Nominally Hedged: Enerflex, NGS and Flowco Deep Dives
Devon Energy can call any compression vendor in the Permian and get a yes. They called the one with 563,000 horsepower.
Devon Energy can call any compression vendor in the Permian and get a yes. KGS has 4.5 million horsepower. Archrock has 4.8 million. USAC, post-J-W, has 4.4 million.
Devon chose NGS. NGS has 563,000.
The CEO was specific about what drove the expansion: “as they understood some of the capabilities of our units and some of the data that they would be able to get off of that, that was the primary driver.” That is the management narrative. There is an alternative explanation that fits the data at least as well: when two customers account for 59% of your revenue, you deliver exceptional service to those two customers because the alternative is going out of business. The technology story and the concentration story produce identical observable outcomes (great uptime for Devon). They produce very different predictions about what happens when NGS tries to serve customer number 61 with the same 196 field employees.
That distinction tells you something about this market that the earnings call does not.
We have spent the last three weeks taking apart the Big Three. The conclusion was not subtle: the strongest vendor BATNAs in compression history. If you stopped there, you would conclude that the only game is learning to negotiate within those three relationships. For 87% of the public compression market, that conclusion is correct.
The other 13% is where the leverage lives. And those vendors are, to put it precisely, weird. Not “might go bankrupt” weird. “Each one has a structural vulnerability the Big Three have spent two years eliminating” weird. The interesting kind.
This week: three niche players that do not fit the Big Three template and do not fit each other. A compression manufacturer with a rental fleet it is trying to grow into something the market takes seriously, whose $30/HP/month headline metric collapses the moment you decompose it by fleet composition (Slide 16 of the investor presentation is doing a remarkable amount of work for a single chart). The fastest-growing public compression fleet in the sector, growing EBITDA at 34% CAGR on the strength of a technology narrative the market is valuing at a 24% discount to peers, which is the equity market’s way of saying “we are not sure that is technology.” And a production optimization platform built around HPGL and VRUs that IPO’d 15 months ago, carries four material weaknesses in internal controls (which have already produced financial statement revisions, a detail the investor presentation omits), and just bought an ESP company to get upstream in the artificial lift lifecycle, which is actually the smartest strategic move any vendor in this analysis has made.
None of them are the Big Three. All of them have pressure points the Big Three spent two years eliminating. For operating teams building a BATNA, these are the three phone calls that change every other negotiation you have this year.