Archrock Inc 2026 Q2 Earnings Call

You may begin. Thank you, Erica.

Hello, everyone, appreciate you joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock, and Mohit Singh, Chief Financial Officer of Archrock. Yesterday, we released our financial and operating results for the second quarter of 2026. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, based on our current beliefs and expectations, as well as assumptions made by and information currently available to Archrock's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.

Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, adjusted EPS, adjusted net income, adjusted free cash flow, and adjusted free cash flow after dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's second quarter results and provide an update on our business.

Thank you, Meighan, good morning, everyone. Before we get into the quarter and our performance, I want to welcome Mohit Singh to Archrock as our Senior Vice President and Chief Financial Officer. Mohit joined our team in July and brings more than 25 years of experience across the energy value chain. Mohit's public company experience, deep understanding of natural gas fundamentals, and strategic perspective will be valuable as we position Archrock for its next phase of growth. Mohit, we're excited to have you on board. Now let me turn to our second quarter results. Against a constructive market backdrop, the quarter was outstanding and showcased the quality of our platform with excellent contract operations profitability, high utilization, significant free cash flow, low leverage, and continued dividend growth.

These results demonstrate the resilience of our business model and the flexibility we have to balance high return growth while returning capital to shareholders. Let me share a few highlights from the quarter. We delivered EPS of $0.38 and adjusted EBITDA of $213 million in the second quarter, supported by solid contract operations fundamentals and disciplined execution across the business. Customer demand remains healthy, as evidenced by our continued high utilization, strong bookings for new starts, low unit stop activity, and a long-term agreement we signed with an existing strategic customer covering approximately 665,000 horsepower for midstream applications. We again delivered outstanding operating performance and profitability in contract operations, including utilization of 94.4% and our seventh consecutive quarter of adjusted gross margin above 70%, with adjusted gross margin at 71% in the quarter.

We translated this performance into adjusted free cash flow of $67 million in the quarter, of which we returned $39 million to shareholders through dividends. Our board recently approved our fifth dividend increase in two years, underscoring the earnings and cash flow strength of our business. We ended the quarter with leverage of 2.6 times and dividend coverage of 3.1 times, both underscoring our continued financial strength and ability to balance investing in growth while returning capital to shareholders. Overall, we're very pleased with our second quarter performance and remain confident in the strength of our core business and long-term outlook.

Last night with our earnings release, we tightened our full-year 2026 adjusted EBITDA guidance range to reflect changes in assumptions for several largely external or timing-related factors, including near-term lube oil and make-ready cost pressures, AMS customer deferrals, and higher long-term incentive compensation driven by our increasing stock price. This does not reflect a change in demand fundamentals. As a result of these factors, our updated full-year 2026 adjusted EBITDA guidance range is $865 million-$885 million, compared to our prior guidance range of $865 million-$915 million. Stepping back, our long-term confidence is supported by three key advantages: the right market, the right platform, and the right balance sheet. First, we're in the right market. Natural gas remains essential to powering economic growth, supporting energy security, and meeting rising demand from LNG exports, industrial activity, and power generation.

These growth drivers for natural gas correlate directly with strong demand for compression over the long term. Second, we have the right platform. Archrock has the scale, fleet quality, operating discipline, and customer relationships that we have built over time to capture that opportunity profitably. Our track record of reliable execution and strong customer service positions us to grow alongside our customers. Third, we have the right balance sheet with low leverage, significant liquidity, and strong free cash flow generation. Taken together, these advantages reinforce our confidence in our ability to compound earnings and free cash flow and deliver sustainable superior returns on capital. Looking ahead, favorable long-term fundamentals support robust growth in natural gas and compression demand. In the Permian, associated gas volumes continue to outpace oil growth as gas-to-oil ratios are expected to increase approximately 21% by 2030.

This trend is increasing compression intensity across the basin and should continue to support demand for our services. Infrastructure additions provide further support with approximately 4.6 Bcf a day of Permian takeaway capacity expected to come online in the second half of 2026, and another 6.7 Bcf a day anticipated between 2027 and the end of the decade. These projects should improve basin economics and facilitate continued natural gas production growth. Longer term, LNG remains one of the most visible drivers of demand growth. Industry forecasts point to LNG-related natural gas demand reaching approximately 35 Bcf a day by 2030 and 40 Bcf a day by 2035, up from approximately 20 Bcf a day in 2026. At the same time, data center and AI-related power demand represent an additional source of upside, with natural gas-fired generation expected to play an important role in meeting growing electricity needs.

Simply put, we believe the combination of growing natural gas production, expanding takeaway infrastructure, increasing LNG exports, and rising power demand create a favorable backdrop for compression demand. We stand ready to support our customers in meeting this demand growth and creating value for our shareholders. Moving to our segments, contract operations delivered a strong performance supported by excellent execution and high utilization. Customer demand remains robust across our fleet, particularly for large horsepower, and demand remains broad-based and geographically diverse across multiple operating areas. During the quarter, we signed a long-term contract with an existing strategic customer covering approximately 665,000 horsepower for midstream applications. This agreement includes an eight-year base term and a two-year extension option, underscoring the value of our fleet, the strength of customer demand, and the importance of partnering with strategic customers over multi-year development cycles.

The market remains tight, with Cat engine lead times still extended at just under 200 weeks. This reflects the strength of natural gas demand, the production growth outlook, and the compression equipment required to support that growth. It also underscores the importance of securing equipment and remaining well-positioned to grow with customers, supported by our financial strength and market position. In this environment, excellent execution by Archrock and the compression industry continued to support attractive returns, constructive commercial arrangements, and disciplined capital deployment. We exited the quarter at 94.4% utilization, reflecting continued high demand and the quality of our fleet. We are also seeing recent wins that are putting idle equipment back to work in the second half of the year.

At quarter end, operating horsepower was 4.5 million, compared to 4.7 million at the end of the second quarter of 2025, with the largest driver of that change being the sale of approximately 165,000 non-strategic operating horsepower year-over-year. On a sequential basis, net operating horsepower was relatively flat, down approximately 7,500 horsepower, excluding active asset sales. Revenue per horsepower per month was higher sequentially and year-over-year, supported by solid utilization. Contract operations adjusted gross margin remained excellent at over 71%. As we look to the back half of the year, we expect to manage near-term cost pressures. First, we are seeing a higher make-ready cost as we put idle units back to work to meet customer demand. Second, we anticipate low oil cost pressure related to the Iran conflict that has driven oil prices higher.

Even with these pressures, margins should remain around 70% in the second half of the year, reflecting the strong profitability of our business. Moving to our Aftermarket Services segment, activity has been softer than expected as some customers defer major maintenance to keep equipment operating in the current high crude price environment. While AMS can be lumpy and is a smaller part of our overall business, Adjusted gross margin percentage has significantly improved, reflecting disciplined execution and our focus on higher quality, higher margin work. AMS remains an attractive contributor to returns because it is less capital-intensive and it enhances the ROIC profile of the company. Turning to capital allocation, we remain disciplined and returns-focused with a framework designed to balance high-return growth investment, durable shareholder returns, and continued balance sheet strength.