Archrock, Inc. (AROC) stock intrinsic value fair value estimate & owner earnings analysis

Archrock rents natural gas compression equipment to oil and gas producers and pipeline operators in the United States, operates and maintains it under contract, and sells parts and repair services (its aftermarket business). Compression is needed to move gas out of the field and into pipelines, so demand follows US gas production rather than gas prices day to day. At mid-2026 the company had about 4.5 million horsepower operating at 94% utilisation. In 2025 revenue was $1.49 billion and the rental business earned gross margins of about 70%. Two purchases made the business much bigger: TOPS (electric-drive compression in the Permian Basin, acquired for about $983 million in August 2024) and NGCS (acquired in May 2025). The five largest customers account for about 35% of revenue, and none accounts for more than 10%. How we measured earnings. We start from operating cash flow, strip out swings in working capital, subtract stock-based pay, and subtract the capital spending needed to keep the business as it is. Archrock reports only $110.7 million of its 2025 capital spending as maintenance and calls the rest growth. We did not accept that split. The company's maintenance figure covers overhauls only, not replacing worn-out units, and depreciation alone was $242 million. We used a consistent rule instead that treats only a small share of spending as growth. It counted about $413 million of 2025's $502 million as the cost of standing still. We also did not count gains or cash from selling old compressors ($121 million in 2025) as earnings. Both choices are conservative. On this basis, owner earnings were $0.75 per share in 2024 and $1.44 in 2025. They were negative in 2017-2019 and 2022, when heavy building programs were under way. We start from $1.09 per share, the middle of the two years since the TOPS purchase changed the business. The first half of 2026 ran at roughly $1.15 annualised, which supports that figure. One accounting point matters: Archrock pays almost no cash income tax today, because of tax losses carried forward from earlier years (a $147 million tax asset) and fast write-offs on new equipment. The $98 million of 2025 tax expense was deferred. That saving is a deferral, not a permanent benefit, so our weaker case charges for cash taxes later. Base case ($18.90). Owner earnings grow about 5% a year for three years. That growth comes from new horsepower the company has contracted and is building in 2026 (it plans $250-275 million of growth spending), and from a record of rising revenue per horsepower: rental revenue rose 3% in the second quarter of 2026 even with 135,000 less horsepower running. Growth then slows to 2% a year through year 10, and earnings stay flat until year 30. The long tail rests on two things: the fleet is kept whole by the spending already charged against earnings, and the business and its predecessors have rented compression through every gas cycle for decades. For year 1 we assume 5% growth. Last year's actual growth was 92%, but most of that came from the acquisitions and is not repeatable. Bear case ($9.50). A gas-activity downturn like 2019-2021, when revenue fell about 19%, pushes earnings to about $0.85 per share for two years. The aftermarket business is already volatile: its revenue fell 35% in the second quarter of 2026. Then, as the tax losses run out, cash taxes take about $0.30 per share a year, leaving about $0.80. This case gives no value beyond year 20. Debt of about $2.35 billion (roughly 2.6 times cash earnings) is manageable but leaves less room in a long downturn. Bull case ($26.50). The new-build program keeps its 2023-2025 pace and pricing keeps rising. Owner earnings grow about 10% a year for five years and 3% a year to year 10, and the fleet earns for 40 years in total. The shares appear to be worth roughly $19. The margin-of-safety price is about $11.50. This is a cyclical, leveraged energy-services business whose earnings shrink when drilling slows, so the margin-of-safety price sits well below our central value, close to the bear-case value. The main ways we could be wrong on the low side: Archrock's own split (a much lower maintenance cost) could be closer to the truth, in which case earning power is well above our figure. On the high side: a long stall in US gas production growth, or the tax deferral unwinding sooner than expected.