Flowco Holdings Inc. 2026 Q2 Earnings Call

Good morning, everyone, and thanks for joining us to discuss Flowco's second quarter results. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this morning's press release, as well as our filings with the SEC, which can be found on our website at ir.flowco-inc.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliation of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings. Joining me on the call today are our President and Chief Executive Officer, Joe Bob Edwards, and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we will open the call for your questions. With that, I will turn the call over to Joe Bob.

Thank you, Andrew. Good morning, everybody, and thank you for joining us today. I will begin today's call with a review of our second quarter performance and key highlights. Jon will then discuss our financial results, segment performance, capital allocation, and balance sheet in more detail. I will conclude with our perspective on the current market environment and our outlook for the third quarter. Flowco delivered solid results in the second quarter, generating adjusted EBITDA of approximately $94 million, while maintaining our top quartile adjusted EBITDA margins of roughly 40%. Revenue increased 13% quarter-over-quarter, while adjusted EBITDA grew 10%, reflecting solid execution across the business. These results were supported by better than expected performance from recently acquired Valiant, continued growth in rental revenue across our surface equipment and vapor recovery businesses, and a stronger quarter in downhole components product sales.

Flowco generated $50 million of free cash flow during the quarter, further enhancing our balance sheet and reinforcing the strength of our business model. 56% of our revenue in the quarter was generated from rental revenue, which provide a high degree of revenue visibility, while our asset-light sales businesses continue to generate attractive returns and strong cash conversion. This balanced model enables us to consistently generate meaningful free cash flow while we invest in Flowco's long-term growth prospects. Overall, I am very pleased with our execution during the quarter. While we experienced the cost headwinds discussed in our mid-quarter update, which Jon will discuss in greater detail, our team remains focused on the factors within our control, superior service quality, efficient execution, and delivering the solutions that help operators generate more attractive returns from their existing assets. This disciplined approach enabled us to deliver results within our original expectations.

Our second quarter performance reflects the demand for Flowco's production optimization technologies and the critical role they play throughout the productive life of the well. Whether we are enhancing production through our broad artificial lift portfolio, capturing high-value hydrocarbons through our vapor recovery solutions, or providing the surface equipment that enables more efficient production of oil and natural gas, our objective is the same, helping customers optimize production with the right solution for each well, every time. As operators continue to prioritize production optimization to drive their performance, we believe our differentiated platform is well-positioned to support our customers throughout the lifecycle of the well. Looking ahead, we see opportunities to further leverage our platform and deliver even greater value to our customers. Valiant is an excellent example of this strategy in action.

The acquisition of Valiant's ESP capability broadened our production optimization platform while enhancing our ability to better serve customers across the life of the well. By leveraging the operational data generated through platforms like Optimus, Valiant's ESP monitoring and optimization software, we are better positioned to identify customer opportunities earlier and deliver more integrated solutions. We believe this data-driven, collaborative approach is applicable across our platform and will continue to strengthen customer relationships, identify new commercial opportunities, and enhance the value we deliver. In summary, the second quarter demonstrated our ability to deliver profitable growth, generate meaningful free cash flow, and continue executing on our long-term strategy. With that, I'll turn it over to Joe Bob.

Thanks, Joe Bob. Turning to our financials, second quarter performance was within our original guidance range, driven by growth in our high-margin rental businesses and a full quarter of contribution from Valiant. Total revenue increased 13% sequentially to $236 million, primarily driven by growth within production solutions. Adjusted EBITDA increased approximately $8 million from the first quarter to approximately $94 million. While higher operating and maintenance expenses within production solutions created modest margin pressure during the quarter, we continued to deliver approximately 40% adjusted EBITDA margins, highlighting the strength of our operating model and customer demand for our technologies. In our production solutions segment, second quarter revenue increased 22% sequentially to $171 million, while adjusted segment EBITDA increased approximately 16% to $71 million. The increase was primarily driven by downhole components, including the contribution from Valiant, which is performing ahead of our expectations.

Integration activities for Valiant are substantially complete, and our focus has shifted towards capturing incremental commercial opportunities across the combined platform as we continue to invest in the business. Turning to margins, adjusted segment EBITDA margin decreased 229 basis points quarter-over-quarter, reflecting a revenue mix shift towards downhole components following the inclusion of Valiant, as well as higher operating and maintenance expenses within the segment, including increased lubricant and fuel expenses. We expect these cost pressures to continue into the third quarter and have reflected them in our third quarter guidance. We are actively focused on mitigating these cost pressures through disciplined cost management, improving the efficiency of our rental fleet maintenance program, optimizing overtime, and reducing fuel and lubricant costs where possible. In our Natural Gas Systems segment, second quarter revenue and adjusted segment EBITDA each decreased 6% sequentially to approximately $65 million and $28 million respectively.

The decline was primarily driven by lower vapor recovery system sales, which more than offset continued growth in our vapor recovery rental business. Turning to corporate costs, second quarter corporate expenses decreased to $5 million from approximately $5.6 million in the prior quarter, primarily due to lower professional fees. Overall, second quarter adjusted EBITDA came in at $93.9 million, underscoring the durability of our operating model and building on the momentum we outlined last quarter. In the second quarter, we generated approximately $50 million of free cash flow while investing $45 million of capital, primarily to expand our surface equipment and vapor recovery rental fleets and support the continued growth of Valiant. Our annualized adjusted return on capital employed for the quarter was approximately 18%.

Capital investment was elevated during the quarter with the inclusion of Valiant and continued expansion of our rental fleet, but our full year capital outlook remains unchanged and continues to support meaningful free cash flow generation. Our vertically integrated manufacturing model and six-month lead time on equipment provide flexibility to respond efficiently to customer demand while focusing our capital on high return opportunities. Turning to our balance sheet, liquidity, and capital allocation. We continued to strengthen our financial position during the second quarter and into the third quarter, increasing available liquidity while reducing leverage further below one times. As of August 7, we had approximately $274 million of borrowings outstanding under our credit facility with a borrowing base of $722 million. We had approximately $446 million of available capacity.

Our conservative balance sheet and consistent cash flow generation provide the flexibility to invest organically, pursue strategic acquisition opportunities that strengthen the business, and consistently return capital to shareholders through dividends and opportunistic share repurchases. Subsequent to the quarter, our board approved a $0.14 per share one time special dividend to Class A shareholders only. This is in addition to our quarterly discretionary dividend of $0.09 declared on July 30. As a result of our ownership structure, we've accumulated cash on our balance sheet and are returning this cash to our shareholders. We do not anticipate similar special dividends in the future. In summary, we delivered another strong quarter, strong free cash flow, disciplined investment, and high return growth, and a stronger balance sheet that provides strategic flexibility. We're well positioned for the opportunities ahead. Back to you, Joe Bob.

Thanks, Jon. Let me close by sharing our perspective on the current market environment, Flowco's positioning, and our outlook for the quarter. We believe we continue to benefit from our North American positioning, where reliable domestic energy production is playing an increasingly important role in meeting global energy demand. We continue to see an uptick in activity across portions of our customer base, which we expect will increasingly accrue to Flowco's benefit over time. With U.S. production expected to remain near record levels, operators must continue working to offset natural decline across a large and growing base of producing wells. This requires an increasing focus on production optimization, operating efficiency, and recovery, providing consistent demand for our solutions. Against this backdrop, we anticipate third quarter adjusted EBITDA of $92 million-$98 million. We will continue to drive incremental efficiencies across our full organization and further integrate our platform.

Increasingly, that means putting our operational data and deep industry expertise to work, not just to identify cross-sell opportunities and the right solutions for each customer, but to run our broader rental fleet more efficiently through condition-based maintenance powered by AI and machine learning. We also remain disciplined in evaluating strategic opportunities that complement our existing technologies, broaden our platform, and enhance the value that we deliver customers. Together, we believe this positions us to deepen customer relationships and drive profitability over time. We believe Flowco is the leading pure-play production optimization platform, positioned to benefit from our customers' non-discretionary spending patterns in what has become an increasingly industrialized production base in North America. We believe our margins, returns on capital, consistency of our free cash flow generation, and capital-efficient growth are differentiated within our industry segment.