Kodiak Gas Services(KGS) - 2024 Q4 - Annual Report

Part I Business Kodiak Gas Services provides large horsepower contract compression infrastructure in the U.S., expanding its fleet and service offerings through the 2024 CSI Compressco acquisition - On April 1, 2024, the company completed the CSI Compressco acquisition, integrating operations and re-evaluating segments into Contract Services and Other Services[28][29] - The company is a market leader in the Permian Basin, focusing on large horsepower compression units which comprise approximately 78% of its 4.4 million total fleet horsepower[30][32] Fleet Overview as of December 31, 2024 | | Fleet Horsepower | Percent of Total Horsepower | Number of Units | Percent of Units | | :--- | :--- | :--- | :--- | :--- | | Large horsepower >1,000 horsepower | 3,428,062 | 78% | 2,100 | 41% | | Medium & small horsepower <1,000 horsepower | 974,685 | 22% | 2,969 | 59% | | Total | 4,402,747 | 100% | 5,069 | 100% | - Approximately 82% of compression assets are deployed in the Permian Basin and Eagle Ford Shale, regions with expected significant production volumes through at least 2050[42] Operations and Contract Structure Kodiak provides large horsepower Contract Services under fixed-revenue contracts, typically one to seven years, with customers paying a fixed monthly fee and annual inflation adjustments - Contracts typically have a primary term of one to seven years, with large horsepower units contracted for three or more years, continuing month-to-month thereafter[51] - As of December 31, 2024, approximately 11.3% of revenue-generating horsepower was on a month-to-month contract term[51] - Customers pay a fixed monthly fee, similar to 'take-or-pay' contracts, often including an annual inflation adjustment, and are responsible for fuel gas and ad valorem taxes[54] Governmental Regulation and Climate Change Kodiak's operations are subject to extensive environmental and safety regulations, with increasing scrutiny on climate change and GHG emissions, potentially imposing significant compliance costs - The company is subject to stringent environmental (CAA, CWA) and health and safety (OSHA) regulations, with customers typically responsible for site-specific air permits[62][64] - The Inflation Reduction Act introduces a methane 'waste emissions charge' starting at $900 per ton in 2024, increasing to $1,500 in 2026[67] - The SEC's proposed climate-related disclosure rule, if enacted, could result in increased legal, accounting, and compliance costs[70] Recent Developments In 2024, Kodiak completed the CSI Compressco acquisition, initiated share repurchases, divested non-core assets, and paid a cash dividend in early 2025 - Completed the acquisition of CSI Compressco on April 1, 2024[90] - In November 2024, the Board approved a $50 million share repurchase program, with $15.0 million repurchased by year-end, in addition to a separate $25.0 million repurchase in September[92][93][94] - Divested assets in Canada and Argentina in the second half of 2024, recognizing losses of approximately $7.0 million and $13.6 million, respectively[96][97] - On February 21, 2025, paid a cash dividend of $0.41 per share, totaling approximately $36.0 million[98] Risk Factors The company faces significant business, regulatory, and financial risks, including dependence on natural gas and oil demand, customer concentration, evolving environmental policies, and substantial indebtedness Business and Industry Risks Kodiak's business risks include dependence on the cyclical natural gas and oil industry, high customer and geographic concentration, intense competition, and potential sales tax liabilities - The business is dependent on the cyclical demand for natural gas and oil, which is affected by commodity prices[102] - The loss of key customers could materially impact financial results, as the top four customers accounted for 32% of total revenues in 2024[103][44] - Operations are geographically concentrated in the Permian Basin and Eagle Ford Shale, increasing vulnerability to regional risks[108] - The company has accrued a contingent liability of $70.1 million as of December 31, 2024, related to a Texas sales tax audit[112] Regulatory Risks Regulatory risks include evolving environmental, health, and safety regulations, particularly climate change legislation like the Inflation Reduction Act's methane charge, and changes in U.S. trade policy - Evolving regulations under the Clean Air Act (CAA), particularly those targeting methane emissions from the oil and gas sector, could increase compliance costs[126][127] - The Inflation Reduction Act imposes a methane 'waste emissions charge' starting at $900/ton in 2024 and rising to $1,500/ton in 2026, potentially increasing operating costs[128] - A societal and regulatory shift away from fossil fuels poses a long-term risk to service demand and could impact capital market access[129][131] - Changes in U.S. trade policy, including new tariffs enacted in February 2025, could significantly impact financial results[142] Indebtedness Risks Kodiak's substantial indebtedness of approximately $2.6 billion as of December 31, 2024, imposes restrictive covenants, limits financial flexibility, and exposes the company to interest rate risk - As of December 31, 2024, total long-term debt was approximately $2.6 billion, including $750 million in senior notes[172] - The ABL Credit Agreement and Indenture contain restrictive covenants limiting operational and financial flexibility, including restrictions on dividends, additional debt, and investments[179][180] - Borrowings under the ABL Credit Agreement are at variable interest rates, exposing the company to interest rate increase risk[184] Cybersecurity Kodiak maintains a cyber risk management program based on NIST and ISO standards, overseen by the Audit & Risk Committee and Board, with no material incidents to date - The company's cyber risk management program is based on recognized frameworks like NIST CSF and ISO 27001, and is assessed annually by a third party[209][210] - Cybersecurity is managed by a team led by the CIO, augmented by an outsourced CISO and a Cyber Security Operations Center[211][212] - The Audit & Risk Committee and the Board of Directors oversee the cybersecurity program, reviewing risks and mitigation strategies periodically[215] - The company believes no prior or current cybersecurity incidents are reasonably likely to have a material adverse effect[214] Properties As of December 31, 2024, Kodiak owns five service facilities in North Dakota and Texas, and leases its corporate headquarters and other facilities across multiple states - The company owns five service facilities located in Texas and North Dakota[216] - The corporate headquarters in The Woodlands, Texas, is leased, along with numerous other service facilities in key operating states[216] Legal Proceedings The company is involved in ordinary course legal proceedings, which management does not expect to have a material adverse effect on its financial position - Management believes the resolution of ordinary course legal proceedings is not expected to have a material adverse effect on the company's financial condition[217] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kodiak's common stock trades on the NYSE, with the company paying quarterly dividends and initiating a $50 million share repurchase program in late 2024 - The company's common stock trades on the New York Stock Exchange under the ticker 'KGS'[221] - A quarterly dividend of $0.41 per share was declared on February 3, 2025, and paid on February 21, 2025[223] Share Repurchases for Three Months Ended Dec 31, 2024 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in thousands) | | :--- | :--- | :--- | :--- | :--- | | October 1-31, 2024 | — | — | — | — | | November 1-30, 2024 | 434,783 | $34.50 | 434,783 | $35,000 | | December 1-31, 2024 | — | — | — | — | | Total | 434,783 | $34.50 | 434,783 | $35,000 | - On November 14, 2024, the Board approved a share repurchase program for up to $50.0 million of common stock, expiring December 31, 2025[229] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, Kodiak's financial performance was significantly impacted by the CSI Compressco acquisition, driving total revenue growth to $1.16 billion and net income to $50.3 million, alongside increased capital expenditures and debt issuance 2024 Operational Highlights In 2024, operational capacity significantly expanded due to the CSI Compressco acquisition, increasing fleet horsepower by 35.0% to 4.4 million, while fleet utilization remained high at 96.5% Operational Data Comparison (as of Dec 31) | | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Fleet horsepower | 4,402,747 | 3,261,661 | 35.0 % | | Revenue-generating horsepower | 4,250,499 | 3,258,951 | 30.4 % | | Fleet utilization | 96.5 % | 99.9 % | (3.4)% | Financial Results of Operations For 2024, total revenues increased 36.3% to $1.16 billion, primarily driven by the CSI Acquisition, leading to a 148.7% rise in net income to $49.9 million, despite a 50.1% increase in operating expenses Selected Financial Data (in thousands) | | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,159,311 | $850,381 | 36.3 % | | Contract Services Revenue | $1,034,173 | $735,605 | 40.6 % | | Other Services Revenue | $125,138 | $114,776 | 9.0 % | | Income from operations | $249,450 | $244,110 | 2.2 % | | Interest expense | ($197,144) | ($222,514) | (11.4)% | | Net income attributable to common shareholders | $49,895 | $20,066 | 148.7 % | - The increase in Contract Services revenue was primarily due to incremental revenues from the CSI Acquisition, accounting for approximately 22% of 2024 consolidated revenue, and growth in revenue-generating horsepower[257] - Selling, general and administrative (SG&A) expenses increased 106.9% to $151.7 million, mainly due to $29.0 million in CSI Acquisition transaction costs and increased labor and stock compensation expenses[263] Liquidity and Capital Resources Kodiak's liquidity is primarily from operations and its ABL Facility, with 2024 seeing increased net cash from operations to $328.0 million, significant capital expenditures of $352.2 million, and the issuance of $750 million in senior notes Cash Flow Summary (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $327,987 | $266,326 | | Net cash used in investing activities | ($292,468) | ($218,421) | | Net cash used in financing activities | ($36,331) | ($62,774) | - Total capital expenditures for 2024 were $352.2 million, a significant increase from $221.5 million in 2023, driven by new unit acquisitions and CSI fleet upgrades[273] - On February 2, 2024, the company issued $750 million of 7.250% senior notes due 2029[293] - As of December 31, 2024, the company had total long-term debt of $2.6 billion and $322.5 million available under its ABL Facility[172][276] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA, which increased to $609.6 million in 2024, and Free Cash Flow, which grew to $122.3 million, reflecting improved operational cash generation Adjusted EBITDA Reconciliation (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Net income | $50,334 | $20,066 | | Interest expense | 197,144 | 222,514 | | Income tax expense | 25,574 | 15,070 | | Depreciation and amortization | 260,272 | 182,869 | | Transaction expenses | 32,552 | 6,001 | | Other adjustments | 43,274 | (18,290) | | Adjusted EBITDA | $609,550 | $438,148 | Free Cash Flow Reconciliation (in thousands) | | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $327,987 | $266,326 | | Maintenance capital expenditures | (66,200) | (36,990) | | Growth capital expenditures | (285,992) | (184,487) | | Proceeds from sale of assets | 35,030 | 1,449 | | Other adjustments | 11,494 | 8,813 | | Free cash flow | $122,319 | $65,111 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate risk from its variable-rate ABL Facility, counterparty risk, and significant customer concentration risk, with the top four customers accounting for 32% of 2024 revenue - A 1.0% increase in average interest rates on the ABL Facility would have increased 2024 interest expense by an estimated $16.7 million, excluding swap effects[341] - The four largest customers accounted for approximately 32% of total revenues in 2024, with one customer representing 13.4%[344] Controls and Procedures As of December 31, 2024, management concluded disclosure controls were effective, excluding the CSI Compressco acquisition, which represents approximately 22% of consolidated assets and revenues - Management concluded that disclosure controls and procedures were effective as of December 31, 2024[350] - Management's assessment of internal control over financial reporting excluded the CSI Compressco acquisition, representing about 22% of consolidated assets and revenues for the year[352] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[359] Executive Compensation Information regarding executive compensation is incorporated by reference from the forthcoming definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[360] Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters This section details equity compensation plans, with 1,945,134 securities outstanding and 5,703,962 available for future issuance as of December 31, 2024 Equity Compensation Plan Information as of December 31, 2024 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,945,134 | $ — | 5,703,962 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 1,945,134 | $ — | 5,703,962 | Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the forthcoming definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[362] Principal Accounting Fees and Services The company's independent registered public accounting firm is BDO USA, P.C., with further information incorporated by reference from the forthcoming definitive proxy statement - The company's independent auditor is BDO USA, P.C., with further information incorporated by reference from the forthcoming definitive proxy statement[363] Part IV Exhibits and Financial Statement Schedules This section includes the audited consolidated financial statements for 2024, 2023, and 2022, along with the independent auditor's report and a list of all filed exhibits - This section includes the audited consolidated financial statements and related notes for the fiscal years ended December 31, 2024, 2023, and 2022[347][378] - The independent auditor, BDO USA, P.C., issued an unqualified opinion on the consolidated financial statements[379] Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $4,435,123 | $3,244,106 | | Total Liabilities | $3,061,516 | $2,101,453 | | Total Stockholders' Equity | $1,373,607 | $1,142,653 | Consolidated Statement of Operations Highlights (in thousands) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,159,311 | $850,381 | $707,913 | | Income from Operations | $249,450 | $244,110 | $222,091 | | Net Income | $50,334 | $20,066 | $106,265 |