Kodiak Gas Services: Strong Margins, But Risks Remain Amidst Largest Shareholder Ownership

Kodiak Gas Services is a provider of contract natural gas compression services, primarily focused on the Permian basin. The company's business model is centered around must-have services, which helps maintain strong margins. However, risks continue from the largest shareholder, making it essential for investors to be cautious.

Kodiak Gas Services (KGS) is a provider of contract natural gas compression services, primarily focused on the Permian basin. The company's business model is centered around must-have services, which helps maintain strong margins. However, risks continue from the largest shareholder, making it essential for investors to be cautious.

Despite the volatility in crude oil markets, growth in Permian-based natural gas production has remained robust. According to data by YCharts, natural gas production has steadily climbed, now producing 50% more gas than early 2020 [1]. This growth is driven by increasing gas-to-oil ratios, which have grown by 20% since 2019. As a result, more compression will be needed to sustain current levels of production, let alone growth [2].

The company's stock offers a compelling yield and reasonable valuation, making it an attractive option for investors seeking income. However, the stock carries risk through motivations from the company's largest shareholder, EQT Corp. (EQT), to unload its remaining 35% ownership stake. EQT has been steadily liquidating its position over the last 18 months, placing significant downward pressure on the stock as the public float expands [3].

KGS is performing well and improving margins consistently. It outpaces its main competitor, USA Compression (USAC), in both gross margin and monthly revenue per operating horsepower. However, the company's higher dividend expense limits its capital available for growth CAPEX [4].

In conclusion, Kodiak Gas Services offers strong margins and a compelling yield. However, the persistent risks from EQT's ownership stake make it challenging to argue that KGS is a better place for investor capital than its competitor, Archrock (AROC), in the compression space. For now, KGS is rated as a HOLD, but the rating could upgrade to a BUY if EQT stopped selling or its ownership stake became meaningfully smaller.

References:
[1] https://seekingalpha.com/article/4802523-kodiak-gas-services-strong-margins-but-risks-continue-from-largest-shareholder
[2] https://seekingalpha.com/article/4802523-kodiak-gas-services-strong-margins-but-risks-continue-from-largest-shareholder
[3] https://seekingalpha.com/article/4802523-kodiak-gas-services-strong-margins-but-risks-continue-from-largest-shareholder
[4] https://seekingalpha.com/article/4802523-kodiak-gas-services-strong-margins-but-risks-continue-from-largest-shareholder