All right, great. We're on the back nine of day one. Hopefully, Joe Bob, you're more like J.J. Spaun at the U.S. Open and not Tommy Fleetwood, who maybe messed up the... Anyways, enough of my golf joke. Again, really pleased to have Flowco to present today. For those who do not know the story, this is one of the more unique stories we have in All-Field Services because they have a really disruptive technology that Joe Bob is going to talk about. They are also more levered to the production phase of the oil and gas life cycle. I think one of the themes from the conference you have heard from companies like SLB and others is they are more focused today on getting leverage to the OpEx part of the cycle versus just D&C.
I think this company really fits with that theme of providing leverage to the OpEx, that production side of the oil and gas life cycle, which should be more resilient. The other thing about it is they have some unique technology which drives not only really strong margin potential from the company, but also growth. With that, excited to have Flowco, Joe Bob Edwards, who's the CEO of the company. We're going to... Joe Bob will start with some introductory comments just to talk a little bit about Flowco, and then we'll end up with a... We'll finish up with a fireside chat. Joe Bob?
Excellent. Arun, would you like me at the podium sitting?
Why don't you start with the podium and then we'll pivot to a fireside chat.
Happy to do it. Good afternoon, everybody, and thank you for your attention and thank you for your interest in Flowco.
As Arun mentioned, I'm Joe Bob Edwards, President and CEO of Flowco. I spent a career as a private equity investor in energy and most recently ran a firm called White Deer Energy, which is today an owner of Flowco. To be clear, I've left behind my life as a private equity investor. I like to say I'm no longer a private equity overlord. I'm actually now sitting in the seat to be judged by my private equity investors and all of you. I'm thrilled to be here in front of you today to tell you what I think is a very exciting story about a truly differentiated oil field service name in the North American onshore market. We are a pure play production optimization and artificial lift company.
We count among our clients some of the largest and most well-capitalized oil companies in the U.S., and we really sit at the epicenter of what makes U.S. energy work. As Arun said, we are an OpEx story, not a CapEx story, and we've got an interesting mix of growth and returns that we'd like to tell you about today. Maybe by the numbers, we've been compounding our top line at just north of 20% year on year. We've got some guidance out there for 2025, which we can touch on later. We have very attractive returns in the space, approaching 40% EBITDA margins. Most importantly, as I like to tell my team, you can't eat a margin, but you can certainly eat a return.
We generate north of 20% rate of return on invested capital year in and year out on the capital base that we have as a company. Over 1,200 employees scattered across 43 field locations in the U.S. We have six manufacturing locations, really three manufacturing centers of excellence, and we are headquartered in Houston. We put three companies together a year ago in a merger of three privately owned businesses to create what is today Flowco. The three businesses were far from a private equity mashup in advance of an IPO. They actually make a ton of industrial logic together. We are organized today into two segments. Production solutions on the left-hand side of this page is our artificial lift offering. We go to market with a combination of surface equipment and downhole components.
The surface equipment that we offer clients are largely compression packages that help make our downhole components work properly. On the right-hand side is our natural gas technologies business, largely our vapor recovery operation. Left-hand side, artificial lift. Right-hand side, vapor recovery. Left-hand side oil, right-hand side natural gas. We have a very good balance between an exposure to the two main commodities that make the U.S. oil and gas business work. As I said, we're kind of everywhere where there is shale production in the U.S. We sit really at the critical juncture of where production happens. That's at the well site, helping an oil company select the right production technique for not just the specific wellbore characteristics, but also the phase of production that the well might find itself in.
What you do early in the life of the well is not what you do late in the life of the well. Okay, so this is a representative decline curve. Once an operator drills and completes a well, they've got to live with it for 20 years. The type of production technique that that oil company will deploy early in the life of the well is critical in making that wellbore that they drill and frack a profitable investment. That is where our technique comes in early in the life of the well before changing over to more conventional types of artificial lift. Again, we are there for the life of the well to help the client with the selection of the right tool in every well.
Along the way, too, we are capturing fugitive methane emissions to enable oil companies to actually monetize what was previously seen as a waste product, and that is our vapor recovery offering. If you look at the, again, the left-hand side of that previous page I showed you, our artificial lift solutions, and you really look at the market more broadly, there are five main forms of artificial lift that an oil company can select and put in their wellbore. We offer three out of the five for our clients. The three have in common that they utilize the inherent energy that exists within compressed natural gas to drive fluid to the surface from the subsurface. Okay, so that is high-pressure gas lift, conventional gas lift, and plunger lift.
The two forms of lift that we don't offer are really the legacy forms of artificial lift that have existed in both cases for 100 years. Okay, an electrical submersible pump and a rod lift system rely upon a mechanical or an electrical connection between the surface driver of the power required to actuate the downhole pump to actually effectuate the lift. We are in the three fastest growing forms of lift, and we're also in a very exciting area that we pioneered in particular, the high-pressure gas lift solution, which is taking share from the ESP offering. Maybe just diving in on that for a minute. What is high-pressure gas lift? Why is it exciting? Why did we focus on developing this technique? We are the pioneers of this method of artificial lift.
We started with unit number one roughly six years ago with two oil company client sponsors, SM Energy and EOG. There is a co-authored white paper written for the SPE out there you can download to look at. Quite simply, we are utilizing gas compression to lift a well with no downhole moving parts. We are injecting natural gas into the production tubing and producing up the annulus of a well at a rate comparable to what an ESP can produce. Importantly, this lack of downhole moving parts, this more reliable mechanical availability of over 99% uptime compares to the average uptime for an ESP on the order of 92%. Now, why does an ESP not work virtually all the time? It's because it hasn't been engineered to do the job of lifting a shale well. An ESP doesn't like sand. It doesn't like gas.
It tends to short out when downhole conditions change, and that is the nature of shale production. When you factor in this additional operational uptime, it yields additional profitability, additional NPV for our clients. That is how we have been able to take our very first unit and build upwards of 700 of them and put them on rent every day to over 60 oil company clients who rely on us for their early production phase. It is a quite elegant technique. We are very proud to lead the market in this area with upwards of 70% market share. Talked about this a little bit earlier. Do not want to dwell on it. In the United States, the artificial lift market is roughly $6 billion, $6 billion-$7 billion in size. We touch about half of that.
The bit that we touch is growing more rapidly than the ESP and rod lift markets that we are not in. I always throw a caveat in when I talk about this page. The ESP and rod lift solutions are not going anywhere. There will always be a place in the market for both of those. I think Flowco is a perfect acquisition or acquirer of additional lift techniques, which could include the two forms of lift that we are not in today. Okay, how am I doing, Arun? I'm almost up to time. Real quick, let's talk about vapor recovery. This is our other very exciting, fast-growing product line. We are capturing fugitive methane emissions from oil company tank batteries where, by design, historically, oil companies would allow methane vapors to settle out of solution and be vented to the atmosphere or sent to a flare stack.
Obviously, in a horribly environmentally costly solution to methane emissions. We have deployed a system not only is solving an environmental problem, but allowing oil companies to maximize profits because what you send to a flare could otherwise be captured and sold for a profit. We have over 4,000 of these things on rent every day in the market. This market is only roughly 17% penetrated. If you look at the Permian specifically, roughly 40% of all tank batteries have vapor recovery installed. Lots of room to grow organically. That is what our plan is, not only this year, but going forward. The rest of this I will leave for your viewing pleasure. I want to end on this, Arun, before we have a chat. We went public, I think, as a differentiated production story levered to OpEx, not CapEx in the oil field.
We are able to grow in a flat production environment. We've demonstrated that the last several years. We've got guidance out there this year that would indicate that we should be able to continue that. On this page, we've plotted our normal comp set, and we have highlighted for you what we think is the precursor to superior equity valuation and the ability to continue to compound rates of return north of 20% on the invested capital that we have by deploying our free cash flow into unaddressed markets or markets that are being addressed by inferior forms of artificial lift and continue to grow at double-digit rates should yield, I think, a superior stock price performance over time. Hopefully you guys agree and will go out and prove me right. That's Flowco.
Great. Joe Bob, thanks for the introductory comments. I wanted to maybe talk to you a little bit about what we're seeing in the field and understanding that you're more levered to production. We have seen a little bit of a pullback in activity. We monitor this on a weekly basis, but we've seen about 30 rigs in oil and combo basins come down, which is offset by about 11 rig increase in gas basins. What are you seeing in some of these, or what are you seeing in the field in terms of activity declines in the oil basins? Does the recent Iran-Israel conflict, are you seeing any changes in planned activity levels from operators?
Our, again, we're levered to production, not drilling. We are muted in terms of the impact of the day-to-day swings in rig count and frack spread count, the direct impact on our business, but we're not immune. In particular, some of our more short-cycle products that are sold downhole have seen some pressure this year. We telegraphed this on our Q1 call. I think if you parsed our language carefully on our Q1 call, which you did, and you've taken our 2025 expectations down roughly 5%. I would contrast that with the rest of the space that has come down more. We've definitely been impacted by, I'd say, market sentiment more so than activity levels. The most recent, I'll call it last two weeks, did we spend 24 hours in World War III? I don't know. It was a very quick battle.
We haven't really processed that yet. Your guess is as good as mine there.
Okay. I'm going to go back to the 1Q call. You trimmed a little bit, but you're still delivering very robust growth. You and John talked about your expectation that Flowco could still deliver a year-over-year EBITDA growth in the low double digits. Do you still have confidence kind of in that outlook? Again, a lot of uncertainty, volatility in the marketplace today.
Yeah, no, we do. If you look at our Q1 actual and our Q2 guide and you think about what we're seeing in terms of the CapEx deployment in our rental fleet, we still have confidence that we can deploy $100 million-$110 million of growth capital this year at very nice rates of return. That's going to get you into that low double-digit EBITDA growth. Still feel good about that. Yeah, that's still our plan.
Can you talk a little bit about the revenue mix between rentals and product sales?
It's a good mix, Arun. It's roughly 50/50. It's going to trend more toward rentals as we continue to invest in both the VRU and the high-pressure gas lift solution. Those investments are going to be in rental systems that yield higher margins. I think you'll see some margin improvement in our business. We're in the high 30%. I think you could see us hit 40%, if not a touch above on a quarterly basis from here to the end of the year and certainly going into 2026.
One of the things that's become really important in this phase where the U.S. is implementing tariffs on foreign countries is just the supply chain. Can you talk about Flowco's supply chain?
Yeah. Yeah. We have, first of all, our systems that we rent and all of the downhole equipment that we sell is made in the U.S.A. Now, the rental items that we put out on rent are made up of critical components that we purchase from suppliers. When you look at those suppliers' supply chains, those are largely domestic. As we said on our Q1 call, we feel like any tariff pressure that the industry is under, in particular from places like China, we are going to be able to absorb it and pass it through. We do not even think we are going to see a financial impact. The good news is that our competitive technologies that we are selling against, in particular ESPs, 75% of the market's ESPs are sourced from China.
Having been in the ESP business before, I can tell you that ESP players will try to pass all of that tariff along to the client. If you think about our technique as a competitive, a better mouse trap than an ESP in some cases, if they're under pricing pressure, our system just got that much more profitable.
Got it. Got it. Could you talk about just general market penetration for high-pressure gas lift versus ESPs?
Yeah, absolutely. We actually have a page on this if I can get back to it. When we went to market, we looked at 2023 data. Here we go. We estimate that if you look at lift in total in the United States, ESPs serve us about a $3 billion market. We think only about half of that can be addressed by high-pressure gas lift, or $1.2 billion in 2023. Of that $1.2 billion, we've only penetrated 14% of the market. Now, as of today, mid-2025, is that higher? Yes. By how much? Not really sure. Call it somewhere between 15%-20%. We have 60 customers for this technique, Arun. Everybody who has tried it has endorsed it and has, in fact, asked for more of it.
We're going to continue to build into that demand profile and hopefully get as much of this market as we can.
Okay. Maybe going back to ESPs, you mentioned how 75% of them are made in China. Costs are clearly going up for a competing technology. Has you seen any, is this shaping any customer changes or how are conversations progressing that we may start to see more people switch over to HPGL?
Yeah, we've seen customers do what you would expect, right? If a vendor comes in and says, "Hey, I've got a tariff, I need to increase price," we've seen customers come to us and say, "How quickly can I get more HPGL?" So we've seen that. Now, what we've also seen are the ESP players react in a variety of ways. They are going to actively try to diversify their supply chains away from China. They are also going to try to pass through as much tariff as they can. Some of them will actually absorb the cost to try to gain market share. There are a lot of levers to pull. We think we're the beneficiary, though, net-net of the tariff noise going on in the market.
Okay. Let's talk about some things that you highlighted on your 1Q call. Talk about your e-Grizzly product line.
An e-Grizzly is an electric compressor that is configured for this application, high-pressure gas lift, and allows an operator to utilize one machine to lift multiple wells at the same time. The way that we've configured the compressor, the way that we have engineered the system to work overall, allows an oil company to rent one machine versus multiple machines. Feeding into this whole efficiency curve that the operators are chasing. We hope to build more. We've got more demand for these. It's a pretty slick system.
Okay. What about SurgeFlow?
Look, SurgeFlow is a wellhead assembly that is installed really as the well is completed that allows an operator to switch from their intermediate phase of lift to plunger lift much more seamlessly. It feeds into more efficiency, less downtime later in the well's life. We're starting to sell a lot of SurgeFlow systems, which is a precursor to more plunger lift systems. The reason why we highlighted both of these, I just want to be really clear, it's indicative of the innovative culture that Flowco has. We are constantly coming up with ways to work with our clients to provide a more seamless solution and more fit-for-purpose technique of artificial lift and vapor recovery. These two made it all the way through from whiteboard to commercialization under our ownership. We're really proud of them.
We think that the growth in these two product lines could be greater than the company as a whole.
All right. Let's shift gears and talk a little bit about natural gas technologies, that segment, VRUs. I think in a period of stronger gas prices, I think this is an easier maybe sale to the customer. Talk to us about market penetration from your traditional E&P customers as well as maybe moving into the midstream space.
You bet. This is a page that actually, for those of you that attended our roadshow presentation for the IPO, is a new page that relies on government data provided to the EPA by operators that indicates that of the 182,000 tanks that are in the oil field in the lower 48, only 17% of those tanks have a vapor recovery unit deployed and actually actively capturing methane vapors. Okay. 31,000 tanks out of a total addressable market of 182. On the right-hand side, you can see that the Permian has adopted these much more aggressively. You mentioned gas prices, Arun, and that is a critical point here. The only reason why an operator will deploy one of our systems is if it makes money for them. There are no methane taxes.
There was, for a brief moment in time, embedded within the Inflation Reduction Act, a waste emissions charge that was due to come in in 2025, but that's been gutted by the new administration. Our market penetration has been as a result of economics. Even at $2 gas, given the composition of the molecules that we actually help operators capture, these things are extremely economic. I'm talking about paybacks for an oil company in the matter of a month or two to deploy a VRU to capture fugitive methane emissions. The reason why we do not have greater penetration in places like the Bakken or the DJ is because they lack the natural gas takeaway capacity to actually move the molecules after you capture them. It is not economic to capture where you do not have natural gas handling, processing, and takeaway capacity.
Every new pad in the Permian is being hooked up with natural gas takeaway capacity. Rising GORs help us here. The trends are good for us in this space.
Okay. Let's shift gears, talk a little bit about capital allocation. Talk to us about your CapEx plans for 2025, including the mix of sustaining versus growth capital.
Yeah. I think our all-in CapEx is going to be on the order of $140 million-ish. Call it $110million-$120 million of that is going to be growth. We estimate only about $20 million of maintenance CapEx to maintain the equipment that we have. If you want to think more broadly of, call it $310 million of, I think that's your model, $310 million of EBITDA for the year, after CapEx, you get down to kind of $200 million of discretionary cash flow. You factor in some interest, you factor in some dividends. You get down to $100 million and some growth CapEx. You get down to $100 million of true free cash flow. We're going to pay down debt. We do have a share buyback authorized, but we've got, I think, a very strong position to continue to diversify the business inorganically as well.
Okay. I want to address some more current events, recent events. Your COO, John Gatling, announced effective August 1st, he'd be leaving the company. Talk to us about this departure. It sounds like you're not planning to replace John. You got two really strong divisional heads and maybe talk a little bit about the bench in this decision.
Yeah, you bet. When we formed what is today Flowco, we merged, as I said earlier, three businesses together. Three businesses had three different management teams. When you form something like this, you're obviously picking best athletes for every role. The two divisions that we're organized into, Production Solutions and Natural Gas Technologies, are run by two former CEOs of legacy businesses. All operations that we perform, be they manufacturing, sales, field service, all report to those two individuals. Those two individuals from the get-go have reported to me. John, as Chief Operating Officer, has led our integration efforts. He has really helped pull together three disparate businesses into one cohesive company. Candidly, he was running out of things to do because we're a year into our integration, obviously post-IPO.
John and I had a conversation about the future of Flowco and my vision for how the business is going to be run. We agreed that it was probably best to part ways.
Great. More recently, the board authorized a $50 million buyback. Talk to us about, and that was in mid-June. Can you elaborate on this decision? Obviously welcomed by investors.
Yeah. We look at our share price and obviously we're not happy. We're trading below IPO. Now the world has changed and I know that we've guided down and so there's probably a little bit of investor reaction to where our shares are trading. The board agreed with our recommendation that if you put in place an authorization, you can at least be in a position to opportunistically buy back stock if the valuation of the company starts to compete for capital for other opportunities that the company has to grow. We've got our organic growth efforts, our M&A efforts, and we're going to keep an eye on where the shares are trading and maybe opportunistically buy a few. We're not going to put in place, we have no plans to put in place a programmatic share buyback purchase or share buyback program.
Look, on a personal note, it kills me to think that we're going to buy back from the public what we worked so hard to list, but it's the right thing to do if the valuation gets to a point where you just can't ignore it. We wanted to make the authorization, get it out there, have it available as a tool in the toolkit if and when we feel like we need to use it.
Okay. We have time for one or two questions. I know the next presentation with our CEO is at 3:30 P.M., but any questions from the audience?
I'm sorry. Things kind of what the maintenance capital looks like for the business as kind of the installed base of rental equipment grows over time. How do things happen? What is the useful life of both the high-pressure gas lift as well as the VRUs? Are these things that last for 30 years with relatively low ongoing CapEx or are you having to constantly replace that?
That's a good question, Chetan. So $20 million a year of maintenance CapEx is what we have telegraphed to the market. As the rental fleet grows, that maintenance CapEx number will increase pro rata as the number of units, with the number of units that we add. Useful life of the systems we think is on the order of 20 years. Paybacks on new construction of units are on the order of two to four years. Okay. Contract lengths on these new systems as we build them range from a low of 60 days to a long of three years. We are getting really good contract cover on a long-lived asset with low maintenance CapEx that we can redeploy as the initial contract matures. A lot of times we get questions about capital efficiency. Is this a capital-intensive business to grow? The answer is yes.
The returns on the capital that we're deploying, I think, are quite attractive. The long-lived nature, low CapEx nature of the assets make them quite unique in the oil field. Sorry, one more thing on that. Our book depreciation is going to be less than this 20 years that I quoted you. If you look at our financials, you're going to see something that looks more like 12-ish. It's a constant argument with our auditors on what is the useful life of these systems, but that's how we're depreciating them on the books.
Great. I think we're out of one more. Sorry.
Could you talk about the quality of your fabrication business on the compression side? I know some of your competitors, perhaps with more generic products, they have terrible margins. Sort of how do you think about the quality of that business and margins going forward?
Our fabrication capability is really our internal supply chain. That ability and our vertical integration, that ability to build our own systems enables us to ramp up and down CapEx far more nimbly than, let's say, the larger horsepower compression operators. Okay. Now, you're correct. The margins on building those units for sale are quite pedestrian. They're dilutive to our overall company margin. That's why we're not leaning into the sale of compression systems to third parties.
Thanks.
You got it.
Yep. We're out of time. Thank you so much, Joe Bob.
You bet. Thank you, Arun. Appreciate it.