Kodiak CEO: Company ‘well-positioned’ for natural gas boom

In its latest earnings report, Kodiak Gas Services announced a significant turnaround in financial performance for the fourth quarter and full year 2024, with net income attributable to common shareholders reaching $19.1 million for the quarter and $49.9 million for the year, compared to a net loss in the previous year’s fourth quarter. The company also provided optimistic guidance for 2025. (Image: Kodiak Gas Services)

Kodiak Gas Services had a transformative 2024, with the company executing a large-scale acquisition, making a debut bond market issuance, and delivering strong results for shareholders, according to President and CEO Mickey McKee.

“The ramp up of natural gas demand remains highly visible,” McKee said. “We’ve already seen natural gas prices respond, signaling the need to increase production and invest in additional pipeline infrastructure. The increase in gas production is going to require significant compression infrastructure development, and we continue to believe that Kodiak is well positioned to be the compression provider of choice.”

Central to the company’s progress was its strategic focus on large horsepower compression units, with an emphasis on streamlining operations and improving margins, all while investing in cutting-edge technologies for future growth, said McKee, who spoke during the company’s earnings call with industry analysts.

A Strategic Shift Toward Large Horsepower Compression

Key financial highlights for the company include an adjusted EBITDA of $609.6 million for 2024, marking a substantial increase from $438.1 million in 2023. The company also reported a 40.6% increase in Contract Services segment revenues, reaching $1.0 billion. Strategic moves included deploying new compression units primarily in the Permian Basin, which contributed to a fleet utilization rate of 97%.

The company finalized its $854 million acquisition of CSI Compressco in April 2024. CSI Compressco provided compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. In addition, CSI Compressco provides a variety of natural gas treating services. CSI Compressco’s contract services business included a fleet of approximately 4,800 compressor packages providing approximately 1.2 million in aggregate horsepower.

A key highlight in Kodiak’s journey was the company’s deliberate shift to focus on large horsepower compression, particularly in high-demand oil and gas basins like the Permian.

“We told you during the CSI acquisition that our core strategy would remain unchanged, focusing on large horsepower compression in oil-directed basins,” McKee said.

After the CSI acquisition, Kodiak had operations in six countries. Since then, the company has pulled out of operations in four countries, leaving only the U.S. and Mexico as markets. The company’s move to divest non-core assets, such as 129,000 horsepower in low-margin units, allowed Kodiak to enhance its fleet by adding 23,000 horsepower in units greater than 2,000 horsepower, reinforcing the importance of scalability and efficiency. 

Mickey McKee

Kodiak’s fleet now boasts a nearly fully utilized capacity of 4.25 million horsepower, with a significant portion of that located in the Permian and Eagle Ford. This strategic focus on larger, more powerful compression units has had a tangible impact on the company’s margins, driving profitability and improving its market position. With large horsepower units, the company is well-positioned to meet the evolving demands of the industry, which is increasingly favoring larger, more efficient equipment capable of handling higher volumes of natural gas.

Equipment Cost and Maintenance Intervals: Navigating Rising Costs and Innovation

One of the challenges Kodiak faced in 2024 was the rising cost of equipment. “Equipment is more expensive than it’s ever been. I think probably 50% more expensive than it was just two or three years ago when we saw hyperinflation,” McKee explained. Despite the higher capital expenditures for new equipment, Kodiak is focused on achieving the same return on investment as they did with previous, less expensive equipment. This cost increase is reflective of broader market conditions, where the price of materials and technology has surged.

On the maintenance side, Kodiak has been working to streamline operational costs by extending maintenance intervals, similar to innovations in the automotive industry.

“We’re testing the same kind of thing on these compressors that are saying, hey, you may not need to maintenance that unit at ninety days,” McKee said. “We might be able to push that out to one hundred or one hundred and ten or one hundred and twenty days and cut some of our maintenance interval.” This shift not only improves operational efficiency but also generates substantial cost savings over the long term, improving margins and cash flows, he said.

Engine-Driven vs. Electric-Driven Compression: Weighing Pros and Cons

Kodiak is also exploring electric-driven compression units, with a focus on their potential benefits and challenges compared to traditional engine-driven rigs. While the initial cost of electric-driven units is similar to that of gas-driven engines, there are notable operational cost differences. McKee elaborated, “They don’t use lube oil in the engine like a natural gas driven engine does for their motors. There’s less of a maintenance cycle.” The electric units are generally cheaper to maintain, and their operating costs tend to be lower due to fewer moving parts and the absence of lube oil.

However, McKee also pointed out the trade-offs involved in relying on electric units. The biggest challenge remains the availability and reliability of grid electricity in areas like the Permian Basin, which often struggle with power consistency. “With the natural gas driven unit, you’ve got a clean burning fuel that is an abundant resource out there,” McKee said. The flexibility and reliability of natural gas-driven units make them more adaptable, especially in regions with unpredictable power grids.

Kodiak’s approach to balancing these two technologies will be crucial as the company continues to refine its fleet. For now, electric units are being deployed primarily in the Permian, where infrastructure may support their use in the future. Still, natural gas-driven units remain the backbone of the company’s compression strategy due to their self-contained nature and ease of deployment.

A Vision for the Future

Looking ahead to 2025, Kodiak is confident in the continued growth of natural gas production, particularly in the Permian Basin. McKee is optimistic that the company’s investments in its fleet, AI technology, and training programs will set Kodiak apart as a leader in the compression industry. “We’re developing some technology that to aid younger type of less experienced technicians that we’re really excited about and think that that’s going to differentiate us through training and technology of our people,” he said. With nearly 200 employees already attending Kodiak’s state-of-the-art training academy, the company is preparing to meet the growing demand for skilled technicians in the field.