Kodiak Gas (KGS) Q1 2026 Earnings Transcript

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DATE

Monday, May 11, 2026 at 11 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Mickey McKee
• Executive Vice President and Chief Financial Officer — John Griggs
• Investor Relations — Graham Sones

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TAKEAWAYS

• Total revenue -- $346 million, a 5% increase, driven by additional horsepower, price increases, and operational execution.
• Contract services revenue -- Increased 6% year over year and 2% sequentially, attributed to higher average horsepower and improved pricing.
• Revenue-generating horsepower -- Ended the quarter at 4.4 million, growing by approximately 35,000 sequentially, with 20,000 acquired near quarter-end via purchase-leaseback.
• Average horsepower per revenue-generating unit -- Reached 977, up from 943 at the end of the prior-year quarter, reflecting ongoing fleet high-grading and focus on large horsepower units.
• Fleet utilization -- Achieved 98%, indicating operational efficiency and high demand.
• Contract services adjusted gross margin -- Improved to 70.6%, up 138 basis points sequentially and 286 basis points year over year; the highest on record for the company and the seventh consecutive quarterly increase.
• Other services revenue -- Rose 25% sequentially, primarily due to increased station construction activity; segment margin also improved to approximately 16%.
• Adjusted EBITDA -- Set a new record at $190 million, increasing 7% year over year, reflecting performance across all segments.
• Adjusted net income -- $52 million, or $0.59 per diluted share.
• Discretionary cash flow -- $126.5 million, up 9% year over year, driven by EBITDA growth and lower cash taxes.
• Net debt -- $2.7 billion as of quarter end, following issuance of $1 billion in senior notes at 5.75% to redeem 2029 notes and reduce ABL exposure.
• Leverage ratio -- Reported at 3.6x as of March 31, below the stated 4.0x long-term target.
• Dividend declaration -- Board declared a $0.49 per share dividend to be paid in May; current discretionary cash flow covers this 2.9x.
• Maintenance CapEx -- $18 million for the quarter, aligned with forecasts.
• Other CapEx -- $7.5 million, matching expectations.
• Growth CapEx -- $86 million, including $24 million for a compression purchase-leaseback, $18 million allocated to new power generation equipment, and approximately $44 million devoted to compression additions and fleet upgrades.
• Compression fleet growth target -- Management reaffirmed a goal of adding approximately 170,000 horsepower for the year and reaching at least 5.2 million horsepower by decade-end.
• Purchase-leaseback transaction -- Completed during the quarter with a Permian producer, resulting in a seven-year compression contract and immediate fleet expansion.
• Contract extensions -- Entered a 10-year compression contract extension with a top customer and is finalizing another of similar duration.
• Distributed power orders -- More than 260 megawatts secured; 61 megawatts scheduled for 2026 with the balance between 2027-2029; additional 1.3 gigawatts in advanced negotiation for delivery through 2030.
• Power equipment mix -- Initial 260 megawatt procurement is around 50% reciprocating engines and 50% turbines, with a future mix anticipated to be approximately 25% reciprocating and 75% turbine, reflecting data center application needs.
• Distributed power fleet growth target -- Management aims to grow the power fleet by 300 to 500 megawatts annually through 2030, targeting roughly 2 gigawatts by year-end 2030.
• Expected unlevered return on power investment -- Management projects greater than 15% unlevered returns with EBITDA build multiples around 5x.
• 2026 guidance: Adjusted EBITDA -- Increased to a range of $820 million to $860 million, reflecting expansion in both core compression and power segments.
• 2026 guidance: Discretionary cash flow -- Projected between $520 million and $570 million.
• 2026 guidance: Compression infrastructure revenues -- Low end raised due to recontracting progress and visibility on unit growth; adjusted gross margin guidance increased to 68.5%-70%, considering oil price impacts.
• 2026 guidance: Power infrastructure revenues -- Forecast set at $95 million to $125 million with an adjusted gross margin range of 60%-70% as the business is integrated and contracts are executed.
• 2026 growth CapEx -- Compression: $245 million to $275 million; Power: $400 million to $500 million, with approximately $90 million for 2026 deliveries and the remainder for post-2026 equipment.

SUMMARY

Kodiak Gas Services (NYSE:KGS) confirmed all 2026 compression unit deliveries are fully contracted, and over 40% of 2027 deliveries have been secured. Ample liquidity exists via the company's asset-based lending facility and multiple financing sources, supporting a period of infrastructure-driven expansion. The company is proactively securing long-lead items, including engines and packaging shop capacity, well in advance through 2029. Advanced technology deployments in field operations are credited for reductions in compression parts expense and improved equipment uptime. Kodiak Power Solutions, the newly integrated subsidiary, operates under wide initial margin guidance to accommodate transition, short-term contracts, and scaling dynamics.

• CEO Mickey McKee stated customer commitments include new 10-year and 7-year contracts, demonstrating increasing contract durations and highlighting infrastructure-like demand for services.
• CFO John Griggs indicated expectations for power segment revenue contributions to be immaterial until 2027 despite equipment deliveries in 2026.
• Management acknowledged higher oil prices may elevate lube oil and fuel expenses, influencing mid-year cost assumptions for compression margins.
• Fleet high-grading, through divestiture of noncore small horsepower assets, raised average horsepower per unit and sustained revenue per horsepower versus peers.
• Kodiak Gas Services is maintaining separate operations groups for compression and power but expects possible cost and operational efficiencies as the power business matures near core asset locations.
• Leverage policy allows periodic increases above 4.0x as power investment accelerates, with a previous stated target of sub-3.5x leverage by 2025 already achieved.
• Customer conversations suggest distributed power is viewed increasingly as a permanent solution, with many long-term data center contracts now exceeding a decade in duration.
• Kodiak Gas Services confirmed active consideration of further purchase-leaseback transactions and opportunistic compression acquisitions as industry tightness persists.
• Advanced discussions are underway to secure up to 1.3 gigawatts of incremental power capacity, enabling competitive positioning for data center and microgrid opportunities.

INDUSTRY GLOSSARY

• Recip: Short for reciprocating engine, used in power generation and compression applications, valued for modularity and efficiency in certain load profiles.
• Balance of plant (BOP): Auxiliary equipment and systems necessary to support core power generation assets, such as transformers, switchgear, fuel handling, and cooling infrastructure.
• Purchase-leaseback: Transaction wherein assets are purchased from a customer and immediately leased back under a multiyear service contract, facilitating fleet expansion and long-term customer retention.

Full Conference Call Transcript

Graham Sones: Good morning, and thanks for joining us for the Kodiak Gas Services, Inc. conference call and webcast to review our first quarter 2026 results. Joining me from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Executive Vice President and Chief Financial Officer. After my remarks, Mickey and John will cover recent market developments, share an update on our power strategy, and walk through our results and updated 2026 outlook, including our new power segment. Then we will open it up for Q&A. A replay of today's call will be available by webcast and phone through May 25, 2026. Replay details are on the Investors tab of our website at codietgas.com.

As a reminder, the information discussed today speaks only as of 05/11/2026 and may no longer be accurate by the time you listen to a replay or read a transcript. The comments made by management during this call may contain forward-looking statements within the meaning of U.S. Federal Securities Laws. These statements reflect management's current views, beliefs and assumptions based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct.

The comments will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in our earnings release, which can be found on our website. Now, I would like to turn the call over to Kodiak Gas Services, Inc.'s President and CEO, Mickey McKee. Mickey?

Mickey McKee: Thanks, Graham. 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 is a good reminder that driving is one of the riskiest things many of us do every day. That is why we have all Kodiak 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 Gas Services, Inc. is well positioned to meet this challenge. Our supply chain team has been proactive in sourcing new equipment for both compression and power, and our highly skilled workforce is ready to keep delivering the service our customers expect.

The natural gas compression market is in uncharted territory. Lead times for new large horsepower equipment keep extending and now sit at over 180 weeks for 3,600 inline gas compression engines—over three years. Through our strong vendor relationships, we have secured new large horsepower compression packages for 2027 and 2028, and we are working to secure additional units for 2029 delivery. We remain confident in our ability to achieve our targeted annual horsepower growth of 150,000 horsepower per year, resulting in a compression fleet of at least 5.2 million horsepower by the end of the decade.

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

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

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

This was important for a few reasons: it is an accretive way to grow market share and generate immediate cash flow in this long lead time environment; it also reinforces what we hear from customers—Kodiak Gas Services, Inc. can operate units efficiently and cost effectively. Next, I want to talk about our Distributed Power business, now going to market as Kodiak Power Solutions. We closed the DPS acquisition on April 1, and we have been moving quickly on integration. We are already operating on the same ERP platform, and we have realigned our commercial and operations teams to support the business.

DPS brought a strong commercial team with deep distributed power experience, including one of the first islanded primary power data center contracts, which is now in its third year of operation and has capably delivered on its 99.9% reliability guarantee to its customer. I will touch on a few reasons we are excited about the long-term growth in distributed power. The power market is evolving quickly. Texas leads the nation in data centers under development with over 150 currently in development, as hyperscalers prioritize low-cost energy, available land, and a constructive regulatory environment in the site selection process. One recent estimate says there are over 30 gigawatts of planned data centers in Texas over the next two years.

Speed to power also matters. The AI world is moving fast; delays can put projects at a disadvantage. Behind-the-meter solutions are not just short-term solutions; they are increasingly cost competitive with grid power, often with similar or better reliability. We are currently in discussions with a number of data center customers about long-term contracts at high-quality returns to provide primary power. The opportunity set is significant, and we expect it will keep growing as hyperscalers expand their CapEx plans. Recent estimates indicate the hyperscalers' AI-related CapEx spending between now and 2030 may exceed $5 trillion.

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

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

As we invest to grow both our contract compression and distributed power assets, we are committed to maintaining financial flexibility and having a strong balance sheet. Our contract compression business is generating highly resilient free cash flow, which will help fund our power growth. Plus, we have ample liquidity on our ABL and a variety of financing options available to us as we undergo this period of strong infrastructure growth. The investments we make today will help build a stronger, more profitable company in the future. This morning, we released our first quarter 2026 financial results. I will hit a few highlights, and I will let John go into more detail.

We ended the first quarter at 4.4 million revenue-generating horsepower. Average horsepower per revenue-generating unit was 977, the highest among our contract compression peers, and a figure we expect to keep moving higher given our large horsepower focus. Our investments to grow the fleet, along with divestitures of noncore units, drove fleet utilization to 98%, another industry-leading metric. In Q1, we delivered strong year-over-year growth in contract services revenue and adjusted gross margin. Contract services adjusted gross margin was 70.6%, a seventh consecutive quarterly increase and a new high for Kodiak Gas Services, Inc. Margin gains continue to be driven by strong operational execution and returns on our technology investments.

Real-time equipment monitoring is helping us catch issues earlier, reduce failures, increase operational efficiency, and lower parts spend. In our Other Services segment, first quarter results reflected a sequential pickup in station construction activity along with better margins on AMS services. Strong results from each segment drove adjusted EBITDA to $190 million for the quarter, up 7% year over year and a new company record. Looking ahead to the rest of 2026, we see continued strong momentum in compression. We are fully contracted for our 2026 new unit compression deliveries, and are making strong progress on our 2027 deliveries with over 40% already contracted.

Our updated guidance reflects both the incremental contribution we expect from Power and the investment we are making to scale that business and drive growth for years to come. Now, I will pass the call to John Griggs to further discuss our financial results and our revised outlook for 2026. John?

John Griggs: Thanks, Mickey. You summed it up well. Kodiak Gas Services, Inc. has a lot of positive momentum. Our compression business continues to set new records in both revenues and margins, and the growth and return potential for our new power business is extremely compelling. Now let us turn to the quarter's results. We reported total revenue of $346 million, up 5% year over year. The growth was primarily driven by new horsepower, price increases, and strong operational execution. In contract services, revenues increased 6% year over year and 2% sequentially. Revenue-generating horsepower increased by approximately 35,000 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 revenues. A real bright spot was our contract services adjusted gross margin of 70.6%, up 138 basis points sequentially and 286 basis points year over year. This high watermark is further proof to us that the significant investments we have been making in our training and operational technology over the last couple of years are generating real returns.

During the quarter, we realized a reduction in compression parts expense as our investment in telemetry technology and data analysis has allowed us to monitor equipment more closely, leading to a reduction in failures and spend. We are also gaining efficiencies through the connectivity of our technology platforms, making information more rapidly available to our skilled technicians. All of this leads to more informed, real-time field-level decisions, which then tends to result in improved run time and even better customer service. In Other Services, revenues rose 25% sequentially as we saw increased station construction activity during the quarter.

We realized a sequential margin increase to around 16% as we saw a greater portion of activity this quarter in higher margin revenue streams. Adjusted EBITDA for the quarter was up 7% versus the prior-year quarter, landing at a new company record of $190 million. We reported adjusted net income of $52 million, or $0.59 per diluted share. Let us turn to capital expenditures. Maintenance CapEx was approximately $18 million in Q1, in line with our expectations. Other CapEx was $7.5 million, also in line. Growth CapEx of $86 million included $24 million for the compression purchase-leaseback transaction and $18 million related to new power generation equipment. We will break out the power growth CapEx in future quarters.

The power gen equipment orders we are making average about $1.1 million to $1.2 million per megawatt. We would expect to spend an additional roughly 30% for balance of plant equipment; that BOP figure could vary depending upon the setup required by customers. After backing out the purchase-leaseback and power-related figures, compression growth CapEx was around $44 million, which included the delivery of 18,000 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 5.75%. We used the proceeds to redeem our 2029 senior notes and pay down our ABL. Our credit agreement leverage ratio was 3.6x as of March 31. Finally, our Board declared a dividend of $0.49 per share that will be paid later this month. Based on our first quarter discretionary cash flow, our dividend remains well covered at 2.9x. Let us turn to our updated 2026 guidance, which we split into the three segments we intend to report going forward.

Contract Services will become Compression Infrastructure and continue to include the same items it did previously. We are creating a new segment called Power Infrastructure, which will include the vast majority of our new power business. A small portion of DPS' historical and future revenues, mainly things like fleet mobilization and logistics, will be reported in our Other Services segment. We will guide and report growth CapEx separately for compression and power to increase visibility. As a reminder, our 2026 guidance reflects just three quarters of contribution from the DPS acquisition. In terms of changes, we increased the low-end Compression Infrastructure revenue guidance to reflect the progress we have made recontracting units and the increased visibility on new unit growth.

We moved up our adjusted gross margin estimate to 68.5% to 70%, up from our original guidance, taking into account the recent rise in oil prices and its impact on our lube oil and fuel expenses in the second half of the year. For Power Infrastructure, we are guiding to full-year revenues of $95 million to $125 million and an adjusted gross margin range of 60% to 70%. We are keeping those ranges wide given the newness of the acquisition, as well as to maintain commercial flexibility to meet the timing needs of longer strategic deployments.

While we expect to take delivery of 61 megawatts of additional power equipment in 2026, we do not expect to realize any material increase in revenue for these units until early 2027. We increased the top end of our Other Services revenue guidance range to account for the addition of the nonrecurring revenues from the Power business I previously mentioned. Putting that all together, our 2026 adjusted EBITDA guidance is now $820 million to $860 million, and our discretionary cash flow guide is $520 million to $570 million. We bumped up each of Maintenance and Other CapEx by $5 million based on the addition of the power fleet.

Compression growth CapEx of $245 million to $275 million is consistent with the March press release announcing the purchase-leaseback transaction, and we remain on pace to add approximately 170,000 horsepower over the course of the year. As for power growth CapEx, as Mickey highlighted, in light of the strong demand signals we are seeing, we are embarking on an investment cycle in power designed to meaningfully increase our earnings power over time. That translates into the addition of roughly 300 megawatts to 500 megawatts per year from 2027 through 2030.

To hit those targets, we expect power growth CapEx this year to range from $400 million to $500 million, with approximately $90 million related to gensets and balance of plant to be delivered in 2026. The remainder is for equipment scheduled for delivery in 2027 plus. I will echo Mickey's comment that we are going to use the strength of our extremely resilient and highly creditworthy compression business to help us fund our initial growth in Power. You should expect us to guard the balance sheet while doing so. With that, I will hand it back to Mickey.

Mickey McKee: Thanks, John. I will wrap up by reiterating that 2026 is off to a great start. Q1 adjusted EBITDA exceeded our expectations. Contract compression market fundamentals remain compelling, with highly visible demand. We are extremely excited about our distributed power business offerings and the opportunities to grow that business. Thanks for your participation today. We will now open the call for questions.

John Griggs: Operator?

Operator: Thank you. To allow for as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Elias Max Jossen with JPMorgan. Please proceed with your question.

Elias Max Jossen: Hey, good morning, everyone. Just wanted to start on the sort of contracting framework for the backlog. I know that you have provided some incremental color on long-term contracts that you have executed, but how should we think about contracting within the sort of 2 gigawatt backlog target that you have outlined? And should we think about incremental updates as we move forward on that 300 to 500 megawatts of annual capacity that you plan to add?

Mickey McKee: Hey, Elias, thanks for the question. Good morning. I think that we have only owned this business now for five weeks, and we are pretty hyper-focused right now on making sure that we have the supply in place to get the contracts put in place. So we are really focused on making sure that we have the equipment coming to us right now. And then on top of that, we have a tremendous amount of inbounds and conversations that are happening right now both on the data center side and on the microgrid side as well. There will be more updates on those contracts as we go along and as they come in.

We will get those frameworks put together for you, and we will be able to update probably on a quarterly basis going out in the future from here.

Elias Max Jossen: Awesome. And then I think that the competitive edge that you guys have demonstrated from an execution standpoint on equipment procurement is definitely differentiated. So can you talk to us about how you are able to procure in this increasingly challenged supply chain and get this equipment versus others? Any color there would be great. Thanks.

Mickey McKee: Yes, absolutely. It is a challenge right now. This equipment is in short supply; it is difficult to come by. But we are leveraging all the relationships that we have both within the compression industry and with our current suppliers along with some new ones. We have some things that are in the works to develop some long-term frameworks around supply agreements, and we are working hard on those. We will update more on those as we get those finalized as well.

Elias Max Jossen: Alright. Great. Thanks, guys.

Mickey McKee: Thanks, Elias.

Operator: Thank you. Our next question comes from the line of John Mackay with Goldman Sachs. Please proceed with your question.

John Mackay: Hey, team. Thank you for the time. I will pick up on the theme you touched on a few times, but I want to ask it a little more directly. If we are thinking about the CapEx per megawatt here, John, I know you touched on it a little bit, but could you give us a little more color on how you are thinking about that balance of plant spend—maybe frame that up around different customer types—and then any comments on what you are targeting for that customer type mix?

John Griggs: Yes, sure. This is John Griggs. I will answer the first part and flip it back over to Mickey. Thanks for the question. As we said, and I think consistent with what others have said as well, the base power since we are already purchasing some and since we are in deep discussions with OEMs about purchasing more, let us call it $1.1 million to $1.2 million per megawatt. It could vary a little bit between recips and turbines, but that is what we are modeling in. From a balance of plant perspective, we are 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 what you were in your original equipment purchase, and if you had something that was a less sophisticated application and perhaps you had some of that kit in-house as well, it could be much smaller—1.2x or something. We think $1.5 million is the right number to be using all in.

Mickey McKee: Yes. And on the customer mix you asked about, we have a tremendous amount of conversations happening right now in the data center space that are a mixture of regular digital infrastructure as well as AI compute-type loads. There is going to be a mix of those different kinds of data center customers, and that is the bulk of what we are looking at right now as far as customer mix goes.

John Mackay: Appreciate that color. Second one from me, probably a quick one. Thinking about those different types of customers and different types of balance of plant buildout, are you confident in that return framework you lined up earlier on the call and when you first announced the DPS acquisition?

Mickey McKee: Yes, absolutely. We will model in those costs as we do the engineering upfront on these projects and make sure that the returns meet the expectations and the thresholds that we have already put in place.

John Mackay: All right. That is great. Appreciate the time. Thank you.

Mickey McKee: Thanks, John.

Operator: Thank you. Our next question comes from the line of James Michael Rollyson with Raymond James. Please proceed with your question.

James Michael Rollyson: Hey, good morning, everyone. Mickey, maybe switching to the competitive landscape. If we look at your history in compression, you guys started out to build a better mousetrap from an uptime and customer service perspective, and have been very successful in doing so. As you now venture into the power space, it is obviously a different landscape of people chasing this business. I am curious how potential customer conversations go, and how you win that business over the half dozen other guys that are chasing this as you go forward?

Mickey McKee: Hey, good morning, James. There are a lot of similarities in these businesses. There are nuances and differences in the type of equipment, but we are going to approach it the same way. That starts with the customer service mentality, being a total solutions provider, and backing that with run times and reliability. What we liked about DPS when we bought the business is the fact that they have a data center contract that is totally islanded already, with over two years of operating history at over 99.9% reliability. The service mentality really lines up with what Kodiak Gas Services, Inc. has always brought to the table in compression.

We are confident we can be a provider of a differentiated solution that focuses on our customers and their needs.

James Michael Rollyson: Got it. Appreciate that. And then maybe switching gears to your core business currently. With the long lead times stretching out, you guys are generally on top of it, but how are you planning ahead to ensure engines? Are you looking even outside of CAT to make sure all your customer needs get met, and how are you planning for all that?

Mickey McKee: Yes, absolutely. We are certainly looking out into the future and making sure that we have engines and shop space—which are really the two biggest commodities here—locked up and accessible going forward. We have 2027 and 2028 completely lined up, and we are working on 2029 right now. That coincides with what our customers are looking at with highly visible natural gas demand from LNG and power. We feel like we are staying ahead of it and doing what we have always done: paying close attention to the supply chain and making sure there are no gaps in deliveries.

John Griggs: And James, I would chime in that the 170,000 incremental horsepower that Mickey called out last quarter is totally doable given how we manage the supply chain and the demand signals.

James Michael Rollyson: Great to hear. Not surprising, and thanks for all the color, guys.

Mickey McKee: Thanks, James.

Operator: Thank you. Our next question comes from the line of Douglas Baker Irwin with Citi. Please proceed with your question.

Douglas Baker Irwin: Hey, team, thanks for the time. I wanted to start with the 260 megawatts you have already procured. Can you provide more detail around what that initial mix of equipment might look like—turbines versus recips—and the timeline beyond 2026 for taking delivery? Where do you stand on contracting discussions so far, understanding it is still very early days?

Mickey McKee: Yes. Hey, good morning, Doug. It is still very early days and we are working through a lot of those details. I will tell you that what we have already procured is a mix of recips and turbines. That is going to be our strategy going forward. We think there is a market and a demand for both, and we think having a quality mix of both is the way we want to go forward. The 260 megawatts that we have already procured is probably in the ballpark of 50/50 recip versus turbine.

Going forward, I would think it will be more heavily weighted toward turbines—about 25% recip and about 75% turbine—as we think those turbines, from a real estate standpoint, take up a lot less space, have a lot more power density, and are really good fits for the data center contracts we are chasing and already in conversations on that are typically in the ballpark of 200 to 300 megawatts at a time. That is the plan going forward and how we are going to target growing the business.

Douglas Baker Irwin: That is helpful. Thanks. As a follow-up, can you talk about how the funding requirements for some of this power equipment might compare to traditional compression? How ratable is that $400 million to $500 million of CapEx this year if some of this power capacity requires more upfront payments or deposits for larger turbines, and what are the implications for cash flow if spending is more front-end weighted?

John Griggs: Yes, you bet. Good question. One thing on the 300 to 500 megawatts that we call out from 2027 through 2030—it is not a straight line, but it is pretty tight within that range in terms of the stuff we have already bought or the conversations we are advancing to buy equipment. You called it out: in the turbine world in particular, there are more upfront or progress payments relative to our compression business. In the recip world, it remains to be seen where it all lands; those are key variables we are working through as we talk to our channel partners or OEMs.

As we think about paying for it, protecting the balance sheet—and therefore the overall franchise—is really important to us. We have our 4.0x leverage target; we are about there right now. When we went public, we were 4.2x leverage and made a commitment we would get it down to 3.5x by 2025, and we did, on target. As we commence this investment cycle, we have been transparent that you should expect us to drift above our 4.0x long-term leverage target, but only periodically, as we build out the foundation. Then, as the contracts come in, the combination of the compression and power businesses will start to delever quickly and get us into target and then some.

We also have this incredible compression business that is extremely resilient, with extremely limited exposure to near-term moves in commodity prices, and it has performed really well in big stress tests like COVID. We have a wonderful ABL and terrific bank groups that support us, and we have executed really well on three bond offerings in the last couple of years, including the first 10-year bond in the compression business. We have a great business, experienced team, and a multitude of options to fund the business going forward.

Mickey McKee: Yes, and Doug, you hit on the fact that there are some advance progress payments due on some of these bigger turbines. We are highly focused on that and on leveraging our existing relationships with our OEMs and vendors to minimize the impact of those progress payments.

Douglas Baker Irwin: Got it. Thanks for the time.

John Griggs: Thanks, Doug.

Operator: Thank you. Our next question comes from the line of Neal Dingmann with William Blair. Please proceed with your question.

Neal Dingmann: Good morning, guys. Nice update and great quarter again. My first question, Mickey, maybe for you or John, on compression M&A: could you talk to future compression horsepower purchase-leaseback potential? Based on my E&P conversations, it sounds like there are several E&Ps that would be willing or wanting to transfer ownership to you all given your service record. How active are those discussions, and what type of potential do you see there?

Mickey McKee: Hey, good morning, Neal. I think there is a lot of opportunity there. We are, as John said, in the middle of this investment cycle in power and we are very focused on that, but we are also going to take advantage of opportunistic things that pop up on the compression side, too, such as purchase-leasebacks. We executed one last quarter, just over a 20,000-horsepower package, which was a really nice, bite-sized deal for us to digest easily. That has gone very smoothly with us taking over operations on April 1. We love those deals and want to look at more of them going forward. As those opportunities come up, we will take advantage of them.

Neal Dingmann: I think that is big. And then secondly, on the services side, would the existing workforce service both compression and power? Do you have enough folks in place now to service what you have, or are you continually adding some folks?

Mickey McKee: We are always adding folks and putting them through our training program—it is a world-class program. We are opening up our new facility in Midland, and we will move in the June timeframe. It is going to be a great resource for us to continue to train our people and also our customers’ people so they can be around our equipment safely. We focus on the training aspect of our workforce as much or more than anybody in our industry, and it is a real differentiator. As for technicians right now, we are pretty fully staffed and continuing to add to handle our growth.

We are adding new training programs into our Bears Academy for power and electrical topics, working with several of our OEMs and equipment providers to provide training programs at our facility. We are also arming them with our technology—we are rolling out large language models and AI agentic tools in the second half of the year to help with parts locations, troubleshooting, and other tasks. That will be a tremendous asset to our employees.

John Griggs: Thanks, Mickey. Thanks, Neal.

Operator: Thank you. Our next question comes from the line of Analyst with Bank of America. Please proceed with your question.

Analyst: Was wondering if we could go back to the contracts and how you are securing contracts for the incremental megawatts you are purchasing. Is it mostly pre-contracted, or is there some on-spec ordering for some of the future megawatts? Thanks.

Mickey McKee: Good morning. We are having to go out and look for this equipment on the power side and make commitments. I would not characterize it as speculative CapEx as much as educated commitments. We are looking at our backlog of opportunities that DPS brought to the table as well as additional inbounds since we closed the deal. We are in pretty advanced conversations on many of those for contracts to be put in place over the next several months. We are ordering equipment based on the visibility we have on the pipeline, and we expect contracts to roll in, hopefully, pretty quickly.

Analyst: Great. That makes sense. Following up, on the Compression Infrastructure margins—you are already above 70% in the first quarter. The new guide is up a little bit, but could you talk about the rest of the year and what we should expect? Could that 70% creep higher given where 1Q has been?

John Griggs: I am glad you called that out. We are really happy to see that number. 70.6% in the first quarter was really gangbusters for us. Compression is hitting on all cylinders. We attribute so much of that to three things: investments in our people and technology over the last two years are paying off—things are breaking less, we are spending more smartly, and we are more productive; continuing to drive toward larger horsepower; and pricing.

In terms of the guide being a little below where we came out in the quarter, maybe there is an element of conservatism, but with oil prices being high, that drives lube oil and fuel prices high, and those are two inputs in our cost of goods sold. Given the unpredictability, we felt the guide range is the right place to be.

Operator: Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.

Theresa Chen: Good morning. Thank you for taking my questions. On the base business, Mickey, now that you are seeing over three years of lead time and that metric has only moved one direction since your IPO, when you think about pricing power at this point—and to your earlier comments about pricing power continuing into 2027 and beyond—what are you seeing in terms of price increases across the industry, and what do you anticipate over the next couple of years as a result of the supply tightness? Taking a step back, do you think the situation is sustainable? How does the industry solve this supply crunch, if it does, and how do you see the landscape evolving as a result?

Mickey McKee: Good morning, Theresa. Good questions. I think pricing on our equipment is going to continue to move up. How much and how far will depend on external factors like the price of oil, competitive landscape, and other dynamics. We have the opportunity to continue the strong pricing we have 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. We are continuing to be able to reprice the base fleet at some increases as contracts roll over. As I mentioned, producers and midstreamers are willing to lock in equipment for longer periods of time now, which is wonderful for our base business.

As for the supply crunch, I think demand will continue to outstrip supply. Lead times continue to extend. There is an increasing amount of compression moving away from electric due to access-to-grid challenges. I think there will continue to be a supply shortage in the industry for the foreseeable future, especially with increasing GORs in the Permian Basin and increased takeaway capacity allowing additional growth. We are excited about the Permian as well as other basins, and we think there will be continued, incredible demand for our services and our equipment.

Theresa Chen: Thank you. That is helpful. On the Power Infrastructure side, separate from the earlier question about contract duration and terms with data center counterparties, how do you think about counterparty credit risk in these contracts? And how much terminal value is embedded in your 15% unlevered return targets?

John Griggs: Great question. I will answer the terminal value one first—it depends on the project and duration. If we are penciling in a 15-year contract, we will have a zero terminal value. Even if you put a lot of terminal value in there, it does not make much difference over that timeframe. If it was a seven-year contract, you get a different answer. We need to feel really good that we are going to be in that upper-teens dynamic when we enter into any contracts. On counterparty credit risk, it is mission critical. In compression, we have been fortunate to see a lot of our counterparties get acquired by some of the largest players in the energy complex—more investment-grade customers.

We think the opportunity set is there on the digital infrastructure side too; it is just a much wider marketplace in terms of participants owning, building, and developing data centers or being the underlying customers. Each contract will be a little different, but we will definitely bake credit considerations into our decisions on which contracts to pursue and which ones we let somebody else grab.

Theresa Chen: Thank you.

Graham Sones: Thanks, Theresa.

Operator: Thank you. Our next question comes from the line of Sebastian Erskine with Rothschild and Co. Redburn. Please proceed with your question.

Sebastian Erskine: Hey, good morning, gentlemen, and congrats on the developments today. Very exciting. First question: in your conversations with customers, one of the advantages with compression has been that equipment tends to stay on for many years even beyond the initial contract term. Are more of your customers thinking about distributed power as a bridging solution until the grid catches up, or is there scope for this to be used as a permanent turnkey utility-type offering for these hyperscalers?

Mickey McKee: Good morning, Sebastian. Typical contract term we are talking about with these data centers is 10 or 15 years, and many want the option to extend at the end. This business has evolved from being seen as a bridge to grid interconnection to increasingly being viewed as a permanent power supply, depending on regulatory developments. Many in this business today are looking at permanent solutions and want to make sure it is right for the long term. Increasingly, we are hearing timelines move from six to eight years to grid interconnection to now outside of a decade to maybe never. We view this as permanent digital and power infrastructure that will be there for a very long period of time.

Sebastian Erskine: Really appreciate the color. On the margins, 60% to 70% adjusted gross margins for the Power Infrastructure business—John, you mentioned a large range to begin with. Could you talk through the drivers behind that and the scope for margin progression over the medium term? Is the focus predominantly on just getting the top line?

John Griggs: It is always going to be focused on return on capital at the end of the day. We guided that way for a couple of reasons. Number one, we have only owned the business for five weeks. We have transferred their business into our ERP system, as Mickey mentioned, but we just wanted to protect ourselves from any surprises. Number two, the DPS business we bought was somewhat capital-starved. They had a neat long-term primary power contract with a data center and were getting traction on contract number two, but they did not have access to more power.

The management team there purposefully kept a lot of their contracts shorter term with the idea that if they could land the 100 to 200-plus megawatt long-term quality opportunity, they could then roll off what they had on short term into that. That is what we inherited. As we invest to build our foundation of power, we do have a lot of power that will stay on short-term contracts, and we want to leave some on short-term so we can pull it off once we grab the longer-term contracts Mickey has talked about. We would be unwise to adjust our cost structure or workforce for what would be a temporary move when we know a longer-term contract is coming.

That causes us to keep a wide range. As we get to scale and have more power, it is our view that the range will narrow and be more similar to the compression business.

Sebastian Erskine: Really appreciate that, John, and congrats on the results today. Excited for the growth. Thanks very much.

John Griggs: Thanks, Sebastian.

Operator: Thank you. Our next question comes from the line of Analyst with RBC Capital Markets. Please proceed with your question. Your line is live.

Analyst: Hi, sorry. Good morning. On the power side, can you talk a little bit about the cash conversion cycle? What are the timelines from when you sign a contract—assuming you have the equipment—to when you start generating revenues?

Mickey McKee: Good morning. That will depend on the contract. You will see some opportunities for less sophisticated installations to be in the three- to six-month timeframe from procuring equipment to generating revenues. For larger plants, it could be longer—maybe six to 12, maybe 18 months. That will be determined based on the contracts we execute.

Analyst: Okay. Great. Thank you. Are most of the discussions you are having on the power side in Texas? And related to that, can the compression and power businesses share technician pools or operations to drive efficiencies?

Mickey McKee: We are seeing a lot of inbounds and opportunities in Texas, but also across the United States. Right now, we are keeping the operations groups separated so that they can focus on either power or compression. As we develop and have projects in close proximity to our compression operations, there will definitely be some overlap where they can support each other, especially on operations support like supply chain and safety. We think there will be some overlap, but for now we are keeping them separated as we build out and determine where the efficiencies come from.

Analyst: Got it. Great. Thank you very much.

John Griggs: Thanks.

Operator: Our final question this morning comes from the line of Analyst with Daniel Energy Partners. Please proceed with your question.

Analyst: Good morning. Thanks for squeezing me in. First one is on the purchase-leaseback transaction. Maybe you could talk through that a little bit more and discuss if there is more interest in transactions like that today on both your side and the operator, given the tightness in the market and for a lot of operators it is not really a core operation for them. How do they think through service quality and things of that nature? Maybe you could elaborate on that a bit more.

Mickey McKee: Good morning. The purchase-leaseback we executed was a really good deal for us, and we think it is a great deal for the customer too. It is not a core competency for many customers to own and operate their own compression. We have the back office and infrastructure built to do that every day and focus on service. There are a lot of advantages for a customer to execute a transaction like that. We do think there are opportunities for additional transactions like these to come to fruition.

Analyst: Thanks for that. And in addition to the engine lead times, you made a comment highlighting the importance of capacity where the units are actually being packaged. Could you share anything on that front—how tight space is today and your thoughts?

Mickey McKee: Yes. That is something we have to pay very close attention to—shop capacity and the ability to put these things together once you get the engine and the compressor for these units. We marry the two as we secure engines, making sure our packagers have ample shop space and capacity. You are looking at something similar to engine deliveries, because they are booking shop space as they get engines and orders coming in. Their lead times are in the same ballpark as engine lead times—excess of three years out, booked up and shop space allocated to build compressors. We are making sure we have that supply procured as well as the engines, to ensure all long-lead, critical-path items are secured.

Analyst: Understood. Thank you for taking my questions.

John Griggs: Thanks.

Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the floor back to Mr. McKee for any final comments.

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

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

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