Compression: The Silent(ish) Giant Squeezing O&G Margins

“The fundamentals of compression are the best in nearly two decades.”

This poses a significant challenge for the industry. In the relentless game of maximizing cash flow, compression typically ranks as the second-largest line item for Lease Operating Expense (LOE). Its importance on the P&L and the counterparty strength of compression providers demand a more elevated, strategic approach to contracting.

Why is compression outperforming while most OFS sectors are struggling?

Four factors explain its abnormal strength:

1. COVID: The Great Fleet Reset

COVID hit, prices went negative, and panic set in. Companies returned units en masse, which gave compression providers the opportunity to modernize fleets while culling outdated inventory. When activity rebounded, the lead time for new units skyrocketed to 13 months. Classic supply-and-demand dynamics kicked in. The added benefit? Pre-committing to new units effectively capped CAPEX expenditures, driving utilization rates to a stunning 98%+.

2. Consolidation: Market Muscle

USAC acquired CDM. Archrock (AROC) absorbed TOPS. KGS snapped up CSI. Now, three players control 75% of the outsourced compression market. This consolidation mirrors trends in E&P and OFS: the pursuit of steady cash flow to attract investors through dividends and buybacks. Fewer players mean tighter control over pricing power—and better margins.

3. The Rise of AI and LNG: Gas’s Next Chapter

It’s almost unbelievable that the equipment responsible for most of my headaches as an engineer is tied to Matthew McConaughey’s AI pitch—but it’s true. Just take a peek at a compression company’s investor deck. Surging demand for natural gas power (to power AI) and LNG exports have placed compressors at the center of the action. These machines now play a starring role in moving the unprecedented volumes of gas required by this energy revolution.

4. Sticker Units: Bigger, Stickier, Costlier

As lateral lengths grow longer, frac sizes expand, and well counts concentrate, compression units have evolved. Today’s larger units not only deliver more power but also come with eye-watering mobilization costs—up to $100,000. Once deployed, they’re harder to displace than a bad habit, creating an even “stickier” dynamic for operators.

So, how can teams regain leverage in compression negotiations?

Here are three practical strategies:

1. Know Your Unique Buying Attributes

Not all buying is created equal. The KGS investor decks often highlight ExxonMobil’s logo as a badge of honor—its creditworthiness and long-term contracts directly influencing stock performance (potentially worth millions). It is clear that there are other variables which matter beyond pricing; revenue certainty, exposure to liquid rich plays and buying power in the region. But it’s not just the majors that hold sway.

At Mainline Ventures, we call this step “Counting Cards.” By analyzing a provider’s revenue concentration in specific basins and across the board, we can calculate leverage. Additionally, with typical contract lengths averaging 36 months (one-third of the fleet rolls off annually), we can probabilistically estimate inventory turnover, enabling better negotiation strategies.

2. Push for Shorter Contracts

Compression companies want longer contracts to lock in high utilization rates and reduce churn. Your goal? The opposite. At Mainline, we use a Power Index Evaluation to model future dynamics and assess whether leverage will improve or decline over time.

If leverage is likely to worsen, longer contracts make sense. But at 98%+ utilization rates, leverage is poised to improve, which argues for shorter contract terms. Yes, pushing for shorter durations is an uphill battle, but it’s essential to regain flexibility.

3. Build a Credible Insourcing Strategy

While three companies control 75% of the outsourced compression market, the other 75% of the total market is insourced. Historically, midstream players have dominated this space, given the roughly seven-year ROI on purchasing equipment outright. However, as wells become more predictable and geographically concentrated, insourcing is emerging as a practical and competitive option for operators.

This isn’t just a hypothetical threat—it’s keeping compression companies awake at night. Over the past 12 months, “insourcing” has been mentioned nearly 200 times on earnings calls, underscoring how much it worries the industry. And it’s no wonder: with high utilization rates and consolidated margins, any shift toward insourcing could disrupt the current balance of power.

At Mainline Ventures, we never float an idea without a clear, confident strategy—and insourcing is no exception. By carefully evaluating operational needs and economic conditions, operators can use insourcing as both a negotiation lever and a viable alternative to outsourced compression.

Negotiating with compression companies may not be as frustrating as a three-stage compressor freezing up at 2 a.m., but it’s no walk in the park either. Judging by compression’s expanding margins, it’s a battle E&Ps are losing.

Curious about how this process works in detail? Drop a comment below, and I’ll flesh it out in a Substack article.