Business Overview: Archrock's Enduring Legacy

Archrock Inc. (AROC) is a leading provider of natural gas compression services in the United States, playing a vital role in supporting the country's surging energy production. With a strong focus on large-horsepower compression equipment, Archrock has established itself as a trusted partner for midstream and upstream operators seeking reliable and efficient compression solutions.

Archrock's origins can be traced back to February 2007, when the company was incorporated as a wholly-owned subsidiary of Universal Compression Holdings, Inc. In August 2007, Universal Compression Holdings, Inc. and Hanover Compressor Company merged into Archrock's wholly owned subsidiaries, with Archrock becoming the parent entity. This merger marked a significant milestone in the company's history, combining the strengths and expertise of two industry leaders.

In November 2015, Archrock underwent a major transformation, completing the spinoff of its international contract operations, international aftermarket services, and global fabrication business into a standalone public company operating as Exterran Corporation. Following this spinoff, the company was renamed to its current name, Archrock, Inc., solidifying its identity as a focused, domestic natural gas compression services provider.

Today, Archrock operates as an energy infrastructure company with a primary focus on midstream natural gas compression. The company has established itself as a premier provider of natural gas compression services to customers in the energy industry throughout the United States. Additionally, Archrock has become a leading supplier of aftermarket services to customers that own compression equipment in the U.S., further diversifying its revenue streams and strengthening its market position.

Throughout its history, Archrock has faced and overcome several key challenges. Operating in a highly competitive business environment with low barriers to entry, the company has had to continually innovate and improve its services to maintain its market share and financial performance. The cyclical and volatile nature of the oil and natural gas industry has also presented challenges, requiring Archrock to adapt to fluctuating demand for its products and services. Moreover, the company has had to navigate complex legal and regulatory requirements, including environmental regulations, which have the potential to increase costs and liabilities.

Despite these challenges, Archrock has achieved several important milestones that have contributed to its success. The company has built a large and stable customer base, consisting primarily of companies engaged in the oil and natural gas industry. This strong customer foundation has provided Archrock with a reliable revenue stream and opportunities for long-term growth. Furthermore, Archrock has established a diversified geographic footprint, operating in substantially all major natural gas and crude oil producing regions in the United States. This widespread presence has not only provided the company with flexibility in meeting customer needs but has also improved its operating expertise and business development opportunities.

Contract Operations: Delivering Reliable Compression Solutions

Archrock's Contract Operations segment is the backbone of its business, accounting for 85% of the company's total revenue in 2024. This segment encompasses the design, sourcing, installation, operation, servicing, repair, and maintenance of Archrock's owned fleet of natural gas compression equipment, which is primarily used to provide compression services to customers in the energy industry.

Archrock's compression fleet is largely standardized around major components and key suppliers, enabling the company to achieve operational efficiencies and maintain a high level of equipment availability. As of December 31, 2024, Archrock's operating fleet consisted of 4.23 million horsepower, with 96% utilization at the end of the year.

In 2024, the Contract Operations segment generated revenue of $980.4 million, with an adjusted gross margin of $657.35 million, representing 67% of its revenue. The compression equipment used in this segment is primarily large horsepower, with 64% of the operating fleet being used in gathering and processing applications and 36% used in gas lift applications.

Aftermarket Services: Leveraging Expertise for Customer Support

Archrock's Aftermarket Services segment provides a full range of services to support the compression needs of customers who own their own compression equipment. These services include operations, maintenance, overhaul, and reconfiguration, as well as the sale of parts and components. This segment accounted for 15% of Archrock's total revenue in 2024.

The Aftermarket Services business benefits from Archrock's deep industry expertise and customer relationships, allowing the company to cross-sell its contract operations services and maintain a strong presence across the natural gas compression value chain. In 2024, this segment generated revenue of $177.19 million, with an adjusted gross margin of $41.74 million, representing 24% of its revenue.

Financial Strength and Operational Efficiency

Archrock's financial performance has been impressive, with the company reporting record results in 2024. For the full year, Archrock's revenue reached $1.16 billion, with net income of $172.23 million, a significant increase from $105.00 million in 2023. The company's adjusted EBITDA for 2024 reached $595.00 million, up from $426.91 million in the previous year, representing a more than 30% increase. Archrock also reported annual operating cash flow of $429.59 million and annual free cash flow of $70.56 million for 2024.

In the fourth quarter of 2024, Archrock's revenue was $326.41 million, with net income of $59.76 million. Year-over-year, Q4 2024 revenue increased compared to Q4 2023, although specific growth percentages were not provided.

The company's strong financial position is evidenced by its healthy balance sheet, with a net debt to adjusted EBITDA ratio of 3.3x as of December 31, 2024, down from 3.5x in Q4 2023. Archrock's debt-to-equity ratio stood at 0.009, with $4.42 million in cash and cash equivalents and an available credit line of $1.1 billion under its revolving credit facility. The company's current ratio was 1.24, and its quick ratio was 0.76 as of December 31, 2024.

Archrock's disciplined capital allocation strategy, which focuses on investing in high-return growth opportunities and maintaining a well-covered dividend, has contributed to its financial resilience. The company's capital-intensive nature is reflected in its 2024 capital expenditures, with growth capital expenditures of $250.9 million (including $69.4 million related to the TOPS Acquisition) and maintenance capital expenditures of $87.8 million.

Archrock's operational efficiency is another key strength, as the company continues to implement technology-driven initiatives to improve its field service operations, fleet management, and inventory management. These efforts have resulted in enhanced asset utilization, reduced maintenance costs, and improved customer service levels, further solidifying Archrock's competitive advantage.

Growth Opportunities and Strategic Initiatives

Archrock is well-positioned to capitalize on the robust demand for natural gas compression services in the United States. The company's strategic focus on large-horsepower compression equipment, particularly in the Permian Basin and other key growth regions, aligns with the industry's ongoing shift towards larger, more efficient compression units.

For 2025, Archrock has provided guidance that reflects its strong growth trajectory. The company expects adjusted EBITDA to range between $750 million and $790 million, representing a nearly 30% increase at the midpoint compared to 2024. Contract operations revenue is projected to increase by 24% at the midpoint compared to 2024, driven by horsepower growth, high utilization, and higher pricing. The contract operations adjusted gross margin percentage is expected to improve to 68% to 71%, up from 67% in 2024.

In the Aftermarket Services segment, Archrock anticipates revenue of $190 million to $210 million for 2025, with an adjusted gross margin percentage of 22% to 24%.

To support this growth, Archrock plans to invest between $470 million and $535 million in capital expenditures for 2025, including $330 million to $370 million in growth capital expenditures. This investment will primarily support over 200,000 horsepower in new additions, focusing on large horsepower midstream gas drive engines (80%) and electric motor drive for gas lift (20%).

Archrock's commitment to sustainability is another key focus area, as the company continues to expand its electric motor-driven compression capabilities to meet the growing demand for lower-emission solutions from its customers. This strategic initiative not only addresses environmental concerns but also enhances Archrock's operational efficiency and customer value proposition.

Risks and Challenges

While Archrock's outlook remains positive, the company is not without its risks and challenges. The natural gas compression industry is highly competitive, with low barriers to entry, which could lead to increased pricing pressure and market share competition. Additionally, Archrock's business is dependent on the overall health of the oil and gas industry, and any prolonged downturn in upstream or midstream activity could impact the company's financial performance.

Archrock also faces the risk of technological disruption, as the industry continues to evolve and customers demand more advanced, energy-efficient compression solutions. The company's ability to adapt and innovate will be crucial in maintaining its competitive edge.

Moreover, Archrock is subject to various regulatory and environmental compliance requirements, which could result in increased costs or operational disruptions if not properly managed.

Conclusion: Archrock's Pivotal Role in the Natural Gas Revolution

Archrock's robust financial performance, operational excellence, and strategic initiatives position the company as a key player in the ongoing natural gas revolution in the United States. With its comprehensive compression services, technological advancements, and unwavering commitment to sustainability, Archrock is poised to continue delivering value to its customers and shareholders alike.

The company's strong 2024 results, including record adjusted EPS and adjusted EBITDA, along with its positive outlook for 2025, demonstrate Archrock's ability to capitalize on favorable industry trends. These trends include significant natural gas resources, increased unconventional oil and natural gas production, decreasing natural reservoir pressures, rising gas-to-oil ratios for maturing wells, and expected increased natural gas demand in the U.S. from growth of liquefied natural gas exports, exports of natural gas via pipeline to Mexico, power generation, and industrial uses.

As Archrock continues to invest in its fleet, expand its capabilities, and optimize its operations, the company is well-positioned to meet the growing demand for natural gas compression services and drive sustainable growth in the years to come. With its strong market position, financial stability, and strategic focus, Archrock stands ready to power the industry's future and play a crucial role in the ongoing energy transition.