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Presentation

Kodiak Gas Services, Inc. misses on earnings expectations. Reported EPS is $0.2 EPS, expectations were $0.54.

Operator: 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.

Graham Sones: 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?

Robert McKee: 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?

John Griggs: 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.

Robert McKee: 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?

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

Elias Jossen: 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?

Robert McKee: 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.

Elias Jossen: 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.

Robert McKee: 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.

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

John Mackay: 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?

John Griggs: 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.

Robert McKee: 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.

John Mackay: 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?

Robert McKee: 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.

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

James Rollyson: 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.

Robert McKee: 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.

James Rollyson: 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.

Robert McKee: 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.

John Griggs: 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.

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

Douglas Irwin: 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.

Robert McKee: 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.

Douglas Irwin: 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?

Robert McKee: 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.

John Griggs: 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.

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

Neal Dingmann: 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?

Robert McKee: 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.

Neal Dingmann: 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?

Robert McKee: 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.

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

Unknown Analyst: 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.

Robert McKee: 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.

Unknown Analyst: 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?

John Griggs: 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.

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

Theresa Chen: 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?

Robert McKee: 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.

Theresa Chen: 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?

John Griggs: 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.

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

Sebastian Erskine: 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.

Robert McKee: 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.

Sebastian Erskine: 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?

John Griggs: 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.

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

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

Elvira Scotto: 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.

Robert McKee: 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.

Elvira Scotto: 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?

Robert McKee: 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.

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

Unknown Analyst: 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.

Robert McKee: 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.

Unknown Analyst: 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?

Robert McKee: 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.

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

Robert McKee: 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.

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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