. Our teams are actively preparing for integration with a focus on disciplined execution and maintaining continuity for customers and employees. Overall, I'm very pleased with how the team executed in 2025. We expanded margins, generated robust free cash flow, reduced leverage, grew our rental platform and laid the groundwork for a strategic step forward with Valiant. We believe Flowco is very well positioned for additional success as we move further into 2026. And with that, I'll turn it back over to John

Thanks, Joe Bob. Before reviewing some of the key financial metrics and results for the fourth quarter, I'd like to provide a reminder on our historical financial information, given the combination of Flowco Logistics and Estis in June of 2024. For clarity, note that any financial information presented prior to the June 20, 2024, business combination, such as information contained within our full year 2024 performance reflects only the historical performance forest. Financial information for the third and fourth quarters of 2025 as well as the fourth quarter of 2024 reflects the financials for the consolidated entities.

Turning to our financials. Fourth quarter performance exceeded expectations, reflecting continued growth in our rental fleet and strong performance and profitability across all our sales business units. We reported adjusted net income of $43 million on revenue of $197 million. Total revenue increased 11% sequentially, primarily driven by higher sales across both segments with the largest contribution coming from Natural Gas Technologies.

Supported by the sales growth and further underpinned by the continued expansion of our higher-margin rental portfolio, adjusted EBITDA increased $6.7 million quarter-over-quarter. Notably, rental revenue, most of which is recurring, surpassed $110 million for the first time in the quarter. As Joe Bob mentioned, we maintained our industry-leading margins in the fourth quarter, achieving adjusted EBITDA margins of 42.4%. That performance reflects strong operating leverage within our rental fleet as well as the impact of the revenue mix shift as sales rebounded.

In our Production Solutions segment, fourth quarter revenue increased 1.5% sequentially to $127 million, while adjusted segment EBITDA increased 4% from the third quarter to $57 million. Adjusted segment EBITDA margins expanded 110 basis points quarter-over-quarter. Revenue growth was primarily driven by higher rental revenue at Surface Equipment and better-than-expected downhole components product sales as the business unit outperformed typical seasonality. The improvement in adjusted segment EBITDA and margin was largely attributable to increased high-margin surface equipment revenue, lower segment level SG&A and a more favorable revenue mix compared to the third quarter.

In our Natural Gas Technologies segment, fourth quarter revenue increased 36% sequentially to $70 million, while adjusted segment EBITDA increased 18.4% to $30 million. The growth was primarily driven by higher natural gas systems and vapor recovery sales during the quarter, along with strong vapor recovery rental performance. Adjusted segment EBITDA margin decreased 634 basis points, reflecting a revenue mix shift towards sales from rentals, particularly through an increase in sales of lower-margin natural gas systems.

Turning briefly to corporate costs and SG&A. Fourth quarter corporate expenses were roughly flat at $3.9 million. Looking to 2026, we expect annual corporate expenses of $18 million to $20 million associated with the consolidation of corporate functions and completion of the build-out of our public company capabilities.

Overall, consolidated fourth quarter adjusted EBITDA was $83.5 million as we delivered another quarter of profitable growth. In our first full year as a public company, we delivered 4% year-over-year revenue growth and increased adjusted EBITDA by 11% versus pro forma consolidated 2024. This performance came despite a more challenging macro backdrop than when we entered the public markets, underscoring our ability to grow in a dynamic environment. This performance reflects the strength of our high-return investments, the scalability of our differentiated platform and the value our solutions provide to our customers as they maximize recovery and generate cash flow from their existing production base.

In the fourth quarter, we deployed $24 million of capital, bringing full year CapEx, excluding M&A, to $127 million, with the majority of this capital allocated towards expanding our surface equipment and vapor recovery rental fleet to support sustained customer demand at attractive returns. Considering our CapEx investments in the context of return on capital employed, our annualized adjusted ROCE for the quarter was approximately 19%. The sequential increase reflects higher product sales, which more than offset incremental capital deployed for the asset acquisition completed in August.

Looking ahead to 2026 and excluding any capital associated with Valiant or other M&A, we expect to invest total CapEx, including maintenance of approximately $115 million, which should support higher free cash flow for the year. We will continue to assess market conditions and customer activity levels to calibrate the appropriate pace of capital deployment, prioritizing investments that support profitable growth and meet our return thresholds. With a typical investment lead time of approximately 6 months, combined with our vertically integrated manufacturing model, we retain meaningful flexibility to adjust capital investment as we monitor customer demand and broader market conditions.

Earlier this month, we entered into a definitive agreement to acquire Valiant Artificial Lift Solutions for approximately $200 million in total consideration. The transaction represents an attractive valuation of approximately 3.9x projected 2026 adjusted EBITDA and does not consider any revenue or cost synergies. The purchase price consists of approximately $170 million in cash, and the issuance of roughly 1.5 million shares of Flowco Class A common stock with the cash portion expected to be funded through our existing credit facility. Pro forma for the transaction, we expect leverage to remain conservative at below 1 turn, and we intend to utilize the combined business' meaningful free cash flow generation to further delever over the course of the year.

We expect Valiant to generate approximately $52 million of adjusted EBITDA for the full year of 2026. And as Joe Bob mentioned, we expect the transaction to close in the first week of March, which would result in approximately 10 months of earnings contribution for Flowco. As we move toward closing, we're focused on executing a disciplined integration plan designed to capture cross-selling opportunities and position the combined platform to drive incremental revenue synergies.

Turning to our balance sheet, liquidity and capital allocation. We ended the quarter in a strong financial position and have made continued progress into the start of the year. As of February 20, 2026, we had $142 million of borrowings outstanding under our credit facility. With a borrowing base of $722 million, we had $580 million of available capacity. The improvement in liquidity was driven by strong free cash flow generation for the quarter, along with continued progress in net working capital efficiency. On January 30, Flowco declared a quarterly dividend of $0.08 per share payable on February 25. The strength and consistency of our cash flow generation give us flexibility to invest in organic growth, execute on strategic opportunities and return capital to shareholders, all while maintaining a conservative leverage profile.

In summary, we delivered a strong fourth quarter, exceeding our adjusted EBITDA guidance while delivering on the expected strength in sales. As we move into 2026, our rental fleet remains well positioned to generate stable, predictable earnings underpinned by durable demand and contracted revenue streams. Across our sales business, we expect continued operational resilience and meaningful free cash flow generation. As we integrate Valiant, we expect to further enhance our growth profile and deepen the advantages of our integrated platform. Supported by disciplined capital allocation and our differentiated operating model, we're confident in our ability to sustain performance and deliver attractive returns in the years ahead. Back to you, Joe Bob.

Thanks, John. Let's turn now to the market outlook. In 2025, U.S. oil production reached a new record of 13.9 million barrels per day despite commodity price volatility and macro uncertainty. We believe this sustained production durability is not solely the result of consistent capital deployment, but increasingly reflects our customers' optimization of existing production and improvements in asset level efficiency. That shift toward maximizing returns from existing production aligns directly with Flowco's core strengths in production optimization, artificial lift and emissions management and monetization, all of which are increasingly important for sustaining output.

Against this backdrop, we are entering 2026 with continued momentum and expect a strong start to the year. For the first quarter, we anticipate adjusted EBITDA of $82 million to $86 million. We expect continued incremental growth across our surface equipment and vapor recovery rental fleets, supported by strong utilization and contracted revenue visibility.

Within Production Solutions, excluding Valiant, we anticipate segment revenue generally consistent with the fourth quarter of 2025. In Natural Gas Technologies, we expect sales activity to be similar to fourth quarter levels as well. As John described, we expect corporate expenses to increase modestly in the first quarter. This first quarter guidance also includes approximately 1 month of contribution from Valiant, assuming the transaction closes in line with our expectations in early March.

Beyond the quarter, we remained focused on strengthening our business for sustained long-term value creation. The pending integration of Valiant represents an important next step in expanding our artificial lift capabilities, particularly in ESP, further enhancing the differentiation of our platform and increasing our addressable market in the lower 48 by approximately 70%.

We are approaching integration with discipline and clear objectives: capture revenue synergies, leverage our combined expertise to better serve our customers and build upon the solid operational foundation that Valiant team has built. Also during the first part of 2026, we are taking our first steps toward expanding our international presence. As we outlined on our investor call regarding Valiant, ESP represents a natural avenue for selective international growth, and we are fortunate to have leadership experience within both Valiant and Flowco that has successfully scaled artificial lift businesses globally.

Separately, over the past few months, Flowco has signed 2 agreements with partners in the Middle East and Latin America, both of whom will enhance our ability to grow in these important markets. While we remain in the early innings of potential international expansion and we'll pursue it in a measured capital-light manner, we are encouraged by the initial response from customers and excited about the long-term opportunity.

Across the organization, we continue to advance operational initiatives to drive efficiency and margin expansion. Early applications of our internally developed machine learning capabilities are already improving maintenance planning, uptime and profitability. Across our field footprint, we are identifying opportunities to streamline processes, enhance collaboration and better leverage our full suite of solutions to serve customers over the life of the well.

Looking ahead, we believe continued innovation, technology-enabled efficiency, disciplined capital deployment and deeper customer partnerships will define the next phase of growth for Flowco. As we integrate Valiant in 2026 and execute across our business segments, we are confident in our ability to drive incremental growth and long-term value while further advancing Flowco production optimization strategy. And with that, I'll turn it back over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Arun Jayaram with JPMorgan.

I wanted to see if you could just talk a little bit about the trends you're seeing between rentals and kind of product sales. It sounds like you hit $110 million in the quarter. But how do you expect -- maybe just give us a sense of how that mix has been trending and maybe expectations as we think about 1Q and over the balance of the year.

Yes. No, happy to do it. Listen, we've been consistently investing in primarily our HPGL fleet and our VRU fleet, as you know. And that CapEx level, Arun, has driven our growth in rental revenue and rental EBITDA. It's led to a mix shift in the overall company. That's why you see margin improvements quarter-over-quarter. And we expect that to continue in 2026.

John, we've invested growth CapEx in the $100 million per year range for the last several years. And so Arun, I think that's going to continue in 2026. Is it going to be at that level or slightly above, slightly below? Market conditions will dictate, but we see no reason to let our foot off the CapEx accelerator because these assets generate really attractive returns. Customers like what they do for them, and we're going to continue to do that until there's no more market demand left to be had.

Understood. And Joe Bob, you intrigued me on your commentary on pursuing some international growth initiatives. You have the team and now with Valiant, maybe the product portfolio to do that. Can you maybe just give us a little bit more details on kind of the plans to scale globally? You mentioned 2 partners in the Middle East and LatAm. But maybe just talk a little bit about what the game plan is for 2026 as you pursue some of these international ambitions.

So the international expansion is obviously very exciting. But to be clear, we are early, okay? But I just want everybody to know that it's something on our radar because our customers that we have so loyally supported in the U.S. are looking internationally to export their capability in unconventional development plays that look a lot like what we've experienced in the last 10, 15 years here in the States. So we want to support that effort.

And to do that, we are getting prepared to follow them as well as to share with new customers, mainly national oil companies who are importing U.S. style innovation to help develop unconventional resource base. So in the Middle East region, obviously, there are several very large national oil companies as well as a handful of multinational independent oil companies as well as some household names that are in the early stages of developing unconventional resource base.

We want to be there to support them. And we feel like, in particular, with this Valiant acquisition, we have the capability to offer more than what we did before, and we want to set ourselves up for success there. The agreements that we've signed are partnership agreements in various forms. They are companies that have deep experience in both of those geo markets. They have local service capability. As I said in the prepared remarks, we're going to take a capital-light approach to this first, make sure we have the right sort of local content, the right sort of balanced approach as we take steps into these 2 international markets.

Our next question comes from the line of Derek Podhaizer with Piper Sandler.

Maybe just to keep going on the Valiant acquisition. It's been a few weeks now since you announced the deal and you're going to close here in a couple of weeks. But as you acquired Valiant and talk to your customers, what's been the initial reaction there, now having the ability to fold in ESPs to your overall production optimization solution or toolkit? Just maybe some thoughts and comments around that initial reaction from your customers and what gives you the excitement as you kind of step forward and being able to deliver all the well -- all the artificial lift solutions at any time in the well.

Yes, Derek, it's been very positive. As we talk to our customers as well as Valiant customers, and as you would assume, several of those are common, it's been a very welcomed collaboration. We now can truly deliver on what we say we want to do for customers, which is to offer the right solution in their well as they bring it online, right? So previously, we only had the ability to offer a high-pressure gas lift solution early in a well's life. And there are wells in the U.S. that are clearly ESP wells. Now we've got both. So we can quite credibly now say that we can be there for the life of the well, including both forms of early lift application.

In addition to that, and what I said in the prepared remarks, this is a revenue synergy story, okay? The ESP application is only a first year or 2 or 3 application in the shale wells where those systems make sense. What does that mean? Well, at the end of the life of the ESP, those wells go on something else, and they most commonly go on conventional gas lift. So we're the market leader in conventional gas lift. So that's a natural sales pipeline for us to pick up as those ESPs get pulled and put on to the next form of lift. So that's what we're most excited about. That's what our commercial teams have been preparing for as we get into integration when this business hopefully closes early next week.

Great. That's great color. And the second question, the free cash flow really impressed this quarter and conversion stepped up to 55% of EBITDA. Obviously, you have some assumption in there with Archrock acquisition effectively pulling that CapEx forward. But how should we think about the free cash flow conversion of the combined business now with Valiant moving into 2026, you gave us the CapEx guide. But clearly, you had a significant step up. I'm just trying to work through the moving pieces and how we should think about pro forma that free cash flow conversion now with the Archrock assets and now with Valiant.

Yes, Derek, the Valiant business has similar cash flow conversion characteristics to our business. Q4 was a great quarter, obviously, in terms of cash flow conversion as we finished our capital plan. We had the Archrock assets that allowed us to pull forward some of the CapEx and our working capital came down mainly on the back of better DSOs and AR. I don't expect to continue at that level in 2026. I think you see something more along the lines of what you saw over the course of the year in 2025.

Our next question comes from the line of Phillip Jungwirth with BMO Capital Markets.

We heard a lot from the E&Ps this quarter in the Permian about targeting deeper zones just with Woodford, Barnett across the Midland Basin in particular. So higher pressure, higher GOR. Recognizing now offer HPGL and ESP, but just how do you see the optimal lift solution for this type of development and opportunity for Flowco if we see more of this in the future?

Yes. Good question. Look, it's still early in those new zones. As our customers have pointed out, they're trying to figure out the right -- not only the right lifting technique, but the right completion technique, right? And as one of our more prominent customers said, never bet against the American engineer, and that's the camp we sit in. We think that there's a lot of room to go in the additional formations in the Permian in particular.

So we're right there with them, helping them evaluate early production data as these wells get completed and turned on. You mentioned higher pressures and higher GORs. Look, both of those feed straight into our gas lift solutions. The -- in particular, the high GORs, that's a tough application for ESPs. But it's early. The good news is we've got both, and we've got an active dialogue going with a lot of the folks that are targeting formations like the Barnett. So very exciting that they're making progress, and we're here to support them.

Okay. Great. And then on the Valiant acquisition call, you did mention selling ESPs in the non-Permian markets where they historically haven't had a presence. Can you talk through how quickly you look to penetrate these markets? And when you -- and also as somewhat of a new entrant, just what are the things you look to do just to maintain comparable margins in these other basins to what Valiant has realized in the past?

Yes. The good news is we've got a footprint that expands beyond the Permian to markets that are big ESP markets in the States. So a lot of the work has, to an extent, already been done with local presence with local infrastructure. And obviously, the customer day-to-day contacts and service that goes along with being in those markets -- the natural markets are the Bakken and the Midcon, okay? These are 2 tried and true ESP markets.

They're not nearly as large as the Permian, but these are areas where we have footprint, and we have active dialogue with customers to hopefully support them there. As for margin profile, I think time will tell. I think we're expecting those markets to be pretty similar to the Permian from our past history. They're not as deep, but they're every bit as profitable for service companies compared to the Permian.

Our next question comes from the line of Keith Beckmann with Pickering Energy Partners.

I just wanted to ask another sort of M&A question around -- we had the Valiant acquisition that really broadened out the portfolio and opened up kind of the total TAM that you're going to be able to address here. I wanted to know if there's any other acquisition opportunities or products that you see you're missing at this point? You guys have a lot of other stuff, and I expect it to be something smaller, but just wanted to get an idea on if there's any other production optimization or elsewhere holes in your portfolio you think that you would fill.

Yes, Keith, we're always looking for the right opportunities, the right types of people, the right types of cultures to join our team. And we do have a robust M&A pipeline, as you would expect. We've been very clear with investors that we want to round out the product portfolio, and we want to expand the geographies in which we operate while always staying true to our production focus. So look, there are a handful of additional lift capabilities that we don't have in the toolkit. There are complementary services and technologies that go along with lift that we can either build or buy.

And as we said in the prepared remarks, there's a big international market out there that we can either go attack organically or via acquisition or both. So all of the above are on the table. I'd say that we're going to stay true to what we've told investors and what we've told ourselves and our Board, which is we're going to be disciplined. We're going to put every opportunity through the screen of returns and never lose sight of the fact that we're here to serve our customers in this production phase, which is what we feel like we do really well. So look, stay tuned, but we're excited to get this transformative deal done, hopefully, early next week.

Awesome. That's really helpful. And then my second question was just kind of asking around CapEx lead times. If I remember right, I believe that you guys kind of have a 6-month investment lead time on customer projects was sort of the right way to think about it, I believe. I wanted to know if that changes at all, looking at the ESP market, like has that changed at all? Is the ESP market different at all? And then has the 6-month investment lead time changed at all here over the last year?

No, it's pretty consistent. Look, the ESP business, the supply chain that supports the ESP business, not just for us, but for all of our competition, it's a slightly more complicated supply chain. You've got some international navigation you need to do. But no, the 6-month lead time is pretty consistent. It's also -- it's not a build to order. It's a -- you're building inventory in advance of expected customer demand. And this is the same thing we're doing in our other product lines. So no, I think the 6-month lead time is pretty accurate.

John mentioned the cash flow conversion, the margin profile. It's all remarkably consistent with what we currently have. So the only added complexity is the slightly more complicated supply chain, which we're very comfortable navigating. And so no, I think you're thinking about it the right way.

[Operator Instructions] Our next question comes from the line of Jeff LeBlanc with TPH.

As operators are more vocal about developing secondary horizons and continue to extend lateral length, have you observed any shifts on how your customers are approaching artificial lift across the well's life, whether it be assuming the primary form of artificial lift is in place for longer or preemptively mapping out their solutions for the various stages?

Look, I'd say that operators are just more pointedly, they're focused on production. They're focused on making do with less. They're looking to their existing reservoirs for longevity, for durability and lift is part of that conversation. As it relates to us, Jeff, we are increasingly talking with operators proactively about the prospective changes in lift as a well matures, okay? As a production profile gets to a level where the existing lift solution becomes less effective, we're right there with them to propose changes, to propose modifications.

We do this early in the well's life. We also do this prospectively. We host 4 artificial lift schools per year for free to our customers in kind of the usual places you would expect, Houston, Midland, Oklahoma City, Denver. And so we're always talking with customers about the tools that we can provide them to give them that look at preventative and proactive lift changeouts, okay? So it's not just lift, it's other things, too, that are helping them make their production more durable. But we're just pleased to be part of that conversation and to be proactive with each one of our customers.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Edwards for final comments.

Well, thank you all for tuning in. And everybody, have a great weekend and a great 2026.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Good morning. Welcome to Flowco Holdings, Inc.'s conference call to discuss its acquisition of Valiant Artificial Lift Solutions. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and questions and answers. At this time, I would like to turn the conference over to Andrew Leonpacher, Vice President of Finance, Corporate Development and Investor Relations at Flowco. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss Flowco's acquisition of Valiant Artificial Lift Solutions. Before we begin, I'd like to remind you that today's call includes forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. These risks are described in the press release we issued this morning announcing the transaction as well as in our SEC filings, which are available on our website. We undertake no obligation to update these statements, except as required by law. We'll also reference certain non-GAAP financial measures, which we believe provide useful insight into the underlying performance of our business.

For those joining by phone or via live webcast, the presentation is available on the webcast or for download from our website and can be referenced throughout the discussion.

Joining me on the call today are our President and Chief Executive Officer, Joe Bob Edwards; and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to our President and Chief Executive Officer, Joe Bob Edwards.

Thanks, Andrew, and thank you to everyone for joining us today. This morning, we announced that Flowco has entered into an agreement to acquire Valiant Artificial Lift Solutions, a leading pure-play ESP provider in the Permian Basin. This transaction represents an important step forward in our strategy to build a differentiated production optimization platform, one that allows us to deliver the right solutions to our customers throughout the life cycle of their producing wells.

Today, we'll walk through the strategic rationale, the transaction details and why we believe this acquisition is the right fit for Flowco. Let's start on Slide 3, and I'll take you through some of the details. We have agreed to acquire Valiant for a total consideration of $200 million, consisting of $170 million in cash and $30 million in newly issued Flowco shares. This transaction implies an attractive purchase price multiple of approximately 3.9x estimated 2026 adjusted EBITDA and is expected to be accretive to both earnings and free cash flow.

The transaction will be funded with modest borrowings under our existing ABL. Post transaction, net leverage is expected to remain below 1 turn, consistent with our disciplined approach to capital allocation with strong free cash flow supporting continued deleveraging throughout the year. We expect the transaction to close in early March, subject to customary closing conditions, including regulatory approval. Following the closing of the transaction, Valiant will operate as part of our Production Solutions segment, and we plan to report results within the segment subject to the concurrence of our auditors.

Turning now to Slide 4. Let's describe a bit of what Valiant is, and I'll spend a minute on why we're so excited about this opportunity. We have known Valiant for quite some time, and we've been impressed by what they've built, particularly their focus on execution and operational discipline. Those are attributes that align closely with Flowco's culture. They've grown the business the right way, staying focused on reliability and responsiveness, which has allowed them to take share over time, including with large operators who value a high level of service.

While the majority of Valiant's revenue today is derived from the Permian Basin, the team brings meaningful experience operating internationally and has established relationships that provide clear line of sight to opportunities outside the U.S. over time. Operationally, Valiant maintains in-house assembly and repair capabilities and supports its customers with proprietary monitoring and analytics tools that help optimize system performance. From a financial standpoint, Valiant is expected to generate approximately $52 million of adjusted EBITDA in 2026 with EBITDA margins around 40%, which are in line with Flowco's margins and are supported by a recurring service-oriented revenue model.

Turning now to Slide 5, where -- let's talk for a minute about the strategic rationale of this transaction. This acquisition fits well within the long-term strategy that we've adopted at Flowco, where we work with customers to deliver the right artificial lift solution at each point of a well's life cycle. By expanding into ESP, we are now able to offer both of the early life lift techniques used by our customers, high-pressure gas lift where it makes sense and ESPs where well conditions are more conducive to that form of lift. Additionally, the transaction creates opportunities to deepen customer relationships through cross-selling across a highly complementary customer base.

And finally, the acquisition reflects our disciplined approach to M&A within production optimization with a focus on attractive valuations and strong returns.

Turning now to Slide 6. This slide highlights how the combined Flowco and Valiant offering expands our presence across more artificial lift applications and deepens our customer relationships over time. Flowco already has meaningful touch points across the well life cycle through HPGL, conventional gas lift, plunger lift and our complementary digital solutions, providing insight into well performance and operating conditions. By adding ESPs, we expand that presence across a much broader set of wells, which gives us early visibility into how wells are performing and how operating conditions are changing over time. There are a large number of wells today producing on ESPs where subsequent artificial lift applications, including conventional gas lift and plunger lift are natural next steps as wells mature.

By being involved earlier and having better well-level data, we are better positioned to know when those transitions are coming and to support customers with the right solution at the right time. The result is more touch points over the life of the well, more opportunities to support our customers and a more durable solutions-oriented relationship with clients.

Maybe taking a step back on Slide 7 and looking at the market, the addition of ESPs meaningfully expands Flowco's addressable market, and it allows us to participate in the largest segment of the artificial lift market. In the Lower 48 alone, the ESP market represents approximately $2.5 billion annually, and the international opportunity is even larger. With that in mind, we are having regular conversations with customers early in the life of the well where ESP is the right solution based on well conditions. Until now, not having an ESP offering has limited our ability to participate fully in those opportunities. And by adding ESPs, this is a natural extension of our offering, and it allows us to support customers with the right solution when it's needed.

Importantly, this expansion is additive. Our conviction around HPGL remains unchanged. HPGL represents approximately $1.5 billion of annual spend in the onshore U.S. market, where we continue to see strong customer demand and growth, and we believe we are still in the early innings of addressing that market opportunity. With the combination of Flowco and Valiant, we believe the expanded offering and combined customer relationships position us to continue gaining share across the artificial lift market over time.

Turning now to Slide 8 and to provide a little bit of a conclusion here, in summary, Valiant is a strong fit with Flowco, and it aligns closely with how we operate and create value. Both organizations share a focus on production optimization, operational discipline and delivering reliable solutions that improve well performance for customers. With Valiant, we believe our expanded offering will allow us to deliver better outcomes for customers while generating attractive returns and strong free cash flow. Just as important, the Valiant team shares Flowco's long-term mindset and commitment to building a durable business, which we believe positions the combined organization well for continued growth and strong returns.

With that, I'll turn it back to the operator for Q&A.

[Operator Instructions]

Our first question is from Derek Podhaizer with Piper Sandler.

Congrats on the deal. So maybe just to kick off. I know at the time of the IPO around this time last year, we talked a lot about ESP being that potential extension for your solution. I think just maybe take some time to remind investors of that. Obviously, you have the HPGL technology. It was always talked about as a replacement technology for ESPs, but now you'll have this fuller portfolio. So maybe, how do you plan on interact with your customers between the ESPs and the HPGL, not maybe pushing one over another. I think this is going to be a new cultural fit for the team. So maybe just how your customers will think about it, how you'll bring that solution approach to your customers when we think about HPGL and ESP and now it's not necessarily a replacement technology, but more of a in line with each other as you do the life of the well with your customers.

Yes. It is truly what you just said, Derek. It is our ability to offer our customers the right solution at the right point in time. of every well, right? And if you have both forms of early lift solution in your toolkit, you can truly be dispassionate about offering them a solutions-oriented sale versus just a sale of a product, right? And importantly, I think it's also worth noting that the expansion of our early well market exposure, Derek, gives us that much more value of incumbency, the ability to be early in the life of the well with the customer ensures that we have better data on how that well is producing, and we can work alongside their engineering teams to determine when that well needs to go to a different form of lift. So this just dramatically increases our shots on goal, okay?

And yes, having the ability to have both allows us to work with the customer to provide the right solution every time.

Got it. That's helpful. And then so Valiant is 100% Permian Basin. You've talked about the opportunities for international expansion. Maybe just help us understand more what that could look like? And maybe just bringing Valiant on the Flowco platform just domestically in the U.S., how you might be able to expand those ESPs across different basins where maybe ESP is more a preferred solution over an HPGL?

Yes, happy to do it. So the founding team from Valiant has deep experience in ESPs really for their entire career. And in fact, ran a global business under a different banner years ago, started the business from scratch roughly 10 years ago and grew it to where it is today. So very impressive start-up and growth early in their life to lead them to this natural evolution. As we mentioned in our prepared remarks, they've got a history in certain international markets that are quite attractive. It's exactly where shale is being exploited, Derek.

So I think it's natural for Flowco to -- now that we have a more expanded product offering to look to new areas overseas for potentially a next leg of growth. And this team would plug right into those efforts, which are ongoing every day within the Flowco team. Closer to home, yes, they are exclusively in the Permian Basin, but Flowco has, as you know, a footprint across every shale basin in the United States. And many of those shale basins has ESP as part of early lift techniques. The Bakken comes to mind as probably the second largest ESP market in the U.S. Valiant does not have a presence in the Bakken, but we do. So that could be a natural step. And what's not asked, but I'd be remiss if I didn't mention is the cross-selling opportunity, Derek, between their customer base and ours.

And we've got just deep decades-long experience with customers that they don't have and vice versa. So I think this is truly going to be a revenue synergy story, much more so than a cost synergy story, and I'm excited to share more about that as these businesses get integrated over the course of the next year or so.

Our next question is from Arun Jayaram with JPMorgan.

Joe Bob, I was wondering if you could talk a little bit about the capital intensity of the ESP business that you're acquiring. Obviously, you mentioned that you expect the deal to be free cash flow accretive to Flowco. But give us a sense of what type of capital this business do you think will need to continue to support your Permian Basin position here.

Yes. Happy to, Arun. And Jon is here with me, too. He can expand. But look, the ESP business in the United States is a mixture of a rental business and an OEM sales business. And as you know, we've got both within Flowco. So our margin profile today at the EBITDA line, as you know, reflects roughly a 40% EBITDA margin. Capital intensity ranges between our businesses, surface equipment and downhole are slightly different. Valiant is a mix of both, okay? They've got some rental, they've got some sale. What I can tell you is from a free cash flow conversion, when you get from EBITDA down to free cash flow, they are roughly in line with where we are, okay? So I think that's a positive.

And Jon, in terms of specifics around that free cash flow conversion, remind me kind of where we are and where they are.

Yes. We've run historically in the 40% to 50% range. This business is in the -- has been kind of in the low 30s. In terms of maintenance capital in this business, we expect to be somewhere between $15 million and $20 million on around $50 million of EBITDA. So it's -- but overall profile of the business, whether it's rental versus sales mix, return on capital employed, payback on equipment, all of those screen very similar to where we are.

Okay. And maybe, Joe Bob, can you could elaborate a little bit on how you'd help us understand maybe the products that you're acquiring. How do these kind of compare to kind of your key oil service peers in terms of technology? And just wanted to know where you'll be competing? Will these products compete at the very high end of the market or a little bit more 80-20 kind of rule? Just a little bit more about the products would be helpful.

Yes. No, it's a good question. Listen, what I can tell you is that the customer base that Valiant has built over time, which we're not going to talk about name by name, obviously, but I can tell you that those customers are not acquired without leading technology as well as leading service quality. And I want to make sure that everybody understands that service quality in this business matters. And I think that's where this business has been able to differentiate their ability to work more closely with customers as pumps need to be sized down over time. That's something that they're very proud of.

In terms of technology, there are a couple of things that I'd like to point out and give a shout out to this team for building. Their proprietary human interface with the system has been built in-house, and it allows their systems to be operated and optimized remotely, much more efficiently than what I would call more commoditized ESPs. That's been something that's been very impressive to us. And then separately, the remote monitoring capability, they've got a facility in Oklahoma City as well as in Midland that allows a team of engineers 24/7 to monitor every well that they are in, and customer by customer. And it gives them data that they are able to interface with their clients with in real time, predictive analytics that allow the Valiant team to work with customers on changing well conditions and what could happen to get ahead of the ultimate service call that's going to be required when the well gets to a point and it needs to be serviced.

So they've done a fantastic job of taking technology and incrementalizing it and rolling it out to their customers with really good success.

Our next question is from Jack Kindregan with BMO Capital Markets.

This is Jack on for Phil. Just curious, as you move into the ESP market versus HPGL and BRU where you're the market leader, you're going up against some pretty large players. It looks like Valiant has grown the business successfully over time. But can you talk about the go-to-market strategy and how to capture additional share in ESP over time?

Yes. Thanks for the question. Happy to. Listen, the onshore U.S. ESP market is one that not only the Valiant team, but the Flowco team knows exceptionally well. And you're right, there are some large players among the largest in our sector that participate in ESPs. But I will reemphasize for the crowd what I think you already know, but is truly the differentiator, and that is that Flowco is the only company that focuses exclusively on the production phase of the well's life, okay? That specialization, that true focus on our customers' well-being in the production phase is really what differentiates us.

That's what's going to allow us to continue to take share. It's going to really be the calling card for Flowco to really get in front of all of our clients and say, hey, Mr. Customer, guess what, we now can offer you an additional solution for your production. I'm excited to report in the quarters to come how we're able to do that. And going against some of our larger brethren while initially might seem intimidating, we're very excited for the challenge. So look forward to it.

Great. And then just my follow-up is on the supply chain for Valiant. I'm just curious if it differs at all from other ESP providers and how they have navigated tariffs over the past year and what success they might have had with passing through those costs.

Yes. Good question. It's -- the supply chain for every ESP player is complicated. And Valiant is well down the path of mitigating exposures to any one key geography, not just from China, which we've talked about in the past, they're well down the path on the various subcomponents that are subject to international supply chains and so therefore, potential tariff risks. We're well ahead of it. Now what I'll also say is that we're a year into this new heightened level of tariff exposure and the industry itself is more comfortable with the varying tariff exposures that the energy business has and the ESP players have.

So whether it's the interactions with customers or those suppliers, the industry is just getting more comfortable dealing with it. And so I would say that Valiant is certainly no worse off than any other player in the ESP business as it relates to tariffs and I think actually better positioned with a couple of key critical components, which we hope to leverage in the coming months.

Our next question is from Jeff LeBlanc with Tudor, Pickering, Holt.

I think you referenced in the prepared remarks the expectation to continue gaining market share over 2026. How should we think about the impact the continued consolidation of the upstream industry will have on achieving this goal, particularly when it feels like the broader expectation for Permian oil production is flattish or slightly down on an exit basis?

Jeff, are you referring to maybe a potential announcement that happened today among our customer base? Yes. Listen, obviously, the consolidation continues amongst our customer base with the Devon, Coterra announcement this morning. That's something that the entire industry obviously needs to come to grips with and figure out their own path forward. What I can tell you is the consolidations that have taken place to date have been a net positive for Flowco. And I expect the one that was announced today as well as any incremental ones that will continue to be the case.

And the reason is quite easy to understand. Smaller, more entrepreneurial businesses that tend to be acquired in the consolidation that we've seen among our customer base are usually the early adopters of new techniques. And are the proving ground for solutions like high-pressure gas lift, okay? And when a larger company buys a smaller company, immediately, they look to the acquired entities for success stories that could be deployed over their larger footprint. And the customers that have emerged into today's market have all done that.

And I don't anticipate that slowing down anytime soon. We benefited at every turn from customers recognizing our specialty, recognizing the fact that we are innovating and have worked with us. I think the service industry needs to keep pace. I think that this acquisition represents, I think, an important step for the service sector to continue to build out broader expertise to support the broader or the larger oil company customer base. So I'm excited to work alongside them and hope that this most recent one is, again, a net positive for us.

There are no further questions at this time. I would like to hand the conference back over to Joe Bob for closing remarks.

Well, thank you all for tuning in, and we look forward to our next scheduled call to talk about our Q4 results in roughly a month's time. But in the meantime, everybody, have a great week, and thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Good morning. Welcome to Flowco Holdings, Inc.'s Third Quarter 2025 Earnings Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A.

At this time, I would like to turn the conference over to Andrew Leonpacher, Vice President, Finance, Corporate Development and Investor Relations at Flowco. Thank you. You may begin.

Good morning, everyone, and thanks for joining us to discuss Flowco's third quarter results.

Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at ir.flowco-inc.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law.

During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings.

Joining me on the call today is our President and Chief Executive Officer, Joe Bob Edwards; and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we'll open the call for your questions.

With that, I'll turn the call over to Joe Bob.

Thank you, Andrew, and good morning, everybody, and thank you for joining us today. I'll start today by reviewing our third quarter results and operational performance, along with an update on the integration of the assets we acquired in August.

Jon will then provide additional detail on our financial and segment results, our balance sheet and thoughts on capital allocation. I'll wrap up with our perspective on the current market environment and our outlook for the remainder of the year before we open up the line for your questions.

In the third quarter, Flowco delivered another period of strong operational and financial execution. We generated adjusted EBITDA of $76.8 million, exceeding expectations, and we saw a 382 basis point expansion in our adjusted EBITDA margin quarter-over-quarter.

Excluding the capital associated with our recent asset acquisition, we generated approximately $43 million in free cash flow, underscoring the durability of our cash flow generation and our disciplined execution across the business.

Our performance reflects a shift toward our high-margin rental portfolio, which is growing through targeted investment and incremental customer demand for high-pressure gas lift and vapor recovery systems.

On HPGL, our solutions are delivering measurable improvements in production efficiency, uptime and reliability, helping operators enhance recovery and returns. Customers continue to value the consistency and economic uplift these systems provide, particularly in an environment that rewards capital efficiency and sustained performance.

On VRU, we are seeing continued momentum as operators recognize the financial and operational benefits of capturing and monetizing natural gas that would otherwise be vented or flared.

Together, our HPGL and VRU fleets provide contracted recurring cash flows that offer visibility and consistency across cycles. These technologies are strengthening Flowco's leadership in production optimization, and we believe there remains substantial runway ahead as customers broaden deployment across their assets and recognize the long-term value of these solutions.

Our high-margin rental portfolio was further bolstered by the acquisition of 155 high-pressure gas lift and vapor recovery systems, which we completed in August and discussed on our second quarter call.

The integration of these assets has gone extremely well and is now complete, with the units performing in line with expectations and contributing to our enhanced margin profile. The acquired systems all deployed in the Permian have also enabled us to establish new relationships with several blue-chip customers while strengthening service to existing accounts. We will continue to evaluate inorganic opportunities within production optimization that complement our portfolio and align with our disciplined capital allocation framework.

Spending a moment on sales and consistent with what we discussed in our second quarter call, revenues declined sequentially in both our Production Solutions and Natural Gas Technologies segments. Jon will expand on this in his remarks, but much of this impact was driven by our Natural Gas Systems business unit, which is our lowest margin business but remains a critical part of our internal supply chain, and it also provides us operational flexibility.

Within Production Solutions, product sales were also impacted, but performance remained resilient considering the environment, and they exceeded our expectations for gross margin performance.

This result underscores the sustained demand for our differentiated high-quality products and highlights the emphasis operators continue to place on reliability and performance in the current environment.

Overall, I am pleased with our operational and financial performance in the third quarter. We continue to execute well across the organization, expanding margins, generating strong free cash flow and strengthening our high-margin rental portfolio through both organic growth and the integration of our acquired assets. These results highlight the resiliency of our business model and consistency of our execution in a dynamic market environment.

With that, I'll turn it over to Jon to provide more detail on the third quarter. Jon?

Thanks, Joe Bob. Before reviewing some of the key financial metrics and results for the third quarter, I'd like to provide a reminder on our historical financial information given the combination of Flowco, Flogistix, and Estis in June of 2024.

For clarity, note that any financial information presented prior to June 20, 2024, business combination, such as the third quarter 2024 financials reflects only the historical performance for Estis. Financial information for the second and third quarters of 2025 reflects the financials for the consolidated entities.

Turning to our financials. Third quarter performance exceeded expectations, reflecting continued growth in our rental fleet and stronger-than-anticipated profitability within our sales business units. We reported adjusted net income of $37.3 million on revenue of $176.9 million.

Total revenue declined 8% sequentially, driven by lower product sales activity in both our Production Solutions and Natural Gas Technologies segment. Despite lower revenue, adjusted EBITDA increased sequentially supported by the continued growth of our rental portfolio and its higher margin profile. As a side note, rental revenue, most of which is recurring, increased to $107 million versus $102 million last quarter.

Adjusted EBITDA margin expanded by 382 basis points quarter-over-quarter, reflecting the benefit of our portfolio mix shift and the operating leverage we continue to capture across the business.

In our Production Solutions segment, third quarter revenue decreased 2.1% to $126 million, while adjusted segment EBITDA increased 3.6% from the second quarter to $55 million. Adjusted segment EBITDA margin expanded 240 basis points quarter-over-quarter. The decline in revenue was primarily driven by lower downhole components product sales and partially offset by higher rental revenue from both our existing fleet and the recently acquired assets.

The increase in adjusted EBITDA margin was largely attributable to improved operating leverage within our surface equipment rental business and an improvement in gross margin performance in downhole components.

In our Natural Gas Technologies segment, third quarter revenue decreased 21% to $51 million compared with the second quarter, while adjusted EBITDA decreased 7.6% to $25 million over the same period, which were attributable to a decrease in natural gas systems and vapor recovery system sales in the quarter. Adjusted segment EBITDA margin increased by 714 basis points due to a favorable revenue mix shift towards vapor recovery from natural gas systems.

Turning briefly to corporate costs. Third quarter corporate expenses were $3.8 million, down from $4.3 million in the second quarter, primarily reflecting lower third-party professional service costs during the period and a reduction in G&A.

Overall, consolidated third quarter adjusted EBITDA was $76.8 million. Since becoming a public company, we've delivered consistent EBITDA growth while expanding margins and sustaining top quartile profitability even against a more challenging macro backdrop than when we entered the public markets.

In the third quarter, we deployed $39.7 million of organic capital with the majority of capital allocated to expanding our surface equipment and vapor recovery rental fleet to support sustained customer demand at attractive returns. As we look to the remainder of the year, we expect only modest adjustments to organic capital spending and anticipate fourth quarter CapEx to decline relative to the third quarter.

As noted last quarter, we accelerated a portion of our 2026 capital plan into 2025 in connection with the asset transaction, and we are assessing market conditions and customer activity levels to determine the appropriate pace of capital deployment for next year. We will continue to prioritize opportunities that enhance growth while meeting our return thresholds in alignment with our broader capital allocation strategy.

Our typical investment lead time is approximately 6 months, which, combined with our vertically integrated manufacturing provides flexibility to adapt spending as we gauge customer demand and market conditions.

On return on capital employed, our annualized adjusted ROCE for the quarter was approximately 16%. The sequential decrease reflects lower product sales in the period and the incremental capital deployed for the asset acquisition.

As an update on our assessment of the One Big Beautiful Bill Act, in the third quarter, we benefited from the reinstatement of 100% bonus depreciation for certain fixed assets applicable to both our current year capital expenditures and the acquired assets. As a result, we've had a reversal of income tax expense in the quarter and anticipate minimal federal income tax burden for the remainder of the year.

Turning to our balance sheet, liquidity and capital allocation. We ended the quarter in a strong financial position. As of October 31, 2025, we had $205.2 million of borrowings outstanding on our credit facility. With a borrowing base of $723.5 million, we had $518.3 million of availability under the facility.

On October 31, Flowco declared a quarterly dividend of $0.08 per share payable on November 26. In addition, during the quarter, we returned $15 million of capital to shareholders through share repurchases. Our ability to pursue both organic and inorganic growth while returning capital to shareholders and maintaining low leverage highlights the durability of our business model and the strong cash flow generation across our business units.

In summary, we delivered a solid third quarter, outperforming our expectations with adjusted EBITDA above our guidance range. We executed well despite a softer upstream backdrop that weighed on product sales. And based on current visibility, we expect sales to improve in the fourth quarter. Joe Bob will speak shortly to the market environment and our outlook as we close out the year.

Looking ahead, we expect our rental fleet to continue delivering consistent, predictable performance, supported by strong demand and contracted cash flows. We also anticipate continued resilience and strong free cash flow generation across our sales business units. Our disciplined capital deployment and differentiated business model give us confidence in our ability to continue delivering strong results.

Back to you, Joe Bob.

Thanks, Jon. Turning now to the market outlook. As we noted last quarter, the North American upstream landscape remains dynamic. with operators continuing to balance production growth with capital discipline in a lower commodity price environment.

While macro uncertainty and commodity price volatility persists, activity levels have generally stabilized and customers are increasingly focused on maximizing returns from their existing production base. We continue to see a shift toward prioritizing operating expenditures over capital expenditures to sustain or grow production, an approach that aligns directly with Flowco's core strengths in production optimization.

Considering this market backdrop, our growth expectations for the remainder of the year are unchanged, and this is reflected in our fourth quarter guidance. In the fourth quarter, we expect adjusted EBITDA of $76 million to $80 million. This outlook reflects continued momentum and growth in our surface equipment and vapor recovery rental fleets, inclusive of a full quarter contribution from the assets acquired in August.

Within Production Solutions, we anticipate a small incremental seasonal slowdown in product sales that will lead to an overall decrease in revenue in the Production Solutions segment. For the Natural Gas Technologies segment, based on current visibility, we anticipate a rebound in sales across both natural gas systems and vapor recovery systems, resulting in segment revenues slightly above second quarter levels.

Finally, we expect SG&A to remain broadly consistent with the third quarter. I am pleased with the solid performance of our business this quarter, and I want to thank all of our employees across Flowco for their continued dedication and disciplined execution.

While we are encouraged by our positioning, we remain focused on strengthening the business for the long term. We are committed to continuously improving our operations and advancing our strategic priorities.

Within Natural Gas Technologies, we are seeing positive early returns from the use of machine learning to improve efficiency, reduce maintenance expenditures and enhance margins through an internally developed proprietary system.

Across our manufacturing and operational footprint, we are evaluating opportunities to further streamline processes and increase profitability. As we strengthen collaboration across the organization, we are identifying ways to more fully service customers through our complete suite of products and solutions.

And we continue to assess both organic and inorganic opportunities to enhance our technology and service offerings, positioning Flowco to further support our customers in maximizing their production and profitability.

2025 has reinforced the value of our strategic focus on production optimization, where advancing artificial lift technologies within Production Solutions and improving vapor recovery performance across Natural Gas Technologies is creating meaningful value for our customers and for Flowco.

We believe the next phase of value creation will be driven by technology-enabled efficiency, continued innovation across our offerings and deeper collaboration with our customers to unlock value over the life of the well.

Flowco is well positioned to continue advancing our strategy and to deliver meaningful long-term value for our customers and shareholders.

And with that, I'll turn it back over to the operator for Q&A.

[Operator Instructions] Our first question is from Derek Podhaizer with Piper Sandler.

Just wanted to start with Natural Gas Technologies, more specifically, the progression of optimizing natural gas systems. It seems like that drove some of the top line decrease, but we've also saw 700 bps margin expansion there. I know, this was a point of emphasis last quarter. So maybe just update us on your progression optimizing that business unit because it seems like you made a lot of progress in the quarter and how we should think about it moving forward as you continue to optimize NGS?

Yes. Certainly, Derek. Thanks for the question. Good to hear from you. So, remember, the natural gas systems business unit is our supply chain, right? Its primary function is to build vapor recovery systems as well as the conventional and high-pressure gas lift systems for our rental fleets.

In addition to that, from time to time, we will sell systems to customers that would prefer to own versus rent. Again, we do not sell high-pressure gas lift systems, but we will sell conventional gas lift packages as well as vapor recovery systems when the stars align and the price is right, okay?

So, with that said, we did take in the earlier part of this year, the step to optimize that part of our supply chain by consolidating one of our facilities into our center of excellence in El Reno. I think you've been there. It's a world-class manufacturing facility, very proud of that facility. We took the painful step to close down one of our sister facilities in Pampa, Texas and reallocate the capacity to El Reno, Oklahoma.

One particular point that we're particularly proud of is the fact that with all of the redundancy that took place in Pampa through various job placement exercises and career fairs that we hosted, we placed almost 100% of those employees in neighboring facilities in the Pampa region.

So even though it was a painful step, it was a necessary step for our shareholders, but we did right by the community that we operate in every day and taking care of those employees. There might be more to go there. We have additional capacity elsewhere in the system. We continue to evaluate it as we look at the demand profile going into 2026. But yes, we're happy to get that behind us this year and move forward in a leaner way.

Got it. Okay. That's helpful color. And then I guess just on the rentals, right, like we're up to 60% of revenue now. We were 50% in first quarter. Is this where you expect the run rate to kind of be going forward as we move into 2026? Or are you continuing to target rentals of HPGL and VRUs that we could see something north of 60% as we move into next year?

It will largely depend on the capital deployment pace, Derek. The shift from 50% to 60% this year is really due to the capital we've deployed as well as the softer product sales, okay? So, it's a mix shift coupled with growth CapEx kind of phenomenon.

Heading into next year, we see -- and we'll talk on this. I think Jon will probably address this in a minute. We see capital deployment roughly in line with what we're deploying -- what we have deployed in 2025. There will be some mix shift within the capital deployment, of course, depending on the demand profile we see. But we fully expect product sales to be largely consistent with where they are in 2025, absent some sort of industry activity boost.

Remember, the product sales are a function of both what happens downhole as well as the surface equipment, and we've seen particular weakness in the surface equipment sales business in 2025.

So yes, look, hard to tell if 60% is going to be the new norm or if it's going to go down. My guess is it's probably going to go down a bit as sales recover heading into the end of the year and then going into '26. Anything to add to that?

No, I agree. I think, I mean, 60% is almost a flip from a couple of years ago because of all the investment we've made in our rental fleet, but Q3 was particularly low in terms of product sales. We expect that to recover a little bit in the next quarter. So I think you'll see that kind of bump back down a little bit. And overall, that will have an impact on margins as well as we sell more than we ramp.

Our next question is from Philip Jungwirth with BMO Capital Markets.

You've operated the Archrock assets for the last couple of months, can you give a bit more detail on the customer response and feedback to date as they work with the Flowco team? And is there any cross-selling potential or increased HPGL penetration that can be done across the new blue-chip customers?

Certainly. To answer the second question first, yes, we inherited a couple of accounts that we, for a variety of reasons, had trouble penetrating, specifically with HPGL, Phil. And we think that the -- and it's early, but we think that those accounts are going to be open to the broader commercial discussions that our teams can have as they progress through the Wells progression from HPGL to another form of lift, most likely traditional gas lift. So those conversations are happening. We're starting to see some good early returns there, and that's just a daily part of the battle on our commercial efforts.

In terms of the first part of your question having to do with really the integration of the systems into our fleet, it was seamless, okay? The reception that we got from customers of us really the leader in the space and what we do is focus on production at the wellhead, customers were very pleased that we were the buyer of these assets and are now the custodian of their early production efforts.

So I'd say all around, it was very positive. I certainly hope all future M&A is as seamless as this. This is a particularly unique one, though, I think. But no, it's gone really well.

Great. Great to hear. And then can you talk about recent trends in VRU adoption across maybe both upstream and midstream? And just given that captured methane is put back into the sales pipeline, I mean one of the big themes we've seen is just the amount of Permian pipelines and construction FID-ed in the last couple of months and what the strip is implying from Waha post 2026. Does this at all make you any more optimistic on increased VRU adoption after you see higher in-basin gas prices?

No question. We are as optimistic, if not more, based on the fundamentals of the natural gas build-out. You mentioned pipeline capacity. It seems like any time you have a new pipeline announcement, it just inevitably gets filled with all of the associated gas that's coming out of the Permian.

And then the massive amount of data center power build-out that's taking place, a very large portion of that will be fueled by natural gas. So, I think the demand profile for natural gas, the fundamentals for natural gas coming out of the Permian in particular, just continue to strengthen.

And vapor recovery is becoming ubiquitous with pad design and with the undeniable economics that it provides to an operator to deploy our systems, we remain confident in additional system deployment. We really track a couple of key KPIs on a month-by-month basis. And one of the most critical ones is the number of units that we set every month net of those that come back to us in terms of returns.

And I'm pleased to say that, we just continue to see positive months as we build more systems, as customer demand improves, that net set number continues to trend in the right direction. So we see no reason to back away from the capital deployment that we plan for 2026 in VRU, and look forward to hopefully providing more positive data points in the quarters to come.

Our next question is from Sean Mitchell with Daniel Energy Partners.

Joe Bob, you kind of mentioned technology in the opening comments. But just are you guys building out kind of proprietary software tools in-house? Are you partnering with kind of digital specialists to accelerate kind of AI and automation capabilities?

Good question, Sean. We actually have built out over the last 10 years, if you can believe it. In-house proprietary software systems that have helped manage and operate our vapor recovery systems more efficiently, more profitably than our competitors, okay? So, this is a legacy of previous investments we've made as a private entity pre-IPO. We're in the very early stages of leveraging that internal capability of software development, specifically software development to help optimize surface equipment more efficiently. We're in the early phases of deploying that capability across the rest of our businesses.

And then obviously, from there, integrating data that we can collect downhole, either with our own equipment or with third-party equipment into more efficient operation of a system that marries downhole lift techniques with surface drive that will enable the lift technique to take place. So, this is largely an in-house effort. We alluded to it in some of our prepared remarks, but we are starting to see some very positive early returns from years' worth of investment and hopefully more to come there.

I think the ultimate end goal is to work with customers who have more data than we do, right, to integrate what they see in their production information with what we can provide with our lift and VRU techniques to help optimize their production on a field-wide basis, not just well by well. But that's the end goal. We're on the journey and look forward to hopefully sharing more good news over time.

Congrats on the quarter.

[Operator Instructions] Our next question is from Jeff LeBlanc with TPH & Company.

I wanted to see if you could help frame the tailwind for your HPGL and VRU businesses as operators start to target gassier benches. I know you just talked about the tailwind for natural gas demand, but it actually seems like at least you're starting to see the shift on phase windows in the Anadarko and Eagle Ford and then probably over time, you can also see it in the Permian. So, I would just appreciate any color there.

For HPGL, what you're really -- what we're really looking at is oil production, right? So, as we look at big picture production data for the country, oil production continues to hang in there. And we haven't seen the meaningful decline in production that I think folks feared earlier this year might take place as commodity prices corrected and activity levels started to be curtailed.

So, I think high-pressure gas lift certainly plays a part of that, and we're going to continue to invest in that effort. We've really seen no change from customers' demand for our systems, in particular, in the Permian, which is our largest concentration of units in the U.S.

So, we expect to continue to generate positive growth out of that specific product line over the next few quarters and really have not seen any kind of demand profile shift. So hopefully, that answers your question. I know, there's not a ton of detail in there, but that's how we see it.

Our next call is a follow-up from Derek Podhaizer with Piper Sandler.

I wanted to ask about the buyback. Nice to see $15 million for this quarter. Maybe just updated thoughts on how you're thinking about that as far as your capital allocation strategy. Obviously, we have the dividend for a couple of quarters. Now we have the buyback. I know you have an authorization out there. You're balancing your capital deployment. Will this just be opportunistic? Will this be more formulaic, returning over 50% of free cash flow, which is really nice to see. Just maybe some more thoughts around the buyback, just given that you just kicked it off.

Yes, certainly, Derek. Listen, we've been very, very careful to not be prescriptive in telegraphing to the market how our capital allocation framework will be period full stop. We've been much more opportunistic in looking at ways to deploy the free cash flow that we generate every day.

As we look during the quarter at our internal opportunities as well as every day how we're valued, it just became increasingly more clear that we're undervalued. And so, we leaned into share repurchases during the quarter, and we will continue to as long as we feel like we are not valued where we feel like we should be, certainly, that in relative terms against the opportunity set that we have to deploy capital in our existing business and, of course, in M&A.

So, look, we'll remain opportunistic. We were happy to start the process during the quarter. to buy back stock opportunistically, and we'll just continue to evaluate it as it hits the screen every day.

Got it. No, that makes sense. And then maybe just looking out to 2026, I appreciate that it's early. But how do you start to think about that kind of where you're comfortable, where estimates are today for next year? And just thinking about the progression of obviously kind of these weaker product sales. We have some seasonal dip in 4Q, but we should have some recovery next year. So maybe just some early thoughts as you look out to 2026 and kind of where numbers are shaking out right now.

Listen, we're a brand-new public company. We've started to and have been consistent in guiding quarter-by-quarter. I think we're going to continue that cadence, Derek. We provided you some guidance for Q4. We obviously have a view on '26, but we're going to see how the planning process goes between now and the end of the year.

What I can tell you is that the opportunity set that we are investing in today, and remember, we're kind of a 6-month lead time kind of organic CapEx organization. The opportunity set looks strong. And we are making capital decisions out through June. And I'd say, they're largely consistent with the opportunity set that we've seen this year. So I don't see any reason why we're going to curtail capital spending certainly through midyear next year.

The form of the capital may be different, moving from electric to natural gas drive or conventional from HPGL. It will move around within the systems that we operate. But I'd say as we see it today, it's pretty steady.

The product sales, as you point out, are shorter cycle. And you tell me what the price deck is for next year, and we can pontificate on what the year could be? But we're just not comfortable enough to give you any kind of full year guidance just yet. But as we look into Q4, things look good, and we're optimistic that we're going to deliver another good quarter with some growth and positive free cash flow and returning capital to shareholders, just as you pointed out.

This will conclude our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, everybody. Look forward to talking to you again in 90 days. I hope everybody has a great Thanksgiving and good rest of the year. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.