Flowco Holdings' Q3 2025: Contradictions Emerge on Natural Gas Systems Optimization, Rental Revenue Composition and Growth, Shareholder Capital Returns, and Archrock Integration and Customer Response

Business Commentary:

* Strong Financial Performance and Margin Expansion: - Flowco Holdings reported adjusted EBITDA of $76.8 million for Q3, exceeding expectations, with a 382 basis point expansion in EBITDA margin quarter over quarter. - This performance was driven by a shift toward the high margin rental portfolio, strong demand for high pressure gas lift and vapor recovery systems, and the successful integration of acquired assets.

• Product Sales and Rental Revenue Dynamics:
• Third-quarter revenue decreased 8% sequentially, primarily due to lower product sales activity, while rental revenue increased to $107 million, up from $102 million in the previous quarter.

• The decline in product sales was partly offset by higher rental revenue from the existing fleet and the recently acquired assets, reflecting a strategic focus on rental growth amidst a challenging macro environment.

• Asset Acquisition and Integration:

• Flowco acquired 155 high pressure gas lift and vapor recovery systems in August, which are now fully integrated and performing in line with expectations.
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• The acquisition enabled Flowco to establish new relationships with blue-chip customers and strengthen service to existing accounts, enhancing profitability and market positioning.

• Investment in Surface Equipment and Capital Allocation:

• Flowco deployed $39.7 million of organic capital in Q3, with a focus on expanding its surface equipment and vapor recovery rental fleet to support sustained customer demand.
• The company's disciplined capital allocation strategy aligns with its growth strategy, prioritizing investments that enhance growth while meeting return thresholds.

• Outlook and Market Conditions:

• Flowco expects adjusted EBITDA of $76 million-$80 million for Q4, reflecting continued growth in its rental fleets and a rebound in sales across natural gas systems and vapor recovery systems.
• Despite macro uncertainty and commodity price volatility, Flowco remains positioned to advance its strategy through technology-enabled efficiency and deeper customer collaboration, anticipating strong results in 2026.
  

Contradiction Point 1

Optimization of Natural Gas Systems

It involves the approach and progress of optimizing the natural gas systems business unit, impacting operational efficiency and costs.

Can you update us on the progress optimizing the natural gas systems business unit, given the top line decline and 700 basis point margin expansion, and how we should view it moving forward as optimization continues? - Derek (Piper Sandler)

2025Q3: Our natural gas systems business unit is our supply chain, primarily focused on building vapor recovery systems and conventional and high pressure gas flow systems for our rental fleets. Early this year, we optimized this part of our supply chain by consolidating one of our facilities into our center of excellence in El Reno, Oklahoma. We expect to see additional capacity evaluations as we plan for 2026, and we are happy to have completed this process. - Joe Bob Edwards(CEO)

What is the 2025 margin outlook? - Arun Jayaram (JPMorgan)

2024Q4: The facilities we've set up to produce those tools are in production now, and so we'll start to see some of that revenue coming in Q1 and then will build through the year. - Jon Byers(CFO)

Contradiction Point 2

Rental Revenue Composition and Growth

It involves the composition and growth expectations of rental revenue, which affects the company's financial performance and product strategy.

Will rental revenue remain near 60% as we approach 2026, or will continued focus on HPGL and VRUs drive it above 60% next year? - Derek Podhaizer(Piper Sandler)

2025Q3: The shift from 50-60% this year is due to capital deployment and growth capital expenditures. We expect capital deployment to remain roughly in line with 2025 levels, but the mix may shift based on demand profiles. The rental revenue increase is primarily due to the acquired assets, which will provide a full quarter contribution in Q4. - John Byers(CFO)

Can you break down the 5% growth in rentals and discuss future trends? - Derek Podhaizer(Piper Sandler)

2025Q2: The rental growth trajectory will continue throughout the year as we expect demand and utilization to remain strong. - Joseph Edwards(CEO)

Contradiction Point 3

Capital Return to Shareholders

It involves the company's strategy and timing for returning capital to shareholders, which impacts investor expectations and financial planning.

Can you provide guidance on when shareholder returns will continue and if there are additional buyback plans? - Derek (Piper Sandler)

2025Q3: We will continue to be opportunistic in returning capital to shareholders, leveraging our current share repurchase authorization and only when we feel undervalued relative to the opportunity set within our existing business and potential M&A. We are not providing specific guidance on future buybacks but will continue to evaluate the opportunity set daily. - Joe Bob Edwards(CEO)

What is your 2025 free cash flow outlook? Will a 2025 dividend be announced? - Philip Jungwirth (BMO Capital Markets)

2024Q4: We are capital disciplined. Our goal is to return significant capital to shareholders upon achieving a certain size and value on a return base. And as we continue to grow and our return base grows, we will continue our return of capital, and we will evaluate it -- we will evaluate when we feel the opportunity set within the existing business is fully valued and we feel like we have asset quality and size that allows us to return capital. - Jon Byers(CFO)

Contradiction Point 4

Customer Response and Integration of Archrock Assets

It involves the customer response and integration of the Archrock assets, which impacts market penetration and growth opportunities for Flowco.

What customer feedback has been received regarding the Flowco team's work, and is there cross-selling potential or increased HPGL penetration among new blue-chip customers? - Philip Jungwirth(BMO Capital Markets)

2025Q3: The integration of the Archrock assets has been seamless, with customers expressing satisfaction in Flowco's leadership in production optimization. We have inherited accounts that were previously difficult to penetrate with HPGL, but we are optimistic about the potential for broader commercial discussions and increased penetration as customer wells progress. - Joe Bob Edwards(CEO)

How is Permian spending affecting Flowco's customers and market share? - Phillip Jungwirth(BMO Capital Markets)

2025Q2: Our expectation is that we will have modest rental growth in the back half of the year, driven by the growth in the Permian and Mid-Continent, and new business that we expect to come on in the second half of this year. - Joseph Edwards(CEO)