Kodiak Gas Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Kodiak operates contract natural-gas compression infrastructure and related construction, maintenance and other services, primarily in U.S. producing basins.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $231.0 million (+26.5%) | $182.6 million | $624.4 million (+18.2%) | $528.1 million |
| Operating income | $61.0 million (+4.6%) | $58.3 million | $183.4 million (+11.5%) | $164.5 million |
| Net income | $21.8 million (-52.6%) | $45.9 million | $26.9 million (-74.2%) | $104.4 million |
| Diluted EPS | $0.28 | $0.78 | $0.41 | $1.77 |
| Adjusted EBITDA (non-GAAP) | $110.1 million | $101.5 million | $324.3 million | $295.8 million |
| Operating cash flow | $85.7 million | $59.2 million | $203.7 million | $186.9 million |
| Capital expenditures | $51.5 million | $53.8 million | $145.6 million | $199.7 million |
Q3 Compression Operations revenue rose 14.1% to $186.7 million, while Other Services revenue increased 133.4% to $44.3 million, mainly from station construction. Q3 total gross margin was $80.6 million, or 34.9% of revenue, versus $68.6 million, or 37.6%. Compression Operations gross margin percentage improved to 40.2% from 38.9%; Other Services margin declined to 12.4% from 26.1%, reflecting the mix and costs of construction work. Q3 Adjusted EBITDA margin was 47.7%, down from 55.6%; nine-month margin was 51.9%, down from 56.0%.
Net income declined despite higher revenue and operating income, chiefly because derivative gains were lower: $15.1 million in Q3 2023 versus $51.9 million in Q3 2022, and $42.1 million for the first nine months versus $77.0 million. Nine-month net interest expense rose 74.0% to $182.0 million, partly reflecting higher debt balances and interest rates. Q3 included a $6.8 million loss on extinguishment of debt. Reported earnings also reflect derivative fair-value movements, which can be volatile.
Fleet horsepower was 3.21 million at quarter-end, up 3.4% year over year; revenue-generating horsepower was 3.21 million, up 3.6%, and utilization was 99.9% versus 99.7%.
Liquidity, debt and capital allocation
- September 30 cash was $6.1 million, down from $20.4 million at December 31, 2022. Nine-month operating cash flow of $203.7 million and investing outflow of $144.6 million were accompanied by financing outflow of $73.4 million.
- Debt outstanding was $1.789 billion, all under the asset-based revolving facility (ABL), versus total debt of $2.754 billion at year-end 2022. The reported carrying value, net of issuance costs, was $1.748 billion. The ABL matures in March 2028; applicable rates at quarter-end were 8.34% for SOFR borrowings and 10.25% for prime-rate borrowings. The company reported covenant compliance.
- ABL availability was $396.2 million, with $14.7 million of letters of credit outstanding. The facility is secured by substantially all company assets and restricts, among other matters, dividends and additional indebtedness. Dividend payments are subject to facility availability requirements and other limits.
- The July IPO and overallotment issued 18.4 million shares at $16 per share and generated approximately $267.0 million in net proceeds. Proceeds, derivative settlement cash and ABL borrowings funded repayment of $300 million of term debt. The remaining $700 million term-loan principal was novated to the parent; Kodiak no longer has obligations under that loan. The reported $689.8 million carrying value of novated debt was recorded as an equity transaction.
- Nine-month growth capital expenditures were $124.0 million and maintenance capital expenditures were $28.1 million. Purchase commitments for compression equipment totaled $215.7 million, of which $182.9 million was expected within 12 months. Operating lease commitments totaled $52.6 million.
Outlook, risks and unusual items
Management said operating cash flow is expected to support debt service, working capital and estimated capital expenditures, and may support dividends at the board’s discretion. The filing provides no specific revenue, earnings or capital-spending guidance. The board declared an initial quarterly dividend of $0.38 per share, payable November 10, 2023, equivalent to $1.52 per share annualized.
- Customer concentration and credit: the four largest customers accounted for approximately 38% of recurring revenue for the first nine months; no single customer exceeded 14%. A customer affiliate in bankruptcy prompted a $2.0 million increase in the credit-loss allowance during 2023.
- Sales-tax contingency: Kodiak accrued $28.7 million for Texas sales-tax audits concerning compression equipment purchases. Management said other legal matters were not expected to have a material adverse effect.
- Interest-rate exposure: debt is predominantly floating-rate, partly offset by swaps. The filing estimates a 1 percentage-point rate increase would have added $13.4 million of ABL interest expense over the first nine months, excluding swaps. Derivatives are not designated as accounting hedges.
- Controls: management concluded disclosure controls were not effective because of a material weakness involving the period assignment of an adjustment to interest-rate swaps. Remediation is underway, but effectiveness has not yet been established; management reported that additional procedures supported the fair presentation of these financial statements.
- Other stated risks include reduced oil and gas demand or production, customer nonpayment or contract nonrenewal, competition, supplier dependence, equipment and operational risks, regulatory and climate-related requirements, cybersecurity, and access to capital. The company said it had no direct commodity-price exposure because it does not take title to oil or gas, but demand for its services is indirectly affected by industry activity.
Important facts for investors to verify
- Whether the material weakness is remediated and controls operate effectively over a sufficient testing period.
- Whether the Texas sales-tax accrual of $28.7 million adequately reflects the audit exposure and whether the estimate changes.
- Customer receivable collection and credit exposure, including the customer-related allowance increase.
- Cash generation after maintenance and growth capital expenditures, the cost and timing of equipment commitments, and the ability to fund the declared dividend within ABL restrictions.
- Debt covenant headroom, borrowing availability and sensitivity of interest expense to rates; distinguish derivative gains from recurring operating performance.
- Whether construction revenue growth can be sustained while Other Services margins recover from their year-over-year decline.