Kodiak Gas Services Stock

Greetings, and welcome to the Kodiak Gas Services Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Graham Sones, Senior Vice President, Investor Relations. You may begin.

Good morning, and thanks for joining us for the Kodiak Gas Services conference call and webcast to review our second quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Executive Vice President and Chief Financial Officer. After my remarks, Mickey and John will discuss the steps we've taken towards our 2030 goals, share an update on the commercial progress in our Power Infrastructure segment and walk through our quarterly results and updated 2026 outlook. Then we'll open it up for Q&A.

A replay of today's call will be available by webcast and phone through August 21, 2026. Replay details are on the Investors tab of our website at kodiakgas.com. And as a reminder, the information discussed today speaks only as of August 7, 2026, and may no longer be accurate by the time you listen to a replay or read the transcript. The comments made by management during this call may contain forward-looking statements within the meaning of U.S. federal securities laws.

These statements reflect management's current views, beliefs and assumptions based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct.

Comments will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in our earnings release, which can be found on our website.

Now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thanks to everybody joining us today. I want to start, as we do in all meetings at Kodiak with safety. August is historically the hottest month of the year. A large portion of Kodiak's workforce is called upon to work outside nearly every day, either in the Permian Basin or South Texas or any other area where we operate.

I'd like to remind everyone to be thoughtful when working outside in the summer heat. Studies have shown that you can become dehydrated in as little as 30 to 60 minutes when working outdoors in hot humid conditions, which we often face in our operating areas. Dealing with the unrelenting summer heat, it is important to drink plenty of water and take breaks in the shade to give yourself time to recover and cool off and be sure to let someone know if you start to feel dizzy or dehydrated. These are important steps to maintain a safety-first mindset.

It is during the hot summer months that people tend to become intensively focused on power reliability and electricity consumption. Recent examples of grid instability due to swings in data center-related demand have once again demonstrated how critically the U.S. needs behind-the-meter power solutions. A few weeks ago, a transmission line in Northern Virginia went out of service, resulting in approximately 3 gigawatts of data center demand disconnecting from the grid, stressing the grid and causing a voltage disruption that was felt in surrounding states. This summer, we have seen the electric grid strain to maintain reliability as the combination of summer heat and the increase in data center power needs stresses the system.

More than half of the U.S.'s 50 states have had to declare emergency alerts this summer, asking consumers to conserve power. PJM even had to take it a step further, receiving permission from the U.S. Energy Department to require data centers and other large customers to turn on backup generation to help support the grid. This dynamic will further intensify in the coming years as data center power demand is expected to more than double over the next 5 years.

This spike in demand is happening at the same time grid operators are increasingly running low on power reserves as reflected by PJM's consecutive power capacity auctions where they fail to acquire enough power to cover their reliability requirement. Behind-the-meter power solutions are going to have to be a part of the solution to solve our nation's growing power crisis. Judging by the depth and strength of Kodiak's rapidly growing commercial power project pipeline, which I will discuss later, the industry fully understands this dynamic and is eager to engage to contract workable solutions.

Now I'd like to update you on the progress we're making on our 5-year plan. Given the highly visible demand for natural gas plus the long lead times for new large horsepower compression equipment, we laid out a target to organically grow our compression fleet to approximately 5.2 million horsepower by year-end 2030. I'm happy to report that we are well on our way to achieving that goal. For the first 6 months of this year, we added approximately 80,000 horsepower of fleet additions. Factoring in the new units we expect to receive through year-end, we're on pace to hit about 170,000 horsepower for the year.

Further, through our strong vendor relationships, we've secured new large horsepower compressor packages for 2027, '28 and '29 deliveries to meet our growth goals and expected customer demand. Bottom line, we remain confident in our ability to achieve our targeted annual horsepower growth of 150,000 horsepower per year, resulting in a compression fleet of at least 5.2 million horsepower by the end of the decade.

Shifting to power. We recently announced a multiyear gas turbine supply agreement with Baker Hughes that will deliver Kodiak 1 gigawatt of turbine power by 2030 with an option to increase that order of up to 1.8 gigawatts. There are a lot of reasons why we're excited about this transaction. First, it gives us price certainty for new turbine equipment for the next 5 years.

Additionally, Baker Hughes has a long track record of producing durable equipment that is well known across the world. Baker Hughes' efficient power generation turbine assets are designed to work on long-term projects, enabling us to deliver dependable power for growing data center and energy infrastructure development. Beyond the equipment, the strategic agreement also covers technician training and parts supply, positioning Kodiak to provide the high-quality service our customers have come to expect.

Combining our previously announced power generation purchases with Baker Hughes plus some additional opportunistic purchases, we have secured approximately 1.8 gigawatts of power generation for our fleet, of which approximately 66% will be turbines and all of which will be available by the end of 2030. Further, we are in discussions to incrementally add to our recip fleet, which would align with our goal of achieving 2 gigawatts of power-producing assets by the end of the decade.

Now I would like to discuss the subject that comes up the most in our meetings with investors, the commercial landscape as it relates to power. Since closing the DPS acquisition just 4 short months ago, we have quickly integrated and retooled our commercial power team to focus on larger-scale projects with long-term contracts at attractive returns. With that focused mandate, the team has been meeting with potential customers while high-grading a large, rapidly growing pipeline of projects that significantly exceeds our future power capacity.

To give you a sense of how dynamic this industry is, we've added about 2 gigawatts of potential projects in the last month, while at the same time, moving on from opportunities that either don't fit our timeline or aren't the right kind of counterparties for us to commit resources. We feel as confident as ever that the commercial opportunities are real and progressing quickly.

As evidence of this, we recently executed a limited notice to proceed with detailed engineering and design work for a data center in West Texas, whose capacity is leased out to a hyperscaler. We've invoiced them for an initial deposit to reserve power equipment for the project while we negotiate a long-term contract to start supplying power in early 2027 with the ability to scale over time.

We'll have more to share on that before the end of the year. Our existing power assets remain in high demand with our current fleet about 90% utilized as we make ready much of our idle fleet. Power assets that we have on contract continue to be extended as customers are wary of releasing equipment. We recently extended one of our data center commissioning contracts and received an increase in the rate. As we look forward to the second half of 2026, we expect to receive approximately 50 megawatts of new gen sets before deliveries ramp up in 2027.

In preparation for a sizable increase in our power infrastructure operations, we've been diligently increasing our technician training program and adding a new power curriculum, further boosting our operational advantage over our peers. Starting this fall, Kodiak's BEARS Academy training facility will become one of the only 2 facilities in the U.S. that are certified to offer a Waukesha electrical mechanical certification on both compressors and gensets.

This certification provides our technicians with the knowledge needed to fully operate and maintain electrical equipment as well as perform troubleshooting and maintenance on the mechanical equipment. The skilled workforce will be helpful as we start undertaking on-site engine overhauls of power assets and other field-level operations in the second half of the year.

This is just 1 example of where Kodiak is investing in training programs to help create opportunities for our workforce to grow and develop into new, more skilled labor roles. Another example is our internal development of AI-enabled technical monitoring solutions that not only require us to hire software engineers, but we also need field technicians to help monitor and assess the information. As we've rolled out new technology, we have reallocated experienced technicians into positions in our industry-leading fleet reliability center and our fleet telemetry group. Kodiak's investment in artificial intelligence and machine learning is creating new roles and opportunities, allowing our workforce to grow and develop.

Yesterday afternoon, we released our second quarter 2026 financial results. I'll hit a few highlights, and then I'll let John go into more detail. In the Compression Infrastructure segment, we ended the second quarter with 4.4 million revenue-generating horsepower. Average horsepower per revenue-generating unit was 991, the highest among our contract compression peers and a figure we expect to keep moving higher given our large horsepower focus.

Our investments to grow the fleet, along with the divestiture of some small noncore units drove yet another increase in fleet utilization to 98.2%, another industry-leading metric. In Q2, we delivered strong year-over-year growth in compression infrastructure revenue and adjusted gross margin. We realized a 4.5% year-over-year price increase to $23.80 per ending revenue-generating horsepower.

The strong pricing performance reflects the positive progress we've made recontracting our existing fleet and the underlying demand for contract compression in this tight market with highly visible gas growth. Compression infrastructure adjusted gross margin was 70%, marking consecutive quarters at or above 70%. The margin gains continue to be driven by strong operational execution and returns on our technology investments.

However, this quarter's margin results were especially impressive considering the negative headwind we faced late in the quarter from higher lube oil prices. Our supply chain team has done a tremendous job planning ahead and negotiating favorable contracts to help us source cost-efficient supplies and reduce price risk.

For Power Infrastructure, we exited the quarter with a fleet of 405 megawatts. We generated revenues of $33 million and an adjusted gross margin of 64.5%. Both were in line with our expectations. As we reprice our legacy business and align our operational philosophies, we look for those margins to increase. In our Other Services segment, second quarter revenue increased by 47% year-over-year as this quarter's results were positively impacted by station revenue and the addition of some other ancillary services related to power. Strong results from each segment drove adjusted EBITDA of $217 million for the quarter, up 22% year-over-year and a new company record.

In summary, our Compression Infrastructure segment continues to deliver solid top line growth and great margins. We've secured new large horsepower compression packages for 2027, '28 and '29 deliveries, and we are already 50% contracted for our 2027 deliveries. And we've already started the process of contracting our 2028 deliveries.

Technology companies remain focused on a historic build-out in data centers with the top 4 hyperscalers increasing capital spending by roughly 80% year-over-year in the second quarter. Total cloud CapEx is tracking to close to $1 trillion in 2026. Given this robust construction boom, our backlog of high-quality commercial opportunities is growing by the day. It's very exciting times for Kodiak and our energized outlook has never been better.

In light of the great results in Q2, and as John will discuss, we are raising the midpoint of our full year adjusted EBITDA, compression infrastructure gross margin and discretionary cash flow guidance to reflect our increased visibility for the second half of the year. We remain excited about the investments we are making today that will drive growth and enhance Kodiak's margins in the years to come. And now I'll pass the call to John to further discuss our financial results and our revised outlook for 2026. John?

Thanks, Mickey. Our compression infrastructure business continues to fire on all cylinders, and we're out of the gate strong in our new Power Infrastructure segment. I'm excited about our near, medium and long-term future. Let's review the quarter. We reported revenue of $391 million, up 21% year-over-year. The growth can be primarily attributed to the addition of DPS alongside increases in compression infrastructure revenue, which itself was driven by continued investments in new horsepower, price increases on legacy equipment and strong operational execution.

In compression infrastructure, revenues increased 7% year-over-year and 3% sequentially. Revenue-generating horsepower increased by approximately 24,000 sequentially. We exited the quarter at $23.80 per ending horsepower, up 4.5% year-over-year, reflecting strong underlying industry fundamentals and a great customer value proposition.

Along with top line growth, we continue to deliver on segment margins. Compression infrastructure adjusted gross margin for the quarter came in at 70%, up 170 basis points year-over-year. That's 2 consecutive quarters of 70% margins. This quarter's results overcame the absorption of the significant increase in lube oil costs driven by the spike in oil prices and crack spreads caused by the war in Iran.

As we have highlighted in the past, lube oil is a significant component of the cost of goods sold in the compression business. Given that significance, we've historically been very intentional about closely managing that aspect of our supply chain via preferred supplier relationships. In today's volatile market, that strategy is paying off as we've been able to materially blunt the impact of price spikes in lube oil prices and in fact, actually raise our guidance for compression adjusted gross margins.

Now turning to our new Power Infrastructure segment. For the quarter, we generated revenues of $33 million and an adjusted gross margin of 65%, the midpoint of our guidance. We fully expect to see margin expansion as we scale the business and increase efficiency by aligning our distributed power operations with compression. As an example, consider that today, more than half of our power fleet runs on Caterpillar 3500 series engines, an engine class that our compression field technicians know well since we use essentially the same engine in a significant number of our compression packages.

This commonality yields a lot of operational efficiency. This is a competitive advantage and 1 of the many reasons why we expanded our infrastructure platform into this business. Adjusted EBITDA for the quarter of $217 million was yet another new company record, and adjusted net income was $54 million or $0.55 per diluted share.

Let's turn to capital expenditures. Maintenance CapEx was approximately $20 million in Q2, right in line with our expectations. Other CapEx, excluding a $43 million noncash long-term capital lease for a new Midland Supercenter was $11 million. We are excluding the Midland lease expenditure from our CapEx guidance given its noncash nature. Compression infrastructure growth CapEx was in line with expectations at $67 million, the vast majority of which was for new units.

Power infrastructure growth CapEx was $134 million, a portion of which was related to power generation orders that we spoke to last quarter as well as initial down payments on the Baker Hughes turbine framework agreement. Our multiyear agreement with Baker Hughes provides us with many benefits, not the least of which is enhanced certainty on the cost to achieve our 2-gigawatt fleet goal by the end of the decade. We think an average cost across our fleet build program of about $1.2 million per megawatt before balance of plant is still the right figure.

Discretionary cash flow for the quarter was $163 million, substantially higher than what we've seen in the past. This was driven by record adjusted EBITDA alongside lower interest expense following May's equity offering as well as a $13 million tax benefit.

Moving to the balance sheet. Net debt was approximately $2.6 billion at quarter end. In May, we raised approximately $836 million after expenses in primary equity, allowing us to fully fund our power business plan while protecting our balance sheet. Our leverage ratio at quarter end after netting out cash was 3.1x, the lowest in our company's history.

Going forward, we think that the strength of our balance sheet plus our access to multiple sources of relatively low-cost capital provides us with yet another meaningful competitive advantage as we build out the power franchise of our energy infrastructure business. Finally, our Board declared a dividend of $0.49 per share that will be paid later this month. Based on our second quarter discretionary cash flow, our dividend remains well covered at north of 3x.

Turning to our updated 2026 guidance. We raised our compression infrastructure adjusted gross margin range to 69% to 70.5%. We expect pricing improvements alongside technology and training-induced operational efficiency to enable us to overcome continued lube oil and fuel headwinds. We're also increasing the outlook for adjusted EBITDA to a range of $830 million to $860 million. Our outlook for discretionary cash flow has increased to a range of $570 million to $600 million. The sizable increase is due to a lot of the factors we previously discussed, including higher adjusted EBITDA, lower interest expense and lower taxes.

Moving to CapEx. We're increasing our compression infrastructure CapEx to a range of $280 million to $300 million. Following our equity offering, we just recently seized the opportunity to spend $33 million to terminate operating leases on 43,000 horsepower of high-quality contracted large horsepower units. Essentially, we're adding large horsepower compression for less than a 6x multiple at a substantial discount to replacement cost and using our favorable ABL interest rate to do so. That explains the updated guidance.

For power infrastructure, we're reducing our capital expenditure forecast to $400 million to $450 million. The reduction is a reflection of the tremendous progress we've made in securing power to get to our 2 gigawatt by 2030 goal. We've got markedly increased certainty on cost plus timing. And our partnership with Baker Hughes facilitates better cash flow management on our turbine purchases.

Also, we now expect to receive approximately 50 megawatts of new power gensets in the second half of 2026. Our outlook for other CapEx remains unchanged and excludes the previously discussed $43 million noncash Midland facility capital lease that I mentioned earlier. With that, I'll hand it back to Mickey.

Thanks, John. I'd like to finish by saying that I'm extremely excited about the direction of the company. Our financial performance continues to exceed expectations. The contract gas compression market fundamentals remain strong with demand continuing to ramp up.

Our right to win in the Power Infrastructure segment is highly visible with clear operational, supply chain and financial advantages. Our future customers realize this, too, as we're building a lot of positive momentum in our Power Infrastructure segment, which I'm eager to share with you at the appropriate time. So thanks for your participation today. And now we're happy to open the line up for questions. Operator?

[Operator Instructions] And our first question comes from Eli Jossen with JPMorgan.

I appreciate the update regarding an NTP with the West Texas data center linked to the hyperscaler. But just maybe a little bit of color on what differentiates you from your peers, which are clearly working towards the same goal. And then what milestones should we expect prior to a contract targeted before year-end?

Elias, thanks for the question. This is Mickey. I mean I think that we've -- in just the short amount of time that we've owned the power platform here, I think it's pretty obvious to a lot of the customers that we're talking to and potential customers that we're talking to here that we bring a level of expertise with operating rotating equipment, right?

And one of the reasons why we thought DPS was such an attractive platform was their engineering capabilities and their commercial capabilities as well. So I think that's playing out in real time and backing those capabilities with Kodiak's operational expertise and balance sheet is resonating well with potential customers. So it's exciting times here.

As far as milestones to get into a contract, I'd like to be able to give you some firm timeline there. But we're working towards a solution right now, looking at potentially starting to install equipment in the first quarter and hopefully have something to be able to announce more firm to you before the end of the year.

Great. And then maybe pivoting over to the compression business. I think we've seen some headwinds across the space for your peers and maybe with respect to lube oil costs. Can you just talk about kind of operationally what you guys are doing that allows you to avoid those types of headwinds and raise the guide?

Sure, Eli, it's John. Yes, we're proud of the performance we had in the quarter, and it kind of caused us to bump the guide from a compression infrastructure perspective. And really, like the answer is multifaceted. I'd say the biggest driver that allows us to overcome high lube oil prices, which are real is it's the continued incremental gains from pouring this next level training in operational artificial intelligence and machine learning across the fleet.

And as we scale that out and roll it up -- roll it out, we're seeing true results. And I say it all the time, like what we see is we truthfully break things less. We fix things when they need to be fixed, not just based on hours and time, and we have higher labor productivity. And the combination of those things allows us to continue to eke out modest gains as time rolls on.

As I pivot to the lube oil piece, one of the big strategies that Kodiak deployed that Mickey and Chad and the team kind of started to implement years ago is to really think about partnering with vendors. The examples of that would be Caterpillar or some of our dealers that we work with now going forward some Baker Hughes.

We've done the same thing in our lube oil contracts. And so we use our scale to our advantage. We get a lot of benefits and one of them is that we think we've got like favorable pricing on lube oil. So look, it's a real issue. We're going to continue to overcome it, but we're pretty confident as we look to the rest of the year in terms of the guidance that we gave.

Your next question comes from Jim Rollyson with Raymond James.

Nice solid results again as usual. I guess, Mickey, maybe spend a minute on power here. Obviously, you've got a lot of equipment secured. You kind of talked about the 50 megawatts coming in this year. Can you kind of elaborate on the delivery timeline when we get into '27 through 2030 based on the 1.8 you've got secured, just to kind of understand how that scales up.

Yes. Jim, I appreciate you listening in this morning. Yes, so we've got the 50 megawatts coming at the end of the year. And we -- like I said, we've only owned this business for 4 months. One of our early priorities was securing the power we needed to grow the business. We've kind of told you -- told everybody that the megawatts over the next 4 years comes in pretty ratably at about 400 megawatts a year, give or take a little bit.

So it's pretty consistent with that. But I would say that the 2027 deliveries are probably a little bit more back-end loaded in 2027 just because that's when the first of the kind of the big Baker Hughes turbines start coming in and kind of early in the fourth quarter. So like I said, it's -- we'll take delivery of another 400 megawatts next year, but it's mostly back-end loaded for next year, and then it starts to level out through '28 through '30.

Got it. That's very helpful. And as a follow-up, I guess, John, you talked about kind of being on track for -- from an equipment standpoint of around $1.2 million a megawatt before balance of plant. I'm curious, maybe, Mickey, what -- as you're talking to some of these data center guys and hyperscalers, what kind of balance of plant requirements are you looking at? Like what kind of reliability do they need? And just trying to understand where this overall capital needs goes that you will, I presume, price into your return equation?

Yes. We'll absolutely price it into our return equations. And so typical projects are all going to have basically the same kind of balance of plant that will be associated with the transformer switch gears, SCRs for emissions reduction and that kind of thing. It's a little bit grayer on the battery and the BESS backup systems.

Some people need them, some people don't. Some are handling themselves, some want us to handle them. But the standard balance of plant of the projects that we've looked at will end up in that $1.6 million per megawatt range. And then if we need -- give or take a little bit and if we need battery backup on top of that, that the customer is looking for, then it will be a little bit higher from there.

Your next question comes from Neal Dingmann with William Blair.

Mickey, John, great update. My first question is just, again, I want to turn to compression specifically, John, you announced and talked about today that strategic announcement of acquiring those previously leased horsepower. Could you remind me, besides now that, is there still potential for accretive purchases of compression either owned by your customers, both on the E&P and midstream side or just other E&Ps and midstream out there?

Neal, it's Mickey. Yes, we kind of opportunistically exercised this capital lease buyout this quarter, and it was something that really made sense for the company and using our lower cost of capital than what we're paying from some previous capital leases that we had inherited from CSI. So after the equity offering with a little bit lower leverage and some dry powder, we thought that was a prudent thing to do.

Kind of looking forward, there is definitely some other opportunities out there that we're looking at for some additional purchase leasebacks. I don't know that they're imminent or not, but there's definitely some discussions going on. And certainly, we'll look to jump on those opportunistically if they materialize.

And I will just chime in just to avoid confusion because this topic has kind of had some people already ask us questions about it. We bought out operating leases in effect, converted them into owned assets. We didn't buy capital leases. So just a simple financial transaction.

Helpful, John. And then, John, maybe sticking with you, just a quick one on shareholder return. Is it fair to assume, obviously, we'll pay -- again, a lot of the money you talked about the upcoming or you or Mickey talked about the upcoming CapEx for power is that I would call it until you hit that inflection, most of the dollars will be going that or debt repayment. And then at some point, you would increase shareholder return? Or how actively are you looking at watching the shares and potentially thinking about opportunistic buybacks?

Sure. I'll kind of cover that. It's a wide-ranging topic. Obviously, it involves a lot of conversations with our Board. Before we bought the DPS business, we were pretty aggressive about buying back some shares. Some of that was because we thought it was the right thing to do and our shares were undervalued. Some of it was to support EQT as they were selling their way down over the last 18 months or so.

And from a dividend perspective, we always kind of thought, look, let's pay out about 35% of our discretionary cash flow in the form of a dividend. And given our growth algorithm and how predictable our business was, that all kind of translated into about upper single digits annual growth for several years in dividend growth. With the addition of the Power business, a, we're going to have a lot of CapEx to spend. We think it's great high-returning CapEx that builds that infrastructure platform in power.

And then b, we're going to grow faster. And so we can't tie the DCF to the dividend anymore. And so the way that we've articulated it internally, and we think the right answer from a capital allocation perspective is, we think we want to pay an attractive dividend that grows. We want to manage the balance sheet. We want to fund the growth in the power business. So you saw that we announced kind of an equivalent or a flat dividend this quarter.

And as we kind of grow the business over time, we'd like to think that we can grow it on an annual basis at an attractive level. I kind of leave it at that. From a share repurchase perspective, we'll always be opportunistic. And now that we, of course, got lower leverage, like that affords us the ability to do so, but we do have a lot of CapEx to spend to execute on our business plan in power. So we're going to be leaning into that.

Your next question comes from Theresa Chen with Barclays.

Going back to your comments, Mickey, on high-grading the power generation commercial pipeline. Can you walk us through your process here? What criteria are you using to prioritize opportunities? How that evolved over the past few months? More specifically, what are the key trade-offs you consider when deciding which projects to advance versus which to de-prioritize?

Yes. Theresa, thanks for the question. Really, the 2 big criteria that we're looking at. Number 1 is the creditworthiness of the counterparty and who the contract will be with. We want to make sure as we're making pretty sizable investments right here that we're protecting any downside risk here for the business and our shareholders. And the other one is just is how close is a data center basically to securing a tenant and how serious those conversations are ongoing.

And we obviously want to make sure that we're not getting in a situation where we're putting a lot of time and effort into a project that is more of a kind of a kick in the tires type of project and something that's real and got legs and has the ability to accelerate and contract quickly.

Understood. And you previously discussed unlevered returns above 15% and build multiples of roughly 5x EBITDA. As customer conversations have advanced and project designs have become more defined, has your view on those economics changed at all? And any early indication of expected contractual terms in terms of duration or other important factors to keep in mind?

Theresa, it's John. I'll answer the first part and then hand it back to Mickey for the second part. We spent a lot of time in the last 4 months refining, I'll call it, the unit/project economic model as well as kind of pressure testing that model with conversations with customers. The short answer is what we said before, we stand behind. The 5-year paybacks, 15% plus internal rates of return with the ability to kind of think about it differently depending upon duration and customer type, et cetera. Those all still hold.

Yes. And as far as contract duration here, we're focusing on the longer-term contract duration. We're seeing pretty typically 10- to 15-year type contract terms in the preliminary discussions that we're having with customers. And there might be some instances where we would agree to a 7- or 8-year contract just depending on the kind of deal it is and the terms of the agreement.

Your next question comes from Doug Irwin with Citi.

Maybe a quick follow-up on Theresa's question there. Just curious how we should think about the size of some of these deals you're working through right now. I would imagine there's a pretty wide spectrum of opportunities out there. So just curious where you see yourself having the biggest competitive advantage in the market? And I guess, in general, should we expect just a couple of larger chunky deals for this gigawatt of equipment you've secured or maybe a handful of smaller contracts?

Doug, this is Mickey. It is a pretty wide spectrum of type deals that we're looking at here. This first one on the limited notice to proceed that we have in place is relatively small because we don't have that much power to put to work in the first quarter, being 90% utilized. So it's kind of a sub-100-megawatt type deal, but with the ability to scale over time.

So we like that as kind of a first bite-sized chunk to get on the board here. And then after that, it's -- like I said, the other opportunities we're looking at are pretty wide spectrum of different things, anywhere from a couple of hundred megawatts of long-term kind of contracted commissioning equipment that would be kind of a 10- to 15-year deal that would be more mobile in nature to permanent primary island behind-the-meter solutions for up to 1 gigawatt scaled over time.

So like I said, it's pretty typical. There's a lot of opportunities out there. And as we high-grade these, there's -- we're looking at several different things here. And -- but with the commonality being, hey, we want to make sure we lock this stuff in for long term, and we want to make sure that it's with the right counterparty.

Got it. That's helpful. And maybe a follow-up on compression contracting. One of your peers this quarter announced a pretty large 8-year contract. You've also announced a few longer-term deals so far this year. Just curious if you could talk about what kind of demand you're seeing for longer duration contracts and whether you might be in a position to keep terming out your fleet a bit.

Yes, we absolutely would love to do that and are in some conversations with some other customers. It's really kind of a customer-by-customer preference here. So some want to keep them a little shorter to preserve some optionality, which in our minds is not a bad thing either because it gives us the ability to churn the fleet a little bit and kind of high-grade customers there if we want to do that. But with the right customers in the right place, we certainly are talking about longer-term deals with them, too.

Your next question comes from Jackie Koletas with Goldman Sachs.

First, I just wanted to go back to Power. On the West Texas Data Center project where you executed the limited notice to proceed, could you provide a little bit more color on the counterparty structure there, specifically what kind of counterparty is the data center developer and the nature of their commitment with the underlying hyperscaler?

Jackie, we're probably not ready to divulge that publicly yet, but we're paying very close attention to making sure that the counterparty is a creditworthy counterpart and it has the appropriate amount of risk for the size of the project for sure.

Understood. And then just pivoting to compression. Given that peers are increasingly formalizing long-term spending plans, how do you view the competitive landscape for large horsepower compression? And does this multiyear visibility change your approach to securing engine supply or alter pricing leverage when negotiating those long-term contract extensions?

Yes. I mean deliveries are still in almost 200 weeks out. So you're still -- so we're having to plan our business in the compression much like power right now and look and have a much longer-term kind of strategic approach here than we have typically in the past. And so yes, we are planning out 3, 4, 5 years in advance right now, and that's what gives us the visibility into the ability to secure that equipment.

Having great relationships with the vendors like Caterpillar and with our packagers that are having shop space availability and that kind of thing. So we're having to plan out quite a bit further. And then with the visibility that you see into specifically Permian natural gas growth in the future as feeding LNG, we're really looking at a long-term forecast here that we feel really good -- really good about and that we can continue to execute on.

Your next question comes from Julien Dumoulin-Smith with Jefferies.

This is Alex Overmeer on for Julien. Just really quick back on the Power CapEx. First, is all of the reduction in power CapEx purely driven by just the down payment? And then separately, it sounds like maybe that $1.6 million per megawatt, including balance of plant has come up a little bit versus your previous expectations of $1.4 million to $1.5 million. Is that fair to say?

I'll take that in order. So number 1, when we bought DPS and came out of the gates, we weren't -- we knew kind of mentally where we wanted to land in terms of how much power we wanted to acquire and when. But we hadn't actually negotiated many of those deals yet. We'd had a few conversations. So as we rolled through the quarter, we strategically basically gotten extremely comfortable and great visibility on our 2 gigawatt by 2030 target.

And that allowed us to say, okay, we can take this guidance down to a lower level because we now know what we're going to pay. I will say with the Baker Hughes agreement, I go back to the comment that I made earlier where our supply chain strategy has always been, let's find great partners and work with them. Let's trade volume for price, so to speak, too, in that sense. And so we were able to kind of work with Baker Hughes, get some favorable payment terms and that also mentally, again, probably lined up with what we hoped to achieve, but that's what the second aspect allowed us to kind of tuck in that guidance in 2026.

I didn't want to correct Mickey earlier when he said the $1.6 million. I think it's $1.5 million is probably where I would say, and he did say kind of plus or minus. So the answer is I don't think it's gone up from where we originally were last quarter. We think we're still right in that zone, call it, plus or minus $1.2 million a megawatt for the raw power and kind of round up to the $1.5 million, again, plus or minus, including balance of plant with a heck of a lot of certainty because we basically locked this in through 2030.

Yes. And Alex, I'd probably just say that maybe I was thinking about some specific projects that I was looking at some numbers on. But I would say that any -- if that balance of plant does come in a little higher than what we expected early on, maybe that's going to come with incremental returns has been pretty well documented amongst us and our peers.

Got it. Yes, that's super helpful. And then just really quick, do you guys have any thoughts on this Texas Moratorium on data center grid connections that was announced this week? And if you've heard anything from potential customers in the wake of that announcement?

Yes. I mean I think that announcement of this Moratorium on these data center interconnections that have been requested that's something in the range of, what, 450 gigawatts on a system that has 95 gigawatts of capacity today, that does nothing but benefit behind-the-meter power solutions providers like ourselves.

And I understand why they're doing it. I think it's a smart thing to do to kind of flush out what are real projects and what are more speculative projects -- with this audit here. So I think it's a good thing, and we certainly have heard initial feedback that there is data centers and customers that are saying, man, behind-the-meter power solutions are going to be key to the future of our businesses. So we think it's positive for us and our peers, to be honest with you.

Your next question comes from Derrick Whitfield with Texas Capital.

I wanted to start with Power, for my first question. While the focus of today's discussion has been on data centers with your power offering, could you speak to how your discussions are going in other areas?

Yes. Derrick, this is Mickey. We absolutely have got some other opportunities for some Microgrid type stuff in the Permian Basin and are progressing some conversations with some customers there, too. And we think that's going to be a really attractive opportunity for us going forward, especially with the recip fleet that we're complementing with the turbines here as well. It leaves us that optionality to be able to chase both of those. And as you're seeing more and more of the limitations on Power, you're seeing a lot of -- we're having a lot of conversations with oil and gas customers on Microgrid opportunities as well.

Great. And as my follow-up, I wanted to focus on compression. As you guys think about the amount of natural gas pipelines that are coming on this year and over the next couple of years in the Permian, under what circumstance would you guys consider accelerating compression build out to meet customer demand?

It's a good question, Derrick. I think that with engine lead times and deliveries where they're at, I wouldn't say that our capacity for future growth is locked in. We will certainly look at projects if they come to us that are incremental to that, if we have the ability to procure equipment and have the balance sheet capacity as we have to evaluate those opportunities and opportunistically jump on them if they make sense.

I'd probably say in the shorter term, over the next year or 2, it's going to be pretty hard to get our hands on additional equipment just because of lead times. But if those opportunities arise, we'll certainly evaluate them. And certainly, if a customer wants us to engage in some sort of conversation around purchase leasebacks or something like that, that's an opportunity for us to certainly deploy more capital on the compression side.

And I might just -- I'm going to tack on there, too. After the equity offering, our leverage ratio kind of bottomed out at around 3x. And we said a lot over the course of the last quarter that we kind of have a line of sight towards peaking out in the mid-3s under the base business plan as we fund the power business.

And so that's squarely in the middle of our long-term leverage targets. And so like I think nothing would make us happier than to find wonderful purchase leaseback opportunities or maybe a chunky customer opportunity or 2 on the compression side. That's just such a wonderful business with great steady returns that we'd love to find those opportunities to fund a little more, and we absolutely have the balance sheet capacity to do it.

Your next question comes from Derek Podhaizer with Piper Sandler.

I wanted to go back to the West Texas data center conversation. So you mentioned that initially, it could be sub-100 megawatts just given your current fleet and scale that over time in line with more of your delivery schedule. And I appreciate you don't want to give out too much information until we get a contract here.

But I'm curious for this specific project, do they have aspirations to ultimately connect to the grid and integrate with the grid? Or do you think this would always be primary power behind the meter? Just maybe a little bit more color on kind of the future generation mix as we think about this project over time.

Yes. I think this project, like a lot of projects that we're looking at, ends up with a mix of grid power and behind-the-meter power. There are some that are talking about exclusive behind-the-meter power for the long term here, but I think there's a lot of thought process right now going around with some of these projects that is hey, we need behind-the-meter power, but we also, in the future, are going to supplement with some grid power. And that's where a lot of people's heads are at the moment. With this recent West Texas Moratorium on grid interconnects, I think that may shift more towards sole behind-the-meter power solutions going forward.

Got it. Okay. That's helpful. And then I know one of the benefits to the Kodiak platform is about the technician crossover on the Power generation assets, particularly for the recip side of things. But given you're leading a bit heavy or more so into the turbine side, backed by the Baker Hughes framework agreement, how should we think about really developing your technicians, leaning on Baker for their technicians and expertise as we -- given you're going to be going more towards like 75%, 25% turbines versus Recips?

Yes. This is absolutely going forward, going to be a partnership approach with Baker Hughes on developing technicians in-house for Kodiak. We part of that framework agreement expressly addresses Baker Hughes bringing in in-house training for Kodiak and Kodiak technicians, which we think is a real upside for that agreement and why we think the partnership with Baker Hughes is really quality for us going forward.

So we've got a little bit of time here before the first turbines start showing up. So we're going to aggressively start that turbine curriculum and training program that is going to get those technicians up to speed and get those people in place early on. And so we think that's a huge advantage there, and we'll continue to develop those people and have high-quality personnel to operate this equipment.

The next question comes from Elvira Scotto with RBC Capital Markets.

So on the power side, you talked about the 2 gigawatt by 2030, but then you also talk about there's tremendous opportunity in excess of that. Now can you do more than 2 gigawatts by 2030? Or is that capped by equipment availability? And then would you consider maybe other bolt-on acquisition opportunities in distributed power?

Yes. So I'll take this, and I suspect Mickey and I will tag team it. So I don't want to go back and repeat what I said before, but we do have the balance sheet capacity to continue to scale, number 1. Number 2 is like we're right out of the gates on this, and we've gotten out of the gate strong. But we're all -- at Kodiak, like we pride ourselves on being great operators, kind of keeping our head down thumbs up and kind of trying to avoid the distractions.

And so we've got the next little while to get our foundation underneath us to continue to operate this business successfully. And Mickey says it all the time, we want to basically take this wonderful engine that we've created in the compression business and take that mental mindset and apply it to the power business. So we have a well-oiled machine down the road.

So that truly is kind of where we're focused. Now that said, I have every expectation that we'll think about how can we build a moat around this power business such that we can continue to basically incrementally gain ground or build a bigger moat relative to the competition. And that could involve kind of strategic tuck-in acquisitions of technologies, of capabilities, of services of things that we need in order to service our customers day in and day out or it could include adding additional capacity.

Last thing I'll say on this is what we fundamentally believe is that the power business will not have 50, 100 different -- our end of the power business will not have 50 or 100 different competitors. Ultimately, there's going to be a handful of people that are successful, and they're going to be successful because they know what they're doing and they take care of their customers. They've got nice balance sheets.

They can scale. They're ultimately someone that the counterparties can say these folks can take care of my needs. We think that's what Kodiak has proven in the compression business, and it's where we're headed in the power business. So I would have every expectation that over time, we will be a consolidator in that space.

Great. And then just moving over to the contract compression side. You talked a little bit about some of the things that you're doing to mitigate the cost increases and your contract services margin guidance moved higher. If you -- lube oil costs hadn't been a headwind, where do you think margins could have been? And just how much higher can those margins go?

You're going to test my CFO math in public, which scares me. But I would tell you that -- yes, relative to kind of where we were at the beginning of the year kind of to where we're going to probably land at the end of the year, it's kind of a $1.5 million a month or so uptick in terms of the cost. So it's really substantial. So if you got back into a normalized market, I guess that's about, what, $18 million of annualized margin that you would benefit from had that not occurred.

Your next question comes from James Larkin with Bank of America.

I guess my first question here is just on the total 2 gigawatt supply. It seems like right now, we're a little more tilted towards engines than I think maybe the long-term goal was. And I think with an additional kind of recip deal maybe coming down the pipeline, maybe we're going to be a little more engine weighted. So I wonder if you could just talk about that and kind of how you're seeing maybe data center developers talk about the difference between engines and turbines.

I'll answer the first point, and then I'll turn it back to Mickey to kind of comment on what the customers are telling us. So the 2 gigawatt target, we still think we're going to stand by it will be about 3/4 turbines, about 1/4 recips. So obviously, the Baker Hughes is a big chunk of the turbine orders.

We've also got some Solar equipment as well, too. And then on the recip side, I think I'm not sure if we publicly announced kind of who we're buying from. We clearly have a whole bunch of CAT stuff, and we're looking at other parties too. And we are hoping to kind of lock into some agreements as we roll through this year to secure the balance of those the recip power by 2030.

Yes. And as far as customer kind of preference there right now, speed to power is one of the most important things that our customers and potential conversations are having. So quite frankly, at this point, customers are relatively agnostic to turbine versus recip power.

Great. And I guess my second question here is a lot of developers now are kind of purchasing their own equipment or have purchased their own equipment. Is there an opportunity maybe outside of the 2-gigawatt target that you guys have to operate some of that equipment for them?

Yes. Yes, absolutely. There definitely is. There's a lot of these folks that have procured equipment that they've got coming in. They can hire somebody to help them install it. But on a day-to-day operational piece, that's something that Kodiak brings a lot of credibility to the table on. And there's a lot of ongoing conversations about us taking care of other people's equipment alongside ours.

And your next question comes from Sunil Sibal with Seaport Global Securities.

A lot of good discussion today. But I wanted to understand a little bit on the gas infrastructure part of the distributed power business. Is that something that you guys are looking at or responsible for when you are looking at these projects? Or is that something that the data center client is bringing on? And then obviously, based on the location at which you are looking at these projects, do you see -- or how do you see that part of the business kind of playing out?

Sunil, thanks for the question. We absolutely have the expertise in-house to do that. I will tell you that the projects that we're looking at right now, especially in the short term, most of the customers that we're talking to have already procured that and already have that covered. So we're not looking at any projects right now where we would have to procure fuel for the generation equipment. But like I said, we certainly have the expertise in-house to do so and some relationships with some partners that would want to partner up to do that if need be.

Your next question comes from Sebastian Erskine with Rothschild & Company, Redburn.

A lot has been asked, but just to follow up on the opportunity around balance of plant. It seems like that's an area of great interest. In terms of your communications, is that something that the majority of your prospective customers are inquiring about?

And I guess, how easy is it for you to procure that additional equipment, whether it's battery energy storage systems or switchgears or transformers? How easy is that to procure? And then potentially, I mean, I appreciate it's early, but is there any sort of way of quantifying that potential kind of uplift on the potential EBITDA profile of those contracts?

As far as the second part first, Sebastian, it's hard to quantify the potential EBITDA uplift right there just because everyone of these projects are very different. But there is a baseline of balance of plant that's going to be needed in basically every one of these projects with transformer switchgears and SCR with emissions reduction capabilities.

So we've already begun procuring that balance of plant with the -- to line up with the orders that we've got and then to make sure that we've got some batteries in inventory basically, for lack of a better word, to go after some of these projects as well.

So John hit earlier on our supply chain strategy. We're going to take the same sort of strategy and make sure that we've got the things that we need to be successful in the business and make sure that we have all the long lead items ordered and taken care of on the balance of plant that would line up with turbine and recip deliveries there.

So we've already begun procuring that stuff. That balance of plant stuff could be anywhere between 4 months and 18- to 24-month lead time. So we're working with suppliers on that and make sure that we've got everything we need to execute on these projects when they materialize.

Perfect. No, that makes total sense. And then the second question is just on the customer mix. Do you get a sense of sort of is it predominantly you're communicating and speaking with hyperscalers or potentially partnering with powered land developers and data center builders? I guess one of your peers announced a JV with a land developer and a relationship with a sort of builder. Is that -- yes, just get a sense of kind of the customer mix, who you're communicating with, where the interest is and how diverse that potential pipeline is.

Yes. It's kind of a mixed bag there, Sebastian. We're talking to directly the hyperscalers right now. We're talking to data center developers, and we're also talking to some powered land developers as well. We -- obviously, we're going to handicap each of those opportunities based on how far progressed their projects are and how -- and who the counterparties are that we'll end up contracting with. So like I said, it's a mixed bag right now. We're talking to several in each of those parties that we discussed. And so all of the above is probably the answer.

And we have reached the end of the question-and-answer session. So I'll turn the call over to Mickey McKee for closing remarks.

Thanks, operator, and thanks for everyone participating in today's call. We look forward to speaking with you again after we report our results for the third quarter.

Thank you. This concludes today's call. All parties may disconnect. Have a good day.

Greetings, and welcome to the Kodiak Gas Services First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Graham Sones, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thanks for joining us for the Kodiak Gas Services conference call and webcast to review our first quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Executive Vice President and Chief Financial Officer. After my remarks, Micky and John will cover recent market developments, share an update on our power strategy and walk through our results and updated 2026 outlook, including our new Power segment. Then we'll open it up for Q&A.

Replay of today's call will be available by webcast and phone through May 25, 2026. Replay details are on the Investors tab of our website at kodiakgas.com. And as a reminder, the information discussed today speaks only as of May 11, 2026, and may no longer be accurate by the time you listen to a replay or read a transcript.

The comments made by management during this call may contain forward-looking statements within the meaning of U.S. federal securities laws. These statements reflect management's current views, beliefs and assumptions based on information currently available. Although we believe the expectations referenced as forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievement's to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct.

The comments will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in our earnings release, which can be found on our website.

Now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thanks to everyone for joining us today. I want to start like we do in all meetings at Kodiak with safety. As we head into the summer driving season, it's a good remark [indiscernible] as one of the riskiest things many of us do every day. That's why we have all Kodiak employees complete a safe driving program, and we rolled out telematics last year to help reduce distractions when behind the wheel. Thank you to our safety and training teams for equipping our people with these valuable tools and to everyone at Kodiak for living our safety-first mindset every day.

Recent geopolitical events have served as a stark reminder that energy security and reliable energy infrastructure are critical to our daily lives. The energy landscape keeps evolving with rising demand for natural gas tied to LNG exports and power generation, including data centers as the AI race accelerates. This step change in demand is straining supply chains, pushing equipment lead times to records and increasing the need for highly trained technicians to keep large horsepower equipment running. Kodiak is well positioned to meet this challenge. Our supply chain team has been proactive in sourcing new equipment for both compression and power and our highly skilled workforce is ready to keep delivering the service our customers expect.

Natural gas compression market is in uncharted territory, lead times for new large horsepower equipment keep extending and now sit at over 180 weeks for 3,600 in-line gas compression engines over 3 years. Through our strong vendor relationships, we've secured new lower-power compression packages for 2027 and 2028, and we're working to secure additional units for 2029 delivery. We remain confident in our ability to achieve our targeted annual horsepower growth of 150,000 horsepower per year, resulting in a compression fleet of at least 5.2 million horsepower by the [indiscernible].

While supply is limited, compression demand is building across both our E&P and midstream customers as they now have increased visibility into the next wave of natural gas volumes. Permian operators are starting to pick up activity with higher oil prices and record U.S. oil export volumes. And with more than 5 Bcf a day of Permian gas takeaway capacity expected online by year-end, several customers have asked whether they can accelerate their 2027 equipment orders. This has manifested itself in our pricing as we've demonstrated continued pricing power, which we expect to continue into 2027 and beyond, given the tightness in the market.

One thing to keep in mind is that Kodiak has consistently high-graded our fleet over the last couple of years, strategically divesting some of our noncore small horsepower compression that commands a higher dollar per horsepower revenue rate but at a lower margin. We've increased our average horsepower per unit in our fleet from 943-horsepower per unit at the end of Q1 last year, to 977-horsepower per unit currently, while also driving up the average dollar for horsepower revenue effectively overcoming industry dynamics for revenues per horsepower, while our peers horsepower per unit has collectively gone down over that time period.

Another dynamic we're seeing is customers signing longer-term compression contracts to lock in equipment availability. During the quarter, we entered into a 10-year compression services contract extension with one of our top customers, and we're in the process of finalizing another 10-year extension with another top customer, further demonstrating the infrastructure nature of the large horsepower compression business. Also in the first quarter, we purchased a package of large horsepower compression units from a Permian producer and signed a 7-year contract to provide compression services.

This was important for a few reasons. It's an accretive way to grow market share and generate immediate cash flow in this long lead time environment for large horsepower engines. It also reinforces what we hear from customers. Kodiak can operate units efficiently and cost effectively.

Next, I want to talk about our distributed power business. Now going to market as Kodiak Power Solutions. We closed the DPS acquisition on April 1, and we've been moving quickly on integration. We're already operating on the same ERP platform, and we've realigned our commercial and operations teams to support the business. DPS brought a strong commercial team with deep distributed power experience, including one of the first islanded primary power data center contracts, which is now in its third year of operation, has capably delivered on its 99.9% reliability guarantee to its customer.

I'll touch on a few reasons we're excited about the long-term growth outlook in Distributed Power. The power market is evolving quickly. Texas leads the nation in data centers under development with over 150 currently in development as hyperscalers prioritize low-cost energy, available land and a constructive regulatory environment in the site selection process. One recent estimate says there are over 30 gigawatts of planned data centers in [indiscernible] over the next 2 years. Speed to power also matters. The AI world is moving fast and delays can put projects at a disadvantage.

[indiscernible] solutions aren't just short-term solutions, they're increasingly cost competitive with grid power often with similar or better reliability. We are currently in discussions with a number of data center customers about long-term contracts at high-quality returns to provide primary power. The opportunity set is significant, and we expect it will keep growing as hyperscalers expand their CapEx plans. Recent estimates indicate the hyperscalers AI-related CapEx spending between now and 2030 may exceed $5 trillion.

Given the significant level of digital infrastructure and microgrid demand that we are currently experiencing and our focus on moving quickly to capture the opportunity, we've been very active in sourcing additional power generation capacity. As noted in this morning's press release, we've sourced additional power generation capacity to add to what we acquired with EPS, currently placed orders for more than 260 megawatts with about 61 megawatts to be received in 2026 and the remainder between 2027 and 2029, and we are in advanced discussions with multiple counterparties for an additional 1.3 gigawatts to be delivered on a relatively ratable delivery schedule through the end of the decade.

Equipment we're buying is a mix of recip engines and industrial gas turbines that are purpose-built for data center and microgrid applications. This is consistent with our power growth strategy targeting growth of 300 to 500 megawatts per year through the end of the decade, equating to a distributed power fleet of around 2 gigawatts by year-end 2030. Based on the discussions we're having today, we expect our investment in power equipment to generate unlevered returns greater than 15% and EBITDA build multiples around 5x competitive with our compression business after factoring the added benefit of increasing the average duration of our contracted cash flow with high-quality customers.

As we invest to grow both our contract compression and distributed power assets, we're committed to maintaining financial flexibility and having a strong balance sheet. Our contract compression business is generating highly resilient free cash flow, which will help fund our power growth, plus we have ample liquidity on our ABL and a variety of financing options available to us as we undergo this period of strong infrastructure growth. The investments we make today will help build a stronger, more profitable company in the future.

This morning, we released our first quarter 2026 financial results. I'll hit a few highlights, and I'll let John go into more detail. We in the first quarter at $4.4 million revenue generating horsepower. Average horsepower per revenue-generating unit was $977, the highest among our contract compression peers and a figure we expect to keep moving higher given our large horsepower focus. Our investments to grow the fleet, along with divestitures of noncore units, drove fleet utilization to 98%, another industry-leading metric.

In Q1, we delivered strong year-over-year growth in contract services revenue and adjusted gross margin. Contract Services adjusted gross margin was 70.6%, a seventh consecutive quarterly increase and a new high for Kodiak. Margin gains continue to be driven by strong operational execution and returns on our technology investments. Real-time equipment monitoring is helping us catch issues earlier, reduce failures, increase operational efficiency and lower part spend.

In our Other Services segment, first quarter results reflected a sequential pickup in station construction activity, along with better margins on AMS services. Strong results from each segment drove adjusted EBITDA to $190 million for the quarter, up 7% year-over-year and a new company record. Looking ahead to the rest of 2026, we see continued strong momentum in compression. We're fully contracted for our 2026 new unit compression deliveries and are making strong progress on our 2027 deliveries with over 40% already contracted. Our updated guidance reflects both the incremental contribution we expect from Power and the investment we're making to scale that business and drive growth for years to come.

Now I'll pass the call to John Griggs to further discuss our financial results and our revised outlook for 2026. John?

Thanks, Mickey. You summed it up well. Kodiak has a lot of positive momentum. Our Compression business continues to set new records in both revenues and margins and the growth and return potential for our new power business is extremely compelling. Now let's turn to the quarter's results. We reported total revenue of $346 million, up 5% year-over-year. The growth was primarily driven by new horsepower, price increases and strong operational execution. In Contract Services, revenues increased 6% year-over-year and 2% sequentially.

Revenue-generating horsepower increased by approximately 35,000 sequentially. We realized a 3.7% year-over-year price increase to $23.31 per ending revenue-generating horsepower. This uptick was impressive, considering that approximately 20,000 of this quarter's horsepower increase came at the end of the quarter via the purchase leaseback transaction Mickey mentioned, and therefore, had no meaningful impact on the revenues.

A real bright spot was our contract services adjusted gross margin of 70.6%, up 138 basis points sequentially and 286 basis points year-over-year. This high watermark is further proved to us that the significant investments we've been making in our training and operational technology over the last couple of years are generating real returns. During the quarter, we realized a reduction in compression parts expense as our investment in telemetry technology and data analysis has allowed us to monitor equipment more closely, leading to a reduction in failures and spend. We're also gaining efficiencies through the connectivity of our technology platforms, making information more rapidly available to our skilled technicians.

All of this leads to more informed real-time field level decisions. which then tends to result in improved run time and even better customer service. In Other Services, revenues rose 25% sequentially as we saw increased station construction activity during the quarter. We realized a sequential margin increase to around 16% as we saw a greater portion of activity this quarter in higher margin revenue streams. Adjusted EBITDA for the quarter was up 7% versus the prior year quarter, landing at a new company record of $190 million. We reported adjusted net income of $52 million or $0.59 per diluted share.

Let's turn to capital expenditures. Maintenance CapEx was approximately $18 million in Q1, in line with our expectations. Other CapEx was $7.5 million, also in line. Growth CapEx of $86 million included $24 million for the compression purchase leaseback transaction and $18 million related to new power generation equipment. We will break out the power growth CapEx in future quarters. The power gen equipment orders, we are making average about $1.1 million to $1.2 million per megawatt. And we'd expect to spend an additional roughly 30% for balance of plant equipment. That BOP figure could vary depending upon the set required by customers.

After backing out the purchase leaseback and power-related figures, compression growth CapEx was around $44 million. which included the delivery of 18,000 new unit horsepower during the quarter as well as a variety of other items, including fleet revamps and deposits on long lead time engines. Discretionary cash flow was $126.5 million, up 9% year-over-year, driven by the higher adjusted EBITDA and lower cash taxes.

Moving to the balance sheet. Net debt was $2.7 billion at quarter end. In February, we issued $1 billion of senior notes due in 2031 at an attractive rate of [ 5 7/8% ]. We used the proceeds to deem our 2029 senior notes and pay down our ABL. Our credit agreement leverage ratio was 3.6x as of March 31. Finally, our Board declared a dividend of $0.49 per share that will be paid later this month. Based on our first quarter discretionary cash flow, our dividend remains well covered at 2.9x.

Let's turn to our updated 2026 guidance, which we split into the 3 segments we intend to report going forward. Contract services will become compression infrastructure and continue to include the same items I did previously. We are creating a new segment called Power Infrastructure, which will include the vast majority of our new power business. A small portion of DPS' historical and future revenues and things like fleet mobilization and logistics, will be reported in our Other Services segment. We will guide and report gross CapEx separately for compression and power to increase visibility.

As a reminder, our 2026 guidance reflects just 3 quarters of contribution from the DPS acquisition. In terms of changes, we increased the low end of compression infrastructure revenue guidance to reflect the progress we've made, recontracting units and the increased visibility on new unit growth. We moved up our adjusted gross margin estimate to 68.5% to 70%, up from our original guidance. Taking into account the recent rise in oil prices and its impact on our lube oil and fuel expenses in the second half of the year.

For Power Infrastructure, we're guiding to full year revenues of $95 million to $125 million, and an adjusted gross margin range, 60% to 70%. We're keeping those ranges wide given the newness of the acquisition as well as to maintain commercial flexibility to meet the timing needs of longer strategic deployments. And while we expect to take delivery of 61 megawatts of additional power equipment in 2026, we do not expect to realize any material increase in revenue for these units until early 2027.

We increased the top end of our other services revenue guidance range to account for the addition of the nonrecurring revenues from the Power business I previously mentioned. Putting that all together, our 2026 adjusted EBITDA guidance is now $820 million to $860 million, and our discretionary cash flow guide is $520 million to $570 million. We bumped up each of maintenance and other CapEx by $5 million based on the addition of the power fleet. Compression growth CapEx of $245 million to $275 million is consistent with the March press release announcing the purchase leaseback transaction, and we remain on pace to add approximately 170,000 horsepower over the course of the year.

As for Power Growth CapEx, as Mickey highlighted, in light of the strong demand signals we're seeing, we're embarking on an investment cycle in power designed to meaningfully increase our earnings power over time. That translates into the addition of roughly 300 to 500 megawatts per year from 2027 through 2030. To hit those targets, we expect power growth CapEx this year to range from $400 million to $500 million. with approximately $90 million related to gen sets and balance of plant to be delivered in 2026. The remainder is for equipment scheduled for delivery in 2027 plus.

I'll echo Mickey's comment that we're going to use the strength of our extremely resilient and highly creditworthy compression business to help us fund our initial growth in power. You should expect us to guard the balance sheet while doing so.

With that, I'll hand it back to Mickey.

Thanks, John. I'll wrap up by reiterating that 2026 is off to a great start. Q1 adjusted EBITDA exceeded our expectations and contract compression market fundamentals remain compelling, with highly visible demand. We're extremely excited about our distributed power business offerings and the opportunities to grow that business. Thanks for your participation today, and now we're happy to open up the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Elias Jossen with JPMorgan.

Just wanted to start on the sort of contracting framework for the backlog. I know that you guys have provided some incremental color on long-term contracts that you've executed. But how should we think about contracting within the sort of 2 gigawatt backlog target that you've outlined? And how should we think about incremental updates as we move forward on that 300 to 500 megawatts of annual capacity that you plan to add?

Elias, thanks for the question. I think that we've only owned this business now for 5 weeks, and we're pretty hyper focused right now on making sure that we have the supply in place to get the contracts put in place. So we're really focused on making sure that we've got the equipment coming to us right now. And then on top of that, we've got a tremendous amount of inbounds and conversations that are happening right now, both on the data center side and on the microgrid side as well. So there'll be more updates on those contracts as we go along as they come in and get those frameworks put together for you, and we'll be able to update probably on a quarterly basis, it's going out in the future from here.

Awesome. And then I think that the kind of competitive edge that you guys have demonstrated from an execution standpoint on equipment procurement is definitely differentiated. So can you talk to us just about how you're able to procure this sort of long increasingly challenged supply chain and yes, get this equipment versus others. So yes, any color there would be great.

Yes, absolutely. It's a challenge right now. It's -- this equipment is in short supply. It's difficult to come by, but we are leveraging all the relationships that we have, both within the industry in the compression industry and with our current suppliers along with some new ones. So we've got some things that are in the works to develop some long-term frameworks around some supply agreements, and we're working hard on those and we'll update more on those as we get those finalized as well.

Our next question comes from the line of John Mackay with Goldman Sachs.

I'll pick up on the theme. You touched on a few of this, but I want to ask it a little more directly. If we're thinking about the CapEx per megawatt here, John, I know you touched on it a little bit, but can you give us a little more color on how you're thinking about that balance of plant spend? Maybe frame that up around kind of different customer types? And any comments on what you guys are targeting for that customer type mix?

Yes, sure. This is John Griggs. I'll answer the first part and then flip it back over to Mickey, and thanks for the question. So as we said, and I think consistent with what others have said as well, too, the base power since we're already kind of purchasing some since we're in deep discussions with OEMs about purchasing more, let's call it, $1.1 million, $1.2 million per megawatt can vary a little bit between resets and turbines, but that's kind of what we're modeling in. And then from a balance of plant perspective, we're using, just call it, $1.5 million per megawatt. It can vary. And the people that are in the business know this quite well. If you had a data center that wanted all the bells and whistles around their project, then you could very easily be at least 2x kind of what you were in your original equipment purchase.

And then if you had something that was a less sophisticated application, and perhaps maybe you had some of that kit in-house well, too, it could be much smaller 1.2x or something. So we think $1.5 million is the right number to be using all in.

Yes. And you just talk a little bit more about that customer mix that you asked about right there, John. we've got a tremendous amount of conversations that are happening right now on the data center space that are a mixture of just kind of regular digital infrastructure as well as kind of AI compute type loads. So there's going to be a mix of those different kind of data center customers, and that's the bulk of what we're looking at right now as far as customer mix goes.

I appreciate that color. Second one for me, probably a quick one. But if you think about those different types of customers, different types of home plant build out depending on the balance of plants, are you confident in that kind of return framework you lined up earlier on the call and when you first announced the DPS acquisition?

Yes, absolutely. We think that we'll model in those costs as we do the engineering upfront on these projects and make sure that the returns that meet the expectations and the thresholds that we've already put in place.

Our next question comes from the line of Jim Rollyson with Raymond James.

Mickey, maybe switching to the competitive kind of landscape. If you look at your history in compression, you guys started out of business basically try to build a better mousetrap from an uptime perspective and customer service perspective. and have been very successful in doing so. And as you now kind of venture into the power space, there's obviously a little different landscape of people chasing this business. So I'm just kind of curious how customer conversations or potential customer conversations go and how you win that business over the half dozen other guys that are chasing this as you go forward.

I mean, look, we -- there's a lot of similarities in these businesses. There are some nuances here and some difference in the type of equipment and that kind of thing, but we're going to approach it the same way. And that starts with the customer service mentality that we're going to be a total solutions provider and we're going to back that with run times and that kind of thing. What we liked about DPS when we bought the business, obviously, is the fact that they have a data center contract that's totally islanded already that's got over 2 years now of operating history at over 99.9% reliability there.

So the service mentality really lines up with what Kodiak has always brought to the table in the compression business. So we're pretty confident that we can be a provider of a differentiated solution here that really focuses on our customers and the needs that they have, they bring to the table.

Got it. Appreciate that. And then maybe switching gears to your core business currently. Just with the long lead time stretching out, you guys are generally on top of it, but just curious how you're planning ahead to ensure engines? Are you looking even outside of CAT to make sure all your customer needs get met and just maybe how you're planning for all that.

Yes, absolutely. We are certainly looking out in the future here and making sure that we've got engines and shop space, which are really the 2 biggest commodities here locked up and make sure that we have access to that stuff going out. We've got 2027 and 2028 completely locked up, and we're working on 2029 right now, that really coincides with what our customers are looking forward with a highly visible kind of natural gas demand out there with LNG and power demand coming on. So we feel like we're staying ahead of it and doing what we've always done and paying close attention to the supply chain and making sure that there's no gaps in the deliveries there.

And Jim, real quick, I would just chime in and say the 750,000 incremental horsepower that Mickey called out last quarter, like that's totally doable, given how we manage the supply chain and the demand signals.

Our next question comes from the line of Doug Irwin with Citi.

On to maybe start with the 260 megawatts you've already procured. Just curious if you can maybe provide any more detail around just what that initial mix of equipment might look like just turbines versus recips. And then any more detail around kind of the time line beyond '26 for taking delivery and where you might stand on contracting discussions here so far, understanding it's still very early days.

Yes. Still very early days, still working through a lot of those details. I will tell you that what we've already procured is a mix of recips and turbines. That's going to be our strategy going forward. We think there's a market and a demand for both, and we think having a quality mix of both recips and turbines is the way we want to go forward. The 260 megawatts that we've already procured is probably in the ballpark of 50-50 versus turbine. And going forward, I would think that it's going to be a little bit more heavily weighted towards the turbine. So I would think as we look at '27 and beyond as we're thinking about 300 to 500 megawatts per year of delivery, I would think about that being about 25% recip and about 75% turbine.

As we think those turbines from a real estate standpoint, take up a lot less real estate have a lot more power density and a really good fit for the data center contracts that we're chasing and already in conversations that are typically in the ballpark of 200 to 300 megawatts at a time. So that's the plan going forward and how we're going to target kind of grow our business.

That's helpful. And then as a follow-up, can you maybe just talk about how the funding requirements for some of this power equipment might compare to traditional compression. Just wondering kind of how ratable that $400 million to $500 million of CapEx from this year might be if some of this power capacity might require more upfront payment or deposits for some of the larger turbines and just kind of thinking about how that might have implications for cash flow if you're more front-end weighted spending here?

Yes. You bet. Good question. So I'll take it. So one thing, just 300 to 500 megawatts that we call out from '27 through '30, it's not a straight line, but it's pretty tight within that range in terms of the stuff that we've already bought or the conversations that we're advancing on in terms of buying equipment. And you did call it, in the turbine world, in particular, there are more upfront payments or progress payments relative to our compression business. In the reset world, it kind of remains to be seen kind of where it all lands. Those are key variables that we're working through, too, as we talk to our kind of channel partners or OEMs on that.

As we think about [indiscernible] for it and kind of how we're going to do this going forward, I guess I'd make a few comments that I think were important, first, let's say, protecting the balance sheet. Therefore, the overall franchise is really, really important to us. We've got our 4x leverage target. We're about kind of there right now. I go back and say when we went public, we were 4.2x leverage and made a commitment we get it down to 3.5 by the end of 2025, and we did on target. So in this case, like as we build -- start to commence on this investment cycle, we've been really transparent with investors and analysts and creditors and agencies et cetera that you should expect us to drift above our 4x long-term leverage target, but only periodically.

And that's as we build out the foundation. And as the contracts come in, kind of take the combination of the compression and the power business and it will start to delever quickly and get us into that target and then some. And I'd last I'd be remiss and remind everybody that we have this incredible compression business that's extremely resilient. And with extremely limited exposure to near-term moves in commodity prices and just performed really, really well in big stress tests like [indiscernible] are even in a post Liberation Day. We've got a wonderful ABL and terrific bank groups that support us. we've executed really well on 3 bond offerings in the last couple of years, including the first 10-year bond in the compression business.

So I sum it all up and say we've got a great business, experienced team and a multitude of options at our disposal to fund the business going forward.

Yes. And I think, Doug, you hit on the fact that there are some advanced progress payments that are due on some of these bigger turbines. We're hyper focused on that and making sure that we leverage our existing relationships with our existing OEMs and vendors to minimize the impact of any of those progress payments.

Our next question comes from the line of Neal Dingmann with William Blair.

Nice update and great quarter again. My first question, Mickey, maybe for you or John, just specifically, on compression M&A. Could you talk to future compression horsepower purchase leaseback potential is? I know based on my E&P conversations, it certainly sounds like there's several E&P is that would be willing to and wanting to transfer ownership to you all given your service record. So just wondered how active are those discussions? What type of potential do you see there?

Neal, I think there's a lot of opportunity there. We're obviously, as John said, in the middle of this investment cycle in power, and we're going to be very focused on that. But we're also going to take advantage of opportunistic things that pop up on the compression side, too, there as far as purchase leasebacks. We executed on the one last quarter, which was just over 20,000 horsepower package, which was a really nice deal for us, a good bite size deal for us to digest easily, and that's gone very smoothly with us taking over operations on that stuff on April 1. So we love those deals and want to look at more of those going forward. And as those opportunities come up, we'll take advantage of them.

No. I think there is a big opportunity there. And then secondly, just my question on the services side. Maybe looking at Slide 14 or one of them you've laid out today, I'm just wondering, Mickey, for you or John, with the existing workforce -- just want to make sure service both the compression and power and are you continuing -- do you have enough folks in place right now to service what you have or you continue to add some folks?

Yes. I mean we're always adding folks and putting them through our training program. It's been a -- it's a world-class program. We're opening up our new facility in Midland in June, I think, time frame. It's going to be a great resource for us to continue to train our people and also our customers' people to where they can be around our equipment safely and that kind of thing. So it's something that we're really focused on. I think we focus on the training aspect of our workforce as much or more than anybody in our industry. And we're excited about what a differentiator that is.

As far as the technicians right now, we're pretty fully staffed. We're continuing to add to handle our growth. We're adding new training programs into our Bears Academy for power and electrical type things right now, working with several of our OEMs and equipment providers to come in, provide training programs at our facility for our people. So we're hyper focused on it and are going to train as many people as we can to be as effective as we can go forward. Also arming them with our technology that we've got. We're rolling out large language models and that kind of thing that will help technicians with AI agentic type things that will allow them to help with parts locations, with troubleshooting and all those kind of things.

So we expect that to be fully rolled out here in the second half of the year, and that's going to be a tremendous asset to our employees.

Our next question comes from the line of James Larkin with Bank of America.

I was wondering if, first, we could kind of go back to the contracts and if you could go through kind of how you are securing contracts for these kind of incremental megawatts that you're purchasing. So is it mostly precontracted? Or is there some on spec ordering, I guess, for some of the future -- in some of the future rewards.

James, this is Mickey. Yes. I mean we're having to go out and look for this equipment on the power side and make commitments to that stuff. Really, it's I wouldn't necessarily characterize it as much as on speculation and commitment to that CapEx spend is more of an educated type of, I guess, guess as we move forward here. We're looking at our backlog of opportunities that we have in place the DPS brought to the table as well as additional inbounds that have come to the table since we closed on the deal. And we're in pretty advanced conversations on a lot of those things for contracts to be put in place over the next several months. So we are having to order some equipment out there based on the how educated we are on the pipeline, but it is -- we should be talking about contracts rolling and hopefully pretty quickly.

Great. That makes sense. And then following up, I guess my next question was on kind of the compression infrastructure margins. I guess we're already above 70% in first quarter. I know the new guide is updated and it's up a little bit. But could you talk about kind of that for the rest of the year and what we should expect? Could that 70% creep higher just given where 1Q has been?

Yes. I'm glad you called that out. We're really, really happy to see that number, 71% in the first quarter was really just gangbusters for us. That business, the compression business is really hitting on all cylinders. And we attribute so much of that to really 3 things: number one is what Micky just described the investments we've been making in our people and the investments we've been making in our technology over the last 2 years. They're just paying off. There's no other way to say it, things are breaking less, we're spending money more smartly, and we're more productive, and you see that in that margin. And then two, continue to drive towards larger horsepower; and three, pricing.

In terms of the guide, the guide being a little bit below where we came out in the first quarter. Maybe there's an element of conservatism, but what is out there is if oil prices being high. that drives lube oil and fuel price is high, and those are 2 inputs in our cost of goods sold. Given the unpredictability of that kind of going forward, we felt that kind of what our guide -- where we laid our guide out is the right place to be.

Our next question comes from the line of Theresa Chen with Barclays.

On the base business, Mickey, now that you're seeing over 3 years of lead time, and that metric has only moved 1 direction since your IPO, and probably before that. When you think about pricing power at this point and to your earlier comments about prices are continuing into 2027 and beyond, what are you seeing in terms of price increases across the industry? And what do you anticipate over the next couple of years as a result of the supply tightness? And taking a step back, Mickey, do you think the situation is sustainable? How do you think the industry solves the supply crunch if it does? And how do you see the landscape evolving as a result?

Good questions there. I think that the pricing on our equipment is going to continue to evolve upward and it's going to continue to move up. How much and how far, we'll -- there's a lot of external factors that are going to affect that, right? With the price of oil, competitive landscape and all those different things. I do think that we've got the opportunity to continue the strong pricing that we've seen over the last several years. New units are continuing to come out the door and be priced at spot rates that are very constructive for us. and we're continuing to be able to reprice the base fleet at some increases as those contracts roll over.

As you can see and what I talked about in my prepared remarks, you've got producers and midstreamers that are willing to lock in equipment for longer periods of time now, which we think is wonderful for our base business. And so we'll continue to see that move up, and we'll continue to see those dynamics in the business. As far as the supply crunch, Boy, I think that the demand is going to continue to outstrip the supply here. You've got lead times that continue to extend. You've got the increasing amount of compression that's moving away from electric these days because of the access to grid power, and I think there's going to continue to be a supply shortage in the industry for the foreseeable future, especially with increasing GORs in the Permian Basin, increasing supply coming out of the Permian as well as increased takeaway capacity that's allowing for additional growth there.

So we're excited about Permian as well as other basins moving forward, and we think that there's going to be a continued demand -- incredible demand for our services and our equipment.

That's helpful. And on the power infrastructure side, when we think about the past, you've laid out on the magnitude of growth through the end of the decade, separate and in addition to the earlier question about contract duration, structure, terms and such with the data center counterparties, which I understand we'll get more color and clarity as you execute through this growth. How do you think about counterparty credit risk in these contracts? And how much terminal value is embedded in your 15% unlevered return targets?

So great question. I'd say -- I'll answer the last one first. It kind of depends on the project itself and the duration. I'd tell you, like if we're penciling in a 15-year contract, we'll have a 0 terminal value and you know the math and you're a finance person, if you put a lot of terminal value in there, it's not going to make much difference over that time frame. If it was a 7-year contract, you get a different answer. So each 1 kind of depends upon the project. But I'd tell you, we need to feel really comfortable that we're going to be in that upper teens dynamic when we're entering into any contracts. What was the first question?

Yes, it's mission-critical, right? And I'd say, I mean, that's always been the case for any business. But for our compression business. We've been really fortunate to see a lot of our counterparties get gobbled up by some of the largest players in the energy complex in the world, more and more investment-grade customers. We think the opportunity set is there on the I'll call it, the digital infrastructure side, too. It's just a much wider marketplace, I guess, in terms of the number of participants that are in there, either owning, building and developing the data centers or the underlying customers. So each contract is going to be a little bit different, but we're going to definitely bake that into our calculus as we decide which contracts to pursue and which ones will let somebody else grab.

Our next question comes from the line of Sebastian Erskine with Rothschild & Co Redburn.

Congrats on the developments today, very exiting. The first question is just on the -- on your conversations with customers. I'm curious, 1 of the advantages impression has been that equipment tends to stay on site for many, many years, even beyond the initial kind of contract term. Are more of your customers kind of thinking about this as a bridging solution until the grid catches up? Or is there scope for this to be used kind of as a permanent kind of turnkey utility type offering for these hyperscalers.

Typical contract term that we're talking about with these data centers is 10 or 15 years, and a lot of them want the option to extend at the end of those contract terms. And so I think that this business has evolved considerably in a short amount of time from people thinking that it was a bridge solution to grid interconnection and increasingly more and more of what we're hearing is that it's going to be probably a permanent power supply for them, depending on regulatory developments and those kind of things. But I think a lot of these people that are in this business today are really looking at this as a permanent solution and want to make sure it's the right solution for the long term here.

So increasingly, we're hearing people saying 6, 8 years to grid interconnection to now outside of a decade to maybe never. So it's -- I think it's something that we're looking at it as permanent digital infrastructure and power infrastructure that's going to be there for a very, very long period of time.

Really appreciate the color. And just on the margin, so 60% to 70% adjusted gross margins for the Power Infrastructure business. Obviously, John, you mentioned a large range to begin with. But maybe could you talk through some of the drivers behind that and the scope for kind of margin progression over the medium term? Or is the focus kind of predominantly on just scaling the top line?

No, it's always going to be focused on return on capital at the end of the day. So we guided that way for a couple of reasons. Number one, we've only owned the business for 5 weeks, we have transferred the business, as Mickey mentioned in his prepared remarks into our ERP system, we just wanted to protect ourselves from any surprises in general. I'd say number two would be we really kind of clear with any investors that we've spoken to that the DPS business that we bought was somewhat capital start and they had this neat long-term primary power contract with the data center, and they were getting a lot of I guess, I'll call it, traction with trying to get contract #2, but they didn't have access to power. So the management team there really purposefully kept a lot of their contracts shorter term with the idea being that if they lands at a 100-, 200-plus type megawatt opportunity on the long-term quality contract that they could then roll off what they had on short term into that.

So that's really what we inherited. So there is an element of, as we are investing to build our foundation of power, we do have a lot of power that's going to stay on short-term contracts, and we want to leave some of that on short-term contracts, so we can then pull it off once we grab the contracts that Mickey has talked about there. And if we were to do that, like we would be extremely dumb to kind of adjust our cost structure, our workforce or something for what would be a temporary type move because we know it's going to come in the longer-term contract. So that also causes us to kind of think, let's keep a wide range as we get to scale, as we have more power, it's our view that, that range is going to narrow, and it's going to be more similar to the compression business.

Really appreciate that, John. And congrats on the results today, excited for the growth.

Our next question comes from the line of Elvira Scotto from RBC Capital Markets.

On the power side, can you talk a little bit about that cash conversion cycle? What are the time lines from -- when you sign a contract, assuming you have the equipment to when you start generating revenue.

Elvira, I think that's going to depend a lot upon the contract. I think that you're going to see some opportunities for some things that are a little less sophisticated installation to be in that kind of 3- to 6-month kind of time frame of procuring equipment to generating revenues. And -- but on some of the more sophisticated larger [indiscernible], it could be longer than that, maybe in that 6 to 12, maybe 18-month time frame. But that's going to be a lot to be determined based on the contracts that we execute here.

Okay. Great. And then, are most of the discussions that you're having on the power side, are they in Texas? And then just related to that, can compression and the power businesses share like technician pools or operations to drive efficiencies?

We think so. So just to hit on the first question, we're seeing a lot of inbounds and opportunities in Texas, but also we're seeing a lot all the way across the United States right now. So a mix of both, but a lot of those are coming from Texas as the development here is being built out. We -- right now, we're keeping the operations groups separated so that they can focus on either power or compression. But I think that as we develop and have projects that are in close proximity to our compression operations that there's going to be -- definitely be some overlap there that -- to where they can support each other, definitely, on the kind of the operations support side as far as supply chain safety and those kind of things go.

But we think there's going to be a little bit of overlap there. But right now, we're keeping them separated so that we can continue to kind of build out understand how these things are going to work and where those efficiencies might come from.

Our final question this morning comes from the line of Josh Jane with Daniel Energy Partners.

First one is on the purchase leaseback transaction. Maybe you could just talk through that a little bit more and discuss is there more interest in transactions like that today on both your side and the operator just given the tightness in the market and for a lot of guys, it's not really a, I guess, core operation to them and just thinking of how they think through service quality and things of that nature. Maybe you could just elaborate on that a little bit more.

Yes. Josh. Yes, the purchase leaseback that we executed, that was really a good deal for us, and we think that it's going to be a great deal for the customer, too. And I think you hit the nail on the head there. It's really not a core competency for a lot of these customers to own and operate their own compression. And we have a back-office support and infrastructure built within the company to do that every day and focus on our service every day. So there's a lot of advantages for a customer to go ahead and execute on something like that. And we do think there's opportunities for -- additional opportunities that are like these to come to fruition here.

Okay. And then in addition to the engine lead times, I believe, in answering a different question. You made a comment, high importance of capacity where the units are actually being packaged. Could you share anything on that front? How tight, I guess, space is today and your thoughts?

Yes. I mean that's also something that we have to pay very close attention to is shop capacity and the ability to put these things together once you do get the engine and the compressor on the -- for these compression units. And so we marry the 2 up as we're looking and securing engines and making sure that our packagers have ample shop space and capacity and that kind of thing. You're really looking at something that's very similar to engineering deliveries because they're booking their shop space as they get engines and get orders coming in. So their lead times are in the same kind of ballpark as these engine lead times are. They're in excess of 3 years out that they've got booked up and shop space allocated to build these compressors and so making sure that we've got that supply procured as well as the engines to make sure that we've got everything we need to make sure that all those long lead items, critical path items are procured.

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

Thanks, Melissa, and thank you to everyone participating in today's call. We look forward to speaking with you again after we report our results for the second quarter.

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

Greetings, and welcome to Kodiak Gas Services Conference Call and Webcast to review fourth quarter and full year 2025 results. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Graham Sones, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for the Kodiak Gas Services webcast to review fourth quarter and full year 2025 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will review recent developments, discuss our financial results and 2026 outlook, and then we'll open the call for Q&A.

There will be a replay of today's call available via webcast and also by phone until March 12, 2026. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com.

Please note that information reported on this call speaks only as of today, February 26, 2026, and therefore, you're advised that such information may no longer be accurate as of the time of any replay listening or transcript reading. Comments made by management during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views, beliefs and assumptions of Kodiak's management based on information currently available.

Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website.

And now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I'd like to begin today's call, as we do with all meetings at Kodiak by discussing safety. I've said this before, but our goal is for each of our employees to return home safely to their families at the end of every day. We made great strides in our safety performance in 2025, but our goal remains 0 work-related injuries. I want to thank our safety and training teams who work hard to equip our employees with the knowledge and tools to do their job safely, our customers for embracing our safety culture; and lastly, our technicians who embody our safety-first mindset.

2025 was another record-setting year for Kodiak. We entered the year with a plan to continue to high-grade our compression fleet by divesting underutilized nonstrategic small horsepower units and to exit operations in noncore areas, allowing us to focus on our core large horsepower operations. I'm proud to say that we ended 2025 with 100% of our operations located in the U.S. and with the largest average horsepower fleet in the industry. The work we did high-grading our fleet also allowed us to deliver strong increases in fleet utilization, adjusted gross margins and free cash flow. Given the high margins and stable operations, our core compression business generates predictable, growing contracted cash flows that we reinvest both in our compression fleet and in tools and technologies that set us up for future success.

Some of our highlights from the last year include: successfully implementing a new ERP system to provide us enterprise-wide, real-time information in order to make more informed business decisions. Our team did an amazing job with the rollout of the new software. We've been operating in the new system without issue since August 1. And at year-end, we closed our accounting books in record time, an extraordinary execution by Kodiak. Investing further in AI and machine learning technologies to drive operational excellence and better customer outcomes. We've deployed our custom large language model to help our technicians quickly diagnose issues encountered in the field and are using agentic AI to source repair parts across our system.

Our technology road map for 2026 includes wearable devices and autonomous solutions to enhance our technicians capabilities, collect more data on our fleet, reduce risk and allow our people to focus on high-value activities. And we also broke ground on a new state-of-the-art training and operations facility in Midland. The new industry-leading facility is expected to be the largest of its kind, allowing us to continue to train and develop the best workforce in the industry. We plan to move in, in May.

Financially, we successfully managed the exit of our former private equity sponsor, eliminating any perceived equity overhang. As a recap, EQT owned approximately 76% of our shares after we went public in 2023. Over the last 1.5 years, through a series of secondary offerings, EQT completely exited its Kodiak investment, much earlier than originally expected. We appreciate everyone who participated in the stock offerings. Additionally, we overhauled our balance sheet, terming out a large portion of our ABL. This further reduced our reliance on secured bank debt, increased liquidity and extended our weighted average debt maturity, providing us with enhanced balance sheet strength and financial flexibility.

Also at year-end, I'm proud to say that we delivered on the promise we made at IPO and achieved our leverage target of 3.5x. Lastly, we maintained our commitment to return capital to shareholders. We increased our dividend with Q4's declared dividend up 20% year-over-year, and we bought back over $100 million in common stock at an average price of $33.79 per share. In total, we returned over $260 million to our shareholders this year. By all measures, 2025 was a great year for Kodiak. And with the recently announced acquisition of Distributed Power Solutions, we're starting 2026 with a lot of positive momentum. We'll give more details after we close, but I can say that we've received a lot of inbound interest in our new distributed power offerings since the announcement and are already working to procure additional power generation capacity through our existing network of vendors to deploy this year after we close. We think the market will continue to move in our direction as large power consumers are increasingly looking to lock in 10-year plus deals for base power.

On to Contract Services, as we have said before, we are really excited about compression. Compression and power are very synergistic and align well for our customers and ongoing relationships. We ended 2025 with $4.35 million revenue generating horsepower. Average horsepower per revenue generating unit was 970, a figure that continues to lead the industry and has increased each quarter since we closed the CSI acquisition. For the year, we added approximately 150,000 new large horsepower to our fleet. Our investments to grow our fleet along with strategic divestitures of noncore units drove our fleet utilization to 98%, another industry-leading metrics.

As we will discuss later in our outlook for 2026, despite slowing oil production growth, the outlook for natural gas supply growth remains highly visible. Last year, Permian natural gas production grew 10% or roughly 2 Bcf per day. Keep in mind, this production growth happened in a limited takeaway environment with negative pricing in West Texas for most of the year. Given the increasing gas-to-oil ratios, we expect sustainable gas growth out of the Permian Basin even in a flat oil environment. This favorable backdrop is driving strong compression demand, one of the many reasons why I'm excited about our 2026 capital spending program, which I'll discuss later.

Yesterday, we released our fourth quarter and full year 2025 financial results. I'll hit the highlights and let John provide more details. For the year, Kodiak set new records in total revenue, adjusted EBITDA, discretionary cash flow and free cash flow. Total revenue grew by 13% to $1.3 billion and adjusted EBITDA grew by 17%, $715 million. The growth was driven by the outstanding execution of our core strategy by Kodiak personnel and our ongoing investment in organic large horsepower growth and the deployment of our technology and AI initiatives. Our technology advances are the result of several years of development, and we are just starting to see the efficiency improvement of our investment.

We've significantly reduced the cost of media repairs to our fleet by using data to identify abnormal operating conditions and address them before they turn into expensive component failures. These early wins give us confidence to continue to invest in technology, allowing us to increase equipment availability and reduce mechanical failures, driving additional value to our customers, and increasing our operating margins. We generated $230 million of free cash flow in 2025 after investing to grow our large horsepower fleet and high grading our overall fleet. Our strong free cash flow led to an industry-leading free cash flow yield and allowed us to reduce outstanding debt and achieve our stated leverage ratio goal of 3.5x at year-end.

Now diving into fourth quarter results. We once again delivered year-over-year growth in contract services revenues and adjusted gross margin. Impressively, our Contract Services adjusted gross margin percentage increased 247 basis points year-over-year to 69.2%, exceeding the high end of our guidance. Adjusted EBITDA for the quarter was up 9% year-over-year to $184 million, setting a new company record. Given strong customer demand, historically high industry-wide utilization, and capital discipline in a contract compression industry, pricing conversations with customers continue to be constructive.

During 2025, we recontracted approximately 40% of our fleet and exited the year with only 10% of our contracts on a month-to-month basis with the rest under multiyear contracts. While we have a smaller percentage of our horsepower up for recontracting in 2026, the compression market remains tight with horsepower pricing continuing to increase. In our Other Services segment, fourth quarter results reflected a sequential pickup in activity as we had a positive uptick in shop services and station construction revenues. Overall, this segment generates free cash flow with minimal capital investment.

Next, I'd like to discuss the evolving natural gas market and increasing lead times for large horsepower engines. Over the next 3 quarters, approximately 4.5 Bcf per day of incremental Permian gas pipeline takeaway capacity is expected to come online. And there's another 7 Bcf per day of additional Permian takeaway pipelines expected by the end of the decade. What's more, we have seen estimates from research firms of more than 2 Bcf per day of in-basin gas consumption for power generation by the end of the decade, including distributed power like DPS and major power plants. This is on top of the highly visible increase in feed gas required for U.S. LNG. After ramping up by roughly 3 Bcf per day in 2025, LNG export capacity is set to increase by another 2 Bcf per day in 2026, with an additional 13 Bcf per day of LNG export capacity expected by the end of 2035. These developments will have a resoundingly positive impact on gas pricing and production in the Permian Basin.

A combination of higher in-basin demand, increased takeaway capacity, better pricing and ever-increasing gas to oil ratio is expected to lead to substantial Permian gas volume growth in the back half of this decade. The significant step-up in midstream and compression capacity needed to support the gas growth in the Permian Basin, in addition to the rapidly growing demand for distributed power generation has driven lead times for new large horsepower compression equipment to greater than 100 weeks. The combination of extended lead times and highly visible compression demand has required our commercial team to engage with customers about longer-term plans. We've already begun receiving commitments from customers for new compression equipment in 2027 and 2028.

On the supply chain side, we're using our buying power and leading position in the industry to secure new compression equipment and are confident we'll be able to hit our long-term horsepower growth targets despite historically high lead times as we've already secured engine deliveries and shop space into 2028. In total, we expect to deploy over 750,000 new large horsepower compression between now and the end of 2030.

Now turning to our outlook for 2026. We have a lot of positive momentum heading into the year. Despite the increased lead times for new equipment, we plan on delivering approximately 150,000 new unit horsepower in 2026 with an average horsepower per unit of approximately 1,700 horsepower, further solidifying our position as the industry leader in large horsepower compression. We're also in discussions with a handful of our customers about purchase leaseback opportunities and expect to announce one soon. We view purchase leaseback transactions as low-risk acquisitions, they have the benefit of accelerating our growth and compelling returns on invested capital without adding additional compression capacity to the market.

The strong pricing environment we've seen for the last several years continues, and we expect to deliver further margin increases as we capture operating efficiencies. And we're seeing positive signs in the station construction business, part sales and our Other Services segment. In summary, we had a great year. Our adjusted EBITDA significantly exceeded both our initial guidance for the year and our latest update, driven by operational efficiency and cost management. We high-graded our fleet, exited international operations and achieved our leverage target of 3.5x. We have numerous tailwinds heading into 2026 as demand for contract compression remains strong and utilization rates continue to be at record highs. We're extremely excited to add distributed power to our business offerings and believe the outlook for that business will allow us to increase our underlying growth rate and drive higher margins.

And now I'll pass the call to John Griggs, to further discuss our financial results and our outlook for 2026. John?

Thank you. At the risk of sounding like a broken record, 2025 was an outstanding year. There's just no other way to say it. From a financial perspective, we exited the year with the lowest leverage, most liquidity and highest EBITDA free cash flow and contract services adjusted gross margin in our company's history. Our new enterprise-wide business system meaningfully reduces SOX-related risk and is increasingly providing us with enhanced visibility into our operating and financial performance, giving our company's leaders far better data and insights to ultimately make faster and better business decisions. Our financial strength has never been better equipped to capture all of the growth opportunities that are in front of us today.

Before I tackle the financial highlights, I'd like to give a shout out to my team. I am so proud of everything they've accomplished over the past couple of years, an IPO and all of that entails, the CSI acquisition and integration, several capital markets transactions, more than $2 billion in bond issuances and ERP implementation and more recently, moving to full SOX compliance. It's been a big, big, big lift, but they've risen the occasion time to time again. I'm privileged to lead them, and I look forward to seeing them continue to do great things as we move forward.

Let's turn to the financial highlights. For the year, we reported total revenue of approximately $1.3 billion, a 13% increase over 2024. The growth was primarily driven by the addition of new horsepower, price increases from recontracting activity and solid operational execution. We reported adjusted net income of $139 million and adjusted EBITDA of approximately $715 million, up 51% and 17%, respectively, from the prior year. For the fourth quarter, total revenues were nearly $333 million, up 3% sequentially as we benefited from a large amount of recontracting that happened around the beginning of the fourth quarter.

Revenue for ending horsepower was $23.10 at year-end, a 2% increase from the previous quarter and up approximately 5% from the previous year's quarter. As we discussed last quarter, the fourth quarter sequential increase in dollars for revenue-generating horsepower was driven by the combination of less overall new horsepower being set in Q4 in conjunction with solid pricing for new units set during the third quarter plus recontracting during Q4 at ever higher rates.

Our Contract Services adjusted gross margin percentage for the fourth quarter exceeded 69%. That's up 90 basis points sequentially and 247 basis points year-over-year. The margin improvement is a reflection of the success we've realized in achieving higher average pricing for horsepower alongside lower operating expense for horsepower, which itself was a function of new technology, process and training initiatives that either reduce costs, defer spend or improve labor productivity or some combination of all 3.

In our Other Services segment, revenues were just over $31 million in Q4 with an adjusted gross margin percentage of 13%. The sequential increase in revenues was driven primarily by an increase in shop services and station construction revenues. Reported SG&A for the quarter was $38.9 million, and after adjusting for nonrecurring or noncash items, it was $29.7 million, down nearly 6% in the prior quarter. Net income attributable to common shareholders for the fourth quarter was almost $25 million or $0.28 per diluted share. Excluding asset impairment, severance and transaction expenses and other onetime items, adjusted net income was $35 million or $0.40 per diluted share.

Now let's turn to capital expenditures. Maintenance CapEx for the quarter was approximately $22 million, and it was $76 million for the year, which was at the low end of our annual guidance range. The same investments in technology and the insights we're gaining from them are also allowing us to extend overhaul intervals and thereby defer associated spend on a major portion of our fleet. As expected, growth CapEx declined sharply this quarter to approximately $25 million. For the year, we added approximately $150,000 in new unit horsepower, in line with previous expectations. Other CapEx was just under $12 million for the quarter, slightly down from the prior quarter.

Discretionary cash flow came in at $113 million, an increase of approximately $5 million versus the comparable quarter from last year. Free cash flow, which we define as discretionary cash flow less growth in other CapEx plus the proceeds from asset sales was $79 million, a new quarterly company record. For the year, we generated approximately $462 million in discretionary cash flow. Our discretionary cash flow is one of our most important business metrics. It drives our growth, and it funds the return of capital to shareholders. The long-term growth of our core compression business, and therefore, our discretionary cash flow is directly correlated with the nearly irrefutable secular growth in domestic natural gas production, and our cash flows are heavily contracted under take-or-pay contracts with inflation escalators. As a result, we tend to produce growing but stable discretionary cash flow, even in times of severe commodity price volatility, which is something we can't emphasize enough.

With regard to the balance sheet, as Mickey highlighted earlier, we delivered on the promise we made to investors at the time of our IPO that we get our leverage down to 3.5x by the time we exited 2025. We exited the year with the strongest balance sheet we've ever had with approximately $1.5 billion in undrawn liquidity and over 3 years before our first debt maturity. To recap, in 2025, we termed out $1.4 billion for of our bank debt in the bond market, including the first issuance of the 10-year bond in the compression sector, when we amended our ABL to reduce interest rate spreads and enhance financial flexibility. Last, our Board declared, and we paid last week a dividend of $0.49 per share, even with 2 increases totaling nearly 20% in 2025, our dividend was well covered for the quarter at 2.6x.

Let's turn to our '26 guidance. We provided our customary metrics in yesterday's release. Keep in mind, our guidance metrics don't include the recently announced DPS acquisition. We plan on revising our guidance for the inclusion of that business after we close the transaction, which we would expect to occur around the beginning of the second quarter. For the year, we expect overall revenue to range between $1.37 billion and $1.43 billion. We expect the adjusted gross margin percentage within the Contract Services segment to range between 67.5% and 69.5%.

Our 2026 adjusted EBITDA guidance range is around $750 million to $780 million, with the midpoint representing annual growth of approximately 8%, directly in line with the upper single-digit percentage annual growth rate that we believe is possible in our core compression business for the foreseeable future. We expect maintenance CapEx to be in the range of $75 million to $85 million, essentially flat with last year, something that would not have been possible had we not been investing in the people, process and systems that allowed us to meaningfully defer maintenance spend without harming our assets or their long-term performance. We see growth capital expenditures landing between $235 million and $265 million. The vast majority of our growth CapEx goes towards buying and installing new units. While the balance gets invested in things like fleet-oriented enhancements and conversions, emissions-related projects and operation-centric technology.

Other capital expenditures, which includes fleet upgrades, make rate expenditures, rolling stock, real estate, capitalized aspects of our training programs are expected to range between $40 million and $50 million. In terms of capital allocation, returning capital to shareholders is important to us. We expect to grow our dividend annually and opportunistically repurchase stock. Prior to the acquisition of DPS, our stated goal is to invest organically at a level that allowed us to deliver long-term annual growth in adjusted EBITDA in the upper single-digit percentage range. Following the acquisition of DPS, we believe we can grow faster than that and have similar or better returns on invested capital.

To wrap it up, '25 was another record-setting year at Kodiak. We're extremely proud of all that we accomplished and the work we did to lay the foundation for future growth. The outlook for contract compression related services is stronger than ever. By our estimation, it looks like it will remain that way for a while, and we're in the process of further increasing our earnings growth rate with the pending acquisition of Distributed Power Solutions.

With that, I'll hand it back to Mickey.

Thanks, John. It's an exciting time to be at Kodiak. Our business model, which generates highly visible, stable and recurring cash flows is performing well. The demand outlook for contract compression remains robust, demonstrated by our ability to maintain strong pricing and continued growth in our industry-leading horsepower utilization. Our new unit horsepower order book is fully contracted for 2026 and into 2027, and we're actively working on finishing 2027 and 2028 as we capitalize on the robust outlook for growth in natural gas.

Besides the top line growth, we took steps to increase margins by divesting noncore units and investing in technology to reduce costs and increase uptime. The pending DPS acquisition will further increase our earnings potential and growth outlook, enhancing our ability to return capital and drive ongoing value for Kodiak shareholders. Needless to say, we're excited about our future. Thanks for your participation today, and now we're happy to open up the line for questions.

Operator?

[Operator Instructions] Our first question comes from Jim Rollyson with Raymond James.

Mickey, maybe just starting with the lead time comments, obviously, all you guys are seeing the same thing. And I'm curious, it's great to see the CapEx commitment on the compression side that just underscores, I think, your view there. But as you think about '27, '28 and where lead times have escalated to here pretty rapidly, how are customers thinking about that? How are you guys planning for that? Because I'm imagining that not only impacts your ability to grow on the compression side, but it's also on the power side once you get that closed. So maybe just some kind of color how you navigate that.

Jim, thanks for joining us today. Yes, it's been a challenge and it's a very fluid environment right now. We've been working really hard over the last couple of weeks to make sure that we secure our supply chain. And we -- like I said in my prepared comments, we've got -- we've got shop space and engines actually secured right now throughout 2027 and into 2028 and doing our best to stay ahead of that and make sure that we have adequate supply for what was the amount that we want to grow in the compression segment here. So I think, as you know, most of our customers also own their own compression equipment partially in their fleets. And so all of our customers already understand the tightness in the supply in the market and are willing to engage in those conversations well ahead of time for us to make sure that we have their needs covered. So our commercial team is doing a great job of staying ahead of it, and we're making sure that we're monitoring that situation on a real-time basis because I can tell you, it is changing by the hour.

Understood. And the other thing, you guys have had a slide in your deck since you IPO-ed kind of about the cost of equipment up 50%, let's say, pre-COVID to relative today. And obviously, that's driven a lot of pricing growth over time as you price new units and mark your fleet up over time. Curious with recent conversation with Caterpillar, given their lead times today, are they talking about more material pricing increases? And if so, wouldn't that allow you over time to kind of reap the same benefits going forward at some point?

Yes. I mean 2 parts to that question, right? I mean, I would expect that going forward that we'll have some pricing power and to be able to have constructive conversations with our customers there because the cost of replacement equipment, naturally, I would think with 100-plus lead times with Caterpillar, would increase. So like I said, the -- our customer base is all very cognizant of what's going on there in that pricing dynamic there. So we haven't heard of significant price increases coming out of Caterpillar yet, but it's something that I would probably expect.

Our next question comes from John Mackay with Goldman Sachs.

Maybe I'll pick up on that first question from earlier. Could you talk a little bit more about what is driving the tightness in the market right now kind of specifically. I think we understand some of the broader trends, but would love to hear a little bit more from you on kind of why we've gotten so tight so quickly here.

John, thanks for joining us this morning. Yes, it's really a pretty interesting discussion that we've had with Caterpillar over the last several months on what's driving the tightness in the market here. And I think a lot of people would assume that it is power that is driving kind of the increased lead times here. And it really is a power discussion. But a lot of the Permian power processing plants for rich natural gas that are going in, in the Permian Basin right now, which there's a lot of them being built, they don't have the access to grid power. So traditionally, in those power plants, you'd see 75,000 horsepower worth of electric motor-driven units for inlet compression for propane compression for residue compression in those plants within the 4 walls because of the limited access to power that these guys have out there, specifically in the Permian. They're having to turn those electric motors within the 4 walls of those plants into large horsepower natural gas-driven engines to drive those -- to drive that compression within those plants.

So I think that, that's a dynamic that really nobody saw coming towards us and is really a driver from the limited access to grid power that people have today and the extended lead times to get hooked up to the grid, which we've heard it can be 7 to 8 years at some point in time. So like I said, these midstream guys and the people that are building these plants out here are having to turn to gas-driven engines versus electric motor-driven -- electric motors in those plants. So it's creating a kind of a new level of demand that we haven't seen previously.

That's interesting. It sounds like a good time to get into the power business, but we can talk about that more in April. Second one for me is just on gross margins. Fourth quarter is really strong. You guys have been generally doing very well on that front. I think the '26 guide points to it being a little flatter. Would love just to hear your general comments on the trajectory there, maybe some conservatism baked in maybe some of the cost savings you've talked about in the past on the AI side. Can you walk us through that?

Yes, sure. So John, I'll take it. This is John Griggs. So we thought a lot about that as we put the guide out, we anticipated we'd get some questions. And one thing that we know is the fourth quarter was a really clean quarter. Our business is highly predictable, but you're always going to have some gremlins that happen within your cost of goods sold, and we really just didn't see many of those, whether that's a lot of hard work, a lot of technology, a lot of planning, great operations and a little bit of luck, we're not exactly sure, but it happened. And when I look at everybody kind of focuses on our dollar per ending horsepower, we also study our $1 per our Contract Services cost of operations for ending horsepower. And it's been really flat until the fourth quarter would have dropped meaningfully.

So I think we probably have a little bit of conservatism in case it gets back on trend to where it was for the prior 3 quarters. Now with that said, I think you hit the nail on the head in that. Pricing continues to be strong and all the investments we've made in, let's say, 2 big buckets, technology, the operational technology, we're starting to see a return on those investments during '25, and we expect to continue to see it in '26. And all the investment we've made in our people around training, those absolutely have an impact on that cost of goods sold, and we expected to see it. So hopefully, as the year goes on, we'll be able to walk that number up. But that does explain kind of where we guided.

Our next question is from Doug Irwin with Citi.

Maybe to add one more on lead times to start. Great to hear that customers are already having conversations out into 2028. But curious just in the context of potential 2-year lead times, if that changes just your general risk appetite to potentially look to maybe orders and capacity on spec, just to be able to make sure you're able to secure it in advance.

Doug, this is Mickey. Yes. I mean, look, it's a different conversation that we're having with our Board today than it was 6 months ago to where we were looking at capacity and lead times that were inside of a year and having contracts to back those up. So we're having to do a little bit more of spec ordering today and making sure that we've got some shop space locked up and engines locked up, so we are having to take a little bit more risk there. However, I would say that, that is mitigated a little bit by the fact that we don't have to commit to 100% of that CapEx cost 2 years out. We might have some engines, some extra engines and that kind of thing that are there. If the demand doesn't come through like we fully expect it to, but -- so there is a little bit more risk appetite to order some equipment on spec out a little bit farther out right now. But again, like I said, that's not for 100% of that cost. It's for a portion of that cost.

And I do want to add on there, too. I think it's really important. As we think about this, a, we have like a macro view of the future where we think production levels are going to be. And we've stated over and over and over again, really since IPO that we think we can grow our fleet volumetrically by that 3% to 5% per year. So everything -- and I should say we have really, really like sophisticated customers today with long-term development plans, and we're in close communication with them. We view them as partners. So virtually everything that we're buying that is ahead of that commitment. We think it's completely in line with kind of our base case on where that market is headed and where our customers will be. So it feels like a really low-risk proposition to us.

Got it. That's helpful. And then maybe a quick one on Power. Realize you haven't given guidance there, but just curious in the context of the guidance you just gave for the base business, just how you're thinking about your capacity to invest in power here over the near term?

Yes, Doug. I mean, look, we bought the DPS platform because we've been looking at the power business for over a year now looking for the right entry point. We want to make sure that we could pair up our operational expertise with high-quality commercial and engineering expertise on the power side, and we settled on the DPS acquisition because they really checked all those boxes. It's a really high-quality platform that we think we can put a strong operational platform behind as well as a strong balance sheet behind. And our full intention is to grow that business. And we'll come back after we close and give a little bit better guidance on kind of what we think the growth opportunity looks like. But we fully intend to grow that business, and we think that there's some opportunities to acquire some megawatts of power even this year to be able to deploy this year. And we're leveraging our relationships that we have with existing vendors and our Caterpillar network to make sure that we can secure some of that equipment and put it to work this year and then come back to you after close with kind of a more fulsome view of what we think the long-term growth outlook looks like for that business. But we fully plan on growing it starting this year and putting some significant growth capital behind that side of the business as well.

Our next question is from [ Gaby Cerny ] with William Blair.

This is Neal Dingmann. Guys, can you just talk about -- Mickey, you've always talked about just external growth. And I know, again, you have the backlog right now with compression. So I'm just wondering, would you approach some of your customers more aggressively to try to add that way?

Yes, Neal, you kind of broke up a little bit on us there. Can you -- do you mind repeating the question? Well, you might have lost. Yes, are you there, Neal? Well, I think that the gist of the question -- sorry about that. I think the gist of the question was kind of approaching our customers with kind of a two-pronged approach on compression and as well as power needs. And we certainly think that, that is an opportunity for us going forward. We've got a lot of customers, specifically in the Permian that are looking at microgrid development and establishing their own power out there in the Permian, and we definitely are having those conversations with them already. And definitely think we can leverage those relationships and the operational expertise to grow that business with our existing customer base as well.

That was exactly it, Mickey. And then just secondly, on the LNG. Mickey, you've always talked about kind of a formula -- I think early in the IPO process, you even talked about a formula for potential LNG demand. Does that formula still exist? And can you kind of remind me about where potential is around maybe the LNG upside demand?

Yes, absolutely. Look, we think that there's a significant amount of LNG feed gas that's going to be required throughout the United States. And as you know, we talk about the Permian a lot, but we're also in every major oil and gas producing region in the United States with commercial and operational presence there. So we're positioned well to provide compression for no matter where that gas is going to come from. We know there's going to be a significant amount of gas production for both behind-the-meter power and for LNG destock. So we think we're in a great position to be able to be there. I think you're referencing -- we're significantly in the Permian Basin. You're probably referencing the compression intensity metrics that we talk about.

One of the reasons why the last 5 years of our business have been so robust is because of the amount of compression it takes to produce one molecule of natural gas out of the Permian Basin because there's compression needed for gas lift. There's compression needed within the 4 walls of processing plants, gathering all those things. So we still firmly believe that the Permian Basin with oil prices being relatively resilient over $60, that there's great economics for our customer base to not only continue to, at a minimum, keep oil production flat, but given gas to oil ratio increases and that kind of thing -- there's going to be significant gas growth out of the Permian, which is going to require a ton of compression to produce that, especially with these new takeaway capacity lines coming into play in the Permian Basin. So we're really excited about the opportunity. We think it's going to be a massive amount of natural gas growth over the next -- throughout the end of the decade and into the 2030s, and we're positioned well to take advantage of that, both on the compression and the power side.

Our next question comes from Elias Jossen with JPMorgan Chase.

Maybe just wanted to start on the visibility you're seeing in the contract compression business. You talked a little bit about seeing 750,000 horsepower through 2030. Maybe just the conversations you're having with customers that kind of support that? And then it seems that would support sort of this mid-single-digit EBITDA growth in just the contract compression business alone based on your historical execution. Is that a fair way to think about it, just continuing the strong growth that we've seen?

Elias, good to hear from you this morning. Yes, that is absolutely our intent is to continue that up into the right trajectory in the compression business and then layer the power business on top of that. We've got very high visibility into our growth. Like I said, we're engaging in conversations with customers right now for 2028 capacity. And there's a very large appetite for multiple of our customers that we're in discussions with right now for multiyear contracting and renewals of the existing equipment that we're seeing elongated types of renewal time frames right there. We're in discussions with multiple customers about 7- and 10-year renewals on that stuff, which is a really great development for our business and the visibility of our existing asset base and the growth of that over time. So we've never really given multiple year kind of guidance or indications of what we expect for horsepower growth, but we feel pretty good about it right now, and that's why we brought it into this call in our prepared remarks today that we really do see a multiyear growth case that is going to underpin kind of our cash flows and stable earnings for a long, long time.

That's awesome. And maybe just sticking with the Contract Services business. I know you guys talked a bit about sort of operational execution driving gross margins higher, and you did give us a guide there. But maybe just on the overall pricing outlook. I think previously, you've talked about exiting this year at around $24 per horsepower per month. Any reason to think that would be different or higher or just high level, what you're seeing right now on the overall sort of fleet pricing?

Yes. As we said, conversations with customers have been very constructive and continue to be. We're not seeing any significant change in pricing on equipment going forward. I think John did mention it in his prepared remarks, we do have less of a percentage of our fleet that's up for recontracting this year. I think last year, we recontracted 40% of the fleet. This year, it's kind of in the low 20%. So I would say that our ability to raise prices on the existing fleet is just as strong as it ever has, albeit it might be a little bit more muted of a contribution this year because of the limited amount of equipment that we have kind of coming up for recontracting. That being said, our goal is still to reach that $24 of horsepower by the end of the year, and we feel pretty good that we're going to get there by the end of the year and feel good about that target.

Our next question comes from [ Nate Pendleton ] with Texas Capital Bank.

Congrats on the quarter. I wanted to dive a bit deeper into your prepared remarks regarding applying AI and machine learning to improve the business. Can you provide your view on how these developments can further improve financials from here? And perhaps how well those technologies can apply to the newly acquired power assets?

Nate, thanks for joining us. Yes, we're really excited about what we've done in the technology space. We think we've got some first mover type of advantages there. We've really done a great job through our technology group and our operations group in adopting that kind of stuff. And we've already rolled out kind of conditions-based maintenances to where we're not just saying, hey, you need to change this oil in this equipment every 90 days, but we're letting the equipment tell us today when that oil needs to be changed based on kind of operating conditions and oil sampling and that kind of stuff. And we're able to recognize when that equipment is operating outside of the bounds of kind of where it should be. And that's provided a pretty significant uplift in our gross margins because we're able to kind of extend maintenance intervals based on the health of the machine, not necessarily based on time.

I've said it many, many times before, we used to change the oil in our cars every 3,000 miles. Now, we're going 10,000 miles in our cars and trucks, and they tell us when they need the oil change in them. So that's a result of technology and looking at the status of the equipment rather than how it is actually -- rather than a time-based type of an interval. We're also applying that on our major maintenance cycles as well and extending those major maintenance cycles, which is why you've seen a growth in the fleet, but our maintenance capital line item staying flat throughout the year, the last couple of years, and we're happy to see that.

The upside that we have there is we haven't applied those -- that stuff across the whole fleet yet. We've tested it in '24 and '25. We've rolled it out to a much larger portion of the fleet now. And now we have the ability to roll it out to an even larger portion of the fleet going forward. So we should see continued impact on technology through deploying that technology and then looking at how that applies to the power world, we think that we have a long, long history of operating cat equipment. We've got -- we're acquiring a business that has a significant amount of power that's driven by 3516 Caterpillar engines. And we think we can apply the same metrics to -- on the power side and apply our technology there. So we're really excited to be kind of first movers in that space, too, as kind of one of the first companies that had significant operating history in Caterpillar equipment to be able to apply that expertise and operating kind of regimen to really the same engines that are just driving power generators versus gas compressors. So we're excited about that, and we think we'll be able to have the same kind of impact there on that operation.

Thanks for the detail there. And then as my follow-up, I guess, going to the DPS acquisition. I know there is limited you can say at this point, but can you provide any high-level details about the inbound interest since announcing the deal that you alluded to in the prepared remarks?

Yes. I can't talk a ton about it obviously yet, but we have to stay a little bit at arm's length with DPS right now on the commercial side, just for antitrust issues and that kind of thing. I think everybody understands that. However, independent of our discussions with DPS, we have had inbound calls from multiple data centers and multiple customers that have recognized the fact that we're bringing an operational expertise into a world that is -- there's a lot of competition out there. And however, that competition doesn't have nearly the experience that we do in operating large horsepower equipment. And the customer base out there is really starting to take notice of the -- of the ability that we'll have to apply that operational expertise in the power world as well.

I said it a little bit earlier, we really were hunting for a company that really had a significant commercial expertise in the power division as well as engineering expertise DPS is one of the only companies that has a multiyear contract and has been operating for multiple years already on a data center project, right? So they have experience. They understand AI load management that is required for some of the challenges that go along with powering a data center, and we feel like we've got a really, really great opportunity to make a big impact in that business by combining the commercial and engineering expertise of DPS with Kodiak's operational expertise.

Our next question is from Selman Akyol with Stifel.

Two quick ones for me and just more little follow-ups. In your previous question, I think you referenced sort of 40% of contracts recontracted and then 10% in your opening comments for '26. The question is this, how much of recontracting for 2027?

That's a good question. I actually haven't run those numbers, Selman. Thanks for joining us. Sorry, -- to be honest with you, I don't have that number at my fingertips. It's something that we'll be looking at. But I can tell you that kind of on average, we expect 25% to 30% of our fleet recontracts every year, and we would expect that to be in the in the 2027 outlook. To be honest with you though, we actually are having some really constructive conversations with customers right now about pulling forward some of those recontracting efforts. I mentioned earlier, we've -- we're in conversations with some customers about some 7- and 10-year renewals right now. And quite frankly, some of that stuff is -- stuff that's not even up for recontracting in 2026, and it would be pulling that forward from '27 and '28 in some cases, too. So we're really excited about that. And so it's kind of a moving target a little bit right now. But for argument's sake, really 25% to 30% of our contracts in any given year would come due, and that's our full expectation for '27.

Okay. Great. I mean repricing into a stronger environment. Then the other one, just real quick. So you talked about potentially ordering some engines on spec and then you said you wouldn't have to commit 100% of the capital. But could those engines be swapped over to DPS if you didn't have a need for them?

Yes, we think they can. So we definitely can -- we'll be looking at how we do that and how we manage that supply chain, but we can definitely would be able to kind of by some of those slots and maybe hopefully be able to kind of manage whether they support compression or power.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Kodiak's CEO, Mickey McKee.

Thank you, operator, and thank you for everyone participating in today's call. We look forward to speaking with you again after we report our results for the first quarter.

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

Good morning, and welcome to Kodiak Gas Services conference call to discuss the announced acquisition of Distributed Power Solutions. [Operator Instructions]

Please note that this conference is being recorded. I would now like to turn the call over to your host, Graham Sones. Please go ahead.

Hello, and thank you for joining us. Today, we issued a press release announcing that Kodiak has agreed to acquire Distributed Power Solutions. That press release and an accompanying presentation are posted to the Investor Relations section of our website. A few housekeeping items. The comments made by management during this call may contain forward-looking statements within the meaning of United States federal securities laws. These forward-looking statements reflect the current views, beliefs and assumptions of Kodiak's management based on information currently available.

Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievements to differ materially from those expressed in the statements made by management. Management can give no assurance that such statements or expectations will prove to be correct.

We may also refer to certain non-GAAP financial measures and metrics. Please refer to Slide 2 in the presentation posted on our website for additional discussion of forward-looking statements and non-GAAP measures. Participating from Kodiak today are Mickey McKee, President and Chief Executive Officer; Steven Green, Chief Commercial Officer; and John Griggs, Chief Financial Officer.

Now I'd like to turn the call over to Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today to discuss an exciting new chapter for Kodiak. We recently announced that Kodiak has agreed to acquire Distributed Power Solutions for $675 million, positioning us to expand our product offering to include power generation solutions for our customers.

As many of you know, we've been actively studying the distributed power market for some time, and I'm very happy to say that we have found the ideal asset base and management team to enter this exciting and growing market. Let me start by discussing why DPS is a great fit for Kodiak. As discussed on Slide 4, this transaction provides us with a state-of-the-art fleet of 384 megawatts of distributed power generation equipment, which includes both turbines and reciprocating engines, providing flexibility across a variety of applications and end markets.

Many of you know, the lead times for new power generation equipment are quite long, with some stretching out until well into 2028. We feel like the opportunity to acquire a quality fleet with existing customers and contracts, including data centers, is the right way to enter the distributed power end market, plus the fleet is 100% powered by Caterpillar engines and turbines, a company we clearly know well. Our combined Caterpillar relationships and supply chain arrangements should be beneficial as we invest and grow the business.

Kodiak prides itself on our level of customer service and our industry-leading track record of operating large horsepower engines at high levels of reliability. We currently have over 700 technicians who are certified to work on Caterpillar engines, providing us the opportunity to bring the same level of customer service to the power industry. Next, this transaction brings a seasoned team with decades of distributed power experience that has been successful in signing long-term multiyear contracts with data centers for primary power.

As shown on Slide 6, approximately 2/3 of DPS' active fleet is currently contracted to data centers, including a multiyear agreement to supply primary power to a large data center operator in Virginia. The contract has been in place for over a year and is running at 99.9% reliability. DPS has a healthy and growing pipeline of additional data center opportunities and is also active and growing in behind-the-meter microgrid business.

Just as important, we have alignment on our safety culture, with DPS having a 0.0 TRIR since the inception. We feel like the combination of DPS' relationships with data centers and our existing commercial relationships provides Kodiak with a key unique advantage. The combination of our customer-focused business model, strong relationships with key suppliers and a long successful track record of operating large horsepower engines at industry-leading levels of reliability will help us unlock significant value and accelerate the growth outlook for this business. On a per share basis, this transaction is accretive to both discretionary cash flow and earnings. We expect to be able to accelerate our earnings growth while protecting the balance sheet and maintaining our commitment to shareholder returns.

Lastly, we have the right infrastructure in place to integrate and grow this business. John will discuss the financing in more detail, but it's important to point out that thanks to the strategic actions we took in 2025, implementing a new ERP system, terming out our debt and accelerating our technology investments, Kodiak is positioned to support this business as it scales and provide the capital it needs to meet the strong organic growth outlook.

As a reminder, when we started Kodiak, we had a vision for how we could transform what was historically a volatile sector by focusing on large horsepower compression assets, allowing us to generate stable earnings supported by contracted cash flow. We believe the distributed power industry is ready for a similar transformation as more data center and energy infrastructure companies are forced to provide their own permanent power solutions. We've done this before and believe that our customer service focus, our deep bench of highly trained technicians and our focus on large horsepower engines provide us with a unique competitive advantage in distributed power.

I want to spend a few minutes discussing our compression business, too. The outlook for contract compression remains as strong as ever. The recent weather events have reminded us all how important natural gas is to our day-to-day lives. As we move closer to the onset of additional Permian gas takeaway, combined with further expansion of LNG export capacity along the Gulf Coast, our compression services remain in high demand. We have fully sold out our compression in 2026 and have begun taking orders for 2027 and into 2028. We are really excited about the unique combination of distributed power and large horsepower compression under the same roof and the future it holds for the growth of Kodiak.

I'll now turn the call over to Steven Green to discuss the market outlook.

Thank you, Mickey. The U.S. power market is at an inflection point with demand growth over the next decade expected to accelerate rapidly. Electricity demand for data centers in the U.S. will double by 2035, accounting for over 50% of the power demand growth over that time period, a transformative demand increase on the grid that's somewhat comparing to the advent of air conditioning in the 1960s. It has been well documented that power demand is overwhelming utility providers with hyperscalers and other large power consumers experiencing unprecedented wait times to connect to the grid if they can connect at all.

In PJM, wait times are estimated to be over 6 years to connect to the grid, is estimated to be closer to 8 years in New Mexico. With more regulatory and political pushbacks for large loads connecting to the grid, we see an emerging trend for data centers and others to supply their own power. Increasingly, that power is going to be permanent, not waiting for the grid. This is why we are seeing a shift in companies recognizing they need to provide their own power solution.

The charts on Slide 10 illustrate the speed with which this shift is occurring as more data centers developers expect on-site power generation. In fact, based on third-party research, more than 40% of the data centers that are expected to be online by 2035 are not expected to connect to the grid and instead supply their own power solutions. Based on this, we believe that the market will need in excess of 60 gigawatts behind-the-meter power solutions. Mickey stated, the distributed power industry is ripe for transformation, once defined by short-term contracts and volatile cash flows is now moving to 5- to 7-year plus contracts with healthy returns and stable cash flows.

It is our belief that over the next 12 months, we will be in a position to sign long-term contracts with data centers that effectively increase Kodiak's overall contract duration, enhancing Kodiak's stable earnings profile.

Now I'd like to turn the call over to John Griggs to provide you with more details on how we plan to finance the transaction.

Thanks, Steven. As shown on Slide 5, the total cost of the transaction, including estimated fees and expenses is approximately $609 million or about 7.4x what we would expect DPS' adjusted EBITDA to be in 2026 on a full year basis. We plan to finance the transaction with approximately $590 million drawn on our existing ABL facility, plus the issuance of $100 million of our stock to the sellers, which will be equal to about 2.4 million shares, totaling just under 3% ownership post close.

As Mickey mentioned earlier, we're committed to maintaining a strong balance sheet and our shareholder returns framework. All the work we did last year on our balance sheet put us in a great position to finance not only this transaction, but also our future growth. As a reminder, closing is subject to a variety of conditions, including HSR. Since our businesses don't overlap, we don't anticipate any issues there, which would suggest that we can close the transaction most likely early in the second quarter, if not sooner. And we expect to provide full guidance for the Power segment at that time.

With that, I'll hand it back to Mickey.

Thanks, John. In closing, this is a remarkable opportunity to gain access to a rapidly growing industry that is in the early stages of undergoing a tremendous transformation. This transaction expands our customer offering and allows us to increase our organic growth outlook. Distributed power is a natural fit for Kodiak's culture, our workforce and our customers, and we're excited for the future. Thanks for your participation today, and now we're happy to open up the line for questions. Operator?

[Operator Instructions] Our first question today comes from John Mackay of Goldman Sachs.

Congrats on the announcement. Can we start a little bit on the operational synergies? I know you shared a fair amount of detail. But can you walk us through what you see in terms of synergies on both the existing fleet you're acquiring? And then also what that could look like for new projects in the future?

John, this is Mickey. Look, I mean, I think that the thesis since we started looking at this has been Caterpillar qualified technicians that we can use on both sides of the fence here on power and compression. So we think that there's some opportunities there that are pretty significant. DPS current operations has quite a bit of equipment that is in the Permian already and quite a bit of growth outlook for the Permian Basin, which is obviously where we're very well stocked with Caterpillar technicians as well as spare parts and pieces inventory, all that kind of thing.

So these -- a lot of these reciprocating engines are the same engines that we're using on our compressors. So we ought to be able to cross-train technicians and those kind of things to use on both sides of the fence here. So like I said, we're not ready to guide on kind of what synergy kind of looks like right here, but this is a small private company. And so the synergy number is not going to be huge. We think that the organic growth profile is what the attractive part of this deal is.

That's helpful. Maybe just a second one. Can we talk a little bit about that? You mentioned broadly, they have a backlog of projects they're working on. I know you guys have been talking to your customers kind of before this on something on the power side. Maybe just walk us through what that growth opportunity looks like from here.

If you look at this business right now and you look at the other people in the business that are doing the same thing that you guys are pretty familiar with those names, really and truly, the opportunity set is as big as you want to make it right now. And so we've got some work to do here. We're not ready to guide really on what CapEx looks like and that kind of thing yet, but we have identified some equipment that is available in the market right now that could be deployed in 2026 as well as into 2027. So we're excited about getting our hands on some of that equipment. But like I said, this is step 1, getting this announced. Hopefully, we'll close here in a month or 2 and be ready to guide and go forward from there.

The next question is from Jim Rollyson of Raymond James.

Congrats. And Mickey, just -- I know you're going to get this question. I know you've been asked this question as you've been talking about this for the last while, but I'll go ahead and ask it. Given that you're now entering the power business, kind of curious just how that shapes your view or vision around the compression business? And maybe following from that, how you think about capital allocation between the 2 businesses and opportunity sets?

I appreciate you joining us this morning. But look, nothing has changed on our view of the compression business. I touched on it a little bit in the prepared remarks there. We are seeing as much or more demand on the compression side as we've ever seen. We believe that the right thing to do is continue a disciplined capital approach on the compression side that we've demonstrated for the last 3, 4, 5 years that's worked really well for us, and we don't plan to change that at all.

We want to continue growing the compression business. It's a wonderful foundational business for us to leapfrog into this power business. And then on the other side of that, we want to be able to deploy as much capital as we think is reasonable into the power business to continue growing that. So from a capital allocation framework perspective, we're still -- we're not ready to talk about that publicly yet as we're trying to -- like I said in the last question, we're still trying to figure out kind of what the equipment availability is in '26 and '27 in the immediate term and then develop a capital plan throughout in '27 and '28 as we look at equipment availability out there beyond that. So like I said, the compression business is still a wonderful business, and we want to continue to deploy an adequate amount of capital in that and then also grow the power side as well.

Got you. And then as a following up, maybe, John, the question for you. I realize this will depend on how this plan develops, but many of the folks in your competitive landscape in this business right now are obviously talking about some external project finance type of financing. And I'm just curious how you all are thinking about financing organic growth as we think about this scaling up over time.

Yes. I'm going to kind of go back to where Mickey said, too. We're still going to kind of have to dial everything in. I think it does. The growth opportunity, as Mickey said, is as big as you want it to be. We're going to honor the balance sheet big time, and we know that's very, very important to us. And so I think it's going to allow us an opportunity to get real creative, whether that's through partnerships, whether that's through financing opportunities, whether that's through kind of tapping more in the bond markets.

Again, we think that it's going to be a much more creative financing playing field going forward than it has been at Kodiak in the past because we just are so excited about the return on new investment on this power side as well, too. So I'll leave it at that.

The next question is from Doug Irwin of Citi.

I just want to start with the contracts. You had a comment about seeing power contracts kind of shift to that 5- to 7-year duration range. Could you maybe just talk about what the duration of these assets looks like today? And then more broadly, kind of any sense of where you see Kodiak's overall portfolio contract duration trending over time with the addition of these assets?

Yes. Doug, this is Mickey. Thanks for joining us. Today, as you'll see in the presentation, about 2/3 of these assets right now are deployed on data centers currently with another 1/3 deployed on kind of industrial type applications as well as oil and gas microgrid type of applications. I think those industrial and microgrid applications kind of trend in the 1- or 2-year contract kind of time line length, whereas the data center stuff, we're seeing the shift up to 5- and 7-year contracts and even up to 10 or 15 in some of the larger discussions that we've had there.

So to our understanding. So the -- our goal will be to trend as much as possible towards long-term infrastructure type primary power contracts. So we'd like to extend the contract terms of all this kind of stuff out and get it locked down for a long period of time and really mirror what we've done with the compression business, right? It's let's make sure we're setting it in the right places with the right customers and with the right contracts and that way that we minimize volatility and maintain stable cash flows.

Understood. That's helpful. And then as a follow-up, just curious on the base compression business. We've seen you divest a lot of noncore horsepower over the last few years. Does the addition of these power assets and the fact that they're competing for capital here moving forward, maybe change the way you're thinking about some of your compression fleet outside of the Permian? Could we potentially see some more divestitures coming?

I wouldn't say there's anything like that imminent or that we've shifted our strategy at all. We continue to believe that our core base compression business is, like I said before, a wonderful platform of stable fee-based cash flows that is going to underpin the cash flow to continue to grow both sides of this business right here. So I wouldn't suspect anything like that is imminent or is going to change anytime soon.

The next question is from Eli Jossen of JPMorgan.

Maybe just to dive deeper into the relationship with CAT and the ability to secure equipment to expand both the compression fleet and also the new power gen assets. Are there synergies specifically with CAT? Or how do you guys think about the mix shift equipment between the 2 segments and your ability to deploy them and maybe how the returns compare between those 2 businesses as well?

I'll let John jump in here on the returns side of it. But as far as the synergies go kind of with Caterpillars and the adjacencies there goes, I mean, we've been one of the largest buyers of Caterpillar engines in the oil and gas side over the last several years. And so we obviously have a great relationship with them, and we think that's only going to get better as we increase our buying power with Caterpillar.

So I think that, that's a big benefit to us, and we think that we'll be the first of our kind to be buying on both sides of the house here. So it's going to be an interesting. We've got a lot of conversations to have with CAT. We haven't had a chance to have too many of those yet as we've got to respect the rules of pre-closing here and all that kind of thing. So we're still -- a lot of that is to be determined, but we think it only is going to make our relationship better and is only going to enhance our buying power with CAT and others. So I'll let John jump here on the return side.

Yes. And I just want to add on to what Mickey said. So Mickey and the team at Kodiak has spent 15 years building a reputation within the Caterpillar network that includes CAT itself, includes the dealers, it includes CAT finance. And I think the reputation is a great one and the partnership is a great one. So we think it's absolutely leverageable, and I think that's going to extend into the debt capital market side, into the partnership side.

I think that's part of the overall kind of strategic synergy in this transaction is that we've worked really hard to get to where we are today, and now we're going to apply everything that we've done in this business to the power business, and we're going to get there, too. In terms of returns, we said it in the deck, and we'll say it over and over.

And I think you can corroborate this with any of the other, I'll call it, OFS players and people like that, that have stepped into the distributed power business. returns are pretty comparable, kind of sub 5-year EBITDA creation multiples, plus or minus 20% internal rates of return. Mickey mentioned the contract duration earlier as well, like we think the opportunity set is there on the power side for prime power contracts to extend those pretty meaningfully.

So again, our model is infrastructure cash flows, steady up into the right type business. And through this acquisition, we think the up and to the right can kind of -- the slope can shift upward a bit more. And so we're just really excited about this next, call it, 90, 180 days to get our arms around it, but more excited about, call it, the 2- to 5-year type outlook.

Awesome. And then maybe, John, just further on the capital allocation piece. You guys have been pretty committed to a balanced approach, shareholder returns. Can you just speak a little bit to what a larger scale business means for those returns and how you balance that with deleveraging post deal, the overall capital allocation framework as you see it?

Sure, absolutely. So we and our Board take capital allocation very seriously as do our investors and that kind of starts with the kind of organic growth that we see, the CapEx and then down to the dividends and shareholder -- excuse me, share repurchases. So I would say kind of like sitting here today, as we evaluate it, we don't see any change in terms of our kind of dividend type model where we're going to pay out a healthy percentage of our discretionary cash flows going forward in the form of the dividend.

In terms of share repurchases, like everybody knows, it's been around Kodiak that we leaned into that heavily last year to help grease the skids for EQT sell-down and help act like a catalyst in a couple of the debt financing transactions. Going forward, we'll evaluate the best uses of cash every quarter with our Board and make a great recommendation, but I would expect leaning into the share repurchases days, the returns on kind of new power sets and on compression are going to probably dwarf that going forward. And so we'll just have a programmatic approach to try to minimize dilution from management compensation vesting and all that. But again, we think the real juice and the best returns for the shareholder as we sit here today are going to be on organic CapEx in the power and compression business.

The next question is from Neal Dingmann of William Blair.

John, my first question is just on plans for your future power generation build-out. It looks like looking at DPS, I think what is about 60% reciprocating generators, about 40% turbine. I'm wondering when you all sort of -- I know it's still super early, nothing sort of ways from even closing this. But when you think about maybe building out the future power gen, do you think more maybe potentially on the -- I would say, on the turbine side, given the higher horsepower. And it seems like if you're looking at maybe, I don't know, some key areas, it seems like people are looking for higher horse or any thoughts on that yet or it's still too early?

Yes. I mean we'll still -- the details are still a little bit TBD there, Neal. But I think that the common thought process probably is in the short term as we want to get our hands on additional megawatts in '26 and early into '27, the resets are going to be easier to come by in that kind of time frame. But as we shift to larger type power infrastructure type deals with data centers and that kind of thing, I think that the shift will obviously move towards turbines as we get into the queue for some of that supply chain out into '28 and '29.

That makes a lot of sense. That's kind of what I was looking for. And then secondly, just quickly, do you think now by having and adding power, it will provide some key advantages on the compression side? Or is compression already so tight that I'm just wondering like will it help you get into more customers or key areas that you're maybe not in that you wanted to get on the compression?

Just wondering, again, or is the compression business already so tight given the, what, 80-plus week backlog of motors, Cat engines, does it not provide really anything significant on that side?

Yes. Look, I think there is some opportunities there that we have to kind of figure out, which those engine deliveries are now 90-plus weeks, by the way, Neal. So -- on the compression side. So we think that there is some opportunities that there might be able to unlock there, specifically on some of our customers and their desire to maybe go to electric motor-driven compression that they haven't had access to grid power in the past.

We think that some of those conversations are going to be pretty interesting in our ability to provide some power at least as a bridge to grid or ultimately, as we've talked about before, as primary power that's permanent on that microgrid type of installation they're supporting electric motor-driven compression as well as other operations. So more to come on that, but I think that there definitely is an opportunity there.

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

Yes. Thank you, operator, and thanks for everybody for participating in today's call. If you have follow-up questions or we didn't get to you today, please reach out to our Investor Relations team. We'll talk to you in a few weeks on our fourth quarter earnings call. Thanks a lot. Bye-bye.

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

Greetings, and welcome to the Kodiak Gas Services Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded.

I will now turn the conference over to your host, Graham Sones. Please go ahead.

SP999 Good morning, and thank you for joining us for the Kodiak Gas Services conference call and webcast to review third quarter 2025 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will discuss our financial and operating results and 2025 guidance, then we'll open the call for Q&A.

There will be a replay of today's call available via webcast and also by phone until November 19, 2025. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, November 5, 2025, and therefore, you are advised that such information may no longer be accurate as of the time of any replay listening or transcript reading.

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

The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website.

And now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I'd like to begin today's call as we do with all meetings at Kodiak with a safety topic. As we head into the holiday season and prepare to travel and spend time with friends and family, I want to remind everybody that safety doesn't stop at the workplace, whether you're commuting, visiting family or running errands, please avoid distractions while driving, no text or call is worth risking your safety. Please join me in committing to staying focused behind the wheel, so we can enjoy the holidays with those who matter most.

We had a busy third quarter, delivering solid financial results and executing on several strategic actions to improve the operational and financial outlook of the company while remaining focused on returning capital to shareholders.

Let me begin by discussing some of the strategic actions we have taken over the past few months. First, we went live with our new ERP system in August that was delivered on time and under budget. We consolidated several legacy systems into an integrated platform that will increase our visibility with real-time financial and operational information and enable us to deploy multiple facets of AI technology into our everyday business.

The implementation of the new ERP system involved a lot of hard work by the team. and I want to thank everyone involved for their dedication to getting this important project over the line. The new ERP system is a foundational step in our genetic AI initiatives. The team is currently working on multiple AI agents across a broad range of processes, including parts sales, customer order handling and supplier and inventory management.

We're specifically excited about our tech parts agent, which will assist our field service technicians in locating the right parts for the job in an expedited manner. These agenetic AI initiatives complement our operational AI initiatives, which include condition-based preventative maintenance scheduling and predictive failure detection, just to name a few.

The next, as a result of the CSI acquisition 18 months ago, we inherited operations in 5 foreign countries. As part of our strategic goal to high-grade our fleet and concentrate capital and efforts on markets with the best combination of growth and returns, we made a decision to exit all of our international operations.

I'm pleased to report that during the third quarter, we successfully exited the last of our international operations by divesting our operations and assets in Mexico, which included the sale of approximately 19,000 operating horsepower. We had great people in those countries, and I wish the buyer as well, but we firmly believe that the U.S. is the right place to be for Kodiak in the contract compression business.

Relative to the international markets where we previously operated, including Argentina, Canada, Chile, Romania and Mexico, we believe the U.S. offers higher returns, lower operating risk and a superior growth outlook for many years to come. And we successfully divested all of these operating areas in under 18 months from the close of the highly successful acquisition of CSI.

The next major initiative in Q3 that I'd like to highlight is the strategic moves we made with our balance sheet. During the quarter, we termed out $1.4 billion of debt through 2 bond offerings at a weighted average cost of debt of 6.6%, including the first-ever 10-year term bond issuance in the compression sector. These offerings were another strategic step in derisking our business and setting us up for continued growth and success by allowing us to stagger and extend our debt maturities and significantly increase our liquidity. We ended the quarter with $1.5 billion of availability in our ABL facility, giving us ample flexibility to pursue exciting future growth opportunities.

Finally, we returned an industry-leading amount of over $90 million to our shareholders in the quarter through a $50 million share repurchase and our dividend. Furthermore, as a result of the underlying strength of our business fundamentals, our strong financial results and our outlook for future discretionary cash flow, we increased our quarterly dividend by another 9% to $0.49 per share, equal to approximately 35% of our discretionary cash flow, our stated goal for returning capital to our shareholders.

Since September 2024, the $110 million in share repurchases we've completed, have allowed us to reduce our share count by nearly 3.5 million shares. We have approximately $65 million available under this program, and we expect to use it. Share repurchases are a fundamental and exciting part of our overall shareholder return strategy.

We ended the quarter with $4.35 million in revenue generating horsepower. Average horsepower per revenue generating unit was $965, a figure that continues to lead the industry and that has increased each quarter since we closed the CSI acquisition.

In the third quarter, we deployed approximately 60,000 new horsepower that averaged more than 1,900 horsepower per unit and roughly 40% of those new units were electric motor driven. We also added about 30,000 operating horsepower through a small purchase leaseback with an existing customer and through the exercise of an early buyout option on some previously leased units.

Including the exit from Mexico, we divested approximately 26,000 operating horsepower of nonstrategic units during the quarter. Our investments to grow the fleet along with strategic divestitures of noncore units drove our fleet utilization to roughly 98%, another industry-leading metric.

Our large horsepower units remain fully utilized at over 99%, reflecting the continuing strong demand for large horsepower compression, and we expect that to continue.

With new or expanded pipelines representing over 4.5 Bcf a day of incremental Permian gas takeaway capacity coming online by the end of 2026, our Permian customers have been very active this fall in ordering new compression to be delivered next year. In addition to the new pipelines, there's another 4 Bcf a day of sanctioned pipeline projects that are expected to be online by the end of the decade with numerous other Permian egress projects in the works.

Given the recent surge in new compression orders, new pipeline takeaway capacity and forecasted natural gas volume growth, lead times for new compression equipment has significantly stretched out to upwards of 60 weeks. We'll give you more details on our 2026 capital spending plans next quarter, but as a result of the high level of demand across the industry and our customers' needs, our capital plan for 2026 is effectively fully under contract.

Before we discuss our third quarter financial results, a few thoughts about the macro environment. Since oil growth below $70 in the first quarter, we have seen the U.S. E&P industry adjust to the lower pricing environment in different ways. Permian operators have high-graded their drilling locations and realized increases in drilling and completion efficiencies, such as reducing days to drill to help offset the decline in oil prices and rig count.

The result is that we continue to see oil production growth from the Permian Basin and the U.S., and our customers continue to see accelerating growth in natural gas. So we expect 2026 to be a big year in gas growth from the Permian Basin. Given this backdrop, combined with the strength of our business model, the demand outlook for large horsepower compression remains very strong.

Kodiak has continued to deliver top line revenue growth, margin increases and Contract Services segment growth throughout the year. Also, as I'll discuss shortly, we have taken several steps to reduce costs and boost our operating efficiencies. We see no reason why this dynamic won't continue into 2026, driving further revenue growth and margin improvement.

Now turning to third quarter 2025 results. We once again delivered sequential growth in Contract Services adjusted gross margin and set another record in quarterly discretionary cash flow. As John will discuss in more detail, adjusted EBITDA for the quarter of $175 million was negatively impacted by over $5 million of nonrecurring SG&A expenses associated with the divested Mexico business.

Given strong customer demand, historically high industry-wide utilization and disciplined decision-making by the contract compression industry, pricing conversations with customers continues to be constructive. We completed the majority of our planned 2025 contract renewals in the first half, but in Q3, we recontracted just over 200,000 horsepower and above our current fleet average.

Contract Services adjusted gross margin percentage matched the high watermark we set last quarter at 68.3%, a 230 basis point increase compared to the third quarter of 2024. In addition to fleet growth, optimization efforts and pricing, we're seeing margin improvements from setting new large horsepower units and our investments in technology to drive fleet uptime and reliability.

Specifically, we've reduced lube oil consumption on a per horsepower basis through our AI and machine learning deployment. And our fleet reliability center that monitors our fleet remotely 24 hours a day is helping us identify problems before they become more expensive repairs with longer downtime. This drives lower engine and compressor repair costs and leads to better uptime for our customers.

In our other services segment, third quarter results were consistent with our expectations. We're seeing positive momentum in our station construction business as evidenced by the recent award of a 30,000 horsepower compressor station that will feed supply fuel gas to a power plant located in Texas. This project is expected to kick off soon and will take roughly a year to complete.

As Texas and other areas in the country look for additional natural gas-fired power plants to satisfy surging electricity demand, we're optimistic that more opportunities like this will arise. I'd now like to pivot to a few things that I believe are an underappreciated part of Kodiak's investment case, our short cash conversion cycle and our industry-leading discretionary cash flow yield.

Unlike other midstream and infrastructure companies with lengthy construction projects that require substantial percentages of total capital expenditures long before revenues are generated, Kodiak has a short time frame between capital outlay and first revenue. The ability to quickly generate cash plus the strong returns on our growth investments, allows Kodiak to generate a discretionary cash flow yield that we believe to be among the best in the midstream investment universe.

We generated nearly $117 million in discretionary cash flow in the third quarter and over $450 million over the last 4 quarters. That equates to approximately 15% discretionary cash flow yield at our current stock price. We define discretionary cash flow as adjusted EBITDA, less cash taxes, cash interest and maintenance CapEx. This represents the starting point for our capital allocation framework. We continue to use this cash flow to return capital to shareholders, buying back approximately $50 million in stock in Q3 2025 and paying out a well-covered quarterly dividend.

Now I'd like to turn to the outlook for the remainder of 2025. Even following the sale of Mexico and the incurrence of extraordinary and nonrecurring SG&A expenses during Q3, we remain on track to hit our annual revenue, margins and adjusted EBITDA guidance, and we're right where we expected to be with capital spending.

At the end of the quarter, we have deployed about 90% of the new units for the year with the remainder expected to be installed in the fourth quarter. Given our reduced outlook for cash taxes, we're on pace to exceed our discretionary cash flow guidance. Therefore, we increased our outlook on this metric for the year.

In summary, we're very pleased with our third quarter results. We're on track to achieve our full year guidance and the steps we've taken this year position us for continued margin growth in the future. Our focused large horsepower business model is helping us generate industry-leading discretionary cash flow yields, position us to further strengthen our balance sheet and return cash to shareholders.

And now I'll pass the call to John Griggs to further discuss our financial results and our updated guidance for the year. John?

Thank you. As Mickey made clear, we accomplished some really important strategic objectives during the quarter. Actions that serve to set us up well for the next leg of returns oriented growth in the years to come.

Let's turn to the quarter's highlights, and I'll start with our Contract Services segment. We generated solid revenue growth in this segment in Q3 as evidenced by a year-over-year increase of 4.5% and quarter-over-quarter increase of 1.2%. Revenue per ending horsepower was $22.75 this quarter, a nice uplift versus the same quarter last year and effectively flat sequentially.

We anticipated this outcome, and we called it out on our last quarterly call because we knew we were adding a lot of revenue-generating horsepower during this quarter, but only a portion of that horsepower revenues. With less new horsepower being set in Q4 and in conjunction with the recontracting rate increases and solid pricing from new units, Mickey already spoke to, we expect to see a nice uptick in the revenue per horsepower metric for Q4.

Relative to Q3 of '24, Contract Services adjusted gross margin percentage increased by 230 basis points to 68.3%. The margin improvement is a reflection of the success we've realized in achieving higher pricing for horsepower alongside lower operating expenses per horsepower. We've driven these results through a relentless focus on high-grading the fleet through large horsepower gas and electric additions combined with the sale of noncore low-margin units. And we're habitually rolling out new technology and process initiatives that either reduce costs to first spend or improve labor productivity or some combination of the 3.

In our Other Services segment, we generated revenues and adjusted gross margin, in line with our expectations. We've seen a resurgence of contract activity in that plus our backlog gives us confidence that we remain on track to achieve our annual revenue and margin guidance.

Reported SG&A for the quarter was $37.8 million, and after adjusting for nonrecurring and noncash items, it was $31.5 million. As Mickey mentioned, the $31.5 million still includes approximately $5 million in professional expenses associated with the cleanup and sale of our former Mexico operations. With our Mexico operations and assets now sold, we expect SG&A to revert back to a more normalized level during Q4.

During the quarter, we booked a noncash charge of $28 million in other expenses that was related to our multiyear negotiation with the state of Texas over the taxability of our compression assets. We've recently made significant progress in gaining clarity on the issue and ultimate potential selling.

The charge takes our reserve to an amount we believe will satisfy this obligation in full. Based on our current discussions, we'd expect to pay the state and close out this accrual in early '26. By doing so, we'll eliminate a significant contingent liability that has been with us for many years.

And importantly, we believe that our view and the state's view on taxability of these assets is relatively low, and we don't foresee any changes to our future margins or return on investment associated with the tax structure going forward. Net loss attributable to common shareholders for the third quarter was $14 million or $0.17 per diluted share. Excluding the loss on the sale of our Mexico business, the Texas sales and use tax charge and other onetime items, adjusted net income was $31.5 million or $0.36 per diluted share.

Maintenance CapEx for the quarter was approximately $20 million and trending toward the low end of our guidance range for the full year. Our investments in technology and the insights we're gaining from that are allowing us to extend preventative maintenance intervals and commensurately associated spending on a major portion of the fleet.

We're increasingly seeing the benefit in our maintenance CapEx and believe we'll see more of that going forward as well. As expected, Growth CapEx more than doubled quarter-over-quarter to approximately $80 million based on the addition of the roughly $60,000 in new horsepower.

Year-to-date, we've added roughly 140,000 horsepower in on pace to slightly exceed our forecast of $150,000 for the year. Other CapEx was $12 million for the quarter. As we previously highlighted, other CapEx was front-half weighted in 2025 due to capitalized spend on our new ERP system as well as some residual spend on our CSI-related fleet upgrades, which are now complete.

The discretionary cash flow came in at $117 million, an increase of approximately $14 million versus the comparable quarter from last year. Free cash flow for the quarter was $33 million. With regard to the balance sheet, we made great strides in the execution of our finance strategy. We achieved our goal of terming out the majority of our ABL into bonds with staggered maturities, including the first 10-year bond in the compression space. These actions derisk our balance sheet and add a further element of cash flow stability to our business. which, in turn, helps us execute on our capital allocation and shareholder return strategies with enhanced confidence.

During Q3, we issued $1.4 billion of bonds, exiting the quarter with $521 million drawn on the ABL and leaving us with approximately $1.5 billion in availability. Total debt at quarter end was approximately $2.7 billion. We exited the quarter with a credit agreement leverage ratio of around 3.8x. And up from the prior quarter, mainly as a result of debt financing fees as well as our $50 million share repurchase from EQT. We expect to exit the year at about 3.6x.

Last, our Board recently declared an increased dividend of $0.29 per share, even with 2 increases totaling nearly 20% this year, our dividend is well covered at 2.9x. Briefly on guidance. As we close out the year, we remain on track to hit our segment level guidance for revenues and margins as well as adjusted EBITDA, even after all the extra spend on Mexico during Q3.

On CapEx, our prior guidance remains unchanged as the vast majority of 2025's capital spending is now behind us. We expect the fourth quarter CapEx and new unit growth will decline from Q3 levels. Thanks to our reduced outlook on cash taxes and the reduced spend we're seeing in maintenance CapEx, we're on pace to exceed our prior guidance for discretionary cash flow. We now expect to generate between $450 million and $470 million in discretionary cash flow for the year.

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

Thanks, John. Our business model, which generates stable and recurring cash flows is performing well in the current market. The demand outlook for contract compression remains robust, demonstrated by our ability to maintain strong pricing and continued growth in our industry-leading horsepower utilization. Additionally, our new unit horsepower order book is essentially fully contracted for 2026. And as we capitalize on the robust outlook for growth in natural gas.

Besides the top line growth, we are successfully making steps to increase margins by divesting noncore units and investing in technology to reduce costs and increase uptime. These targeted actions have enabled us to reach new financial milestones across several important metrics. As a result, we delivered year-over-year increases in contract services revenue, adjusted gross margin and set a new quarterly record in discretionary cash flow, strengthening our ability to return capital and drive ongoing value for Kodiak shareholders.

Thank you for your participation today, and now we're happy to open up the line for questions. Operator?

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

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

Doug, this is Mickey. Thanks for being with us today. Yes, we're not quite ready to give guidance into '26 quite yet. But like we said in our prepared remarks, we're effectively fully contracted out for what we plan on spending for next year. We've been pretty clear about the fact that our plan is to spend kind of roughly 60% of our discretionary cash flow on our growth capital for any given year, and we think that next year ought to be pretty comparable to that. And we have contracts out into the latter parts of next year that ought to be somewhere in that ballpark.

So -- next quarter, when we give the official guidance for '26, we'll give that in more detail, but we feel pretty good about where we're at right now and should have continued growth into next year.

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

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

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

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

John, good to talk to you this morning. So in Q3, we had a small purchase leaseback transaction that we executed on that was really good for us and helped us grow the revenue-generating horsepower by above that 30,000 horsepower mark. So we've got good conversations with that kind of stuff going on. Nothing -- no big things super imminent right now, but those conversations are happening with customers.

And just kind of back to Doug's question that I just answered, right? Like the strategic initiatives that we executed on in this quarter with the ERP implementation that allows us to get that real-time financial and operational data at our fingertips, as well as the bond issuance freeing up a lot of liquidity for us is those were 2 really important steps as a prerequisite to executing on some larger type of not only M&A, but also kind of like strategic transactions with our customers.

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

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

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

And we'll go next to Connor Jensen with Raymond James.

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

Yes. I mean I think lead times are a function of the demand in the industry, right? And so I think you're seeing this -- the industry see an extraordinary amount of demand from not only takeaway capacity increases in the Permian Basin, but significant volume increases that are being projected for natural gas, not only in the Permian, but in other basins as well. So I think you're starting to see this LNG capacity come online and you're starting to see a significant amount of volume increase projections from our customers and others that are saying, man, we need a lot of compression and we need a lot more of it.

So I think that is all going to be positive for pricing going forward, and we expect that we will continue to have positive pricing discussions with our customers.

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

Yes. I think going forward, the divestitures will come at a lower pace, now that we've successfully exited Mexico and Argentina. Those businesses were definitely at a lower margin contribution than the standard large horsepower compression that we have that's very, very concentrated in the U.S., especially in the Permian Basin.

So we're certainly divesting of lower-margin business there. So I would consider -- I would definitely think that it would be helpful to our overall margin. So -- but it's pretty small contribution. So it's not going to be a big impact.

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

Moving next to John Anis with Texas Cap.

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

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

Yes. I mean I think that you're definitely seeing a little bit of a pull back away from electric-driven compression orders and inquiries coming in. It's just a power problem, especially in the Permian Basin. They're just the lead times for getting power and connecting the grid access is just a problem for people that have aspirations to go to electric. I think those aspirations are still there. They just are looking at shorter-term solutions and that kind of thing that are going to than the longer-term electric desires that they have.

So the power problem is real, and it's kind of shifting some of those customers of desire to go electric.

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

John, it's really hard for us to quantify what of our -- how much of our compression is going to serve LNG versus data center demand and that kind of thing. -- once that gas gets into a pipeline, you never know if that certain molecule is going to support fuel for power for data center or it's head in to the Gulf Coast to be liquefied and sent to Europe for LNG.

So we really can't tell the difference from our standpoint, we do know that there's a lot of demand for natural gas, and it all requires multiple stages of compression. It's good for our business. So we see it coming down the pipeline, and we don't see any differences really from those standpoints of contract terms or duration there. So from where we sit in that value chain, it's too early to kind of determine

Moving next to Zack Van Everen with TPH & Company.

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

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

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

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

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

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

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

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

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

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

Yes. Selman good question. And quite frankly, the bulk of the capital spend by our customers has gone to the Permian Basin, like you said. So we key on the Permian probably more than most people. But I will tell you there is some uplift in opportunities that we're seeing in some other basins.

We've got some really interesting opportunities that we're taking advantage of up in the Northeast as well as in the Eagle Ford as well as in the Rocky Mountains. So we're seeing some of those other basins start to have a lot more interest and activity.

So it's a good thing, and we think that certainly from a natural gas standpoint of support and LNG build-out and data center build-out and that kind of thing, some interest from these other basins is a quay thing for us.

And we'll hear next from Eli Jolson with JPMorgan.

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

Yes, sure. So this is John. I'll take I'm sure Mickey, he'll chime in, too. So look, you asked a broader question. I'm going to say that our capital allocation framework that we've been consistently applying since we went public is still the 1 that we're going to stick to, and that's an algorithm that kind of looks at that 3% to 4% growth in horsepower on a year-over-year basis for several years. generates upper single digits EBITDA growth for several years in a row, and that should translate into a similar, if not slightly higher discretionary cash flow growth rate going forward as well, too. we want to honor the 3.5x long-term leverage target that we've kind of set forth. And so we will always want to protect that balance sheet.

But then we've got this pile of discretionary cash flow that we have the optionality and what we're going to do stuff with. We're still seeing wonderful returns. We always talk about kind of the new horsepower sets that we see in generating really, I guess, high-quality returns well above our hurdle rates on new horsepower. So we'll continue to do that.

And then as we think about M&A, Mickey answer a lot of those questions at the beginning. So we've gotten so many of these things that have kept us pretty focused post going public, post-CSI integration, exiting international operations, exiting the small horsepower business implementing the new ERP system that we're really, real geared up to just take advantage of this kind of I'll call it, new management capacity that we have for the next chapter of Kodiak growth.

So we're going to look at all opportunities within compression that fit our kind of pistol, which is going to be the large horsepower, high-quality assets in the right basins. And then as we think about power, how can you not think about power in a world that we live in, our customers ask us to do it. We're in the electric power business. We have relationships with all of the people that are buying their own distributed power that are concerned about what's going to happen to the grid and stability. So it's conversations that we'll continue to have going forward.

And then the last is that opportunity to work creatively with our customers to potentially do the purchase leaseback type transactions. Those would be wonderful ways to grow our business without growing industry capacity to a degree and can make great financial sense for investors. So it's really -- it's -- we're sitting really well for 2026 to try to think about, once again, the next chapter of Kodiak's growth that is in addition to this awesome long-term business model that we have in large horsepower U.S. compression.

Yes, so really appreciate the color there. And then maybe just kind of back to some of the the 6-week lead times and the contracting that you're seeing. Can you just talk a little bit about pricing trends, particularly in the Permian. I know those continue to move up into the right, but just what you guys are seeing on the pricing front and how you expect that to evolve in the future?

Yes, Eli, we don't expect things to change that. I think we've still got the ability to command leading edge pricing that we have for the last couple of years. We've repriced a good bit of our fleet, but there is still a significant piece of our fleet that we haven't repriced. And so we expect kind of the existing price book of the existing fleet to continue to move up over time as we adjust some of the legacy contracts that we had that are 3 or 4 years old.

And then we expect to continue to command kind of leading-edge pricing on the unit deployments that we have coming out the door, too, because quite frankly, with the inflation and increased cost of operations on that stuff. We have to command a higher price to come in the same kind of margins that we've had. So we'll be focused -- laser-focused on those, but we think that the pricing situation remains pretty status quo, and we think we can still drive pricing on new units and the existing fleet.

Anything Mr. Jossen?

I leave it there.

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

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

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