Archrock, Inc. (AROC): what the price requires

Generated: 2026-07-19 · Source: https://boothcheck.com/report/AROC

Headline

Field	Value
Ticker	AROC
Company	Archrock, Inc.
Current price	$37.97/sh
Composition	Contract operations: 0-1,000 horsepower per unit 28% / Contract operations: 1,001-1,500 horsepower per unit 29% / Contract operations: Over 1,500 horsepower per unit 28% / Contract operations: Other 0% / Aftermarket services: Services 9% / Aftermarket services: OTC parts and components sales 6% / Aftermarket services: Other 0%

What The Price Requires (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

Field	Value
Inversion basis	whole-company
Operating margin needed	8.5%
Operating margin today	25.1%
Margin compression implied	-16.6pp
Must persist for	6.8y
Multiple paid	32x operating income

The operating-margin requirement is derived from the framework's value band at year 10, a separately labeled basis from the headline growth/duration solve.

Solve inputs: computed at a 9.4% cost of capital; growth searched up to the 25% self-funding ceiling; each 1pp moves the implied horizon ~1.9 years.

How unusual the bet is: elevated

Reference	Value
vs own history	+1.70σ
cohort percentile (of 72 peers)	88
sustained it ~6.8 years at this level	32%
implied end-window share	0%

Valuation X-Ray

Asset, earnings-power and peer-multiple models all land far below the price; ONLY the growth-DCF reaches it. The bet is durable compounding the static frames structurally cannot price (a moat/durability premium).

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

Family	Median price/FV	Models	Reads
Asset	1.60x	4	expensive
Earnings	1.27x	2	expensive
Relative	1.25x	5	expensive
Growth	1.09x	3	expensive

Families that justify the price: Growth Families that call it expensive: Asset

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 7.1%); the inversion above states its own rate.

Per-Model Detail (n=14)

Model	Family	FV	Price/FV	Applicable	Methodology
DCF Perpetual Growth	Growth	$80.34	0.47x	yes	FCF base $0.5B, growth 24% (input: historical growth), terminal g 4.0%, WACC 7.1%, 7yr projection
DCF Exit Multiple	Growth	$34.82	1.09x	yes	Exit EV/EBITDA: 31.5x / 33.5x / 35.5x (bear / base = today's held flat / bull), 7yr
Relative Valuation	Relative	$30.32	1.25x	yes	P/E 20x (static sector reference · 2026-04), scenarios: 16.1x / 20.0x / 23.9x (bear / base = reference held flat / bull), EV/EBITDA 19.15x
Simple DDM	Growth	—	—	no	—
Two-Stage DDM	Growth	—	—	no	—
Simple Excess Return	Asset	$20.15	1.88x	yes	BV/sh $8.70, ROE (TTM) 21.4%, ke 9.3%
Two-Stage Excess Return	Asset	$30.45	1.25x	yes	5yr excess ROE then converge to ke=9.3%
Discounted Future Market Cap	Growth	$25.01	1.52x	yes	Rev $1.5B, growth 24% (input: historical growth; tapered), Terminal P/S: 3.5x / 4.4x / 5.2x (bear / base = today's held flat / bull, cap 12x)
Peter Lynch Fair Value	Relative	$64.40	0.59x	yes	EPS $1.84, growth 35% (input: historical EPS growth), PEG=0.58 (Undervalued)
Margin Trajectory	Growth	—	—	no	—
Earnings Power Value	Earnings	—	—	no	—
Residual Income	Asset	$28.84	1.32x	yes	BV $8.70 + 5yr PV of (ROE (TTM) 21.4% − Kₑ 9.3%) × BV; BV grows 8.8%/yr
Graham Number	Asset	$18.98	2.00x	yes	√(22.5 × EPS $1.84 × BVPS $8.70) — Graham's conservative floor
EV/EBITDA Relative	Relative	$6.37	5.96x	yes	EBITDA $0.27B × sector EV/EBITDA 13.0x
FCF Yield	Earnings	$1.48	25.65x	yes	FCF $244.5M / Kₑ 9.3% — zero-growth perpetuity (excluded from median)
SBC-Adj FCF Yield	Earnings	$0.01	3796.50x	yes	SBC-adj FCF $0.21B (FCF $0.24B − SBC $0.04B) capitalized at Kₑ (excluded from median)
Ben Graham Formula	Earnings	$59.37	0.64x	yes	EPS $1.84 × (8.5 + 2×15.0%) × (4.4 / 5.3%)
ROIC-Justified P/B	Asset	—	—	no	—
P/Sales Sector	Relative	$21.73	1.75x	yes	Revenue $1.52B × sector P/S 2.5x
PEG Fair Value	Relative	$69.00	0.55x	yes	EPS $1.84 × (PEG 1.5 × growth 25.0% (input: historical EPS growth)) → PE 37.5x
Earnings Yield	Earnings	$19.89	1.91x	yes	EPS $1.84 / required return 9.3% (Rf 4.3% + ERP 5.0%)
Funds From Operations Multiple	Relative	—	—	no	—
Clinical Phase NPV	Growth	—	—	no	—
Merton	Asset	—	—	no	—
V5 Mechanical	—	—	—	no	—

Solvency

Field	Value
Net debt	$2.4b
Net debt / NOPAT (after-tax)	8.38x
Net debt / operating income (pre-tax)	6.37x
Interest coverage	2.3x
Share count CAGR (dilution)	3.4%
Burning cash	no

Bullet Takeaways

• Archrock rents and operates natural gas compression equipment for producers, a recurring, contract-based business that ran its fleet at 95% utilization exiting Q1 2026.
• The capital story is the draw: a high return on equity above 21% funds both a covered, growing dividend and continued fleet investment, with management reaffirming 2026 adjusted EBITDA guidance of $865 million to $915 million.
• The constraint is debt and demand: net debt is roughly six times operating income with interest covered only about twice over, and the business ultimately rides on the volume of gas that producers, concentrated in the Permian, keep pulling out of the ground.

Bull Case

The clearest read on Archrock is how it deploys capital, because the business is essentially a machine for turning compression equipment into recurring cash and then redeploying that cash. It earns a return on equity above 21% on a book value of about $8.70 a share, which is unusually high for an asset-heavy lessor and tells you the fleet is being priced and utilized well. That return funds a deliberate capital-allocation policy: the company is committed to growing cash returns to shareholders while keeping the dividend robustly covered and preserving room for growth investment. A covered and rising dividend, backed by a high return on capital, is the kind of compounding that does not depend on a story going right.

The moat is scale and incumbency in a business customers prefer to outsource. The company believes its "long-standing customer relationships and our large compression fleet will enable us to capitalize on what we believe are favorable long-term" industry trends, and that producers increasingly want "to deploy their capital on projects more directly related to their primary business by reducing their compression equipment and maintenance capital requirements". Outsourcing compression lets a driller keep its capital in the ground rather than in iron, and the operator with the largest fleet and the deepest field service network is the one positioned to take that work.

The demand backdrop is genuinely supportive right now. The fleet exited Q1 2026 at 95% utilization, and Archrock's footprint is concentrated in the faster-growing basins, especially the Permian, where rising gas-to-oil ratios are making production more compression-intensive over time. New takeaway capacity of about 4.6 billion cubic feet a day expected later in the year should support further activity. Management reaffirmed 2026 adjusted EBITDA guidance of $865 million to $915 million. The bull case is a high-utilization, high-return infrastructure business with pricing power, a covered growing dividend, and a multi-year tailwind from the simple physics of aging oil wells needing more compression to keep producing gas.

Bear Case

The advantage that looks durable today, pricing power on a 95%-utilized fleet, is exactly the thing competition erodes when the cycle turns. Archrock's own filing is candid that its ability to renew "operations service agreements with our customers at rates sufficient to maintain current revenue and cash flows could be adversely affected by the activities of our competitors". High utilization is a function of tight equipment supply; the moment the industry adds horsepower faster than demand grows, or a rival decides to win share on price, the pricing power that produces the 21% return on equity compresses. The current rates are a cyclical high, not a contractual entitlement, and the methods anchored on the company's asset base, which land in the low $20s against a $37 price (June 27, 2026), are pricing the fleet closer to its replacement economics than to its peak-cycle earnings.

The demand side is the deeper erosion risk because it is not in management's control. The entire business is a derivative of how much gas U.S. producers keep pulling out of the ground, and that is concentrated in a handful of basins and a handful of large customers. The Permian tailwind is real, but it ties Archrock's fortunes to one region's drilling economics; a sustained drop in the gas or oil price that slows Permian activity would idle horsepower regardless of how good the fleet is. Over a longer horizon, the energy transition is a slow headwind to the volume of fossil gas that needs compressing at all, and the filing notes that current and potential future laws could "reduce demand for our services and reduce our access to financial markets".

The balance sheet narrows the margin for error. Net debt sits at roughly six times operating income, and interest is covered only about twice over by operating profit, which is thin for a capital-intensive lessor. The dividend is covered today, but the combination of high leverage, a depreciating asset base that requires continuous reinvestment just to stand still, and cyclical pricing means the cash available for shareholders is more fragile than the current coverage suggests. At about 32 times operating income, the price assumes the favorable utilization and pricing environment persists for years; if competition or a basin slowdown erodes either, the asset-based methods in the low $20s are the reminder of where the floor sits.

Valuation

Archrock's price embeds a continuation of the present good times. At about $37 a share, the stock trades near 32 times company-wide operating income, which inverts to growth held near the firm's self-funding ceiling for roughly seven years. Keep that approximate; it is one solve under fixed assumptions. The near-term pace is within what the company has recently delivered, so the stretch is less about whether it can grow at that rate for a year and more about whether the favorable utilization-and-pricing environment lasts most of a decade.

The methods land in a tight cluster around the price rather than scattering, which marks this as a value-and-cash-flow name rather than a pure growth bet. The relative-multiple family, using a sector price-to-earnings near 20 times, lands around $30. The growth-DCF exit-multiple method lands near $34, and the excess-return and residual-income approaches land near $29 to $30. The asset-value family sits a touch lower, in the low $20s, which is the conservative end. Only the perpetual-growth DCF, which extrapolates recent high growth, lands far above. Read together, the methods say the price is supported by the company's current earnings power and peer multiples, with the upside resting on the growth assumption holding. The free-cash-flow and EV-to-EBITDA models produce distorted figures here because a continuously reinvesting lessor's free cash flow understates its economic earnings; the cleaner read is the earnings-power and relative cluster.

Solvency is where the buyer should focus, because the leverage is the real constraint on the cash-return story. Net debt is roughly six times operating income with interest coverage near two times. The high return on equity and the covered dividend are genuine, but they sit on top of a balance sheet that leaves little slack if pricing or utilization softens. The decisive question the valuation poses is whether the Permian-driven demand and tight equipment supply keep the fleet earning peak-cycle returns long enough to justify a 32-times multiple, or whether the cluster of methods near $30 is the more honest read once the cycle normalizes.

Catalysts

The first quarter of 2026 confirmed a tight market. Archrock reported revenue of $373.8 million, adjusted EBITDA of $221 million, up 12% year over year, and adjusted earnings per share of $0.42, with the fleet exiting the quarter at 95% utilization. These adjusted measures are company-defined; the underlying driver is high fleet utilization at firm pricing.

The forward catalysts are basin activity and capital returns. Rising gas-to-oil ratios in the Permian are making production more compression-intensive, and roughly 4.6 billion cubic feet a day of new takeaway capacity expected later in 2026 should support further demand for horsepower. Management reaffirmed 2026 adjusted EBITDA guidance of $865 million to $915 million and restated its commitment to growing cash returns while keeping the dividend robustly covered and preserving capacity for growth investment. The metrics to watch over the next several quarters are whether utilization holds near its current peak, whether contract renewal rates stay firm against competitors, and whether the dividend keeps rising within coverage. Each is a direct read on whether the high return on capital persists or begins to normalize.

Peer Cohorts (Per Segment, With Filing Citations)

Contract operations / Aftermarket services (reported)

• USAC (USA Compression Partners, LP)
• FY2025 10-K: …service or transfer of the parts, and payment generally is due 30 days after receipt of our invoice. The amount of consideration we receive and revenue we recognize is based on the invoice amount. There are typically no material obligations for returns, refunds, or warranties. Our standard contracts do not usually…
• FY2025 10-K: …or on a month-to-month or longer basis. We primarily enter into fixed-fee contracts whereby our customers are required to pay our monthly fee even during periods of limited or disrupted throughput, which enhances the stability and predictability of our cash flows. We bill most of our customers in advance of the…
• KGS (Kodiak Gas Services, Inc.)
• FY2025 10-K: …years, depending on the customer, application, location, and size of the compression unit, with large horsepower typically contracted for a primary term of three to five years. After the expiration of the primary term, our contracts continue on a month-to-month basis until renewed or until the contract is terminated…
• FY2025 10-K: …high fleet utilization for our company. We are focused on being a resilient and sustainable enterprise and we seek to be a responsible operator that provides safe, reliable and efficient energy solutions. We will continue to innovate processes and technologies to assist our customers in meeting their emission…
• DTM (DT Midstream, Inc.)
• FY2025 10-K: …flow. Interruptible service revenues are recognized over time based on the output measure of natural gas volumes gathered, transported, or stored. Certain of our contracts allow for the recovery of production-related operating expenses, which are offsetting in revenue and operating expense. Recovery of…
• FY2025 10-K: …to natural gas price fluctuations. Firm service revenue contracts are typically long-term and structured using fixed demand charges or MVCs with fixed deficiency fee rates. Contracts structured using fixed demand charges contain a performance obligation of a stand-ready series of distinct services that are…

Methodology Note

• Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
• Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
• Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
• Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.

Sources

Q1 2026 earnings, May 7 2026 · FY2025 10-K · company financials