Kodiak Gas Services, Inc. (KGS) Q2 2026 Earnings Call Transcript

Greetings, and welcome to the Kodiak Gas Services Second Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Graham Sones, Senior Vice President, Investor Relations. You may begin.

Good morning, and thanks for joining us for the Kodiak Gas Services conference call and webcast to review our second 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, Mickey and John will discuss the steps we've taken towards our 2030 goals, share an update on the commercial progress in our Power Infrastructure segment and walk through our quarterly results and updated 2026 outlook. Then we'll open it up for Q&A. A replay of today's call will be available by webcast and phone through August 21, 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 August 7, 2026, and may no longer be accurate by the time you listen to a replay or read the 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 in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievements 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. 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?

Thanks, Graham, and thanks to everybody joining us today. I want to start, as we do in all meetings at Kodiak, with safety. August is historically the hottest month of the year. A large portion of Kodiak's workforce is called upon to work outside nearly every day, either in the Permian Basin or South Texas or any other area where we operate. I'd like to remind everyone to be thoughtful when working outside in the summer heat. Studies have shown that you can become dehydrated in as little as 30 to 60 minutes when working outdoors in hot, humid conditions, which we often face in our operating areas. Dealing with the unrelenting summer heat, it is important to drink plenty of water and take breaks in the shade to give yourself time to recover and cool off and be sure to let someone know if you start to feel dizzy or dehydrated. These are important steps to maintain a safety-first mindset. It is during the hot summer months that people tend to become intensely focused on power reliability and electricity consumption. Recent examples of grid instability due to swings in data center-related demand have once again demonstrated how critically the U.S. needs behind-the-meter power solutions. A few weeks ago, a transmission line in Northern Virginia went out of service, resulting in approximately 3 gigawatts of data center demand disconnecting from the grid, stressing the grid and causing a voltage disruption that was felt in surrounding states. This summer, we have seen the electric grid strain to maintain reliability as the combination of summer heat and the increase in data center power needs stresses the system. More than half of the U.S.'s 50 states have had to declare emergency alerts this summer, asking consumers to conserve power. PJM even had to take it a step further, receiving permission from the U.S. Energy Department to require data centers and other large customers to turn on backup generation to help support the grid. This dynamic will further intensify in the coming years as data center power demand is expected to more than double over the next five years. This spike in demand is happening at the same time grid operators are increasingly running low on power reserves as reflected by PJM's consecutive power capacity auctions where they fail to acquire enough power to cover their reliability requirement. Behind-the-meter power solutions are going to have to be a part of the solution to solve our nation's growing power crisis. Judging by the depth and strength of Kodiak's rapidly growing commercial power project pipeline, which I will discuss later, the industry fully understands this dynamic and is eager to engage to contract workable solutions. Now I'd like to update you on the progress we're making on our five-year plan. Given the highly visible demand for natural gas plus the long lead times for new large horsepower compression equipment, we laid out a target to organically grow our compression fleet to approximately 5.2 million horsepower by year-end 2030. I'm happy to report that we are well on our way to achieving that goal. For the first six months of this year, we added approximately 80,000 horsepower of fleet additions. Factoring in the new units we expect to receive through year-end, we're on pace to hit about 170,000 horsepower for the year. Further, through our strong vendor relationships, we've secured new large horsepower compressor packages for 2027, 2028 and 2029 deliveries to meet our growth goals and expected customer demand. Bottom line, 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 end of the decade. Shifting to power. We recently announced a multiyear gas turbine supply agreement with Baker Hughes that will deliver Kodiak 1 gigawatt of turbine power by 2030 with an option to increase that order up to 1.8 gigawatts. There are a lot of reasons why we're excited about this transaction. First, it gives us price certainty for new turbine equipment for the next five years. Additionally, Baker Hughes has a long track record of producing durable equipment that is well known across the world. Baker Hughes' efficient power generation turbine assets are designed to work on long-term projects, enabling us to deliver dependable power for growing data center and energy infrastructure development. Beyond the equipment, the strategic agreement also covers technician training and parts supply, positioning Kodiak to provide the high-quality service our customers have come to expect. Combining our previously announced power generation purchases with Baker Hughes plus some additional opportunistic purchases, we have secured approximately 1.8 gigawatts of power generation for our fleet, of which approximately 66% will be turbines and all of which will be available by the end of 2030. Further, we are in discussions to incrementally add to our recip fleet, which would align with our goal of achieving 2 gigawatts of power-producing assets by the end of the decade. Now I would like to discuss the subject that comes up the most in our meetings with investors, the commercial landscape as it relates to power. Since closing the DPS acquisition just four short months ago, we have quickly integrated and retooled our commercial power team to focus on larger-scale projects with long-term contracts at attractive returns. With that focused mandate, the team has been meeting with potential customers while high-grading a large, rapidly growing pipeline of projects that significantly exceeds our future power capacity. To give you a sense of how dynamic this industry is, we've added about 2 gigawatts of potential projects in the last month, while at the same time, moving on from opportunities that either don't fit our timeline or aren't the right kind of counterparties for us to commit resources. We feel as confident as ever that the commercial opportunities are real and progressing quickly. As evidence of this, we recently executed a limited notice to proceed with detailed engineering and design work for a data center in West Texas, whose capacity is leased out to a hyperscaler. We've invoiced them for an initial deposit to reserve power equipment for the project while we negotiate a long-term contract to start supplying power in early 2027 with the ability to scale over time. We'll have more to share on that before the end of the year. Our existing power assets remain in high demand with our current fleet about 90% utilized as we make ready much of our idle fleet. Power assets that we have on contract continue to be extended as customers are wary of releasing equipment. We recently extended one of our data center commissioning contracts and received an increase in the rate. As we look forward to the second half of 2026, we expect to receive approximately 50 megawatts of new gen sets before deliveries ramp up in 2027. In preparation for a sizable increase in our power infrastructure operations, we've been diligently increasing our technician training program and adding a new power curriculum, further boosting our operational advantage over our peers. Starting this fall, Kodiak's BEARS Academy training facility will become one of only two facilities in the U.S. that are certified to offer a Waukesha electromechanical certification on both compressors and gensets. This certification provides our technicians with the knowledge needed to fully operate and maintain electrical equipment as well as perform troubleshooting and maintenance on the mechanical equipment. The skilled workforce will be helpful as we start undertaking on-site engine overhauls of power assets and other field-level operations in the second half of the year. This is just one example of where Kodiak is investing in training programs to help create opportunities for our workforce to grow and develop into new, more skilled labor roles. Another example is our internal development of AI-enabled technical monitoring solutions that not only require us to hire software engineers, but we also need field technicians to help monitor and assess the information. As we've rolled out new technology, we have reallocated experienced technicians into positions in our industry-leading fleet reliability center and our fleet telemetry group. Kodiak's investment in artificial intelligence and machine learning is creating new roles and opportunities, allowing our workforce to grow and develop. Yesterday afternoon, we released our second quarter 2026 financial results. I'll hit a few highlights, and then I'll let John go into more detail. In the Compression Infrastructure segment, we ended the second quarter with 4.4 million revenue-generating horsepower. Average horsepower per revenue-generating unit was 991, 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 the divestiture of some small noncore units drove yet another increase in fleet utilization to 98.2%, another industry-leading metric. In Q2, we delivered strong year-over-year growth in compression infrastructure revenue and adjusted gross margin. We realized a 4.5% year-over-year price increase to $23.80 per ending revenue-generating horsepower. The strong pricing performance reflects the positive progress we've made recontracting our existing fleet and the underlying demand for contract compression in this tight market with highly visible gas growth. Compression infrastructure adjusted gross margin was 70%, marking consecutive quarters at or above 70%. The margin gains continue to be driven by strong operational execution and returns on our technology investments. However, this quarter's margin results were especially impressive considering the negative headwind we faced late in the quarter from higher lube oil prices. Our supply chain team has done a tremendous job planning ahead and negotiating favorable contracts to help us source cost-efficient supplies and reduce price risk. For Power Infrastructure, we exited the quarter with a fleet of 405 megawatts. We generated revenues of $33 million and an adjusted gross margin of 64.5%. Both were in line with our expectations. As we reprice our legacy business and align our operational philosophies, we look for those margins to increase. In our Other Services segment, second quarter revenue increased by 47% year-over-year as this quarter's results were positively impacted by station revenue and the addition of some other ancillary services related to power. Strong results from each segment drove adjusted EBITDA of $217 million for the quarter, up 22% year-over-year and a new company record. In summary, our Compression Infrastructure segment continues to deliver solid top line growth and great margins. We've secured new large horsepower compression packages for 2027, 2028 and 2029 deliveries, and we are already 50% contracted for our 2027 deliveries. And we've already started the process of contracting our 2028 deliveries. Technology companies remain focused on a historic build-out in data centers with the top four hyperscalers increasing capital spending by roughly 80% year-over-year in the second quarter. Total cloud CapEx is tracking to close to $1 trillion in 2026. Given this robust construction boom, our backlog of high-quality commercial opportunities is growing by the day. It's very exciting times for Kodiak and our energized outlook has never been better. In light of the great results in Q2, and as John will discuss, we are raising the midpoint of our full year adjusted EBITDA, compression infrastructure gross margin and discretionary cash flow guidance to reflect our increased visibility for the second half of the year. We remain excited about the investments we are making today that will drive growth and enhance Kodiak's margins in the years to come. And now I'll pass the call to John to further discuss our financial results and our revised outlook for 2026. John?

Thanks, Mickey. Our compression infrastructure business continues to fire on all cylinders, and we're out of the gate strong in our new Power Infrastructure segment. I'm excited about our near, medium and long-term future. Let's review the quarter. We reported revenue of $391 million, up 21% year-over-year. The growth can be primarily attributed to the addition of DPS alongside increases in compression infrastructure revenue, which itself was driven by continued investments in new horsepower, price increases on legacy equipment and strong operational execution. In compression infrastructure, revenues increased 7% year-over-year and 3% sequentially. Revenue-generating horsepower increased by approximately 24,000 sequentially. We exited the quarter at $23.80 per ending horsepower, up 4.5% year-over-year, reflecting strong underlying industry fundamentals and a great customer value proposition. Along with top line growth, we continue to deliver on segment margins. Compression infrastructure adjusted gross margin for the quarter came in at 70%, up 170 basis points year-over-year. That's two consecutive quarters of 70% margins. This quarter's results overcame the absorption of the significant increase in lube oil costs driven by the spike in oil prices and crack spreads caused by the war in Iran. As we have highlighted in the past, lube oil is a significant component of the cost of goods sold in the compression business. Given that significance, we've historically been very intentional about closely managing that aspect of our supply chain via preferred supplier relationships. In today's volatile market, that strategy is paying off as we've been able to materially blunt the impact of price spikes in lube oil prices and in fact actually raise our guidance for compression adjusted gross margins. Now turning to our new Power Infrastructure segment. For the quarter, we generated revenues of $33 million and an adjusted gross margin of 65%, the midpoint of our guidance. We fully expect to see margin expansion as we scale the business and increase efficiency by aligning our distributed power operations with compression. As an example, consider that today, more than half of our power fleet runs on Caterpillar 3500 series engines, an engine class that our compression field technicians know well since we use essentially the same engine in a significant number of our compression packages. This commonality yields a lot of operational efficiency. This is a competitive advantage and one of the many reasons why we expanded our infrastructure platform into this business. Adjusted EBITDA for the quarter of $217 million was yet another new company record, and adjusted net income was $54 million or $0.55 per diluted share. Let's turn to capital expenditures. Maintenance CapEx was approximately $20 million in Q2, right in line with our expectations. Other CapEx, excluding a $43 million noncash long-term capital lease for a new Midland Supercenter was $11 million. We are excluding the Midland lease expenditure from our CapEx guidance given its noncash nature. Compression infrastructure growth CapEx was in line with expectations at $67 million, the vast majority of which was for new units. Power infrastructure growth CapEx was $134 million, a portion of which was related to power generation orders that we spoke to last quarter as well as initial down payments on the Baker Hughes turbine framework agreement. Our multiyear agreement with Baker Hughes provides us with many benefits, not the least of which is enhanced certainty on the cost to achieve our two-gigawatt fleet goal by the end of the decade. We think an average cost across our fleet build program of about $1.2 million per megawatt before balance of plant is still the right figure. Discretionary cash flow for the quarter was $163 million, substantially higher than what we've seen in the past. This was driven by record adjusted EBITDA alongside lower interest expense following May's equity offering as well as a $13 million tax benefit. Moving to the balance sheet. Net debt was approximately $2.6 billion at quarter end. In May, we raised approximately $836 million after expenses in primary equity, allowing us to fully fund our power business plan while protecting our balance sheet. Our leverage ratio at quarter end after netting out cash was 3.1x, the lowest in our company's history. Going forward, we think that the strength of our balance sheet plus our access to multiple sources of relatively low-cost capital provides us with yet another meaningful competitive advantage as we build out the power franchise of our energy infrastructure business. Finally, our Board declared a dividend of $0.49 per share that will be paid later this month. Based on our second quarter discretionary cash flow, our dividend remains well covered at north of 3x. Turning to our updated 2026 guidance. We raised our compression infrastructure adjusted gross margin range to 69% to 70.5%. We expect pricing improvements alongside technology and training-induced operational efficiency to enable us to overcome continued lube oil and fuel headwinds. We're also increasing the outlook for adjusted EBITDA to a range of $830 million to $860 million. Our outlook for discretionary cash flow has increased to a range of $570 million to $600 million. The sizable increase is due to a lot of the factors we previously discussed, including higher adjusted EBITDA, lower interest expense and lower taxes. Moving to CapEx. We're increasing our compression infrastructure CapEx to a range of $280 million to $300 million. Following our equity offering, we just recently seized the opportunity to spend $33 million to terminate operating leases on 43,000 horsepower of high-quality contracted large horsepower units. Essentially, we're adding large horsepower compression for less than a 6x multiple at a substantial discount to replacement cost and using our favorable ABL interest rate to do so. That explains the updated guidance. For power infrastructure, we're reducing our capital expenditure forecast to $400 million to $450 million. The reduction is a reflection of the tremendous progress we've made in securing power to get to our two gigawatt by 2030 goal. We've got markedly increased certainty on cost plus timing. And our partnership with Baker Hughes facilitates better cash flow management on our turbine purchases. Also, we now expect to receive approximately 50 megawatts of new power gensets in the second half of 2026. Our outlook for other CapEx remains unchanged and excludes the previously discussed $43 million noncash Midland facility capital lease that I mentioned earlier. With that, I'll hand it back to Mickey.

Thanks, John. I'd like to finish by saying that I'm extremely excited about the direction of the company. Our financial performance continues to exceed expectations. The contract gas compression market fundamentals remain strong with demand continuing to ramp up. Our right to win in the Power Infrastructure segment is highly visible with clear operational, supply chain and financial advantages. Our future customers realize this, too, as we're building a lot of positive momentum in our Power Infrastructure segment, which I'm eager to share with you at the appropriate time. So thanks for your participation today. And now we're happy to open the line up for questions. Operator?

And our first question comes from Elias Jossen with JPMorgan.

I appreciate the update regarding an NTP with the West Texas data center linked to the hyperscaler. But just maybe a little bit of color on what differentiates you from your peers, which are clearly working towards the same goal. And then what milestones should we expect prior to a contract targeted before year-end?

Elias, thanks for the question. I mean I think that we've — in just the short amount of time that we've owned the power platform here, I think it's pretty obvious to a lot of the customers that we're talking to and potential customers that we're talking to here that we bring a level of expertise with operating rotating equipment, right? And one of the reasons why we thought DPS was such an attractive platform was their engineering capabilities and their commercial capabilities as well. So I think that's playing out in real time and backing those capabilities with Kodiak's operational expertise and balance sheet is resonating well with potential customers. So it's exciting times here. As far as milestones to get into a contract, I'd like to be able to give you some firm timeline there. But we're working towards a solution right now, looking at potentially starting to install equipment in the first quarter and hopefully have something to be able to announce more firm to you before the end of the year.

Great. And then maybe pivoting over to the compression business. I think we've seen some headwinds across the space for your peers and maybe with respect to lube oil costs. Can you just talk about kind of operationally what you guys are doing that allows you to avoid those types of headwinds and raise the guide?

Sure, Eli, it's John. Yes, we're proud of the performance we had in the quarter, and it kind of caused us to bump the guide from a compression infrastructure perspective. And really, like the answer is multifaceted. I'd say the biggest driver that allows us to overcome high lube oil prices, which are real, is the continued incremental gains from pouring this next level of training in operational artificial intelligence and machine learning across the fleet. And as we scale that out and roll it out, we're seeing true results. And I say it all the time, like what we see is we truthfully break things less. We fix things when they need to be fixed, not just based on hours and time, and we have higher labor productivity. And the combination of those things allows us to continue to eke out modest gains as time rolls on. As I pivot to the lube oil piece, one of the big strategies that Kodiak deployed that Mickey and Chad and the team kind of started to implement years ago is to really think about partnering with vendors. The examples of that would be Caterpillar or some of our dealers that we work with now going forward, some Baker Hughes. We've done the same thing in our lube oil contracts. And so we use our scale to our advantage. We get a lot of benefits and one of them is that we think we've got favorable pricing on lube oil. So look, it's a real issue. We're going to continue to overcome it, but we're pretty confident as we look to the rest of the year in terms of the guidance that we gave.

Your next question comes from Jim Rollyson with Raymond James.

Nice solid results again as usual. I guess, Mickey, maybe spend a minute on power here. Obviously, you've got a lot of equipment secured. You kind of talked about the 50 megawatts coming in this year. Can you kind of elaborate on the delivery timeline when we get into 2027 through 2030 based on the 1.8 you've got secured, just to kind of understand how that scales up?

Yes. Jim, I appreciate you listening in this morning. Yes, so we've got the 50 megawatts coming at the end of the year. And we — like I said, we've only owned this business for four months. One of our early priorities was securing the power we needed to grow the business. We've kind of told you — told everybody that the megawatts over the next four years comes in pretty ratably at about 400 megawatts a year, give or take a little bit. So it's pretty consistent with that. But I would say that the 2027 deliveries are probably a little bit more back-end loaded in 2027 just because that's when the first of the big Baker Hughes turbines start coming in and kind of early in the fourth quarter. So like I said, we'll take delivery of another 400 megawatts next year, but it's mostly back-end loaded for next year, and then it starts to level out through 2028 through 2030.

Got it. That's very helpful. And as a follow-up, I guess, John, you talked about kind of being on track for — from an equipment standpoint of around $1.2 million a megawatt before balance of plant. I'm curious, maybe, Mickey, what — as you're talking to some of these data center guys and hyperscalers, what kind of balance of plant requirements are you looking at? Like what kind of reliability do they need? And just trying to understand where this overall capital needs goes that you will, I presume, price into your return equation?

Yes. We'll absolutely price it into our return equations. And so typical projects are all going to have basically the same kind of balance of plant that will be associated with the transformer, switchgear, SCRs for emissions reduction and that kind of thing. It's a little bit grayer on the battery and the BESS backup systems. Some people need them, some people don't. Some are handling themselves, some want us to handle them. But the standard balance of plant of the projects that we've looked at will end up in that $1.6 million per megawatt range, give or take a little bit, and if we need battery backup on top of that that the customer is looking for, then it will be a little bit higher from there.

Your next question comes from Neal Dingmann with William Blair.

Mickey, John, great update. My first question is just, again, I want to turn to compression specifically, John, you announced and talked about today that strategic announcement of acquiring those previously leased horsepower. Could you remind me, besides that, is there still potential for accretive purchases of compression either owned by your customers, both on the E&P and midstream side or just other E&Ps and midstream out there?

Neal, yes, we kind of opportunistically exercised this capital lease buyout this quarter, and it was something that really made sense for the company and using our lower cost of capital than what we're paying from some previous capital leases that we had inherited from CSI. So after the equity offering with a little bit lower leverage and some dry powder, we thought that was a prudent thing to do. Kind of looking forward, there is definitely some other opportunities out there that we're looking at for some additional purchase leasebacks. I don't know that they're imminent or not, but there's definitely some discussions going on. And certainly, we'll look to jump on those opportunistically if they materialize.

And I will just chime in just to avoid confusion because this topic has kind of had some people already ask us questions about it. We bought out operating leases in effect, converted them into owned assets. We didn't buy capital leases. So just a simple financial transaction.

Helpful, John. And then, John, maybe sticking with you, just a quick one on shareholder return. Is it fair to assume, obviously, we'll pay — again, a lot of the money you talked about the upcoming or Mickey talked about the upcoming CapEx for power is that I would call it until you hit that inflection, most of the dollars will be going that or debt repayment. And then at some point, you would increase shareholder return? Or how actively are you looking at watching the shares and potentially thinking about opportunistic buybacks?

Sure. I'll kind of cover that. It's a wide-ranging topic. Obviously, it involves a lot of conversations with our Board. Before we bought the DPS business, we were pretty aggressive about buying back some shares. Some of that was because we thought it was the right thing to do and our shares were undervalued. Some of it was to support EQT as they were selling their way down over the last 18 months or so. And from a dividend perspective, we always kind of thought, look, let's pay out about 35% of our discretionary cash flow in the form of a dividend. And given our growth algorithm and how predictable our business was, that all kind of translated into about upper single digits annual growth for several years in dividend growth. With the addition of the Power business, a, we're going to have a lot of CapEx to spend. We think it's great high-returning CapEx that builds that infrastructure platform in power. And then b, we're going to grow faster. And so we can't tie the DCF to the dividend anymore. And so the way that we've articulated it internally, and we think the right answer from a capital allocation perspective is, we think we want to pay an attractive dividend that grows. We want to manage the balance sheet. We want to fund the growth in the power business. So you saw that we announced kind of an equivalent or a flat dividend this quarter. And as we kind of grow the business over time, we'd like to think that we can grow it on an annual basis at an attractive level. I kind of leave it at that. From a share repurchase perspective, we'll always be opportunistic. And now that we, of course, got lower leverage, like that affords us the ability to do so, but we do have a lot of CapEx to spend to execute on our business plan in power. So we're going to be leaning into that.

Your next question comes from Theresa Chen with Barclays.

Going back to your comments, Mickey, on high-grading the power generation commercial pipeline. Can you walk us through your process here? What criteria are you using to prioritize opportunities? How has that evolved over the past few months? More specifically, what are the key trade-offs you consider when deciding which projects to advance versus which to de-prioritize?

Yes. Theresa, thanks for the question. Really, the two big criteria that we're looking at: Number one is the creditworthiness of the counterparty and who the contract will be with. We want to make sure as we're making pretty sizable investments right here that we're protecting any downside risk for the business and our shareholders. And the other one is just how close is a data center basically to securing a tenant and how serious those conversations are ongoing. And we obviously want to make sure that we're not getting in a situation where we're putting a lot of time and effort into a project that is more of a kick-the-tires type of project and something that's real and has the ability to accelerate and contract quickly.

Understood. And you previously discussed unlevered returns above 15% and build multiples of roughly 5x EBITDA. As customer conversations have advanced and project designs have become more defined, has your view on those economics changed at all? And any early indication of expected contractual terms in terms of duration or other important factors to keep in mind?

Theresa, it's John. I'll answer the first part and then hand it back to Mickey for the second part. We spent a lot of time in the last four months refining, I'll call it, the unit/project economic model as well as kind of pressure testing that model with conversations with customers. The short answer is what we said before, we stand behind the five-year paybacks, 15% plus internal rates of return with the ability to kind of think about it differently depending upon duration and customer type, etc. Those all still hold.

Yes. And as far as contract duration here, we're focusing on the longer-term contract duration. We're seeing pretty typically 10- to 15-year type contract terms in the preliminary discussions that we're having with customers. And there might be some instances where we would agree to a seven- or eight-year contract just depending on the kind of deal it is and the terms of the agreement.

Your next question comes from Doug Irwin with Citi.

Maybe a quick follow-up on Theresa's question there. Just curious how we should think about the size of some of these deals you're working through right now. I would imagine there's a pretty wide spectrum of opportunities out there. So just curious where you see yourself having the biggest competitive advantage in the market? And I guess, in general, should we expect just a couple of larger chunky deals for this gigawatt of equipment you've secured or maybe a handful of smaller contracts?

Doug, it is a pretty wide spectrum of deal types that we're looking at. This first one on the limited notice to proceed that we have in place is relatively small because we don't have that much power to put to work in the first quarter, being 90% utilized. So it's kind of a sub-100-megawatt type deal, but with the ability to scale over time. So we like that as kind of a first bite-sized chunk to get on the board here. And then after that, the other opportunities we're looking at are a pretty wide spectrum of different things, anywhere from a couple of hundred megawatts of long-term contracted commissioning equipment that would be kind of a 10- to 15-year deal that would be more mobile in nature to permanent primary island behind-the-meter solutions for up to 1 gigawatt scaled over time. So it's pretty typical. There's a lot of opportunities out there. And as we high-grade these, we're looking at several different things here, with the commonality being we want to make sure we lock this stuff in for the long term, and we want to make sure that it's with the right counterparty.

Got it. That's helpful. And maybe a follow-up on compression contracting. One of your peers this quarter announced a pretty large eight-year contract. You've also announced a few longer-term deals so far this year. Just curious if you could talk about what kind of demand you're seeing for longer duration contracts and whether you might be in a position to keep terming out your fleet a bit?

Yes, we absolutely would love to do that and are in some conversations with some other customers. It's really kind of a customer-by-customer preference here. So some want to keep them a little shorter to preserve some optionality, which in our minds is not a bad thing either because it gives us the ability to churn the fleet a little bit and kind of high-grade customers there if we want to do that. But with the right customers in the right place, we certainly are talking about longer-term deals with them, too.

Your next question comes from Jackie Koletas with Goldman Sachs.

First, I just wanted to go back to Power. On the West Texas Data Center project where you executed the limited notice to proceed, could you provide a little bit more color on the counterparty structure there, specifically what kind of counterparty is the data center developer and the nature of their commitment with the underlying hyperscaler?

Jackie, we're probably not ready to divulge that publicly yet, but we're paying very close attention to making sure that the counterparty is a creditworthy counterparty and it has the appropriate amount of risk for the size of the project for sure.

Understood. And then just pivoting to compression. Given that peers are increasingly formalizing long-term spending plans, how do you view the competitive landscape for large horsepower compression? And does this multiyear visibility change your approach to securing engine supply or alter pricing leverage when negotiating those long-term contract extensions?

Yes. Deliveries are still almost 200 weeks out. So we're having to plan our business in compression much like power right now and look and have a much longer-term strategic approach than we have typically in the past. And so yes, we are planning out three, four, five years in advance right now, and that's what gives us the visibility into the ability to secure that equipment. Having great relationships with the vendors like Caterpillar and with our packagers that are having shop space availability and that kind of thing. So we're having to plan out quite a bit further. And then with the visibility that you see into specifically Permian natural gas growth in the future as feeding LNG, we're really looking at a long-term forecast here that we feel really good about and that we can continue to execute on.

Your next question comes from Julien Dumoulin-Smith with Jefferies. Jan Overmeer is on for Julien.

This is Alex Overmeer on for Julien. Just really quick back on the Power CapEx. First, is all of the reduction in power CapEx purely driven by the down payment? And then separately, it sounds like maybe that $1.6 million per megawatt, including balance of plant, has come up a little bit versus your previous expectations of $1.4 million to $1.5 million. Is that fair to say?

I'll take that in order. So number one, when we bought DPS and came out of the gates, we weren't — we knew mentally where we wanted to land in terms of how much power we wanted to acquire and when. But we hadn't actually negotiated many of those deals yet. We'd had a few conversations. So as we rolled through the quarter, we strategically got extremely comfortable and have great visibility on our two-gigawatt by 2030 target. That allowed us to say, okay, we can take this guidance down to a lower level because we now know what we're going to pay. I will say with the Baker Hughes agreement, I go back to the comment that I made earlier where our supply chain strategy has always been, let's find great partners and work with them. Let's trade volume for price, so to speak, too, in that sense. And so we were able to work with Baker Hughes, get some favorable payment terms and that also mentally, again, probably lined up with what we hoped to achieve, but that's what the second aspect allowed us to kind of tuck in that guidance in 2026. I didn't want to correct Mickey earlier when he said the $1.6 million. I think $1.5 million is probably where I would say, and he did say kind of plus or minus. So the answer is I don't think it's gone up from where we originally were last quarter. We think we're still right in that zone, call it, plus or minus $1.2 million a megawatt for the raw power and kind of round up to the $1.5 million, again, plus or minus, including balance of plant with a lot of certainty because we basically locked this in through 2030.

Yes. And Alex, I'd probably just say that maybe I was thinking about some specific projects that I was looking at some numbers on. But I would say that any incremental balance of plant that does come in a little higher than what we expected early on maybe will come with incremental returns, as has been pretty well documented among us and our peers.

Got it. Yes, that's super helpful. And then just really quick, do you guys have any thoughts on this Texas moratorium on data center grid connections that was announced this week? And if you've heard anything from potential customers in the wake of that announcement?

Yes. I think that announcement of the moratorium on data center interconnections that's being requested, something in the range of 450 gigawatts on a system that has 95 gigawatts of capacity today, does nothing but benefit behind-the-meter power solutions providers like ourselves. And I understand why they're doing it. I think it's a smart thing to do to flush out what are real projects and what are more speculative projects with this audit. So I think it's a good thing, and we certainly have heard initial feedback that there are data centers and customers that are saying behind-the-meter power solutions are going to be key to the future of our businesses. So we think it's positive for us and our peers, to be honest with you.

Your next question comes from Derrick Whitfield with Texas Capital.

I wanted to start with Power for my first question. While the focus of today's discussion has been on data centers with your power offering, could you speak to how your discussions are going in other areas?

Yes. Derrick, we absolutely have some opportunities for microgrid-type projects in the Permian Basin and are progressing some conversations with customers there, too. We think that's going to be a really attractive opportunity for us going forward, especially with the recip fleet that we're complementing with the turbines as well. It leaves us the optionality to chase both of those. As you're seeing more and more limitations on the grid, we're having a lot of conversations with oil and gas customers on microgrid opportunities as well.

Great. And as my follow-up, I wanted to focus on compression. As you guys think about the amount of natural gas pipelines that are coming on this year and over the next couple of years in the Permian, under what circumstance would you guys consider accelerating compression build out to meet customer demand?

It's a good question, Derrick. With engine lead times and deliveries where they're at, I wouldn't say that our capacity for future growth is locked in. We will certainly look at projects if they come to us that are incremental to that, if we have the ability to procure equipment and have the balance sheet capacity, and we will evaluate those opportunities and opportunistically jump on them if they make sense. In the shorter term, over the next year or two, it's going to be pretty hard to get our hands on additional equipment just because of lead times. But if those opportunities arise, we'll certainly evaluate them. And if a customer wants us to engage in some sort of conversation around purchase leasebacks or something like that, that's an opportunity for us to deploy more capital on the compression side.

And I might just tack on there, too. After the equity offering, our leverage ratio kind of bottomed out at around 3x. And we said a lot over the course of the last quarter that we kind of have a line of sight towards peaking out in the mid-3s under the base business plan as we fund the power business. And so that's squarely in the middle of our long-term leverage targets. So nothing would make us happier than to find wonderful purchase leaseback opportunities or maybe a chunky customer opportunity or two on the compression side. That's such a wonderful business with great steady returns that we'd love to find those opportunities to fund a little more, and we absolutely have the balance sheet capacity to do it.

Your next question comes from Derek Podhaizer with Piper Sandler.

I wanted to go back to the West Texas data center conversation. You mentioned that initially, it could be sub-100 megawatts just given your current fleet and scale that over time in line with more of your delivery schedule. For this specific project, do they have aspirations to ultimately connect to the grid and integrate with the grid? Or do you think this would always be primary power behind the meter? Just a little more color on the future generation mix as we think about this project over time.

I think this project, like a lot of projects that we're looking at, ends up with a mix of grid power and behind-the-meter power. There are some that are talking about exclusive behind-the-meter power for the long term, but I think there's a lot of thought process right now going around with some of these projects that is: we need behind-the-meter power, but we also, in the future, are going to supplement with some grid power. With the recent West Texas moratorium on grid interconnects, I think that may shift more towards sole behind-the-meter power solutions going forward.

Got it. That's helpful. And then I know one of the benefits to the Kodiak platform is about the technician crossover on the power generation assets, particularly for the recip side of things. But given you're leaning a bit heavier into the turbine side, backed by the Baker Hughes framework agreement, how should we think about really developing your technicians, leaning on Baker for their technicians and expertise as you go more towards a turbines-versus-recip mix?

This is absolutely going to be a partnership approach with Baker Hughes on developing technicians in-house for Kodiak. Part of that framework agreement expressly addresses Baker Hughes bringing in training for Kodiak technicians, which we think is a real upside for that agreement and why we think the partnership with Baker Hughes is really valuable for us going forward. So we've got a little bit of time before the first turbines start showing up. We're going to aggressively start that turbine curriculum and training program that will get those technicians up to speed and get those people in place early on. We think that's a huge advantage, and we'll continue to develop those people and have high-quality personnel to operate this equipment.

The next question comes from Elvira Scotto with RBC Capital Markets.

So on the power side, you talked about the two gigawatt by 2030 target, but then you also talk about there's tremendous opportunity in excess of that. Can you do more than two gigawatts by 2030? Or is that capped by equipment availability? And would you consider other bolt-on acquisition opportunities in distributed power?

I'll take this and Mickey will tag-team. We do have the balance sheet capacity to continue to scale. We're right out of the gates on this and we've gotten out of the gate strong. But we pride ourselves on being great operators and keeping our head down to avoid distractions. We've got some time to get our foundation underneath us to continue to operate this business successfully. That said, we expect to think about building a moat around this power business. That could involve strategic tuck-in acquisitions of technologies, capabilities or services we need to service our customers or it could include adding additional capacity. Ultimately, we believe the end of this business will be consolidated among a handful of businesses that are successful because they know what they're doing and can scale with the customers. We believe Kodiak can be such a consolidator in that space.

Yes. We have every expectation that over time we will be a consolidator in this space, and while our immediate focus is on execution and building a solid operating foundation, we're absolutely open to bolt-on acquisitions that make strategic sense as we continue to build out the platform.

Great. And then just moving over to the contract compression side. You talked a little bit about some of the things you're doing to mitigate cost increases and your contract services margin guidance moved higher. If lube oil costs hadn't been a headwind, where do you think margins could have been? And just how much higher can those margins go?

You're going to test my CFO math in public, which scares me. But I would tell you that relative to where we were at the beginning of the year to where we're going to probably land at the end of the year, it's about a $1.5 million a month uptick in cost. So it's really substantial. If that hadn't occurred, you're looking at roughly $18 million of annualized margin benefit. In a normalized market, that would be the kind of tailwind you'd see.

Your next question comes from James Larkin with Bank of America.

I guess my first question here is just on the total two gigawatt supply. It seems like right now we're a little more tilted towards engines than I think maybe the long-term goal was. With an additional recip deal maybe coming, are you going to be engine-weighted? Maybe talk about how you're seeing data center developers talk about the difference between engines and turbines.

I'll answer the first point and then turn it back to Mickey. The two-gigawatt target still stands; we expect about three quarters turbines and about one quarter recips. Baker Hughes is a big chunk of the turbine orders. We've also got some solar equipment as well. On the recip side, we have a lot of CAT equipment and are looking at other parties too. We're hoping to lock into some agreements this year to secure the balance of the recip power by 2030.

As far as customer preference right now, speed to power is one of the most important things our customers are telling us. Quite frankly, customers are relatively agnostic to turbine versus recip power at this point; they're focused on reliability and speed of delivery.

Great. And I guess my second question is many developers now are purchasing their own equipment. Is there an opportunity outside of the two-gigawatt target that you could operate some of that equipment for them?

Yes, absolutely. Many folks have procured equipment that they have coming in. They can hire somebody to help them install it, but on a day-to-day operational basis, that's something Kodiak brings a lot of credibility for. There are ongoing conversations about us operating other people's equipment alongside ours.

Your next question comes from Sunil Sibal with Seaport Global Securities.

A lot of good discussion today. I wanted to understand a little bit on the gas infrastructure part of the distributed power business. Is that something that you guys are looking at or responsible for when you're looking at these projects? Or is that something the data center client is bringing on? And based on the locations you are looking at these projects, how do you see that part of the business playing out?

Sunil, we absolutely have the expertise in-house to manage gas infrastructure procurement. For the projects we're looking at in the short term, most customers have already procured fuel and have that covered. But we do have the expertise and partner relationships to procure and manage fuel infrastructure if a project requires it.

Your next question comes from Sebastian Erskine with Rothschild & Company, Redburn.

A lot has been asked, but just to follow up on the opportunity around balance of plant. It seems like that's an area of great interest. In terms of your communications, is that something the majority of your prospective customers are inquiring about? How easy is it for you to procure additional equipment such as battery energy storage systems, switchgear or transformers? And is there any way of quantifying potential uplift on the EBITDA profile of those contracts?

As far as quantifying EBITDA uplift, it's early and project-specific, so it's hard to give a uniform number. There is a baseline balance of plant needed for nearly every project—transformer, switchgear, SCRs. We've begun procuring balance-of-plant items and batteries to align with the orders we have and to ensure we have long-lead items ordered. Balance-of-plant lead times can range from four months to 18–24 months, so we're working with suppliers to make sure we can execute when projects materialize.

Perfect. And then the second question is on customer mix. Are you predominantly communicating with hyperscalers or partnering with powered land developers and data center builders? One of your peers announced a JV with a land developer and a relationship with a builder. Can you give a sense of customer mix and how diverse the pipeline is?

It's a mixed bag. We're talking directly with hyperscalers, data center developers and powered land developers. We'll handicap opportunities based on how far along their projects are and who the counterparties are that we'll contract with. So it's all of the above—several conversations across each of those categories.

We have reached the end of the question-and-answer session. I'll turn the call over to Mickey McKee for closing remarks.

Thanks, operator, and thanks to everyone participating in today's call. We look forward to speaking with you again after we report our results for the third quarter.

Thank you. This concludes today's call. All parties may disconnect. Have a good day.