Archrock Inc. Aktie

Good morning. Welcome to the Archrock Second Quarter 2026 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Erica. Hello, everyone, and 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 and 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 dividends. 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, Megan, and 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 2 years, underscoring the earnings and cash flow strength of our business.

We ended the quarter with leverage of 2.6x and dividend coverage of 3.1x, 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 the change in demand fundamentals. As a result of these factors, our updated full year 2026 adjusted EBITDA guidance range is $865 million to $885 million compared to our prior guidance range of $865 million to $915 million.

Stepping back, our long-term confidence is supported by 3 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 demands. 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 '26 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 8-year base term and a 2-year extension option, underscoring the value of our fleet, the strength of customer demand and the importance of partnering with strategic customers over multiyear 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 continue 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're 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 nonstrategic 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 operation's adjusted gross margin remained excellent at over 71%. As we look back to the back half of the year -- as we look to the back half of the year, we expect to manage near-term cost pressures. First, we're seeing higher make-ready costs as we put idle units back to work to meet customer demand. And second, we anticipate lube 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. And AMS remains an attractive contributor to returns because it is less capital intensive and 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. For 2026, we're reaffirming growth capital expenditures of $250 million to $275 million, reflecting continued investment in growth horsepower to meet customer demand and extend the growth of our profitable platform.

Looking beyond 2026, we're introducing a long-term capital allocation framework supported by the strong market backdrop for natural gas and compression demand. This framework reflects an all-of-the-above approach to capital allocation with 3 components.

First, we expect to prioritize high-return organic growth investments that add the new build horsepower needed to meet customer demand. Based on forecasted natural gas demand growth, we estimate that we will require new horsepower additions totaling approximately 1 million horsepower from 2027 through 2030. To meet that demand, we expect to invest $1.4 billion to $1.6 billion of growth capital cumulatively over that 4-year time frame in high-return organic growth opportunities, predominantly in large horsepower and electric motor drive new compression.

Second, we expect substantial free cash flow to support increasing shareholder returns. We plan to return 25% to 35% of operating cash flow to shareholders through continued dividend growth and opportunistic share repurchases. Our Board recently increased our quarterly dividend to $0.23 per share, up from $0.22 per share and up approximately 10% year-over-year, marking our fifth dividend increase in 2 years and all while maintaining robust dividend coverage.

We have flexibility for additional shareholder returns, including $113 million of remaining authorization under our share repurchase program as of quarter end, which we use a tool within our returns-based framework and may opportunistically use more actively during periods of market dislocation.

Third, even after these robust investment levels and with meaningful capital returns to shareholders, we expect to continue generating significant free cash flow. We exited the quarter with a leverage ratio of 2.6x, comfortably below our long-term leverage target range of 3 to 3.5x.

This financial position, free cash flow and low leverage preserve flexibility to also pursue inorganic growth opportunities in the future. Simply put, our strong balance sheet and cash flow generation give us flexibility to fund robust organic growth, increase shareholder returns and pursue additional strategic options.

In summary, Archrock delivered strong second quarter results and remains well positioned, and the underlying demand fundamentals for long-term growth remain robust. We are confident in our ability to grow profitably, invest in attractive opportunities and increase shareholder returns and create sustainable long-term value.

With that, I'll turn the call over to Mohit to walk through our second quarter and 2026 outlook.

Good morning, everyone. I would like to start by thanking Brad for the warm welcome. Archrock is exceptionally well positioned with an industry-leading operating platform, a healthy order book, a highly motivated team and a peer-leading balance sheet. I have really enjoyed meeting our impressive finance team as we continue to execute on our priorities.

With that, let's review our second quarter results and then cover our current financial outlook for 2026. Second quarter net income and adjusted net income were both $67 million and adjusted EPS was $0.38. We delivered strong adjusted EBITDA of $213 million for the second quarter of 2026, essentially flat year-over-year. Higher adjusted gross margin dollars in contract compression operations were offset by lower AMS gross margin dollars and higher SG&A expense.

In the second quarter, total CapEx was $98 million, including $51 million of growth CapEx, $39 million of maintenance CapEx and $8 million of other CapEx. That performance translated into adjusted free cash flow of $67 million and adjusted free cash flow after dividends of $28 million in the quarter, driven by durable operating cash flow and supporting our ongoing commitment to return capital to shareholders.

Turning to our business segments. Contract operations revenue came in at $329 million for the second quarter, up 3% compared to the second quarter of 2025. The year-over-year increase reflected higher rates, an additional month of contribution from the NGCS acquisition and revenue from horsepower additions. Those benefits were partially offset by active horsepower sales to high-grade our fleet. Contract operations adjusted gross margin was 71% in the second quarter, up from 70% in the year ago quarter, reflecting continued pricing strength and disciplined cost management.

In our aftermarket services segment, second quarter 2026 revenue was $42 million compared to $65 million in the year ago quarter. The decline was driven primarily by lower part sales and reduced customer demand for major maintenance activity as some customers deferred work to keep equipment operating in the current high crude oil price environment. The year-over-year comparison was also affected by an unusually strong second quarter of 2025, which included higher parts sales and nonrecurring sales of overhauled engines.

Adjusted gross margin was 24% in the quarter, up from 23% in the year ago period, reflecting disciplined execution and our continued focus on higher quality, higher-margin work.

Turning to the balance sheet. We ended the quarter in a strong financial position with long-term debt of $2.3 billion at June 30. Our leverage ratio was 2.6x at quarter end, down meaningfully from 3.3x a year ago. That improvement reflects the strength of our earnings growth and cash flow profile, and it keeps us comfortably below our long-term target range.

Consistent with that progress, both Moody's and S&P recently reaffirmed our credit ratings and revised their outlooks to positive. We now have positive outlooks from all 3 rating agencies, reflecting our consistent cash generation, financial strength and strong business outlook.

During the quarter, we also completed the repurchase of our $800 million 6.25% senior notes due April 2028. We redeemed those notes at par plus accrued interest using borrowings under our revolving credit facility. The transaction was straightforward from a balance sheet perspective and resulted in a modest debt extinguishment gain in the quarter.

This has cleared the runway for us with the first debt maturity out in 2032. After that activity, we ended June with $631 million of available liquidity, preserving flexibility to invest in the business, pursue high-return growth opportunities and return capital to shareholders.

Turning to shareholder returns. Our Board recently declared a quarterly dividend of $0.23 per share, up from the prior quarterly dividend of $0.22 per share or $0.92 per share annualized. This is up approximately 10% from the second quarter of last year and represents our fifth dividend increase in 2 years, reflecting our continued confidence in the strength and durability of our cash flow.

Dividend coverage remained strong at 3.1x in the second quarter, underscoring the sustainability of our return of capital framework. The second quarter dividend is payable August 11 to shareholders of record at the close of business on August 4.

On repurchases, we ended June with $113.2 million of remaining capacity under our authorization. That gives us meaningful flexibility to be disciplined and opportunistic using buybacks alongside the dividend and growth investments to enhance long-term shareholder returns when market conditions are attractive.

Since the inception of the share repurchase program in April 2023, we have repurchased approximately 4.6 million shares at an average price of $20.91 per share for a total of $96.9 million.

Turning to capital guidance. On a full year basis, our 2026 total CapEx remains unchanged at approximately $400 million to $445 million. Within that total, we continue to expect growth CapEx of $250 million to $275 million to support investment in new build horsepower and repackage CapEx to meet continued customer demands.

Growth is expected to be funded by operations with additional support from nonstrategic asset sale proceeds as we continue to high-grade our fleet, including year-to-date proceeds totaling approximately $21 million.

Maintenance CapEx is still expected to be approximately $125 million to $135 million, up versus 2025 due to increased planned overhaul activity. Other CapEx remains in the range of approximately $25 million to $35 million, primarily for new vehicles.

In summary, our business remains well positioned, and we remain focused on disciplined execution, our capital plan and long-term value creation.

With that, Erica, we are ready to open the line for questions.

[Operator Instructions] Your first question comes from the line of Jim Rollyson with Raymond James.

Putting your money where your mouth is with regards to your long-term bullish gas view and the new kind of multiyear CapEx plan, I guess my question is, like, I'm not surprised given the market outlook and our views and all that, which coincide, but I'm a little surprised to see you actually announce that today. So I'd love to just hear the genesis of kind of why you decided to announce that and maybe a little color around what my math is that kind of implies about a 40% to 45% hike in average annual spend over what you're spending this year. So maybe a little color around the drivers behind the CapEx release.

Sure. So a couple of thoughts. Number one, you may remember this quarter last year, we announced preliminary CapEx for 2026 also. So this is the time when as we see the CapEx demand for the prior year solidify, we shared that with our investors. This year, with the amazing lead times that we're seeing for compression equipment, for power equipment as well, it's the case that we are definitely booking ahead. And since we see that tight -- super tight market, long lead times and our expectations for what's required going forward, that drove the timing really of sharing that information with our investors.

But stepping back and thinking about the market overall, 2026, it felt a bit like the calm before the storm, even with tight industry conditions, the high utilization we're experiencing, strong revenue per horsepower pricing, clearly long lead times and backlogs. The amount of demand for nat gas and for compression that we see for '27 through '30 and beyond is about to incline sharply higher, as we see a significant amount of LNG come online, as I shared in my prepared remarks, as well as expanded pipeline capacity out of the Permian, all of this being fueled by LNG and by data center power demand.

So, we can see that the industry is really preparing for this onslaught of growth that we're going to experience. And we see it pretty clearly. I think most forecasts are in alignment on what this is going to look like. And so what we're pointing out is just like the amount of pipeline capacity expansion that you're seeing, the amount of compression required by the market to meet this demand is going to be robust, and we expect to be there for our customers with the equipment to provide that growth. So that was the market reason for sharing it.

Appreciate that. It's certainly a pretty bullish outlook for sure. Maybe switching gears just to AMS. You mentioned, kind of, the softer-than-expected ramp was deferral of major maintenance given where oil prices are. I imagine that can only persist for so long. So as you think about this over time going into next year and beyond, I presume this eventually comes back around and maybe sets up a better '27 outlook as those guys actually have to hit the maintenance.

Yes. I mean, we've said this in the past, AMS is notoriously difficult to forecast. And this unexpectedly high oil price in the current quarter, in 2026, primarily driven by the Iran conflict, we believe is driving significant deferrals by our customer base. But we said in the past, too, that this is a business it's pay us now or pay us later. The equipment is going to require the maintenance. It's going to require the parts. The market is just not taking that right now. It's a not-yet scenario, but we believe we will see this work come back. We absolutely will see the work come back.

And I'll also point out that profitability remains solid in that segment. So it's a signal that the high-quality work is there, just a bunch of it is being deferred.

The next question comes from the line of Nate Pendleton with Texas Capital.

Perhaps starting with Mohit. Now that you're getting settled in the CFO role, can you talk through your key strategic priorities? And maybe if there are any areas that you're looking to address really in the near term?

Thanks, Nate. Thanks for the warm welcome. As Brad was alluding to, one of the big reasons why I joined the company is it's a very, very unique opportunity where, when I look at the macro setup, there's a huge amount of demand pull that's coming from LNG and from the AI data center-driven power demand and understanding the natural gas macro dynamics and trying to couple it with the fleet strategy, which Archrock has been very, very phenomenal historically in terms of high-grading and standardizing the fleet itself, and translating that into great financial outcomes is at a very high level, how I would describe what the priorities are.

And stating that very, very simply, it's more about my focus has been coming in and trying to make the transition be as seamless as possible because the team has done a phenomenal job. I alluded to earlier, the finance leadership team and the overall finance team is very, very capable and performing at a very, very high level. So my intention is to continue to deliver on the priorities that the Board and Brad have set together for the company. And it's essentially figuring out what role do we play within this setup as we look out into the end of the decade.

The demand is coming. The natural gas is a must-run service. We need to be there to support our customers. We have very deep, long relationships with strategic customers, which, again, as we announced that 665,000 horsepower contract, I mean, it's a testament to that deep relationships that we have. And then we have long-standing partnerships. So it's more about execution, Nate, is what we are focused on. And I'm very encouraged and excited about the overall setup over the next coming years.

That's great. Really appreciate all that detail. And then I wanted to touch on the updated guidance for a moment. Looking at the updated guidance in the second half of 2026, it would imply an average quarterly EBITDA above what you just announced this past quarter despite the lube oil and make-ready cost headwinds that you talked about. Maybe can you talk about some of the sequential improvements that you expect to see versus that 2Q run rate that more than offset those costs?

Yes. We do see the opportunity for horsepower growth in the back half of the year because we're taking delivery of more horsepower in the second half of 2026 than we took in the first half. We also see some pricing opportunities that are going to come in later in the year that are going to impact overall margins or overall gross margin dollars in contract operations.

And then I'll point out that the amount of recovery in AMS, it remains an opportunity that we're working for. And finally, because we hit these headwinds with lube oil pricing and AMS, you can be assured that the team is working really hard to mitigate with other cost initiatives that will take that impact in the back half of the year as well. So when we hit this lube oil pricing and AMS headwind, it wasn't without a response internally, and that's going to impact our performance in the back half of the year as well.

Your next question comes from the line of Elvira Scotto with RBC Capital Markets.

Welcome, Mohit. The new 665,000 horsepower 8-year contract with the existing strategic customer is significant. Can you provide any details around the genesis of that deal? And also, are you looking for other contracts of this tenor? Or are customers asking to increase the tenor of their contracts?

Thanks, Elvira. Well, look, we're not going to go into the details of the contract, as you can imagine, just for commercial reasons. But what this does signify is that with this customer -- and we have other customers with longer-term contracts as well -- it does signify a long-standing, highly valued partnership that we have with this customer.

We really like the recognition that it provides of an integral and integrated operating partnership that we have with our customer base. And I think these longer term tenors may be more in the future as we've expressed and shared that our units are simply staying on location longer. Large horsepower stay on location on average of 8 years and all horsepower with an average of 6 years. And I think our customer base wants to ensure that they can both obtain and retain the horsepower that we bring to help grow with our operations.

So we really like the signal that this has and really very proud of the organization of our team for the recognition to suggest as to the strength of our operations and our customers' willingness to partner with us so closely.

And then just my next question, are you seeing any demand shifts across basins, especially as we start to see more LNG export capacity come online, there may be a greater call on the Haynesville. And then also, have you seen an uptick in the Permian as the new gas takeaway capacity has come online?

We're starting to see an uptick in activity in the Permian compared to the prior quarters. That's for sure. And a lot of it does have to do with the fact that export capacity is starting to come online and some of the negative economics that have been predominant or in the Permian should be alleviated with this pipeline capacity expansion.

And we are seeing some nice growth opportunities in other basins right now as well. So when we look at the diversified footprint that Archrock has, less than half of our recent bookings have come from the Permian and about half of our bookings are in other places. And we like that a lot because it's nice to see that diversified portfolio pay off in growth opportunities in other basins.

Your next question comes from the line of Doug Irwin with Citi.

[Operator Instructions] Our next question comes from the line of Elias Jossen with JPMorgan.

So if we think about the CapEx guidance through 2030, I just wanted to understand the sort of role of higher input costs versus sort of more fleet additions than we would have previously anticipated. How much are higher overall costs factoring into that equation versus the historical precedent we've seen for horsepower?

Thanks, Eli. We've included in our forecast the impact of an inflation for new unit acquisitions. But we've included it at the rate that we've been experiencing, which is a very normalized level of inflation. We have not seen sharp price increases overall from our -- from the OEMs or from the packagers. And so it's included at a more normalized rate of inflationary increase.

Got it. So if we think about more broadly across the industry, we're seeing structurally longer contracts in what appears to be a really tight supply-demand backdrop. If the contemplated CapEx guide is just passing through kind of historical inflation trends, how should we also think about the kind of pricing going forward? It would seem that this is a pretty favorable environment for pricing, but we also understand the kind of fairness with which you approach your customer contracts.

It's a very supportive environment for pricing and profitability in contract operations in our business. And you're seeing that come through with the 71% gross margin we delivered in the quarter and our forecast that even with the headwinds we articulated, we're going to be at 70% in this current environment.

As we see this growth ramp, we expect to continue to generate great profitability on a margin basis and robust returns for investors. So we think that this environment is going to be very constructive and very supportive for price increases in the future.

I will point out, it's a competitive market, however, including with our customers. And so we do approach this incredible business to generate great returns for our investors, but we are responsible in how we have those negotiations with our -- and drive that pricing with our customers.

Your next question comes from the line of Nick Amicucci with Evercore ISI.

Just a quick one for me. Just as we, kind of, think about the bifurcation or, I guess, just the bookings and the current order book, just if you could, kind of, break out LNG exports and so kind of like the LNG feed gas versus gas on just the behind-the-meter side?

Nick, thanks for the question. I really wish I had a great answer for you that could quantify the spread and the difference between what gas that we're compressing is going to which end market. But that's really not data that's available to us. So I would just pause and point out that regardless of where the gas is going to go, the robust demand that we expect ahead is going to be really solid for the industry, candidly, and for our business overall.

Got it. That makes sense. And then I'm sorry if I missed this in the prepared remarks, but how should we think about just kind of the free cash flow with the growth CapEx kind of scaling up in '27 through 2030, just as we think about kind of the free cash flow and obviously, it seems like you're able to underwrite it with, kind of, these longer term contracts or at least one longer term contract? But just if we could kind of level set on that.

Even after our capital allocation framework, which is sharing and returning capital to shareholders in the -- at the level of 25% to 35% of our operating cash flow after investing in the level of growth that we articulated, we still expect to have net free cash flow after those after that return of capital and those investments. And we believe that with our strong balance sheet positions us exceptionally well to pursue other strategic and growth opportunities in the market.

Our next question comes from the line of Gabe Moreen with Mizuho.

[Operator Instructions]. Your next question comes from the line of Josh Jayne with Daniel Energy Partners.

I just wanted to follow up on the lead time question for Caterpillar and where they stand. I believe you said less than 200 weeks. Actually, it sounds like some slight level of release. Maybe you could just offer your thoughts on if you think that they've peaked and just your discussions with them into line of sight and how you see that going longer term if we've seen sort of the peak of lead times.

Thank you, Josh. We say often, we don't speak for Caterpillar. I still don't speak for Caterpillar. And I cannot predict what's going to happen with their lead times. But for the equipment we require, their lead times are now out where we're ordering for 2029. So it's right at 195 weeks, which I think is the most recent announcement or the quotes that we're getting back for equipment.

We do not see these long lead times abating or improving. We see no indication that there's a reason for them to improve. The market remains poised for growth. And I think that Caterpillar being one of the key suppliers to the power market as well as well as for oil and gas and the compression market as they had their call yesterday. They see a robust backlog going into the future. So we expect the market to remain very tight.

On the good news front, it portends that those of us that are in a position to deploy capital and have the equipment for our customers are going to be able to drive and participate in that growth that we see ahead. And our investments are intended for us to do exactly that to support the growth of our customer base.

And then as a follow-up, just another piece of the puzzle is just space and availability at equipment packagers. Could you just talk about that a bit today? Are you having any issues there? Or is there adequate space to sort of piece all of this together? And is that one of the reasons that you were also sort of out in front of going ahead and ordering or committing to this level of CapEx? Maybe just some details around what you're seeing there would be helpful. And then I'll turn it back.

Floor space to the packagers definitely has tightened up over the -- over the last year, 1.5 years. We have not, however, had a challenge in getting the equipment that we require through the shops. We don't expect to have it. But it is absolutely, along with the Caterpillar lead times, one of the drivers for our overall CapEx approach and what we see in the market today and our willingness to share that outlook and forecast with the market.

So it's robust. It's a tight time. We expect we will have the equipment that we require to meet need. And there is, however, incrementally some available space with the packagers, but it's definitely tight.

Your next question comes from the line of Steve Ferazani with Sidoti.

Welcome, Mohit. Brad, you did raise the dividend again a couple of weeks ago, showing your confidence in market demand. It's been multiple raises over 3 years. Over this run-up, you've added -- you've had fleet expansion, you've lowered leverage and you've raised the dividend. You sort of provided for everyone here. Given that massive growth CapEx you're outlaying for the next 4 years, does that have to shift your capital allocation plans?

Steve, thanks for the question. We don't believe so. As I put in my prepared remarks, we think that this is an all-of-the-above approach. We expect to continue returning capital to investors. We expect to make this investment through this cycle. We expect to grow the business, and we expect to be in a position to generate free cash flow after all of that as well. So we think that the market is just positioned and poised.

I shared a minute ago in one of my comments that 2026 has felt a little bit like a pause before the storm. What we've seen, especially in the Permian is, I think a lot of companies ended last year, into the beginning of this year were ambivalent with a lower oil price environment. Clearly, the war has changed that. But the longer term outlook for that oil price is something that keeps the market just a bit ambivalent.

We're seeing an increase -- a steady increase in activity, which we think is promising. We're seeing a nice increase in the gas-to-oil ratio, which we think is very promising. And we expect that the market, the LNG demand and the power demand is going to require all of this equipment to go to work very profitably for very attractive returns to support the growth that we see in the market going ahead. But overall, we're still going to be generating free cash flow. It puts us in a great position to consider other strategic options.

You covered it well. One thing I would add, I mean, when we debated internally whether to go out with the long-term capital guide, we don't take a decision like that lightly. And the fact that we are giving the long-term outlook should underpin or should signal our confidence in the outlook. And for all the reasons that Brad mentioned, we feel very good about the trajectory and the direction of travel here in terms of utilizations, in terms of profitability and margins, in terms of free cash flow generation.

So from our perspective, we are trying to balance shareholder returns, which is a core tenet, but at the same time, reinvesting it back into the business because those investments at these margins are most value accretive for the investors.

Very helpful. My follow-up, just in terms of -- I know the high grading of the fleet is an ongoing process. We can see you've gotten rid of a significant portion of the lower horsepower. We can see how it's contributing to margins even beyond just the market demand. How are you approaching high grading as we enter an even faster growth period? Is it less important given that demand is so overwhelming?

Interesting question. The truth is it's both less important, but more importantly, maybe it's less available. We've made such strides in high-grading the fleet that we have a fleet that is very competitive, meeting our customers' needs and the amount of available nonstrategic horsepower that could be a part of that has reduced over time.

So while we'll always have disciplined asset management practices that will take into account the standardization of the fleet -- the continuing to improve the standardization of the fleet, it's less available to us in the future than it was in the past.

We have reached the end of the Q&A session. Now I would like to turn the call over to Mr. Childers for final remarks.

Thank you, Erica, and thank you, everyone, for joining us today. We're pleased with our second quarter performance and remain confident in the strength of our business, healthy customer demand and the long-term opportunity ahead. We appreciate your continued interest in Archrock and look forward to updating you next quarter. Thank you, everyone.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to the Archrock First Quarter 2026 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock.

I would now like to turn the call over to Ms. Repine. You may begin.

Thank you, Carrie. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the first 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 and Exchange Act of 1934 based on 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 expectations will prove to be correct. Please refer to our latest SEC filings with the securities -- 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, cash available for dividend, 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 first quarter results and provide an update on our business.

Thank you, Megan, and good morning, everyone. Archrock is off to a strong start in 2026, driven by disciplined execution and continued progress on our strategy with a clear focus on delivering returns to our investors. At the same time, customer demand remains strong and our order book continues to build, supporting a constructive outlook for compression and Archrock over the long term.

Let me share a few highlights from the quarter that underscore the momentum in our performance and the durability of our business model. We delivered adjusted EPS of $0.42 during the first quarter of 2026, and adjusted EBITDA of $221 million. Compared to the first quarter of 2025, we increased our adjusted EBITDA by 12%. Our fleet remains fully utilized, extending our multiyear track record of full utilization. At the same time, we continue to high-grade our fleet with the sale of nonstrategic compression units totaling approximately 40,000 horsepower, strengthening our portfolio and supporting disciplined capital allocation with year-to-date asset sale proceeds of $21 million helping to fund our newbuild program.

We again delivered outstanding performance and profitability in both our contract compression and aftermarket services business segments. And we translated this performance into adjusted free cash flow of $92 million in the quarter, of which we returned $44 million to shareholders through dividends and share repurchases, which is up 29% year-over-year.

Overall, we're encouraged by the strong start to 2026, which keeps us on pace to achieve our full year 2026 adjusted EBITDA guidance range of between $865 million and $915 million, which we expect will translate into meaningful free cash flow generation for the year.

As we look ahead, we believe our strategy is supported by 3 key drivers: the right market, the right platform, and the right balance sheet. Let me briefly walk through each one.

First, the right market. The importance of natural gas is clear today, and it has been underscored again by recent conflict in the Middle East. Natural gas remains essential to powering economic growth, delivering affordable, reliable energy and enabling energy security, driving sustained demand for the infrastructure needed to move more gas to market.

Second, the right platform. We have the people, assets and technologies in place to help customers move more gas to market more efficiently and safely and to do so profitably. Customer service is a top priority for our organization, and we're continually deploying technology and data-driven tools for the benefit of our customers, our employees and our shareholders. Our scale, operating discipline and focus on reliability position us to execute consistently.

Third, the right balance sheet. Our leverage profile reflects the strength and durability of our cash flows, and it provides the flexibility to invest in the organic and inorganic opportunities the current market is offering while continuing to return capital to shareholders.

Taken together, these 3 drivers give us confidence in our ability to continue compounding earnings and free cash flow. And as we execute by moving more gas to market safely and efficiently, investing in the highest return segments of the growing compression industry and maintaining balance sheet strength, we believe Archrock is well positioned to deliver sustainable and superior returns on capital.

Natural gas production continues to climb, and we expect U.S. volumes to reach record levels for the sixth consecutive year in 2026. For Archrock, our footprint is concentrated in the faster-growing basins, especially the Permian, where associated gas volumes are expected to grow at mid-single-digit rates. Rising gas-to-oil ratios are making the basin more compression intensive and about 4.6 Bcf a day of new takeaway capacity expected later this year should further support expanding levels of activity. We're also seeing early but encouraging signs of improving compression demand beyond the Permian across other basins.

On demand, LNG remains a key driver. Roughly 2 Bcf a day of additional FID export capacity is expected to come online in 2026 and projects already sanctioned represent about 14 Bcf a day of incremental capacity through 2030. At the same time, the build-out of AI data centers is accelerating power demand, reinforcing natural gas-fired generation as a practical scalable source of incremental electricity.

Bottom line, we continue to see a constructive setup for natural gas and for compression across the market. Near term, the U.S. is on track for another record year in 2026. And in the Permian, we expect mid-single-digit gas growth supported by rising gas to oil ratios and new takeaway later this year.

Geopolitical risk in the Middle East, including Iran-related volatility, reinforces the strategic value of U.S. supply and supports tighter global LNG fundamentals. And longer term, the outlook is improving. The EIA's Annual Energy Outlook 2026 raised its view of U.S. gas production and demand versus last year, driven in part by LNG growth and AI data center power needs with production projected to rise from 107 Bcf a day in 2025 to approximately 133 to 151 Bcf a day by 2050. That would represent an increase in natural gas production of between 24% and 41%, reinforcing our view of a longer-term growth trajectory for both natural gas production and for compression.

Moving to our segments. Contract operations delivered outstanding performance, supported by excellent execution and continued high demand for our compression fleet, particularly our large horsepower and electric motor drive units, extending our track record of strong results. Our fleet remained highly utilized during the quarter, exiting at 95% utilization, reflecting continued high demand and the high quality of our fleet and sustaining strong utilization in our contract operations business over a multiyear period. That durability is also evident in the time on location with the blended fleet averaging approximately 6 years and units of 1,500 horsepower or greater averaging approximately 8 years in largely midstream applications.

At quarter end, we had 4.5 million operating horsepower. Operating horsepower declined by approximately 43,000 as newbuild deliveries during the quarter were more than offset by the sale of approximately 40,000 nonstrategic horsepower, including 21,000 active horsepower. As a reminder, we also sold approximately 123,000 horsepower, including 84,000 active horsepower at the end of 2025. Taken together, these sales reduced first quarter adjusted EBITDA by approximately $3 million on a sequential basis.

Monthly revenue per horsepower moves higher on a sequential and year-over-year basis. In 2026, we continue to expect monthly revenue per horsepower to benefit from the full year carryover of the rate increases implemented in 2025 and increases in 2026. We achieved a quarterly adjusted gross margin percentage of 72%. Consistent profitability above 70% continues to be driven by strong pricing, disciplined execution and a continued focus on per horsepower cost management.

Over the last several years, we've executed well on the cost inputs into our operations, offsetting some of the cost increases we experienced during the recent higher inflationary environment, including higher costs for labor and parts. We remain focused on continuing this level of execution through technology deployment and ongoing cost management.

Moving to our aftermarket services segment. Performance was solid in the first quarter. As expected, Q1 is seasonally slower. Even so, we continue to deliver strong profitability levels in the business, reflecting disciplined execution and an ongoing focus on higher quality, higher-margin work.

Turning to capital allocation. We remain disciplined and returns-focused, prioritizing growth investment and shareholder returns supported by a strong balance sheet. We reaffirmed our 2026 growth capital plan of $250 million to $275 million for fleet investment, reflecting strong demand and our desire to continue growing our profitable platform through high-return newbuild investments.

We expect substantial free cash flow to support increasing shareholder returns. We declared a quarterly dividend of $0.22 per share, up approximately 16% year-over-year while maintaining robust coverage. We also have flexibility for additional shareholder returns, including $113 million of remaining authorization under our share repurchase program as of quarter end, which we view as a tool within our returns-based framework and may use more actively during periods of market dislocation.

We exited the quarter below our long-term leverage target of between 3x to 3.5x and expect to operate below 3x in the near term, preserving flexibility for both organic and inorganic growth as well as continued shareholder returns.

In summary, Archrock is delivering consistent strong results underpinned by a culture of disciplined execution and continuous improvement. Looking ahead, we see a meaningful runway for profitable growth with earnings supported by a returns-based capital allocation and durable tailwinds for natural gas infrastructure, including compression.

Before I hand it over, I want to recognize Doug Aron. As we previously announced, Doug plans to retire by the end of the year. On behalf of Archrock, thank you, Doug, for more than 7 years of outstanding service and leadership during an exciting and transformative period for the company. Doug has been a key leader and a trusted adviser to me, the rest of the executive leadership team and our Board. And to be clear, he's not going anywhere just yet, Doug will stay in his role until a successor is named to ensure a smooth transition.

With that, I'll turn the call over to Doug to walk through our first quarter and 2026 outlook.

Thank you, Brad. Certainly appreciate the kind words. Good morning, everyone. Thanks for joining us. Let's review our first quarter results and then cover our current financial outlook for 2026.

Net income for the first quarter of 2026 was $73.8 million. Excluding transaction-related and restructuring costs and adjusting for the associated tax impact, we delivered adjusted net income of $74.4 million or $0.42 per share. We reported adjusted EBITDA of $221 million for the first quarter of 2026. Underlying business performance exceeded our basis for guidance and results also benefited from a $10 million net gain from the sale of nonstrategic compression and other assets.

Strength in segment fundamentals was somewhat offset by higher selling, general and administrative expense in the quarter. That performance translated into adjusted free cash flow of $92 million and adjusted free cash flow after dividend of $52 million in the quarter, driven by durable operating cash flow and further supported by proceeds from the nonstrategic asset sales, supporting our ongoing commitment to return capital to shareholders.

SG&A expenses were $45 million in the first quarter of 2026 compared to $37 million in the first quarter of 2025, with the increase primarily driven by higher long-term incentive compensation for two reasons. First, a little more than half of this increase was the result of the sharply higher stock price in the quarter. Second, the balance of the increase was the result of a GAAP accounting acceleration of expense recognition for long-term incentive compensation under an executive retention agreement, which we do not expect will recur in the remaining periods of this year.

Turning to our business segments. Contract operations revenue came in at $331 million in the first quarter, up 10% compared to the first quarter of 2025, driven by growth in horsepower and higher pricing. Operating horsepower of 4.53 million at the end of the quarter was up approximately 250,000 year-over-year from 4.28 million in the first quarter of 2025.

Our adjusted gross margin percentage of 72% in the first quarter of 2026 reflects consistent profitability. While reported adjusted gross margin percentage was down from 78% last quarter, the figure increased slightly on a sequential basis after excluding the impact of out-of-period cash tax settlements and credits we benefited from during the fourth quarter of 2025 that were more onetime in nature.

In our aftermarket services segment, we reported first quarter 2026 revenue of $43 million, reflecting lower service activity and a seasonal slowdown. Even with the expected seasonal softness, AMS delivered a great level of profitability. First quarter 2026 adjusted gross margin percentage was 23%, consistent with the high end of our guidance range for the year.

We ended the quarter with total debt of $2.4 billion. In January, we issued $800 million of senior notes to fund the April 1 repurchase of 100% of our senior notes due 2028 at par, which moves our nearest bond maturity to 2032. Pro forma for this activity, available liquidity was approximately $600 million. Our leverage ratio at quarter end was 2.6x compared to 2.7 in the fourth quarter of 2025 as we continue to operate comfortably below our stated target of 3x in the near term.

We recently declared a first quarter dividend of $0.22 per share or $0.88 on an annualized basis. This is consistent with the fourth quarter '25 dividend level and up approximately 16% year-over-year. Cash available for dividend for the first quarter of 2026 totaled $134 million, leading to robust quarterly dividend coverage of 3.5x.

During the quarter, we repurchased approximately 171,000 shares for approximately $4.4 million at an average price of $25.87 per share. This leaves approximately $113 million in remaining capacity for additional share repurchases.

Given our solid first quarter performance, we reaffirmed our full year 2026 guidance with yesterday's earnings release. We remain on track to deliver our 2026 adjusted EBITDA guidance of $865 million to $915 million. Segment performance in the first quarter was consistent with the basis of that guidance with strength in the underlying business, partially offset by higher SG&A. We do not expect the $3.7 million of long-term compensation expense acceleration to recur in future periods for the remainder of 2026. In contract operations, our outlook reflects year-over-year growth in horsepower, revenue and profitability. In AMS, we expect revenue and profitability to remain strong.

Turning to capital. On a full year basis, we continue to expect total 2026 capital expenditures to be approximately $400 million to $445 million. Within that total, we reiterate growth CapEx of $250 million to $275 million to support investment in newbuild horsepower and repackage CapEx to meet continued customer demand. Growth is expected to be funded by operations with additional support from nonstrategic asset sale proceeds as we continue to high-grade our fleet, including year-to-date proceeds totaling approximately $21 million. Maintenance CapEx is forecasted to be approximately $125 million to $135 million, up versus 2025 due to increased planned overhaul activity. We also anticipate approximately $25 million to $35 million in other CapEx, primarily for new vehicles.

In summary, we remain confident in the strength of our platform and in the long-term opportunity in front of us. The combination of a fully utilized fleet and the continued build-out of U.S. midstream infrastructure to support both expected growth in LNG exports and rising power demand reinforces our view that the need for reliable compression remains strong. Against that backdrop, we are focused on excellent execution, delivering for our customers, advancing the technologies we've put in place, and adhering to a disciplined returns-based approach to capital allocation to grow the business and create long-term value for our shareholders.

With that, Carrie, I believe we are ready to open the line for questions.

[Operator Instructions] Your first question will come from Michael Blum with Wells Fargo.

I wanted to start on the guidance. You made the comment that your first quarter underlying business performance is exceeding the basis for guidance, but you didn't raise guidance here. So is that just a function of the higher SG&A in Q1 or conservatism? Or is there something else?

Yes. Look, I would say, and I can't remember exactly what we did last year because I know we had an acquisition middle of the year. But it is -- for us, historically, to not do anything with guidance after only a quarter is not something that is unusual. And I think that it just feels early in the year. We've given a guidance range that we feel comfortable with. And we'll continue to look at that as we move through the year.

Okay. Fair enough. Appreciate that. And then I wonder if you can just give us your latest view on Cat equipment lead time and how the order book is shaping up for 2027.

Yes. Cat lead times continue to extend out. So we're seeing an extreme tightness in the supply chain. I think that now we're out to close to 160 weeks. So it's meaningfully out there. The interpretation I'd offer that is interesting, though, this tightness in the market just reflects a market that I believe is coiled for growth. We see this in the overall burgeoning demand for natural gas. We see this in the amount of pipeline capacity expected to come online in 2026, the amount of LNG incrementally that's going to come online in 2026. We see it in the tightness in the supply chain. And candidly, we're seeing it in our bookings.

So this is a market that's just posed right now for that accelerated growth for the future and candidly for years. As far as 2027, we are definitely going to be placing orders and have placed orders to ensure we're positioned well to meet customer demand, but we're not yet giving guidance on CapEx for 2027.

Your next question will come from Elias Jossen with JPMorgan.

Congrats to Doug on your retirement and next steps ahead. Maybe to take that last point a step further. I know some of your peers have signaled reserving slots even past '27 and '28 and '29, just given the aforementioned tightness. Can you give any color just in terms of how you're thinking even multiple years ahead and what kind of discussions you're having with your customers so that they can ensure they're getting the equipment they need?

Yes. Thanks for the question. For the customers, we are working closely with our customers to advise where the lead times are and to help them ensure that they are not caught short and without equipment to produce and compress the gas that they're going to have in the coming years. When we think about our outlook for the business, we are seriously optimistic about the growth ahead. And that does mean we are absolutely going to use our incredibly strong balance sheet that positions us well to capture market going forward to place orders and ensure that we're not caught without equipment to support our customers' needs.

Thinking about years beyond 2026, we assess the market overall based on -- and we're willing to place orders based on a contract in hand, based upon a good lead and intel with our customers as well as strong market signals. And so we are going to be in the position to show up and have equipment for our customers and to move the market to capture market share in the future based upon the extreme tightness we see.

Got it. And then maybe just thinking about some of the strong performance we saw this quarter, it looked like pricing jumped up a bit. And I just want to get a sense, I know that you need to balance kind of those price increases with your customers' needs. But can you just give us a signal to how you see price trending throughout the year? And maybe also confirm the cadence for deployment of horsepower this year as well, how much we're expecting and when it should come on?

On the second part of the question first, the deployment of horsepower, it is the case that in Q1, we took -- that was the lowest quarter for us of deliveries of newbuild horsepower, and we expect future deliveries in future quarters of 2026 to continue to grow, and it's more back half weighted. So that -- you'll see that shape in the curve for new equipment deliveries. We expect that to translate to start activity for the same reason.

As far as pricing goes, we are very happy to see the growth in revenue per horsepower that we delivered year-over-year on a sequential basis. It shows the strength in our business. And I'm going to point out that our profitability above 70% now on a sustained -- for a sustained period of time, we are very happy with the overall pricing in the market, the returns we're achieving and expect to grow our business to achieve growing returns to our investors going forward.

As far as particular pricing commentary right now and other points of strategy for the company, let's just say that we're very invested in growing this profitable business for the benefit of our investors.

Your next question will come from Jim Rollyson with Raymond James.

Congrats, Doug, on your pending retirement, and we'll send you off properly in Aspen this summer, I think.

Brad, on the oil price side, obviously, you guys have been in this kind of perfect environment until recently where gas outlook has been fantastic and you've been growing at a pretty rapid clip, and you've had somewhat muted oil prices that have kind of helped on the lube oil and fuel cost side of the equation, and that's obviously changed. So I'm kind of curious what you all are seeing there and how quickly can you pass those through so you can sustain these low 70% margins in that business?

We do expect to have some oil price headwinds primarily in the back half of the year as lube oil pricing for us adjusts quarterly. There's definitely a lag time between when we experience an increase in our costs and when we can pass them on to customers. And I'm not going to use the word transitory. However, what we see in the market today is that we are not willing to know or to guess where oil will ultimately resolve, and therefore, what base oil and lube oil pricing will ultimately result.

But what we see for this higher stock price, higher oil price environment today is it appears to be mostly driven by external events, notably hostility in the Middle East. And so we need to see where that resolves longer term. In the meantime, we did not change our guidance, notwithstanding what we see for risk on lube oil pricing for the back half of the year. We intend to mitigate that through the best cost management we can offer in the market to continue to deliver this high level of profitability and returns to our investors.

Got it. Appreciate that. And then just on the asset sales side, you guys have been basically great portfolio managers for a while now where you keep high-grading assets and redeploying the capital. Just curious if you have any color or view, and maybe you don't yet. But just on how we should think about incremental kind of older asset sales that you're looking to monetize just as we think about how that impacts the numbers and there's obviously a lag between getting the capital and redeploying it. So just wondering how do you think about that going forward?

The fleet repositioning that we've been engaged in for the last number of years now has been remarkably consistent. And just when I think that we actually have de-aged the fleet and we don't -- we no longer have a lot of assets in that category for disposal, yet the calendar turns another year passes, and we find that there's still an opportunity for some assets that we believe will not be as competitive for the future. And so this program on our asset management that we've implemented has some real benefits, and it's really important.

And first and foremost, in keeping our fleet as competitive as we can keep it and in providing the best service to our customers that we can deliver. Second, when we look at the total ownership over the life of a unit, it allows us to really think about how to optimize the total cash flow coming out of the unit for its life, and to sell units while they still have meaningful market value, which is why we've been able to generate nice gain on sale on a fairly consistent basis to our asset management program over that period of time. And then we take those proceeds and redeploy it into our newbuild program, which is a very efficient overall capital management program.

And so -- and the third benefit is that even though I know this is a gain on sale income, in some ways, it accelerates some of that EBITDA into the period. So it's a really effective program when you think about those 3 primary benefits. So we're going to continue to engage in a very disciplined asset management approach. I do think that looking to our past levels is fairly indicative of what could happen in the future. It's very difficult to forecast this, but we're going to continue. And that said, it's going to be consistent with past levels. But I do think it's going to ramp down a bit potentially lower going forward only because of the amazing growth environment that we find ourselves in as an industry in compression and for natural gas production, and because of the high quality and the repositioning we've already accomplished on the fleet.

Your next question will come from Nate Pendleton with Texas Capital.

Brad, in your prepared remarks, you called out improving compression demand outside of the Permian. Can you talk about where you see those opportunities geographically? And maybe if there's any difference in the unit sizes needed for those opportunities?

Yes. Great question. What we saw in the quarter was and really beneficially only about 35% of our bookings were in the Permian in the quarter. And so more were outside. And they're spread fairly evenly between the Northeast, the Mid-Continent, the South, and that would be East Texas, Haynesville and the Rockies. And so it's been a nice spread, but it's also been good to see units moving into other markets and other basins accomplishing some growth, especially on natural gas.

And the unit sizes are more diverse in the plays outside the Permian, especially in the electric motor drives that we're deploying, where we see a spread of horsepower more all the way from 400 to 800 and potentially -- and moving up to 1,500. So we do see more diversity, but it's primarily within the electric motor drives that we're seeing the smaller horsepower go out into the marketplace.

Got it. I appreciate that. And then as my follow-up, with the longer time lines for large horsepower units that's been very topical so far. Can you talk about if those -- if that delay changes your procurement strategy with packagers? Do you have to put down a deposit for the full unit so far in advance? And maybe can you help us understand the cash flow implications of such a long lead time for just the engines?

Well without going into too much on our procurement strategy and the work we do with our packagers, I will say we're very aligned with our packagers in fulfillment and making sure we can manage the need. It does not require a change in the overall kind of structure of the cash flows where we still expect to have very effective deployment of capital so that the unit revenue is recognized within 2 months to 3 months max of when the bulk of the capital goes out the door for a unit.

Your next question will come from Doug Irwin with Citi.

Brad, you made a comment in your prepared remarks about maintaining flexibility for both organic and inorganic growth. Just curious if inorganic growth becomes even more attractive here just given where lead times are as well as the fact that you have a much stronger equity currency compared to the last few acquisitions you did?

We are extremely well positioned, both from a balance sheet perspective, given our low leverage ratio now and our equity position with our stock price, we're definitely really well positioned to finance any growth going forward, including inorganic growth. But I would say that it's not going to -- it doesn't make the targets look more attractive. And we're still going to be very disciplined in how we evaluate the opportunity set going forward. We want to make sure that if we see an opportunity that we know why we can use -- why we can add value to that opportunity or why that opportunity adds value to us.

So the discipline is going to remain outstanding, the really strong financial position we're in. But we do see that there are a number of opportunities in the marketplace that could develop over the coming years. And we're optimistic that just like our track record of having grown through acquisition with TOPS, with NGCSI, that there will be opportunities for us to deploy capital into the market through both means.

Got it. And then maybe just a higher level one as a follow-up here. It sounds like you're working pretty closely with your own customers to make sure they have enough supply over the next year or so, but it's obviously a pretty dynamic market. So just curious to get your view on the balance of the broader market here going forward. I guess, is there a potential scenario where we could see compression become kind of a real near-term bottleneck if we see producers look to start accelerating activity into the back half of the year? Just curious kind of how much slack you see there being in the broader compressor market here.

I don't know that I have enough visibility into the market to be able to answer the question accurately. But I would step back and pose the following that for the United States to deliver all of the LNG we're targeting to export and all the power we expect to fuel through natural gas. I'm going to stick to that. It's in our lane. But we got -- we have a lot of power capacity, power plants, power generation to build. We have a lot of lines to lay. We have a lot of pipelines to lay. We have a lot of gas plants to go in, and we have a lot of compression to go into the market. It is not all going to happen without some bottlenecks and delays along that entire supply chain. At Archrock, we're very invested in not being one of them.

Yes. And look, I think I'd just add, like with our utilization as high as it is the industry and tight utilization, as Brad pointed out, there are a lot of macro factors. We saw a large E&P make a pretty aggressive announcement earlier in the week about their ability to grow even this year. And I think we're going to do everything we can to continue to make sure we have equipment for our customers and support this growth for compression.

Your final question will come from Steve Ferazani with Sidoti.

Brad and Doug, when I think about your fleet, which you've obviously spent several years high grading, it's higher -- it's larger horsepower units. It's a younger fleet. How do you think about changes in annual maintenance and other CapEx, particularly in a quarter where it looks like a lot of your guidance for the full year other CapEx was taken in Q1.

A few things you're seeing in our CapEx. Number one, our CapEx is typically dictated by what the units tell us they need from a time on location, time and operation and hours perspective. We are seeing an incremental uptick in our maintenance CapEx right now because of the time at which we added the horsepower in prior years, we just have more large horsepower due for major maintenance this year than we have in the most recent couple of years. So that's -- what you're going to see in major maintenance in particular, is just going to be exactly that the timing required for the units based upon hours of operation in the field, and that's what we're experiencing.

And even though we've de-aged the fleet nicely, we've standardized the mix of fleet really well, and we've increased the average size of horsepower and added in electric motor drives. The other aspect that you're seeing is that we grew through acquisition. And so some of what we're seeing for the year includes the NGCSI units coming into our fleet. And finally, we did go through a period of inflation that was pretty steep -- and so just the maintenance investment required for the same work has increased over time. So that's what you're seeing in our maintenance activity overall. That said, we're very dedicated to ensuring we spend the maintenance capital required by the units to deliver superior customer service over time.

And when we think about your other CapEx guidance for the year, it looks like you spent about half of it in Q1. Was there anything particular? Any reason to think that number could end up higher?

Likely just timing. The other CapEx is primarily trucks and computers. And so that would just mostly be the timing of delivery of our truck fleet to support the growth that we're seeing in the marketplace and making sure we have the right transportation for our mechanics.

Got it. That's helpful. And then just -- I mean, you almost doubled your available liquidity sequentially with the asset sales. When you think about returning capital to shareholders, does that mean you can get more aggressive? Or do you have to carefully think about the multiyear likely expansion of your fleet given the expected demand growth?

Fortunately, we're in the position to be able to pay attention to both these key drivers of value creation for our investors. First and foremost, given the market we're in, as you just highlighted, growth, poised for growth and maintaining some dry powder for growth is absolutely strategically something we want to make sure we have done. But we do expect to continue to grow our cash returns to our investors over time as we grow our business. We certainly have the financial strength to do that comfortably.

There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks.

Thank you for joining us today. We're pleased with our strong start to 2026 and remain focused on execution, profitable growth and returning capital to shareholders. We appreciate your support and look forward to updating you on our progress next quarter. Thank you.

Thank you for your participation. This does conclude today's conference. You may now disconnect.

Good morning. Welcome to the Archrock Fourth Quarter and Full Year 2025 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Bella. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the fourth quarter and full year 2025 as well as annual guidance for 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 and 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 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 and cash available for 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 will now turn the call over to Brad to discuss Archrock's fourth quarter and full year results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. 2025 was an incredible year for Archrock, one that leveraged a multiyear transformation of the business and demonstrated the strength, durability and scalability of our strategy against what continues to be a robust outlook for our business. Before I review our fourth quarter and 2025 performance, I want to thank our employees across the organization for their tireless focus on safety, customer service and execution. This was another extremely busy year, and our team delivered. The results we're reporting today simply do not happen without the commitment and excellence of Archrock's amazing team.

We achieved much across the business in 2025. Compared to 2024, we increased adjusted EPS by 68% and adjusted EBITDA by 51%. Importantly, with strong Q4 results, we delivered adjusted EBITDA above the midpoint of guidance after raising our outlook twice during the year. Building on the progress we've made in pricing, efficiency and cost discipline, our contract operations and aftermarket Services segments delivered outstanding adjusted gross margins. Contract operations achieved 70% plus adjusted gross margins for the fifth consecutive quarter, underscoring excellent execution in a tight market.

We continue to enhance and standardize our fleet through disciplined portfolio actions, completing our second accretive acquisition in 18 months while executing asset sales of 325,000 horsepower for $192 million, which we redeployed into high-return new build investments. Taken together, these actions drove 8% operating horsepower growth compared to 2024. Our high-quality fleet has maintained full utilization of 95% or higher for the last 11 quarters, underscoring the strength of demand for our equipment, our services and the reliability of our operations.

We translated this performance into meaningful value for shareholders, returning $212 million through dividends and share repurchases during 2025, up over 70% year-over-year. We also concurrently drove our year-end leverage ratio to 2.7x, demonstrating our cash-generating capacity. Overall, 2025 was a year of exceptional earnings growth, balance sheet strengthening and capital returns, providing a strong foundation as we enter 2026.

As we look ahead to 2026, our strategy is grounded in the role natural gas continues to play as a critical component of the global energy mix. Our strategic focus for 2026 centers on 3 priorities. First, capturing opportunities to invest in our natural gas levered transformed energy infrastructure and compression platform by helping our customers move more gas to market more efficiently, safely and with lower environmental impact. We continue to allocate capital toward large horsepower and electric motor drive compression, where we see durable demand, strong returns and clear benefits for both our customers and our shareholders.

Second, maximizing the reliability of our service for our customers. Reliability remains our central value proposition. We're continuing to standardize our field operating model and further enhance adoption of the technology we've implemented across the business. We're deploying advanced digital tools, analytics and machine learning to improve service quality, streamline workflows for our customers, optimize maintenance execution and expand our remote monitoring capabilities. These initiatives are designed to increase equipment reliability and safety, reduce unplanned downtime and drive higher fleet utilization and operating efficiency.

Third, maintaining disciplined returns-based capital allocation and prudent financial management. As we reach a higher level of sustained free cash flow generation, our priorities remain balanced and consistent, investing in high-return growth opportunities we see in this durable growth cycle and returning capital to shareholders while also maintaining a strong balance sheet. This approach has strengthened our portfolio, improved our financial flexibility and positioned us to continue delivering superior returns on capital.

Importantly, while performance over the last few years, including 2025, has validated the strength of the strategy I just outlined, we believe there is meaningful earnings growth still to be captured as we grow our business and realize the benefits of fleet mix, utilization durability, a more automated platform and disciplined capital allocation, which continue to compound over time. Natural gas production continues to increase steadily, and we expect production to reach record levels for the sixth consecutive year in 2026. In the near term, U.S. natural gas volumes are expected to increase incrementally in 2026.

Importantly, for Archrock, our exposure is weighted toward faster-growing gas basins, particularly the Permian, where gas volumes are expected to grow at mid-single-digit rates. In the Permian, oil production is expected to remain relatively flat, while associated gas volumes continue to increase, supporting sustained demand for compression. This growth is being complemented by meaningful additions to takeaway capacity totaling 4.6 billion cubic feet per day, particularly in the second half of the year, which should improve basin economics and support continued producer activity.

At the same time, U.S. LNG exports are expected to continue to grow in 2026 with a 2 Bcf a day of additional FID project export capacity coming online. LNG remains a key driver of incremental natural gas demand and reinforces the need for investment across natural gas production, transportation and compression infrastructure. LNG projects that have already reached final investment decision represent 14 Bcf a day of additional export capacity expected to come online through 2030 with further projects possible beyond that. These developments support sustained demand and a long runway for natural gas infrastructure investment and growth.

In parallel, AI-driven power demand is moving from long-term forecasts into the early stages of infrastructure development, creating another source of incremental demand for natural gas-fired power generation over time. These dynamics support what we believe is a durable multiyear earnings growth opportunity for Archrock. We have a substantial backlog for 2026, which is 85% contracted, and we've already booked units for 2027 delivery.

Now moving to our segments. Contract operations delivered outstanding performance, supported by excellent execution and continued high demand for our compression fleet. Our fleet remained fully utilized during the quarter, exiting at 95.5%. Maintaining utilization above 95% for 11 consecutive quarters is unprecedented for our business and reflects continued growth in natural gas demand, the high quality of our fleet and strong operational execution. Stop activity remains at historically low levels, and our equipment is staying on location longer. Based on 2025 data, the average time an Archrock compressor remains on location is now 73 months or more than 6 years. That's up 61% since 2021.

When isolating large horsepower compression, time on location extends even further relative to the blended fleet average. Average time on location is 97 months or more than 8 years for units with 1,500 horsepower or more, reflecting their use in midstream applications. As we continue to invest in this highly profitable and sticky segment of the market, we expect time on location to extend further over time.

At quarter end, we had 4.6 million operating horsepower. Sequentially, operating horsepower declined by approximately 80,000 as new build deliveries during the quarter were more than offset by the sale of approximately 123,000 horsepower, including 84,000 active horsepower, which we completed at year-end. For the year, compression asset sales totaled 325,000 horsepower, including 175,000 active horsepower, generating $192 million in cash proceeds and net gains on asset sales of $47 million while reducing estimated 2026 adjusted EBITDA by about $18 million.

Monthly revenue per horsepower moved higher on a sequential and year-over-year basis. In 2026, we expect to benefit from a full year's impact of rate increases from 2025, and we also expect additional price increases in 2026, though at more modest levels. We achieved a quarterly adjusted gross margin percentage of 78%. Strong pricing and solid cost management drove underlying operating profitability to 71.5% in the quarter, up from 70% in the third quarter of 2025, excluding the impact of prior period cash tax settlements and credits in both periods. Results reflect lower make-ready and lube oil costs and efforts to mitigate inflation in labor and parts through ongoing cost management.

Fourth quarter 2025 adjusted gross margin further benefited from $23 million in prior period cash tax settlements and credits, which is the driver of the gross margin percentage increase from the 71.5% level to the reported 78% level. Moving to our Aftermarket Services segment. Performance remains solid despite the typical seasonal slowdown in the fourth quarter. Aftermarket services continued to deliver consistent margin performance with adjusted gross margin percentage remaining firmly above 20% and well above historical levels despite normal fluctuations in activity. This reflects our continued focus on higher quality, higher-margin work, disciplined cost management and reliable execution.

Turning to capital allocation. Our framework remains disciplined and returns focused with growth investments and shareholder returns as our top priorities supported by a strong and resilient balance sheet. First, on growth investment. We previously stated that we expected 2026 growth CapEx would be a minimum of $250 million. And last night, we refined our guidance to between $250 million and $275 million. This level of CapEx reflects continued strong demand as well as a deliberate and disciplined approach. It also represents a similar level compared to the previous 2 years, especially when factoring in the 2025 growth capital expenditures included acquired new horsepower investment backlog from both the TOPS and the NGCS transactions.

At this level of growth capital, we expect to generate substantial free cash flows, both before and after dividends, supporting our strategy of increasing returns to shareholders over time. Most recently, our confidence in the outlook for the business and our financial position supported an increase in the fourth quarter dividend to $0.22 per share. This was up approximately 5% compared to the prior quarter and up 16% year-over-year as we focus on maintaining a well-covered dividend that grows along with the profitability increases in our underlying business. This dividend increase still provides flexibility for additional shareholder returns. This includes $117.7 million of remaining authorization under our share repurchase program as of year-end, which we expect to continue to use as a tool for value creation for our shareholders.

Our strategy has been to buy back shares on a regular basis while being more active during periods of market dislocation from the strong fundamentals we see ahead. We've returned over $92 million to stockholders since program inception at an average price of $22.72, including $70 million during 2025 compared to $13 million in 2024. From a balance sheet perspective, we exited the year below our long-term leverage target range of 3 to 3.5x, and we currently expect to operate below 3x in the near term. We're comfortable operating at these levels, which reflect the strength and durability of our cash flows and provide significant flexibility to pursue future organic and inorganic growth opportunities while continuing to return capital to shareholders.

In summary, Archrock is delivering standout performance, driven by consistent operational execution and the successful advancement of our strategic initiatives. As we look ahead, we believe we have additional opportunities to continue monetizing our transformed platform with earnings growth driven by disciplined execution and capital allocation and further supported by durable market tailwinds across the natural gas infrastructure. With that, I'll turn the call over to Doug to walk through our fourth quarter and full year financial performance and provide additional detail on our 2026 outlook.

Thank you, Brad, and good morning, everyone. Let's look at a summary of our fourth quarter and full year results and then cover our financial outlook for 2026. As we review the quarter, it is important to note that results included a few discrete items, which I will walk through briefly. We've also provided supplemental slides on our website with additional details, which bridge the results we reported last night to both 2025 guidance as well as our 2026 expectations.

Net income for the fourth quarter of 2025 was $117 million and adjusted EBITDA was $269 million, bringing net income for the full year 2025 to $322 million and adjusted EBITDA to $901 million. Underlying business performance exceeded expectations in the fourth quarter, and fourth quarter results further benefited from a $23 million cash net benefit to contract operations cost of sales related to prior period sales and use tax audit settlements and credits as well as a $32 million of net gains from the sale of compression and other assets, which occurred at the end of the year. These 2 items were not included in the 2025 annual guidance we provided on our third quarter call. And excluding them, we would have delivered full year 2025 adjusted EBITDA of $846 million, above the midpoint of our most recent guidance range of $835 million to $850 million.

Turning to our business segments. Contract operations revenue came in at $327 million in the fourth quarter of 2025, consistent with the third quarter of 2025. Average operating horsepower was down slightly from the third quarter of '25, primarily due to asset sales and pricing ticked up incrementally. We expanded our adjusted gross margin percentage to approximately 78%. Underlying operating gross profitability was 71.5% in the quarter, up from 70% in the third quarter of '25, excluding the impact of out-of-period cash tax settlements and credits in both periods. Results further benefited from $23 million in prior period cash tax settlements and credits, which, as noted earlier, was the driver of the gross margin percentage increase from the 71.5% level to the reported 78% level.

In our Aftermarket Services segment, we reported fourth quarter 2025 revenue of $50 million, down compared to the third quarter, but higher compared to the $40 million a year ago. The sequential decline reflects typical seasonal softness. Fourth quarter AMS adjusted gross margin percentage was 24% compared to the third quarter and prior year period of 23%. We exited the year with total debt of $2.4 billion and strong available liquidity of $579 million. Long-term debt was down $149 million in the quarter compared to the third quarter of 2025, reflecting strong operating cash flow and further support from asset sales.

We have taken meaningful steps to extend our maturity profile and further derisk our sector-leading balance sheet. First, we redeemed $300 million of our outstanding 2027 notes at par in November. Second, in January of this year, we closed an upsized $800 million 8-year bond issuance priced at 6%. We believe this represented the lowest rate ever achieved in the compression sector and one of the tightest yields in energy high-yield deal history. Pro forma for the offering, our liquidity was over $1.3 billion. With this issuance, we have effectively prefunded the redemption of our 2028 notes, which are callable at par in April of 2026. This provides additional flexibility as our nearest bond maturity would move to 2032 following the call of our 2028 notes.

Our leverage ratio at year-end was 2.7x calculated as year-end 2025 total debt divided by our trailing 12-month EBITDA. This was down compared to 3.3 in the fourth quarter -- 3.3x in the fourth quarter of '24. As Brad mentioned, we currently expect to operate below 3x in the near term, which provides significant flexibility to pursue additional growth opportunities while continuing to return capital to shareholders. The strong financial flexibility I just described continued to support increased capital returns to our shareholders. We recently declared an increased fourth quarter dividend of $0.22 per share or $0.88 on an annualized basis. This is up 5% from the third quarter dividend level and 16% versus the year ago period. Cash available for dividend for the fourth quarter of 2025 totaled $189 million, leading to an impressive quarterly dividend coverage on the increased dividend of 4.9x.

We introduced our full year 2026 guidance with yesterday's earnings release. As I walk through guidance, I want to again point you to the supplemental slides on our website, which bridge 2025 performance to our '26 adjusted EBITDA outlook and help isolate items impacting year-over-year comparability. We announced 2026 adjusted EBITDA guidance of $865 million to $915 million or $890 million at the midpoint. In contract operations, this outlook reflects continued strength with growth in horsepower, revenue and profitability. In aftermarket services, we expect performance to remain near historical peak levels, second only to 2025, which benefited from a small number of onetime items. This robust level of performance is supported by sustained service activity and the durability of the margin improvements achieved over the past several years.

The bridge highlights several items that create noise in our year-over-year comparisons, most notably asset sales and tax-related items, which together have a $98 million impact when comparing 2025 to 2026 adjusted EBITDA. First, tax-related items. 2025 adjusted EBITDA included a $33 million benefit from sales and use tax audit settlements and credits. Second, asset sales. The year-over-year comparison from '25 to '26 is impacted by both the $47 million adjusted EBITDA gains recognized in 2025 and the reduction of associated EBITDA in '26, which we estimate would have totaled approximately $18 million. Of this $18 million, $12 million related to the horsepower sold late in the year and announced alongside our earnings and thus, are not yet factored into analysts forward estimates.

Now turning to capital. On a full year basis, we expect total 2026 capital expenditures to be approximately $400 million to $445 million. Of that, we expect growth CapEx to total between $250 million and $275 million to support investment in the new build horsepower and repackage CapEx to meet continued customer demand. Maintenance CapEx is forecasted to be approximately $125 million to $135 million, up compared to 2025 due to increased planned overhaul activity. We also anticipate approximately $25 million to $35 million in other CapEx, primarily for new vehicles. Total capital expenditures are expected to be funded by operations with the potential for more modest additional support from nonstrategic asset sale proceeds as we continue to high-grade our fleet.

Before we open the line for questions, I'll close by reinforcing that Archrock enters 2026 with strong momentum and a very solid financial foundation. The performance we delivered in 2025 reflects the durability of our business model, disciplined capital allocation and the strength of demand for our compression services. Looking ahead, our outlook is supported by a consistent growth capital profile, expanding free cash flow and a continued focus on execution. As Brad outlined, our priorities remain clear: investing in high-return growth opportunities and returning capital to shareholders. As we execute on those priorities, leverage will continue to move lower naturally, and we are comfortable operating below the midpoint of our target range as an outcome of strong performance, not as a change in our strategy. We believe this framework positions Archrock well to support growth, maintain a resilient balance sheet and continue creating long-term value through cycles. With that, Bella, we are now happy to open the line for questions.

[Operator Instructions] Your first question comes from the line of Doug Irwin with Citi.

Just wanted to start with the growth CapEx guidance here. Just wondering if you could talk about how much organic horsepower you see that translating to being added this year? And then maybe if you could just help fine-tune just the cadence of fleet additions throughout the year.

Yes. Doug, thanks for the question. We -- the CapEx should translate into about 170,000 horsepower that we expect to take delivery of in 2026. And as far as the impact through the year, while it's generally ratable over the 4 quarters throughout the year, we are somewhat front-end loaded and expect about 60% of that horsepower to start up in the first half of the year, which is beneficial and just shows the strength of continuing demand that we see in the market and that we are receiving from our customer base.

Got it. That's helpful. And as a follow-up, maybe just around lead times. We've heard some peers talk about lead times getting longer here to start the year. Could you maybe just talk about what you're seeing today and then how that maybe impacts the way you're thinking about both build costs moving forward and kind of the balance of your pricing power and where you might see gross margin trending in a tighter environment over the next few years?

Lead times have definitely extended. Right now, the long lead time item, the gating item for gas drive equipment is Caterpillar. And for the large horsepower equipment that is the bulk of what we are investing in, it's out to 110 to 120 weeks. For larger horsepower, it's not even further. So lead times have definitely extended as the market is in full pressure and demand for natural gas infrastructure, including compression, which we're very happy and excited to be a part of. As far as the impact on us, fortunately, looking at 2026, we are booked to meet our customers' needs for the year. We are -- that horsepower is 85% committed to go to work. So we have only a little bit left in the year that would be available for new bookings. And we've already started booking horsepower into 2027. And we expect that we will fully be able to meet our customers' needs for growth through that period of time. So while the supply chain is definitely extended right now, showing the high demand in the market, we believe we will have access to the equipment to meet our customers' needs in 2026, 2027. It's way too early to talk about any years beyond that.

As far as the impact on pricing, it's an interesting market right now. There's a slight pause in some oil activity, and that's moderated, I think, some of the immediate pressures for the overall industry and for our segment. And so while we expect to see price increases on our installed base in 2026 at a more modest level, as I think I mentioned in my prepared remarks, we do see price increasing in the year. On the current market, it's at a more moderate level for sure, just because we've all caught up with inflation and the current demand in the market is basically well priced. And as you can see, we and we think the industry is operating at a high level of profitability.

Your next question comes from the line of Jim Rollyson with Raymond James.

Brad, following up on your comments on lead times. One would think as far out as they've stretched to for someone like Caterpillar that usually more material price increases on their front come down the road. I'm curious your thoughts there just because as you talk about more moderate price increases from your end in '26, if they obviously hike prices for future deliveries into '27 and beyond, presumably, that affords you the ability to catch up with that to maintain your returns. So I'm just curious your thoughts on that.

First, we have not seen any significant change or received any significant change in Caterpillar's overall pricing strategy impacting us. Second, we have also not really seen a tremendous change in the pricing from our packagers for the total compression package that's been passed on to us. But the good news is that when we do see that, we will have the full flexibility to price that into our forward pricing with our customer base. One of the main impacts, most interesting impacts of this period we've gone through where over the last 5 years or so, we've had significant inflation impacting our fleet is it has certainly made the existing equipment we've invested in over the prior period -- over the prior years, a lot more valuable. And a lot of the returns that we can generate in our business are from the value we get from those prior investments the pricing power we receive in the current market because of the high demand for compression. And so that value creation that we come from the installed base way outweighs what's going to happen from an inflationary perspective coming through the system from Caterpillar or from the packagers in the near term, all of which we can price in and pass on.

That was exactly why I asked the question. Appreciate that answer. And then following up, I can't recall a time when you've been in quite this position from a leverage and free cash flow generation perspective even after dividends. And as you kind of look forward over the next 2, 3, 4, 5 years, obviously, the gas backdrop is such that you've got a nice runway of annual organic growth there, but your cash flow is going to be far exceeding your ability to spend it, it seems like in this. I'm just curious, as you think about this, you run out somewhat a run out of obvious M&A candidates in your main fairway. Do you return more to shareholders? Do you look at -- you've had a couple -- at least one of your peers enter into another business line as a means to deploy incremental capital. Just how do you think through that because you're in a very enviable position, and I'm just kind of curious how you guys think about that outlook?

I think you could have asked a bigger question, but I'm not sure how. There's a lot to unpack there. I'm going to try to pick a couple of points to make. The first is that we have had worse problems in the past than having to figure out what to do with a lot of free excess cash flow for the benefit of our investors. So we're excited about the position we're in. We think that it demonstrates the strength of this segment. It demonstrates the strength of the natural gas infrastructure sector overall, which is going to continue to grow, and it generates a lot of cash as we're seeing right now. And right now, it's generating on a sustained basis. A lot of this is the benefit of the capital discipline that we've had in the overall energy sector, we've had in the midstream sector, we've had in the compression space, particularly. And as long as that holds, that level of discipline is going to continue to be rewarded by generating great cash returns for our investors. So we're excited to maintain that.

To the M&A question you posed, look, we've demonstrated both the desire and ability to grow organically as well as inorganically. And we've digested in just 18 months, 2 very nice acquisitions with great equipment and great teams and a great customer base to expand our business. And we were able to do that on an accretive basis and pass that accretion on very promptly to our investors through dividend increases. We will continue to be looking for those opportunities. And to the contrary to maybe what you were thinking, we think that there are more compression companies in the space today that will be available for us to look at and will want to think about changing their platform and/or with ownership that we want to monetize in the coming years. So we do see that as a continuing opportunity. And if we can find assets that align with our desire for large equipment, electric motor drive equipment that are well maintained, we will be in the game and competing hard for those assets.

And then I'll close with the last thought, which is that we did note that one of our competitors has entered into the power market. And I'd say a few things about that. The first is that there are some synergies when you think about the supply chains, the equipment, the maintenance practices and the fleet management practices, clearly, there is some overlap and some synergies on how to do this. Second, on how to do that segment. Second, what we've noticed is that we believe the returns are largely comparable to what we can achieve in the compression space. And so there's a lot of, I think, industrial logic to the expansion there. On the other hand, we haven't seen asset packages that have come to market that offer the same level of infrastructure, long-term application investment that we're looking for, whether it's in compression, which is we're looking for there or in power, we want to see those longer-term applications and infrastructure position. But when we see those asset packages, we will be working those hard as well.

Your next question comes from the line of Nate Pendleton with Taxis Capital.

Congrats on the strong quarter. Can you provide some detail on the units sold and perhaps some insight into how your team decides what assets are noncore to the go-forward business?

Yes. A couple of thoughts. First, having a disciplined program that both invests in our fleet as well as dispose of assets that we no longer want to operate in the fleet is a core competency in our business. And so when you look at the level of asset sales that we've had over the prior 5 years, we've been averaging something like 270,000 horsepower per year over that 5 years. So the level of activity that we had in 2025 is not much larger than just the run rate we've had in the kind of nip and tuck of disciplined asset management practices for our fleet. The only -- the other thing I'd say is that we did have one sale that was totally nonstrategic around high-pressure gas lift units. And there was another business, the buyer was very much in that business. And so that just made great strategic sense for both companies. That made the number -- that was a contributor to the size of the number in 2025. And we had one customer that wanted to purchase some horsepower. They acquired operations in an acquisition. And as part of that acquisition, it came with horsepower from us. And that's a customer that likes to own their horsepower as opposed to outsource as much of the horsepower. And so they were aligned with -- they wanted to buy that horsepower for that reason. And for us, when we looked at that horsepower, it was an average age of 17 years and was in the perfect condition to maximize our overall cash generation of that horsepower by selling it. So when we look at the fleet overall, we're always looking to improve the standardization, the quality of our fleet. We are happy to engage with customers that want to buy horsepower and sell, especially when it's horsepower that has already earned a great return and served us well over time.

Got it. And then as my follow-up, Brad, in your prepared remarks, you mentioned continued opportunities that you see in electric motor drive compression. Can you provide more detail on how you see the adoption of the electric compression trending as you look at your 2026 and early '27 order book?

Sure. We still see demand for electric motor drive. It's definitely competing. Our customers are now facing more competition for power, and that is a gating item for electric motor drive. So in the past, we've had electric motor drive, I think, in 2025 was as much as 30% of the equipment that we had on order. We are seeing that moderate to more in the 20% to 30% range, but it's lumpy and it's inconsistent. It really varies not just with power being a gating item, but also with the prioritization of the customer and how well they can get equipment and how well that fits into their overall long-term strategic focus. But on the good news front, we still see nice demand for electric motor drives. We're very proud to be the leader in the industry in that segment, and we expect to see good growth for electric motor drives ahead still.

Your next question comes from the line of Eli Jossen with JPMorgan.

You talked a bit about extended supply chain lead times and tightness there. But maybe just thinking about the growth CapEx figure, if you guys are able to make opportunistic procurement of horsepower or you see kind of swelling demand from your customers, could we see upside to the growth CapEx figure? And what kind of visibility do you have there given strong customer demand?

In a word, yes, but it's going to be tough because shop space is pretty full for 2026. So getting more through the system is going to be a challenge. That said, there are avenues to do so. And if we see the opportunity and the need with our customer base, we will be ambitious in capturing that.

Great. And then maybe just thinking about basin focus. I know the business has increasingly shifted to being liquids-rich Permian basin Eagle Ford. Are you guys kind of still pressing ahead there? Have you looked at expanding within other basins? Or what's the overall geographic strategy?

Yes, we have looked at -- fortunately, we have what is the most diversified footprint in the industry. We operate in every natural gas producing basin, every producing basin in the U.S., and we have an excellent footprint throughout all of them. But everything compels with the CapEx vacuum cleaner that is the Permian Basin today for the industry. And so like with others, our focus is on ensuring that we grow where our customers want us to grow, where they're putting their CapEx and their growth and that -- the Permian Basin remains in the lead. With that, though, looking back on 2025, we had net horsepower growth in a total of 6 basins, one of which was the Permian. So we've seen net growth in other plays, including in dry gas plays, which are seeing a little bit more energy and reactivation right now given the gas price trade-off with the oil price. So it's been a focus of ours to remain prudently diversified as well as we can and at the same time, not miss the incredible opportunity for the most efficient oil production in the country, which is coming in the Permian.

Your next question comes from the line of Selman Akyol with Stifel.

Nice quarter, nice outlook. Two quick ones for me. So in your opening comments, you talked about 11.25 of running at higher utilization, 95%. And then you went on to talk about how your equipment is staying on location longer, especially as you skew towards the higher horsepower. So the question directly is this, '26 probably is another lock for the 95% sounds like '27 is as well. So how far, how long do you see that extending at that high utilization rate?

Selman, we appreciate that you think we could possibly answer that question. That's nice for you to suggest. -- number one, no one knows, and we don't either. But what we see right now with the level of demand for natural gas to feed the LNG beast ahead, which I described in our comments, and we include our best market take in our deck all the time. What we see for power demand in the U.S. for data centers, what we see for pipeline exports to Mexico is that this is a very durable cycle. And it's hard to see what is going to change that within the next 5-plus years. So we expect that our business has just a tremendous growth opportunity. to expand our infrastructure footprint with our customers for an extended period of time. But we're not smart enough to call when the cycle turns, sorry.

Okay. Appreciate all that. And then just kind of going back to the consolidation, when you talked about it, you sort of referenced other companies, but is there anything out there from potentially buying packages from your customers?

Reflecting on the acquisitions we've done, we've actually had success doing that. Going back pretty far back. There was a time when we acquired what was primarily the compression operations of Chesapeake, which we completed in 2 separate transactions. When we acquired the Elite assets back in 2018, that was primarily the asset packages that we were supporting and organized by affiliates of Hillcorp, but it was run in a separate company and the primary customers in that were both Hillcorp and Marathon as we discussed at the time. So we've seen success in acquiring packages that were organized for sale in that way. That said, in other instances, we've seen this to be a very hard area to get a lot of traction between the operating teams and the financial teams within our customer base. And so while we've had success in the past and we have those discussions ongoing with our customers, -- it hasn't fit the mold of a high volume of steady transactions that would be a purchase leaseback machine. So while there are opportunities out there, we think they're going to be structured more like traditional M&A.

Your next question comes from the line of Steve Ferazani with Sidoti.

I was pleasantly surprised by the SG&A guide given the growth in the fleet, given the growth in cash flow, you certainly could be looser on spending, but it looks like you're even getting tighter. And obviously, we're seeing that in your margin guidance on the contract operations where it looks like you're more than offsetting any kind of inflationary pressures. Can you talk a little bit about your actions there and what you're trying to do in a growth market containing those costs?

On the SG&A front, first and then on OpEx -- the nice thing about this business and our platform is our SG&A is very scalable. We can add quite a bit to our operational activities without expanding our SG&A proportionately. So what you're really seeing is the benefit of the full year acquisition benefits coming from the NGCS transaction and the expansion of our organic horsepower, and we just -- we have a great SG&A platform that can grow our activity without growing our SG&A investments. So it's just a very scalable position to be in. We expect to benefit from that in the future. And that's why you're seeing -- when you think about SG&A as a percent of revenue, you're seeing that continue to come down nicely.

On the OpEx side, I'm going to point out a few things that are really long-term focused from a strategic perspective, and we're seeing the benefits now and so are our customers. Over the last several years, we focused hard on our fleet mix, expanding into large horsepower, expanding into electric motor drive. These are the 2 most profitable segments of the market. And by shifting that mix, if you look over a long period of time, you're going to see that our OpEx per horsepower costs have remained super flat for a long time, notwithstanding inflation because we've been fighting off inflation and some of these pressures by engaging in these strategies of adopting a different fleet mix focused on large engines and motor drive.

Second, we've been adding technology to our platform. And so we've invested hard into digitization, automation and just great telemetry into our system, and that's driving a lot of savings in activity, a lot of efficiency and optimization into our activities in the field. So those are the big threads that we're reaping the benefits from. And candidly, so are our customers because we've been able to actually manage the concurrent improvement of customer service, maximizing uptime for our customers and at the same time, managing our costs, which we get to pass some of that on to them in the form of very competitive rates. So those are the biggest drivers that I can think of on how we're attacking costs even in this market.

Yes. I would maybe just make one more point on SG&A, which is that, look, '25 levels were elevated just a little bit, candidly, in recognition of the incredible performance delivered by both the management team and also all of the operating team. And so you saw our short-term incentive and longer-term incentives flow through a bit into that, something that we're glad to share up and down throughout the entire company. But with stronger performance comes stronger expectations in '26. So that level for guidance was reset to more of a target level. I think Brad otherwise summed that up well.

That's really helpful. I always try to get a question in about aftermarket, Brad, the guidance there, look, I know '25, you benefited from equipment sales and you pointed out how that can affect margins. I'm just curious about the growth opportunities given that U.S. compression third parties is growing as well. At any point, do you become waiver constrained to meet third-party service demand? Or can you continue to grow that business?

I actually really appreciate getting a question on AMS because it has been a standout performer for us for a couple of years now. And that team has just done an excellent job in improving the profitability of the business. But one of the strategies to improve the profitability of the business is to be more selective on the jobs that we take and the customers that we work with. So I do think that the growth in that business has -- we've demonstrated that it's constrained. And I also think that access to labor is going to further be a constraint in that business as it is in contract operations. But what we're really seeking is to have the right business. We're trying to make sure that it's as profitable as it can be as value adding to our customers as it can be, and we will grow it prudently. But given the nature of it, I do not expect it to grow in leaps and bounds. I expect we're still going to see sharper levels of growth in the infrastructure side of the business in contract operations.

Question comes from the line of Elvira Scotto with RBC Capital Markets.

So just a couple of follow-up questions for me. The first one, you talked about your investments in technology over the years, telemetry, big data, et cetera. Can you talk about how much more margin improvement or uptime or what you can drive over time? What inning are we in, if you will? And are there other AI initiatives you can undertake to drive incremental margin improvement or uptime for your customers? Any additional color there?

Yes. Thank you. the overall strategy around our technology investments really had 3 goals as our top line priorities. Number one, we've got to continue to drive improvement to the uptime, our customers' experience to service quality, and that's all of the above from a communication perspective, speed of response perspective as well as run time. We want those priorities to come through to our customers. Number two, the market has labor challenges. And so ensuring our labor, our mechanics have the access to the best tools, the best information, best communication to make their lives better and to make their work more easier to perform is the second priority around that initiative. And third would be that if we succeed in both of those, we knew we would drive improvements to profitability.

So with that lens on how we think about technology, we do believe there is still more to come, especially in driving improvement to the service quality that our customers get to experience, just enhancing the customer experience. We are deploying AI in a couple of ways throughout our business, both to make sure our mechanics have the best information at their fingertips and candidly at their laptop and on their iPhone as they can. So the speed of how they can ask questions and receive information is something we're working on quite a bit. Second, we can also make our machines smarter and tell us more. And so getting great the data machine to have great analytics capability and using AI to sort through the noise to identify the most actionable items coming from the alarm system within all of the telemetry and all the sensors we have on the equipment is something we're absolutely working on.

And last, there's more ahead of that. We believe that there's also additional sensor technologies, vibration technologies and acoustic technologies that can utilize AI on the equipment, and we're working hard to figure out how to bring those to market. So that's what we are working on. We are really pleased with the progress we've made to date, the improvement it's had to our operations. But I can't even call the inning in this because I think technology is a continuous improvement exercise, and we are going to focus on driving continuous improvement in the operations that we have at the company.

Great. That's very helpful. And then just my quick follow-up. Are you seeing any change in your customers' desire to in-source compression more or outsource compression more? Any change to that dynamic?

We have not seen a change or shift in the dynamic of in-sourcing and outsourcing. We believe that the customers' primary decision-making around what they're going to do with their compression is driven by their own capital availability, capital allocation and a buy-lease analysis of how long they think they can earn a return on that asset. And all of those factors still favor significant outsourcing, we believe, in the market today. When you think about where we're at, where our large horsepower stays on location on average about 8 years, -- if that is a unit that the customer was considering to purchase and they only had 8 years of use for it, it doesn't make a lot of sense for them to make a 30-year investment for 8 years. So we still think that the overall buy lease analysis is informed by how long the customer expects to be able to utilize that equipment. And what we see in the outsourced industry is that we can amortize our 30-year investment over a broader geography over a broader customer base. And so we have -- that's the driver of our value proposition, and we haven't seen a change in that.

Your last question comes from the line of Nick Ami, I'm sorry, with Evercore...

Just one quick one from me and actually a follow-up and just a clarification on another one. But just given kind of the significant kind of sentiment shift that we've seen from the hyperscalers and just in the AI complex to more of a behind-the-meter solution, just specifically in West Texas, I mean, we had a couple of companies yesterday kind of call out the Permian as kind of an area of ripe for opportunity just given the lack of regulatory constraint. Just wanted to see like has that kind of come to fruition? Have you guys been seeing that level of demand on your end? Have you seen that kind of true inflection of demand yet? Or is there kind of inevitably more to come on that?

If I'm understanding the question fully, what we're seeing is that -- let me just ask for a clarification. that a question for the demand for power, provision for power or translating into compression? Could you clarify for us, please?

Translating into compression, just given that the vast majority of all of these -- all of this demand, right, is going to be powered by -- through natural gas through natural gas generation. So just kind of reading the tea leaves, it would kind of imply that we'd have some significant demand in that area.

Yes. Thank you. That's really helpful. What we are seeing just overall is the demand for in-basin gas supply is something we're seeing an increase in. And I think a lot of it is driven by more in-basin use of natural gas rather than needing to find a long-haul pipeline to get it out to support other markets. So yes, we are seeing that translate in demand. But it's translating into more -- to be direct, more future demand than it is immediate current demand.

Got it. Perfect. And then just kind of touching quickly on the aftermarket, the AMS segment again. So I understand that it's probably -- you guys are taking more of a prudent approach. But just given that we are seeing kind of the units, the assets run harder for longer and kind of the constraints within the supply chain, is there a meaningful kind of price opportunity that could be there, especially given that you guys are taking more of a prudent and deliberate approach like unit economics? Just trying to figure that out from a margin perspective.

We're really happy actually with the returns we're achieving right now and the 24% gross margin for the prior quarter is something that we're pretty excited about. That said, we do see opportunities that we're not going to go into detail on for other reasons, you can imagine, to continue to improve both the stability, quality and earnings in that business. But what I'd say is that if you think about a business that has very low barriers to entry and a ton of competition, that would -- the aftermarket services might be in the dictionary under that heading. And so finding the right strategy to execute both with excellence with the right customer base and on the right jobs becomes -- remains a priority for us in operating that business.

There are no more questions. And now I'd like to turn the call back over to Mr. Childers for final remarks.

Great. Thank you all for joining us today and for your continued interest in Archrock. By nearly every measure, 2025 was a standout year for the company, and we're encouraged by how 2026 is shaping up as we benefit from strong U.S. gas production trends and the result -- and the returns from our continued investment in a first-class compression platform. We appreciate your support and look forward to updating you on our progress next quarter. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.

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” Raymond James

” Citi

” Stifel

” JPMorgan

” Mizuho

” Wells Fargo

” Texas Capital

” Daniel Energy Partners

” Sidoti

” RBC Capital MarketsGood morning, and welcome to the Archrock Third Quarter 2025 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Julianne. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock.

Yesterday, Archrock released its financial and operating results for the third quarter of 2025. 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 net income, adjusted EBITDA, adjusted EPS, adjusted gross margin and cash available for dividend. For reconciliations of these non-GAAP financial measures to the most directly comparable 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 third quarter results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. Third quarter performance again demonstrated the strength of our operations and the natural gas and compression markets. The U.S. natural gas infrastructure build-out continued to support robust third quarter and full-year 2025 performance, and we expect this to continue into 2026 and beyond.

At Archrock, customer service remained outstanding, operational execution excellent and profitability at high levels. We continue to expand our adjusted EPS and adjusted EBITDA during the quarter. Compared to the third quarter of 2024, we increased our adjusted EPS by 50% and our adjusted EBITDA by more than 46%. Our contract operations and Aftermarket Services segments both delivered impressive revenue and gross margins due to strong activity levels, a supportive pricing environment and the efficiency improvements we've driven across our operations.

We maintained our sector-leading financial position, including an attractive quarter end leverage ratio of 3.1x, driven by the stability of our cash flows. Our quarterly dividend per share was up 20% compared to a year ago, and we maintained robust dividend coverage of 3.7x. We also continue to accelerate the repurchase of shares on the confidence we have in the durability of natural gas demand, compression market strength and Archrock's competitive position.

Since the inception of our share repurchase program in April of 2023, we've repurchased more than 3.9 million shares of common stock at an average price of $20.21 per share. I'm both excited by and proud of the level of operational and financial execution we are achieving, which is also giving us strong momentum heading into 2026. Day-to-day, we remain focused on driving the next increment of Archrock's success through our first-rate customer experience, implementation of innovative technology and our returns-based capital allocation.

When coupled with the opportunity-rich market for compression, we believe we are in today and see for the period ahead, we believe that Archrock is set up for an extended period of strong and sustained growth in earnings, free cash flow and returns to our shareholders.

With that overview, I want to dive more into the constructive compression dynamics we see on both a short- and a long-term basis. Beginning with the short term. The current environment is characterized by commodity price volatility, oil rig count declines and the possibility that oil volumes could flatten or even decline slightly in 2026. Should this scenario play out, however, we still expect natural gas production growth in the U.S. with a rate that is likely in the low single digits, including continued gas production growth in the Permian Basin.

The dynamic of natural gas production outpacing oil production is one that is consistent with historical trends in other more mature associated gas shale plays like the Eagle Ford and the Bakken, where rising gas-to-oil ratios have led to natural gas volume growth long after oil volume peaks. Because of this, we expect short-term gas market fundamentals will require a similar amount of growth investment by the industry and Archrock during 2026 compared to 2025, a point I will return to in a bit.

Shifting to the long-term, we believe the compression industry has entered a durable upturn driven by natural gas demand growth and bolstered by the pervasive level of capital discipline across the energy complex, including by the producers, midstream operators and compression service providers.

Expanding on natural gas demand growth, in particular, we see visible growth in U.S. LNG exports and emerging demand for AI-driven power generation. Combined, we expect these demand pressures will require a significant call on U.S. natural gas production to the tune of an incremental 20 to 25 Bcf a day by 2030, depending upon the forecast and with similar levels of growth likely into the next decade.

First, on LNG export facilities. U.S. demand is expected to grow by more than 17 Bcf a day by 2030, much of which is already under construction and at least another 6 Bcf a day of projects could be operational before 2035.

Second, the proliferation of AI is creating a new and meaningful source of domestic energy demand and the opportunity for natural gas production and infrastructure to play a critical role is becoming more tangible. We've now seen hundreds of data center projects announced across the U.S., driving a virtual arms race for power. This includes investments in new power plants by utilities and more recently, natural gas pipeline expansion and direct power generation projects to meet this growing demand.

Variation in the forecasted magnitude and timing of this opportunity remains wide, but the risk forecasts through 2030 are significant, totaling up to 10 Bcf a day with additional growth expected well into the next decade. Simply put, we need all the gas we can produce, transport and therefore, compress. At Archrock, we expect to fully participate in these developing markets and are increasingly encouraged by these leading indicators for our business.

Moving on to our contract operations segment. Our fleet is younger, larger and positioned in competitive basins with high-quality customers. This is translating into enhanced performance across several fleet metrics. First, utilization. We remained fully utilized during the quarter with utilization exiting at a rate of 96%. I'm proud to share that we've maintained utilization in the mid-90s range for the past 12 quarters.

Second, stop activity. Stop activity year-to-date remains at historically low levels. Third, time on location. Based on 2024 data, the average time at Archrock compressor stays on location is now more than 6 years, representing a 64% improvement since 2021. With the investments we've made to high-grade the quality of our fleets and given what we see in the market today, we expect these recent trends in utilization, stop activity and time on location to continue into the foreseeable future.

At quarter end, we had 4.7 million operating horsepower. As a reminder, on August 1, we completed the sale of several small high-pressure gas lift units for $71 million. Excluding this and other active asset sales, we grew horsepower organically by approximately 56,000 horsepower on a sequential basis in the quarter. As we look ahead, we have a substantial contracted backlog and continue booking units for 2026 delivery to meet strong customer demand led by the Permian Basin. Spot pricing continued to increase during the quarter, and as our team remains focused on achieving market rates for all of our units, rates on our active fleet also moved higher.

Now as many of you track trends in quarterly revenue per average operating horsepower per month, I wanted to point out the impact of the recent acquisition and divestment activity on that calculation this quarter. As I mentioned, pricing on our installed base of compression increased sequentially in the quarter. Third quarter 2025 revenue per average operating horsepower per month declined slightly compared to the second quarter of 2025, however, due to 2 factors.

First, the average size of our compression units increased from 899 horsepower per unit to 927 horsepower per unit in the quarter, which was primarily the result of the high-pressure gas lift unit sale I just mentioned.

Second, the full quarter impact of NGCSI fleet acquisition, that we had an average pricing on an equivalent unit basis a bit lower than the Archrock fleet, but we believe this gives us the opportunity to bring rates on those units up to market over time. Concurrent with the decline in revenue per average operating horsepower per month, as you would expect, part of the cost per average operating horsepower per month decline we experienced in the quarter was also due to this increase in average horsepower size.

We achieved a quarterly adjusted gross margin percentage of 73%. Strong pricing and solid cost management drove underlying contract operations gross margin to 70.4%, up slightly from the prior quarter. Third quarter 2025 adjusted gross margin further benefited from a $9.9 million cash tax credit, which is the driver of the gross margin increase from the 70.4% level to the reported 73% level.

In the Aftermarket Service segment, the large base of owned compression continues to support strong AMS activity, particularly in contract maintenance and service work, and great customer service is driving repeat business. Third quarter 2025 AMS gross margin percentage remained at impressive levels and was consistent with guidance.

Shifting to our capital allocation framework. We remain committed to our prudent and returns-based approach. The successful execution of this capital allocation strategy has put us in a position to generate positive free cash flow after dividend moving forward. Over the long term, we are committed to positioning and managing this business to generate positive free cash flow and increase returns to our shareholders.

Now more on our objectives as we look into 2026. We see an opportunity-rich market ahead and the IRRs at which we expect to invest new build capital remain robust. As I mentioned earlier, the average compressor time allocation has extended to more than 6 years, which is beyond our expected payback period on new investments. Our investments continue to be underpinned by multiyear contracts with blue-chip customers in highly profitable basins.

As we indicated last quarter, we expect 2026 growth CapEx to be not less than $250 million and within the range of investment levels that we've made annually since 2023. We believe this is the level of CapEx required to support the infrastructure build-out we are experiencing in the U.S. in order to satisfy the growing demand for natural gas described earlier. As we invest in these compelling opportunities, we're committed to maintaining an industry-leading balance sheet and plan to maintain a target leverage ratio of between 3x to 3.5x.

At the same time, we're delivering on our promise to provide an ongoing and growing return to our shareholders through the payment of a quarterly dividend. We will continue to also use buybacks as an additional tool for value creation for our shareholders. We've returned $159 million to stockholders through dividends and share repurchases during the first 3 quarters of 2025, compared to $93 million at this time last year. Given our confidence in the company's strategy and our commitment to returning capital to shareholders, the Board has approved a $100 million increase to our existing share repurchase program. After accounting for the recent repurchases during the third quarter of 2025 and in October, with this additional authorization, our current capacity is approximately $130 million.

In summary, 2025 continues to be a tremendous year for our company, and I'm as optimistic as I've ever been about where we can drive this business in 2026 and beyond. As the structural growth in natural gas production and compression continue to take hold, we are focused on growing our business, growing our attractive and durable earnings power and growing our free cash flow generation.

With that, I'd like to turn the call over to Doug for a review of our third quarter performance and to provide additional color on our updated 2025 guidance.

Thank you, Brad, and good morning. Let's look at a summary of our third quarter results and then cover our updated financial outlook for 2025. Net income for the third quarter of 2025 was $71 million. Excluding transaction-related and restructuring costs and adjusting for the associated tax impact, we delivered adjusted net income of $73 million or $0.42 per share. We reported adjusted EBITDA of $221 million for the third quarter of 2025.

Underlying business performance was strong in the third quarter as we delivered higher total adjusted gross margin dollars on a sequential and year-over-year basis despite the lost revenue and profits from a larger asset sale during the quarter. We reported a $4 million net gain on the sale of assets, which was offset by $4 million in other expense and related to an amendment fee for our MaCH4 natural gas liquid recovery new venture agreement with our partner.

Turning to our business segments. Contract operations revenue came in at $326 million in the third quarter of 2025, up 2% compared to the second quarter of 2025, driven by growth in horsepower and pricing, and revenue would have been up even more at 4% sequentially, absent the sale of active horsepower, as Brad discussed.

Compared to the second quarter of 2025, we grew our adjusted gross margin dollars by more than $17 million. We expanded our adjusted gross margin percentage by approximately 73%. Underlying operating profitability was 70.4% in the quarter, up slightly compared to the second quarter of 2025. Results further benefited from the receipt of a $9.9 million cash tax settlement.

In our Aftermarket Services segment, we reported third quarter 2025 revenue of $56 million compared to the second quarter of '25 of $65 million, but up 20% from $47 million in the year ago period. Third quarter 2025 AMS adjusted gross margin percentage was 23%, consistent with the second quarter of 2025 and consistent with guidance.

Turning to our balance sheet. Our period end total debt was $2.6 billion and available liquidity totaled $728 million. As previously announced in October, we intend to take advantage of the lower rate environment and use existing capacity on our ABL facility to redeem all $300 million of our outstanding senior notes due 2027 at par. The redemption date for the notes will be November 17, 2025. Our leverage ratio at quarter end was 3.1x calculated as quarter end total debt divided by our trailing 12-month EBITDA. This was down from 3.3x at the end of the second quarter of 2025.

With continued strong performance in our business, we expect to continue deleveraging as the year progresses. We recently declared a third quarter dividend of $0.21 per share or $0.84 on an annualized basis. This level was consistent with the second quarter of 2025 and represents a 20% year-over-year increase. Cash available for dividend for the third quarter of 2025 totaled $136 million, leading to impressive quarterly dividend coverage of 3.7x.

In addition to our quarterly dividend payment, we repurchased approximately 1.1 million shares for approximately $25 million at an average price of $23.18 in the quarter. Including the additional $100 million authorization, this leaves approximately $130 million in remaining capacity for additional share repurchases on the replenished authorization as of October 22.

Turning to our updated outlook. Archrock increased its 2025 annual guidance to reflect continued outperformance during the third quarter of '25 and our expectation for continued strength in our underlying business during the fourth quarter. As a reminder, our guidance reflects 8 months of contribution from the NGCS acquisition and outperformance in our business, partially offset by the removal of 5 months of contribution from the high-pressure gas lift units we sold.

We are raising our 2025 adjusted EBITDA range to $835 million to $850 million from the prior range of $810 million to $850 million. Additional detail can be found in our earnings release issued last night.

Turning to capital. We are narrowing our growth CapEx guidance range to between $345 million and $355 million to support investment in new build horsepower and repackage CapEx to meet continued customer demand. Our growth CapEx is underpinned by multiyear contracts. Maintenance CapEx is forecasted to be approximately $110 million to $115 million. We also expect approximately $35 million to $40 million in other CapEx, primarily for new vehicles.

Total capital expenditures are expected to be funded by operations and further supported by non-strategic asset sale proceeds, which total more than $114 million in 2025 year-to-date. In summary, as the structural growth in our natural gas production and compression continues to take hold, we are focused on finishing out the year strong and setting a solid foundation for even higher levels of customer service, operational execution and financial performance in 2026.

With that, Julianne, we are now ready to open the line for questions.

[Operator Instructions] Our first question comes from Jim Rollyson from Raymond James.

Great job as usual. Brad, you're in an interesting position where it's kind of the first time that I can recall in a long time where you guys generated free cash flow, and as you mentioned, you're set up to do that going forward. At the same time, you're at the bottom end of your leverage goals and you're basically set up to just continue to put cash. I'm curious how you think about deploying that. Obviously, you've been growing the dividend, and there's obviously room for that to continue to grow even today. You just expanded the repurchase program. You've been active in M&A, but maybe just a little color about how you think about that given the kind of unusually strong position that you're in today.

Thanks, Jim. I appreciate it. I'm sure you don't want to expand on that question anymore because I love the way you asked it. We have a tremendous opportunity to create value for our shareholders. When we look at our capital allocation priorities, our absolute best use remains investing in and growing this business. The returns that we get by growing our fleet organically by expanding our footprint with our great customers remains our best -- the best return we can generate for our investors going forward.

We have the additional tools because we are generating sufficient cash. We have great coverage. I think we exited 3.7x what I talked about. We have a tremendous opportunity to continue to grow our dividend over time. As we've demonstrated in the past, it's up 20% on a year-over-year basis. We can grow that over time as we continue to grow our business. In this market today, the macro is dislocation to our stock price, giving us also the opportunity to deploy capital and buying shares when the market is not valuing it appropriately.

We get to buying shares with this complicated oil market and this dislocation and generate additional and great returns for our investors that way. We intend to use all 3 tools for capital allocation going forward, but the priority is, we get to grow our business. The market that we see ahead for natural gas demand is tremendous, and that's what we expect to do with most of our cash.

Appreciate that color. Then maybe my second question, just circling back to margins. Even without the tax benefit, you topped 70%. My math on midpoint of guidance implies 71.5% for 4Q. Maybe just a little color about some of the things that are helping drive this outside of just pricing gains and sustainability and upside. We've had this discussion, I think, off and on every quarter because you keep having better and better margins, but just curious the latest state of the union on margin opportunity.

The first comment I want to address is that this business, the base business, absolutely outperformed without the tax benefit. We saw that in the roughly 70.4% gross margin that we delivered, which was delivered over a combination of continuing pricing prerogative as well as excellent cost management by our teams throughout the organization and especially in the field. That outperformance that you cited is absolutely independent of the tax benefit that we got to claim back, which is a cash tax benefit.

Now on the substance of your question, One of the biggest drivers beyond pricing that we have in our operation today is we have been investing in a very disciplined way over the years into technology, the combination of telemetry sensors on the edge on our equipment, a big data engine that gets to sort through the data and help us prioritize our customer service so that we can maintain better run-time for our customers for the benefit of our customers as priority one, but also we drive a lot more efficiency in how we are touching the units.

The units are telling us more and giving us more information. Our mechanics are able to dispatch in a more efficient way, well-equipped when they arrive on location and it just creates a much more cost-effective approach to managing the operation. We've gotten the benefit of those investments in our numbers today, and we expect to continue to drive improvement in those numbers in the future based on those investments in technology.

Our next question comes from Doug Irwin from Citi.

I wanted to maybe start on the demand side, and I know you kind of touched on it in your prepared remarks already. We've seen an uptick in LNG project FIDs and data center announcements over the past couple of months. These are obviously drivers you've been talking about for a long time now. Just curious if some of that recent activity has maybe translated into an acceleration in some of the discussions you're having with customers on your end?

Then just generally, how that momentum might impact the way you're thinking about your multiyear growth outlook and especially kind of where and what basins that growth might be coming from moving forward?

Sure. Thank you, Doug. Look, what I said in my prepared remarks, I can expand on just a little bit, the point the market is giving us today is that the world is short of power, and that is driving robust demand for LNG. That's a global phenomenon. We like to say at Archrock, we power a cleaner America, and now with so much of our natural gas going into the form of LNG -- exports of LNG, we know we're also participating in powering a cleaner world, and we're very proud of that. That LNG demand is spiking, and we're seeing just a tremendous amount of demand generated there.

By the way, we're also seeing growth in -- I think we had peak exports to Mexico in the quarter as well, so it's not just LNG. We're also seeing pipeline gas going to Mexico. Then on the AI data centers, what's interesting about the wide variation in forecast is that the forecast ranges from a low of 3 Bcf a day to 2030, which I think most people think will blow through, up to 12 Bcf a day of incremental demand through 2030 and then at least that much again beyond 2030.

What we're seeing today is an acceleration in pipes, LNG facilities, FIDs, as well as data centers. What we're also experiencing is the buckling of the pressure of we've underinvested in infrastructure. We've underinvested in infrastructure in pipes, in power, and that really has to catch up. The pressure we're seeing on our business is a really excellent immediate interim and long-term demand for our units. That's translating to be concrete now into our CapEx guidance of a minimum of $250 million for 2026, which is consistent with our levels for 2025, but we see that we have a lot more confidence in the multiyear growth scenario ahead, deploying that level of CapEx to help support this expanded infrastructure requirement for power and for LNG exports.

Then maybe for a follow-up, I guess you've talked a few calls in a row now about units staying on location longer-and-longer than they did even just a few years ago. Just curious if you've seen this translate into increased customer demand for longer duration contracts, even if it's maybe just a shift towards the higher end of your typical 3- to 5-year contract range that you talk about.

Then just curious if you can maybe comment on how you're thinking about the right mix of month-to-month versus long-term contracted capacity moving forward.

The good news is, as we discussed, that our units are staying on location now greater than 6 years, which is a few things -- a few aspects that are important about that. One is that it's a market improvement over the past. This really reflects Archrock's focus and shift to large horsepower installations and the midstream infrastructure position that this business now occupies today, which means that we're going to stay on location longer. We're going to have tremendous stability in those operations as we become an integral part of our customers' operations and capital stack. That's the benefit of the investments we've made into large horsepower over time.

The contract terms remain in the 3- to 5-year range, but yes, because it's predominantly large horsepower, these are large capital investments, we have seen it move to the higher end of the 5 years on entry into these contracts, but we have not either seen and we have not tried to drive a shift in those contract terms.

The important point about the position we have with our major customers is that it's not just about those contract terms on the individual location contracts. It's also that with our largest customers, we have a strategic position and a master services agreement, which builds a longer-term relationship. It gives us the confidence given how critical we are in our customers' operations today that our units stay on location as long as they are operationally required independent of contract term, so it's that time on location. It's the fact that it costs a lot of money that the customer has to bear to switch out a unit that is giving us that longer live application on location and generating much more stability over time.

Our next question comes from Selman Akyol from Stifel.

This is Tim on for Selman. Congrats on the quarter. Just wanted to get an update on how lead times are trending. Just wondering if there's any update to that.

Yes. The gating item for lead times remains Caterpillar engines predominantly for our gasifed engines. Those are in the 60-week lead times now we order a new unit from Caterpillar. There are some units available in the market that we can get sooner just because with all this pressure right now for growth, people are ordering equipment, the packagers are maintaining a bit of equipment available. That will get sucked up pretty quickly though or used up pretty quickly. There' the lead times are 60 weeks with a little bit of opportunity in the market to grab engines from others if we needed to.

Then just my follow-up. Curious on how some of the customers are maybe shifting behavior in a lower crude environment. Are you seeing any more outsourced opportunity? Or is there any changes to the AMS business? Are they looking to defer some of those costs? Just curious on real-time changes in customer behavior.

Sure. Other than the seasonality of order activity, what I mean by that is that customers are in the -- right now are in the budget preparation time for their 2026 business plans. I think we are now in the phase where we're working with our customers on their new equipment needs, on pricing discussions that are starting to occur. It's at this time of the year and also candidly, we have the holidays this time of the year where we see a little bit of slowdown as people are gathering their plans together.

Aside from that, we've seen no major shifts in either the allocation of capital by the customers using an outsourced compression provider like us or in-sourcing their own capital or their own compression equipment. We see no major shift in AMS activity. That still remains robust. The industry is so highly utilized with us at 96%, our competition at high levels of utilization, our customers' fleets at high levels of utilization, we're seeing activity in both contract ops and AMS at high levels to make sure we're keeping the gas moving and keeping the equipment serviced. We've not seen a change in that at a macro level.

Our next question comes from Eli Jossen from JPMorgan.

I wanted to touch on the extended time on location you're seeing from your customers and you talked about it in your opening remarks. Obviously, that reflects really strong utilization and demand from those customers, but can you talk a little bit about how it impacts recontracting? Obviously, we're seeing the dollar per horsepower per month broadly move up into the right, but just how should we think about overall recontracting discussions with those customers?

Sure. I mean I think there are 2 components to the recontracting question in my head. The first is recontracting that unit so that it stays on location longer. I'm going to point out that even with the -- greater than 6 years' time that we're achieving, that includes with a mix of horsepower that's smaller. As we continue to add more large horsepower, my expectation is -- my belief is that we're going to see that time on location continue to grow and expand.

The second component to recontracting, I think, which may be at the heart of your question is really what happens to pricing and what's the opportunity to drive pricing going forward. On the good news front, the way we've structured our contracts, the vast bulk of our large strategic accounts include pricing mechanisms built into the agreement, so that either we reprice on an index or we have a repricing opener. Then with our nonstrategic accounts, we have the ability when they roll off a contract to redo pricing.

On a percentage basis, as in prior years, it remains fairly consistent because of the way we structured the business that we get to reprice annually, 60% to 65% of our contracts are open for repricing, either through a negotiation built into the contract, an index built into the contract or as they roll off their primary term. We're quite optimistic that in this market that at the high levels of utilization we're achieving that we will have the ability to continue to drive pricing forward and certainly in 2026.

Eli, this is Doug. I may make another point that we really haven't talked much about, if at all, on this call, and that is the level of stop activity or units getting returned. We really are seeing that at historically low levels. That's a function of a lot of different things, but most notably, gas volumes are growing in the U.S., and there's just a real lack of available equipment.

Archrock at 96% utilization, the industry at a very similar level, I think our customers have started to understand there's a real need to plan in advance for units, and so part of the contracting is that if we don't have units that are stopping on location, we don't have those available to rebook. All of that, as Brad talked about, leads to an opportunity to continue to reprice. I think, again, if you think about that utilization for the industry as the best sign of just, frankly, how healthy this business is, and we expect it to continue to be.

Then maybe just in that contracting equation, flipping to the cost side, I just wanted to get a sense how input costs are trending. Obviously, the OEMs like Caterpillar, we can expect there's some inflation in those businesses. I know you guys are obviously able to pass along a lot of those costs, and that's what we're seeing -- part of what we're seeing in the dollars per horsepower per month equation, but just if you can frame the way that costs are trending in the business, maybe in the Permian versus elsewhere and what that does to margins in the longer term?

The costs overall are trending at what I would say is a normalized level of inflation, and that's in the low single digits. That's what we're seeing out of the OEMs, both for new equipment and as well as for parts and materials going forward. Lube oil pricing, as you would expect, has actually moderated given the lower crude oil pricing today.

Finally, the only one that's the exception of that is labor costs, especially in the Permian, still run in the mid-single digits. There's more pressure there just because labor is so short, so tight in the -- overall in the energy industry and certainly in the Permian, so that's the way costs are running. It's a very manageable level right now. It feels like a very comfortable level to build in and budget for, I think, for our customers, but also for us. You're right, we do expect to have the ability to continue to pass on and share cost increases through rate increases over time.

Our next question comes from Gabe Moreen from Mizuho.

I just want to circle back on capital return a little bit. Any thoughts -- you've been really good opportunistically here, I think, at share buybacks. Any thoughts to making it, I guess, more programmatic and on a related basis, I'm just curious, Doug, if there's any lower bound leverage level that you just don't want to go below that floor? Or were you just thinking, hey, we're underlevered here and our balance sheet could take more on at these levels?

Yes. Look, fair question, Gabe. I think Brad outlined, we really believe we somewhat uniquely even in the compression space are positioned to be able to do all of the above. That being deploy capital to our customers, grow our dividend and ask our Board for an incremental $100 million share authorization. I think we've been pretty consistent repurchasing shares quarterly. I don't certainly want to share exact specifics of where and at what target price.

Look, as you point out, our leverage is trending towards and headed to even below our target range, which means that not to say we won't end up below that for some period of time, but we have both the luxury and the desire to do all of the above. I think you should expect to see us continue to do that.

Maybe, Brad, if I can ask an open-ended question. You talked about the arms race around power gen. It seems like not a week goes by where there's not some sort of creative solutions to get near-term power to procure to those who demand it. Just curious if Archrock is looking at, in some way, shape or form, participating more directly in that power procurement. Again, open-ended question, but I'll leave it at that.

What we're excited about for the future is the amount of power that is going to be required is going to require the production and the increased production growth in natural gas. That is where we are focused in deploying compression to support natural gas to help support the power growth.

The unique position of the industry today is that only natural gas can respond as quickly as is needed to deliver on an intermediate and I think also a long-term basis, but on an intermediate basis, the amount of feedstock required for the dense sharp, incredibly high demand growth for power that we see ahead. Our primary goal right now is to deploy our capital to grow our compression infrastructure business to support that growth. We're excited about that investment opportunity, first and foremost.

Our next question comes from Michael Blum from Wells Fargo.

Just wanted to ask about the $250 million CapEx for 2026. You obviously have very positive comments on the call, both this quarter and the outlook. Just curious if that's just conservatism on your part? Or are there other factors at play that we should be thinking about?

Thanks for the question. It's interesting in the past, I never would have thought a $250 million growth CapEx budget would be positioned as conservative. We consider it to be very consistent with the levels of CapEx that we've invested in the business at the high end of the CapEx levels we've invested in the business in prior years.

I'll point out that even though it feels like a step back from the $350 million midpoint that we've guided to in 2025, approximately $70 million of that CapEx budget and CapEx spend in 2025 is directly attributable to CapEx budgets that we inherited or CapEx expenditures that we inherited as part of the 2 acquisitions we made. When you think about the delta on our overall fleet compared to that, it feels much more consistent on a year-over-year basis and pointing out that we're getting these huge cash flow benefits in from the 2 acquisitions we made without those requiring the same levels of CapEx that position this business before the acquisition.

We love that actual capital efficiency from the acquisitions. What you're seeing on a year-over-year basis is probably more consistency than may have been apparent in the CapEx budgets, which give us a tremendous amount of growth with our core customers and in the marketplace. We're excited about that level. Again, we pegged that as a minimum for next year. As I also pointed out, our customers -- some of our customers remain absolutely in budget territory right now, so we'll see how the rest of that shakes out.

Our next question comes from Nataniel Pendleton from Texas Capital.

Congrats on the strong quarter. A lot of commentary has understandably been on the strong outlook for natural gas demand and moving that gas to end markets, but with a large amount of horsepower still dedicated to centralized gas lift, can you speak to how those markets are evolving?

Sure. With, I think, a slowdown in oil drilling and a flattening of oil production possible right now, we're absolutely seeing a bit of a flattening in order activity attributed directly to gas lift, and we're seeing much more of the demand right now on a mix basis toward gathering. I'll point out that the great news is that when these units go out for to support gas lift and production, they remain out.

As Doug pointed out, we said in our prepared remarks and Doug highlighted just a minute ago, our stock activity is at absolutely historical low levels. It's a reflection of the strength of this business model that we are leveraged to production, oil for gas lift and natural gas for transportation. Both of those are absolutely at high levels of utilization and incrementally growing going forward.

Right now, as you would expect, we are seeing a bit of a pause in the oil-directed gas lift order activity in the mix. It's still there, but it's definitely at a lower level in the mix. We remain, however, optimistic that gas lift has become an absolutely critical component in the oil production system and that, that demand will come back as the market recovers.

Can you provide more color about the MaCH4 natural gas liquid recovery amendment fee mentioned in the release and the progression of a few of those new venture investments?

Sure. On the MaCH4, particularly, the joint venture was structured where there was a minimum commitments to purchase equipment, and we wanted to change the timing of our commitments, so we basically just bought that out. That was the main impetus behind the amendment, so we pay a charge upfront to buy out the commitment and change the time frame for when those commitments will take place.

On the MaCH4 itself, the good news is that we had a very successful pilot, and we're in the early phases of getting the first units out to see if we can build enough of a commercial market. On the very exciting side, customer enthusiasm for the product is great. I'll just remind everybody what this product does, is it takes a sliver of the natural gas that we would otherwise that we're putting through our gas drive engines, and it takes out the heavy liquids, preserving the quality of the heavier liquids value to be captured downstream and provides residue quality gas for that compressor, which really helps with compression operations. It also reduces the VOCs coming off that unit. It's really an attractive product. We're in those early phases right now, and we've received great support from the customers.

On our other new venture investments, I've been clear in the past, what we are really focused on doing is changing the way we conduct business as an industry. keep the methane in the pipe and eventually put the CO2 back in the ground and our investments in Ecotec, which primarily is our handheld devices that allow us to detect methane and see the leaks to support [indiscernible] repair. That business continues to grow and is doing well. We talked about the MaCH4.

Then the CARBON HAWK, which is a product that captures gas otherwise discharged the atmosphere to the flare in normal operations. We're absolutely seeing a bit of a slowdown in that -- in market acceptance on that product just based upon the regulatory environment changes since we've had a change in administration, but we still remain optimistic that this is a very valuable product for the industry to keep the methane in the pipe instead of venting it to the atmosphere or sending it to the flare. Neither of the Ecotec or that one do we expect to be needle movers for us financially. We've built nothing into the forecast for that, but we do believe these products are incredibly valuable and useful to the industry to conduct the most sustainable oil and gas operations we can for the future.

Our next question comes from Josh Jayne from Daniel Energy Partners.

First one for me. You've talked about the $250 million of CapEx for next year, and then also items like engines having 60-week lead times. I'm just curious, do you see a scenario in the next few years where the market maybe supports you spending, for example, let's pick a round number, $400 million, $500 million in growth CapEx, all supported by contracts? Or is something like that level not really feasible because of supply chain constraints. Maybe you could just talk about that a little bit more.

That level of CapEx is foreseeable. I do believe that while there are constraints out there on equipment lead times and deliveries, I'm going to point out, we were at $350 million last year, inclusive of the CapEx budgets that we took over with the acquisitions of NGCSI and TOPS, and so the gap to get from 350 to 400 is completely foreseeable for the future for this industry. I do believe that while there are supply constraints, that level of CapEx could be achieved even within the existing supply chain.

Then a shorter-term question. You highlighted the full quarter impact of the NGCSI acquisition that hurting some of your metrics in Q3. Could you just speak to when you expect the pricing of that fleet to essentially mirror the rest of your fleet? How long ultimately do you think that takes?

What we're optimistic about is that we knew the -- obviously, we knew the pricing of this when we acquired these units, and they still remain at excellent gross margins, and we will work with that customer base to drive those changes over time, but now it's a part of our fleet. Now the separation has basically disappeared, and we will treat those operations like we would any other units in our installed base to drive pricing up over time.

Then finally, I'm going to point out that with the NGCSI acquisition, in particular, we acquired units that were predominantly a majority of which were with one of our existing key customers with whom we have a great relationship. We expect to do that over time, but candidly, the separation of those units has now disappeared, and we'll see that -- we can see it in the quarter when it impacted us, but it's going to be hard to track that going forward other than it gives us another chunk of units that will allow us to raise price and improve profitability over time.

Our next question comes from Steve Ferazani from Sidoti.

I just wanted to ask now that you've successfully integrated NGCSI after the larger TOPS deal. Now that you've flexed those muscles, do you see other opportunities out there? Does it get easier? Or does it really always come down to whether the quality of the compression meets your standards?

Your latter point is correct. It really is driven by whether or not the fleet position and the potential of the acquired fleet fits our strategic position of focusing on large horsepower with the customer base that we've built and the geographic locations that we operate in and are excited about growing in, as well as the quality of the fleet age and the configuration. Those are the primary factors, starting with the strategic and then moving to the operational. That drives our analysis for sure.

The other 2 components though that are interesting is that, the right opportunity has to be in the market at the time, and we have to have a willing seller and in a transaction that makes pricing sense. On the good news front, there remain other compression companies out there that are operating excellent fleets that are operating really well. They're building their own customer base.

What you're seeing in our business, which is absolutely supported by this market demand, other people have noticed too that this compression business is an attractive business and can drive great returns. I believe that could and should yield additional opportunities in the future that look something like either TOPS or NGCSI or others.

Is there anything complementary services or equipment that could fit as well? Or will you remain compression?

We have a ton of investment opportunities and growth ahead in our compression space. We're excited about investing there right now. That's where we expect to deploy both our capital and keep our focus in the strategically as we look out into the market today.

Our last question today will come from Elvira Scotto from RBC Capital Markets.

Can you talk about what you're seeing in basins other than the Permian? If you've seen any growth as a percentage of your fleet going to some of these other basins? How you see that evolving in the medium and longer term, especially as we see an increase in LNG export capacity? Then does that change any pricing or cost or economic dynamics?

Thanks, Elvira. 60% of our growth is still tied to the Permian. We think 60% of our growth going forward is likely to remain tied to the Permian, and it could go actually higher. Remember, that's really driven by just the breakeven costs and the lower cost of the producers to move oil and gas in the Permian, so that's number one.

We have seen bookings and incremental growth in other basins, including the Haynesville, the Rockies and in the Northeast in the Marcellus. Those basins are absolutely being reactivated. We haven't seen reactivation of dry gas basins, significant reactivation in dry gas basins beyond those, but in those basins, we have seen incremental growth, but the Permian remains the inexhaustible and focus for the energy industry right now.

As far as will that change some of the dynamics in the industry? Pricing, hard to see that changing even if we see equipment and infrastructure moving into other plays, given the high levels of utilization, those plays have to compete on a CapEx allocation level to take that capital away from the Permian and put it in other plays. I do believe that the returns that we're going to achieve in other plays have to be comparable to what we're achieving -- the industry is achieving in the Permian to attract CapEx away.

Finally, I think that to support LNG expansion, we do think that Eagle Ford, not dry gas, but Eagle Ford Shell will also see a growth resurgence and that the LNG export should really be mostly supported by the Haynesville, Permian and Eagle Ford going forward, but the Northeast is going to require for data center demand and power demand, in particular, some growth ahead as well, and that's going to require some compression. That's the way we see how this is shaking out in other plays and how some of the dynamics could be impacted.

I think in your prepared remarks, you noted that you'd finance the CapEx through internally generated cash flow and some potential asset sales. If you look across your portfolio, what is the potential for asset sales?

Thank you for the question. I think this is an area that's underappreciated in the dynamic of our business and how we run it today. When I look over the past 5 years, our asset sales on -- for 5 years have averaged more than $95 million per year. If I look back 5 years before that, our asset sales averaged still north of $40 million a year.

In other words, when you have a fleet business the way, like we have, to keep it fresh and competitive and moving both through customers, through basins, through generations of equipment, having a prudent approach to asset sales is really critical to the business. I think you can snap the chalk line by saying in the low end is somewhere in that $40 million range and the higher end is more in the $90 million range with some variation off of both of those, but that's a way of thinking about how we attend to keeping our fleet as young and as competitive as we can keep it.

If I can sneak in one more. You mentioned that lead times for the Cat engines are about 60 weeks. How does that compare to maybe where it was 3 months ago or 6 months ago?

I'm not sure I can keep track of all those time frames, Elvira, but 6 months ago, I think we were more in the 42-week time frame, and we've seen that increase out. That's the best collection I can offer on those time frames.

There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks.

Great. Thank you, everyone, for participating in our Q3 2025 earnings call. I look forward to updating you on our progress next quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.