Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net income increased to $41 million in Q1 2024 from $16 million in Q1 2023, demonstrating strong financial growth.
- Adjusted EBITDA rose by 35% year-over-year, reaching $131 million due to pricing and profitability gains across all segments.
- Quarterly dividend per share increased by 10% compared to the previous year, reflecting a commitment to enhancing shareholder returns.
- Recorded a near-record utilization rate of 95% in the contract operations business segment, indicating robust demand and operational efficiency.
- Raised the 2024 adjusted EBITDA guidance to $510 million to $540 million, up from the previous range of $500 million to $530 million, signaling confidence in continued strong performance.
Negative Points
- Despite strong performance, total U.S. natural gas production is forecasted to be flat in 2024, which could impact future growth opportunities.
- The energy sector's heightened capital discipline could impose constraints on rapid expansion and scaling.
- Faced a noncash $3 million long-lived asset impairment in Q1 2024, indicating potential challenges in asset valuation.
- While aftermarket services segment showed growth, it remains seasonally slower and could face unpredictability in future quarters.
- Operational challenges such as maintaining labor force and managing increasing costs could impact profit margins and operational efficiency.
Q & A Highlights
Q: Congrats on another fantastic operating quarter. Brad, do you have -- you and I have had this conversation many times in the past that you've talked about ultimately in a cycle like we're in, the upside on pricing is kind of driven by where returns ultimately are and what your customers will allow you to take before they would be willing to do the projects themselves. And if you look at kind of where those returns are today, given what's happened on the cost inflation side, and the offsetting pricing gains you've had. I'm curious, your average revenue per horsepower per month, I think you said it was 2.5% this quarter. And recently at our conference in Orlando, I asked Doug about where leading edge was it was kind of in the mid-20s. I'm trying to understand where you think that pricing level can go given the backdrop of LNG of power demand growth, et cetera, mean I presume mid-20s maybe isn't the stopping point, but it's certainly kind of the near-term bogey to try and aspire getting your whole fleet to. So I'm just maybe some context around where you think leading edge is today? And where do you think that might go just based on the market backdrop?
A: Thanks, Jim. A few comments. First, when I think of spot pricing on a year-over-year basis, the good news is that 23% to 24%. We still see pricing momentum and we see spot pricing up. Now though more in the single digits compared to what we experienced over the last 3 years. Second, we know we have an opportunity to continue to see pricing gains on the installed base, and we're excited about that. And it is reflected in our guidance for sure. But that's the opportunity that we see on pricing is that the market is still supportive of price increases. And we like both what's going on a spot pricing basis as well as the opportunity to bring up the installed base, not just new starts. The second comment I'd make is that we would not give forward-looking guidance on pricing at a future range period. It's probably just not the prerogative of us to guide pricing or to set a future pricing level. So I'd like to just pull back off of that. We're not going to be able to share a target or a range for future pricing for a lot of reasons. So just we don't really want to go there at all. But a real point that you raised in your question is that our returns are good, but the market is going to require higher returns going forward of our customers and of us. The price for new units today is up something like 30% of since 2021. Pricing and inflation for parts, pricing and inflation for the cost of labor are all up pricing had to go up to regain and recover that territory. And candidly, we have. But in addition, cost of capital is up and returns on investment expectations are also up. As an industry, we have to deliver better returns as a business we have to deliver better returns, and we believe that our customer base is supportive of that because they're seeing the same demands from their investors.
Q: Got it. That's helpful color. That's exactly kind of where I'm going just with kind of what the implication is for the trajectory of pricing from here. Maybe switching gears on the free cash flow side, I mean you guys obviously have continued to bring leverage down your dividend coverage climbed again to over 3x led to the dividend increase. I'm curious how you think or how you and the Board think about distributing that cash. You boosted dividend 10% this last quarter. You just refreshed the buyback program. You guys have been probably lighter users so far on the buyback program, but trying to walk through maybe how you think about allocating that capital between debt repayment, now that leverage is in your targeted zone versus dividend growth versus using the buyback program? And are you just opportunistic on the buyback? Or like how do you think about that structure?
A: First, we're really excited about the financial position and the financial flexibility that we have on our platform and in our structure and balance sheet today. We fully intend to be focused on generating great returns of cash to our investors. And it's an exciting time to be in the position we're in with the number of levers we have to pull. So starting off with the dividend. We acknowledge that 10% increase year-over-year has been good. And with the financial performance that we have now, we will be revisiting that dividend rates with our Board every quarter to discuss what the right level is going to be. But note, our goal is to deliver a consistent dividend and dividend growth through the cycle. We're at a strong part in the cycle, and so we want to be thoughtful about how we do that. Second, on buybacks, we are going to target being as systematic as we can be in execution of the share repurchases over time. That does take into account price and returns, however, because our entire approach is to put our cash where we can generate the best returns. And when we can do that for equity, we absolutely are going to do that for equity as opposed to debt because the returns on debt right now. We know what that looks like, and that's the easiest to compute. And finally, we're in a position where the market ahead is going to be robust. What we see, and I said it in my comments, is flat natural gas production in the U.S. for 2024 is going to change in 2025 and beyond. Our customers are working on getting ready for that. We are working on getting ready for that as well. So we see a bit of a pause right now, but growth ahead. So that capital allocation is also going to go towards funding that growth for our -- the benefit of our customers. But finally, with the net result that we absolutely are going to work hard to generate free cash flow in the capital allocation scheme. So that's the way we think about it, Jim. And we're just excited that we know that, that means we have future opportunities to return more capital to our investors.
Q: Thank you. Good morning. So, you talked about the gas lift market, and I was wondering if you could expand a little bit on that. What kind of opportunities do you see there? Maybe talk a little bit about the customer demand you're seeing there? And then does that also have similar economics relative to what you think of coming off the backside of the plants in transportation?
A: Thanks, Selman. I'll talk about the market opportunity first. Number one, what we see for gas lift, it's grown proportionately with what we've seen for gathering stated differently, the percentage and mix of what we have for compression on gas lift on a horsepower basis has basically been a consistent percentage compared to the entire fleet in application to gathering and gas lift. It's moved around a little bit, but been very consistent. So -- and as you know, gas lift is really directed for
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
