Kodiak Gas Services, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk Our primary exposure to interest rate risk results from outstanding borrowings under the ABL Facility, which has a floating interest rate component. We use interest rate derivative instruments to manage our exposure to fluctuations in these variable interest rate components. As of June 30, 2023 and December 31, 2022, we had $1.82 billion and $1.75 billion, respectively, outstanding under the ABL Facility and $1.225 billion and $1.325 billion outstanding and effective notional amounts of floating to fixed interest rate swaps, respectively, which we attribute to our borrowings under our ABL Facility. Excluding the effect of interest rate swaps, the average annualized interest rate incurred on the ABL Facility for borrowings during the six months ended June 30, 2023 was approximately 8.10% and we estimate that a 1.0% increase in the applicable average interest rates for the six months ended June 30, 2023 would have resulted in an estimated $8.8 million increase in ABL-related interest expense. As of June 30, 2023, we had $1.0 billion outstanding under the Term Loan. During the six months ended June 30, 2023 we had $350.0 million notional amounts of floating to fixed interest rate swaps and a $400.0 million notional amount interest rate collar with a floor of 1.70% and a cap of 2.00% that we attribute to our Term Loan. On June 29, 2023 we terminated these positions resulting in proceeds of $26.9 million. Excluding the effect of interest rate derivatives, the average annualized interest rate incurred on the Term Loan for borrowings during the six months ended June 30, 2023 was 11.92%, and we estimate that a 1.0% increase in the applicable average interest rates for the six months ended June 30, 2023 would have resulted in an estimated $5.0 million increase in interest expense related to Term Loan. Counterparty Risk Our credit exposure generally relates to receivables for services provided. If any significant customer of ours should have credit or financial problems resulting in a delay or failure to pay the amount it owes us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, if any significant vendor of ours should have financial problems or operational delays, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, an affiliate of one of our customers in the Powder River Basin has been undergoing a bankruptcy proceeding since 2019. Such customer has from time to time been late in remitting payment for our compression services, which we have continued to deliver, and we are pursuing prompt payment of the amount owed. We do not expect the amount owed presents any material concentration risk. If payment is not timely remitted, we expect to suspend services to such customer. Concentration Risk For the six months ended June 30, 2023 and year ended December 31, 2022, our four largest customers accounted for approximately 38% and 39%, respectively, of our recurring revenues, with no single customer accounting for more than 14% for both ending periods. If any significant customer of ours should discontinue their partnership with us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Commodity Price Risk Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any natural gas or oil in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. However, the demand for our compression operations depends upon the continued demand for, and production of, natural gas and oil. Sustained low natural gas or oil prices over the long term could result in a decline in the production of natural gas or oil, which could result in reduced demand for our compression operations.