Archrock, Inc. (AROC) Earnings

Management highlights

- Core Business Performance Highlights: • Delivered Q2 2026 adjusted EPS of 38 cents, adjusted EBITDA of $213 million, and adjusted free cash flow of $67 million. Returned $39 million to shareholders via dividends, ending the quarter with a 2.6x leverage ratio and 3.1x dividend coverage, both well within target ranges. • Secured a large 8-year base term (with 2-year extension option) long-term contract with an existing strategic customer covering 665,000 horsepower for midstream applications, reflecting strong customer demand and long-term partnership value. • Credit rating agencies reaffirmed ArchRock's ratings and revised outlooks to positive, reflecting consistent cash generation and strong financial performance. Completed redemption of $800 million 2028 senior notes, pushing the next debt maturity out to 2032 and ending the quarter with $631 million in available liquidity. - Long-Term Strategic Advantages: • Natural gas demand is supported by strong secular growth drivers: rising LNG exports, expanding industrial activity, growing power generation demand (including for AI data centers), and increasing associated gas production in the Permian basin. • ArchRock has a scaled, high-quality fleet, strong operating discipline, and deep customer relationships to capture growing compression demand profitably. CAT engine lead times remain extended at ~195 weeks, giving established, well-capitalized players a significant competitive advantage. • A low-leverage balance sheet with strong free cash flow generation provides flexibility to pursue growth, return capital to shareholders, and pursue inorganic opportunities. - Long-Term Capital Allocation Framework (2027-2030): • Prioritize high-return organic growth: expects to add ~1 million total new horsepower to meet customer demand, with cumulative growth capital expenditures of $1.4 billion to $1.6 billion over the four-year period, focused on large horsepower and electric motor drive compression. • Return 25% to 35% of operating cash flow to shareholders via continued dividend growth and opportunistic share repurchases. The board approved the fifth dividend increase in two years, raising the quarterly dividend to 23 cents per share (10% YoY increase), with $113 million remaining in the share repurchase authorization as of quarter end. • Maintain leverage below the 3.0x to 3.5x long-term target range, generating excess free cash flow after growth investment and shareholder returns to pursue future inorganic growth opportunities.

Guidance

- Full-year 2026 adjusted EBITDA guidance range was narrowed to $865 million to $885 million, down from the prior range of $865 million to $915 million. The revision reflects external and timing-related factors (near-term lube oil cost pressures, higher make-ready costs, AMS customer deferrals, and higher long-term incentive compensation driven by ArchRock's rising stock price), not a change in underlying demand fundamentals. - Full-year 2026 total capital expenditure guidance is maintained at $400 million to $445 million, with growth capex held at $250 million to $275 million, maintenance capex expected at $125 million to $135 million, and other capex expected at $25 million to $35 million. - Contract operations adjusted gross margin is expected to remain around 70% in H2 2026, despite near-term cost pressures, reflecting the segment's strong underlying profitability.

Segment performance

ArchRock operates two core business segments, with the following Q2 2026 performance: 1. Contract Operations: Revenue was $329 million, a 3% increase year-over-year (YoY). This growth came from higher rates, a full additional month of contribution from the NGCS acquisition, and new horsepower additions, partially offset by sales of non-strategic horsepower to high-grade the fleet. This segment contributed 88.7% of total Q2 2026 revenue. Adjusted gross margin improved to 71% from 70% in the year-ago quarter, driven by pricing strength and disciplined cost management. Fleet utilization hit 94.4% at quarter end, with operating horsepower of 4.5 million, down from 4.7 million YoY due to the sale of ~165,000 non-strategic horsepower. 2. Aftermarket Services (AMS): Revenue was $42 million, down from $65 million YoY. This segment contributed 11.3% of total Q2 2026 revenue. The decline stemmed from customer deferrals of major maintenance (to keep equipment operating amid high crude prices) and an unusually strong year-ago quarter that included non-recurring engine overhaul sales. Despite lower revenue, adjusted gross margin improved to 24% from 23% YoY, as the segment focused on higher-quality, higher-margin work.

Risks & headwinds

- Near-term cost headwinds from elevated lube oil prices driven by the Iran conflict and higher make-ready costs to reactivate idle equipment for customer demand are expected to impact H2 2026 profitability. - Aftermarket Services demand is currently soft due to customer deferrals of major maintenance amid high crude prices, which has reduced near-term segment revenue. - Supply chain tightness remains a market-wide constraint: CAT engine lead times are extended to ~195 weeks, and packager floor space is tight, creating timing challenges for new equipment delivery. - Industry-wide compression equipment supply is tight, which may limit the speed at which ArchRock can add capacity to meet rising demand.

Analyst Q&A

• Q: Why did ArchRock choose to announce its 2027-2030 capital expenditure plan now, and what is driving the planned annual increase in capital spending? /

  A: The timing aligns with past practice of releasing preliminary multi-year guidance as prior year capital demand solidifies. Extended CAT lead times require the firm to book equipment far in advance to meet expected future demand. Management sees a sharp upcoming increase in natural gas and compression demand driven by new LNG capacity coming online, Permian pipeline takeaway expansion, and rising power demand from data centers, so sharing the plan now aligns investor expectations with this growth outlook.

• Q: What are new CFO Mohit Singh's key near-term strategic priorities at ArchRock? /

  A: Singh's top priority is a seamless transition into the role, as the existing finance team is already high-performing and executing well. The core focus remains on leveraging strong secular demand growth from LNG and AI-driven power demand, building on ArchRock's successful history of fleet high-grading and standardization, and executing to meet customer demand while delivering strong financial outcomes for shareholders.

• Q: What does the large new 665,000 horsepower long-term contract signal about customer demand and contract tenors going forward? /

  A: The contract reflects the long-standing, valuable strategic partnership ArchRock has with the customer. Large horsepower units typically remain on-location for an average of 8 years, so longer tenors align with actual operating patterns. Management expects more long-term contracts going forward, as customers want to secure and retain access to compression capacity to support their long-term growth plans in the current tight supply environment.

• Q: How does the planned 2027-2030 capital expenditure plan impact ArchRock's existing capital allocation framework and shareholder return commitments? /

  A: Management does not expect the higher growth investment to require a shift to the balanced capital allocation approach. The framework remains all-of-the-above: the firm will continue to return 25% to 35% of operating cash flow to shareholders via dividends and buybacks, make the planned growth investments, and still generate excess free cash flow for additional strategic opportunities. Releasing the long-term guidance signals strong management confidence in the demand and margin outlook that supports this balanced approach.