Kodiak Gas Services, Inc. — Q1 2024 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2024, compared with Q1 2023. Kodiak operates contract compression infrastructure and related services in the U.S. through Compression Operations and Other Services. Its fixed-revenue compression contracts support natural gas and oil production, gathering and transportation.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $215.5 million | $190.1 million |
| Operating income | $60.2 million | $60.4 million |
| Net income (loss) | $30.2 million | $(12.3) million |
| Diluted EPS | $0.39 | $(0.21) |
| Cash from operations | $51.5 million | $23.3 million |
| Capital expenditures | $60.2 million | $48.6 million |
| Adjusted EBITDA (non-GAAP) | $117.8 million | $106.3 million |
| Free cash flow (non-GAAP) | $12.5 million | $13.9 million |
Revenue rose 13.4% year over year: Compression Operations increased 8.8% to $193.4 million and Other Services increased 78.0% to $22.1 million. Compression Operations’ gross margin was $80.6 million, or 41.7% of segment revenue, versus $70.0 million, or 39.4%. Other Services gross margin increased to $4.4 million, but its margin fell to 20.0% from 27.6%. Adjusted EBITDA margin declined to 54.6% from 55.9%. Operating margin was approximately 27.9%, compared with 31.7%.
Operating cash flow improved, while investing cash outflow increased to $60.2 million, primarily reflecting higher growth and maintenance capital spending. Growth capex was $59.4 million and maintenance capex was $10.6 million. Management’s non-GAAP discretionary cash flow was $71.9 million. Cash and cash equivalents were $9.3 million at quarter-end.
Debt, liquidity and distributions
At March 31, 2024, gross debt was $1.881 billion, comprising $1.131 billion outstanding under the ABL Facility and $750 million of 7.25% senior notes due 2029. Debt net of unamortized issuance costs was $1.828 billion. ABL availability was $1.068 billion, with $1 million of letters of credit outstanding. The ABL Facility matures in 2028; $1.131 billion of ABL borrowings and $750 million of notes were scheduled to mature in 2028 and 2029, respectively. The ABL weighted-average rate was 7.68% at quarter-end, excluding swaps. The company reported compliance with its debt covenants.
Current assets were $263.3 million and current liabilities were $237.9 million. The company paid $29.8 million of dividends during the quarter, equivalent to $0.38 per share. The board declared a further $0.38-per-share dividend after quarter-end, payable May 20, 2024.
Material changes and notable items
- Compression Operations revenue growth reflected increased average revenue-generating horsepower and higher average monthly revenue per horsepower. At quarter-end, revenue-generating horsepower was 3.286 million, up 3.7% year over year, and utilization was 99.8%.
- Other Services revenue growth was driven mainly by station construction work. Segment costs rose nearly as quickly as revenue, contributing to lower segment margin.
- SG&A increased 89.7% to $24.8 million, including $7.9 million of transaction expenses, primarily related to the CSI Compressco acquisition, and higher stock compensation. Interest expense fell to $39.7 million from $68.7 million, primarily following the 2023 Term Loan extinguishment. A $19.8 million derivative gain, versus a $8.0 million loss, also contributed to the swing to net income.
- On April 1, 2024, Kodiak completed its acquisition of CSI Compressco. The filing reports an aggregate purchase price of $994.1 million, including $651.8 million of acquired debt repaid using ABL borrowings and equity consideration. Kodiak issued 6.786 million common shares and 5.562 million Series A preferred shares alongside OpCo Units to electing holders. The combined fleet was described as having approximately 4.3 million revenue-generating horsepower. Purchase accounting and pro forma results were not yet available in this filing.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said operating cash flow, together with ABL borrowing availability, is expected to support operations, debt service, working capital, capital expenditures and dividends, subject to conditions and board discretion. The company had $106.6 million in commitments for ordered compression units expected to be settled within twelve months.
Key exposures include floating-rate debt and commodity-driven changes in customer activity, although Kodiak does not take title to natural gas or oil. Management estimated that a 1 percentage-point increase in applicable average ABL rates would have increased Q1 ABL-related interest expense by $3.4 million. Four largest customers accounted for approximately 38% of recurring revenue; no single customer exceeded 14%. A $29.2 million Texas sales-tax contingency was accrued at quarter-end. Management stated that other legal matters were not expected to have a material adverse effect. The company identified acquisition integration, customer credit, supplier concentration, competition, regulation, cyber risks and access to capital as additional risks.
Important facts for investors to verify
- Post-acquisition debt, ABL availability, leverage and covenant headroom after borrowing to repay CSI Compressco debt.
- CSI Compressco purchase-price allocation, acquired assets and liabilities, pro forma results, and realization of expected operational benefits.
- Whether operating cash flow can sustain planned growth and maintenance capex and dividends; Q1 free cash flow was below zero only after the company’s reported non-GAAP definition? The filing reports free cash flow of $12.5 million, down from $13.9 million.
- Resolution and potential cash impact of the $29.2 million Texas sales-tax contingency.
- Underlying earnings and interest-rate exposure apart from derivative fair-value gains, and the effect of customer concentration on collections and revenue.