Kodiak Gas Services, Inc. to Acquire CSI Compressco LP in an $854 Million All-Equity Transaction
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Insights
The acquisition of CSI Compressco by Kodiak Gas Services represents a significant strategic move within the energy infrastructure sector. The all-equity nature of the transaction is particularly noteworthy, as it avoids the immediate incurrence of additional debt, while the assumption of existing debt is a common element in such deals. The expected cost synergies of at least $20 million per annum indicate a clear path to enhanced profitability post-merger. Furthermore, the immediate accretion to Discretionary Cash Flow and Free Cash Flow per share for Kodiak shareholders suggests a positive short-term financial impact.
From the perspective of CSI Compressco unitholders, the transaction offers an increased dividend potential and improved stock liquidity, which are attractive incentives. The 14% ownership stake that they will hold in the combined entity also provides a substantial interest in the future performance of the merged company. However, the dilution of current Kodiak shareholders' equity must be considered, as it could potentially offset some of the per-share financial benefits.
Long-term, the merger's success will hinge on the effective integration of the companies' operations and the realization of the projected synergies. The combined company's position as the industry leader in contract compression services could offer a competitive advantage in negotiating contracts and achieving operational efficiencies. Investors should monitor the integration process and the combined company's leverage ratios, particularly given the stated long-term leverage target of 3.0-3.5x by the end of 2025.
The creation of the largest contract compression fleet through this acquisition by Kodiak is a strategic expansion that solidifies its market position, especially in lucrative regions like the Permian Basin. This scale could potentially lead to increased bargaining power with customers and suppliers and provide a buffer against market volatility. The focus on infrastructure applications in premier basins aligns with industry trends towards efficiency and cost-effectiveness.
For the industry, the consolidation may signal a move towards fewer, but more robust, players that can offer a wider range of services. This could drive competition and innovation, but also raise barriers to entry for smaller companies. The fixed-revenue contracts with inflation-protection mechanisms mentioned in the merger details are a critical aspect, as they provide a layer of financial predictability in an industry often subject to price fluctuations.
In terms of environmental impact and regulatory considerations, the enhanced focus on natural gas infrastructure may be viewed favorably in the context of a global shift towards cleaner energy sources. However, investors should be aware of the potential for regulatory changes that could affect operations, particularly as the energy sector faces increasing scrutiny regarding environmental, social and governance (ESG) factors.
The structure of the merger, particularly the Up-C arrangement and the provision for CSI Compressco unitholders to receive limited liability company units, is a sophisticated approach that could offer tax benefits and flexibility for unitholders. This structure may also facilitate future transactions and financial arrangements. The support agreements with major unitholders, including Spartan Energy Partners, indicate strong backing for the merger and could streamline the approval process.
Given the size of the transaction and the involved debt refinancing, the successful execution of the merger will be critical. The planned senior notes offering by Kodiak to refinance CSI Compressco's debt showcases proactive financial management, but it also introduces a layer of complexity and risk. Investors should assess the terms of this offering and its impact on the company's financial structure.
Lastly, the transaction's timing, with a closing expected in the second quarter of 2024, provides a clear timeline for stakeholders to anticipate changes and plan accordingly. However, the time until closing also presents a window during which external factors could influence the merger's final terms or viability. Close attention should be paid to regulatory developments, including Hart Scott Rodino Act clearance, which could affect the merger's progression.
- All-equity acquisition to create the industry's largest contract compression fleet of 4.3 million revenue-generating horsepower
- Deepens Kodiak's position in key operating areas, including over 2.8 million horsepower in the Permian Basin
- Expected annual run-rate cost synergies of at least
$20 million - CSI Compressco unitholders will receive 0.086 shares of Kodiak common stock for each CSI Compressco common unit owned, representing a price of approximately
$1.65 - Kodiak shareholders will realize immediate accretion to Discretionary Cash Flow and Free Cash Flow per share upon closing
- Transaction benefits to CSI Compressco unitholders include a significantly increased dividend, greater stock trading liquidity and significant opportunities for long-term value appreciation
- Kodiak to host a conference call on December 19, 2023 at 9:00 a.m. ET / 8:00 a.m. CT
Strategic Rationale and Transaction Highlights
The addition of CSI Compressco's fleet will give Kodiak the largest contract compression fleet in the industry with 4.3 million revenue-generating horsepower, while also extending Kodiak's service offerings deeper into the natural gas value chain through CSI Compressco's treating, gas cooling and aftermarket services businesses. This enhanced scale will allow Kodiak to continue to provide the highest level of service in the industry and deepen its industry-leading footprint in key operating areas such as the Permian Basin and Eagle Ford Shale. Like Kodiak, CSI Compressco's natural gas compression revenues are supported by fixed-revenue contracts with inflation-protection mechanisms intended to drive stable cash flows through commodity price cycles.
Utilizing Wall Street consensus estimates for both companies, the combined entity is expected to generate approximately
CEO Commentary
Kodiak's CEO Mickey McKee noted "I am excited to announce the acquisition of CSI Compressco, a highly accretive and leverage-neutral transaction that we believe will unlock significant value for both Kodiak shareholders and CSI Compressco unitholders. The increased scale provided by the industry's largest contract compression fleet will allow Kodiak to continue to provide the highest level of service in the industry to our customers, many of which are themselves undergoing consolidation. The increase in pro forma Discretionary Cash Flow and Free Cash Flow will provide Kodiak greater financial flexibility to increase dividends, and implement a share repurchase program, all of which is consistent with our capital allocation strategy that combines investment to grow our fleet and the return of capital to shareholders through an attractive dividend, all while living within free cash flow."
McKee continued, "John Jackson and his team have done a remarkable job of transforming CSI Compressco in the nearly three years since CSI Compressco's general partner was acquired by Spartan Energy Partners LP. The CSI Compressco management team has demonstrated a tremendous track record of improving fleet utilization, increasing EBITDA and reducing leverage by focusing on large horsepower, infrastructure applications in premier basins in the
John Jackson, CSI Compressco's Chief Executive Officer, noted, "The combination of Kodiak and CSI Compressco creates the market leader in compression infrastructure, with significant scale and a diversified customer base. CSI Compressco unitholders will benefit from their ownership in Kodiak in multiple ways - particularly the scale of the combined companies, a strong balance sheet, and an attractive dividend."
Transaction Details
Under the terms of the merger agreement, CSI Compressco unitholders will receive 0.086 shares of Kodiak common stock for each CSI Compressco common unit owned. The combined company will have an "Up-C" structure at closing, and CSI Compressco unitholders meeting certain requirements will have the ability to elect to receive 0.086 limited liability company units representing economic interests in Kodiak's operating subsidiary (along with an equal number of shares of non-economic voting preferred stock of Kodiak) for each CSI Compressco common unit they hold. Each such unit will be redeemable at the option of the holder for one share of Kodiak common stock (along with cancellation of a corresponding share of preferred stock), following a six month post-closing lock-up and subject to certain conditions. Upon closing, CSI Compressco unitholders will own approximately
The transaction has been approved by the Board of Directors of Kodiak and the Board of Directors of CSI Compressco GP LLC. Certain unitholders of CSI Compressco, including Spartan Energy Partners LP, which controls the CSI Compressco GP LLC, Merced Capital LP and Orvieto Fund, that collectively own more than
The transaction is expected to close in the second quarter of 2024, subject to certain regulatory approvals and other closing conditions, including Hart Scott Rodino Act clearance.
Kodiak expects to launch a senior notes offering in the first quarter of 2024, the proceeds of which would ultimately be used to refinance CSI Compressco's debt at closing of the acquisition.
Shareholder Commentary
Alex Darden, Partner and Head of EQT Infrastructure Advisory Team Americas, President of EQT Partners Inc. and Kodiak board member, noted, "This transaction brings unique, significant value creation opportunities. We have full confidence that Kodiak's best-in-class management team, with the combined power of CSI Compressco, will maintain the highest level of service to their customers. EQT looks forward to continuing our longstanding partnership with Kodiak as they continue on their growth trajectory."
Conference Call Information
Kodiak management will host a conference call for investors on December 19, 2023 at 9:00 a.m. Eastern Time (8:00 a.m. Central Time). The conference call may be accessed by dialing (201) 389-0872 or via webcast at ir.kodiakgas.com.
Additional Information
A slide presentation with additional information is accessible via the Kodiak website at ir.kodiakgas.com.
Advisors
Barclays acted as sole financial advisor to Kodiak and King & Spalding LLP acted as legal counsel. Jefferies LLC acted as sole financial advisor to CSI Compressco and Vinson & Elkins LLP acted as legal counsel.
About Kodiak
Kodiak Gas Services, Inc. is one of the largest contract compression services providers in the continental
About CSI Compressco
CSI Compressco is a provider of compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. In addition, CSI Compressco provides a variety of natural gas treating services. CSI Compressco's contract services business includes a fleet of approximately 4,800 compressor packages providing approximately 1.2 million in aggregate horsepower, utilizing a full spectrum of low-, medium- and high-horsepower engines. Additionally, our gas treating equipment fleet includes natural gas cooling units used to reduce the temperature of natural gas so that it can be further treated, processed, or compressed. CSI Compressco also provides well monitoring and automated sand separation services in conjunction with compression and related services in
Important Information about the Transaction and Where to Find It
In connection with the merger transaction (the "Merger"), Kodiak will file with the
The registration statement and consent solicitation statement/prospectus, any amendments or supplements thereto and other relevant materials, and any other documents filed by CSI Compressco or Kodiak with the SEC, may be obtained once such documents are filed with the SEC free of charge at the SEC's website at www.sec.gov or free of charge from CSI Compressco at CSI Compressco's website at www.csicompressco.com or by directing a request to CSI Compressco's Investor Relations Department at jon.byers@csicompressco.com or Kodiak at www.kodiakgas.com or by directing a request to Kodiak's Investor Relations Department at IR@kodiakgas.com.
Participants in the Solicitation
CSI Compressco, Kodiak and certain of their respective executive officers, directors, other members of management and employees (including those of CSI Compressco's general partner) may, under the rules of the SEC, be deemed to be "participants" in the solicitation of proxies in connection with the Merger. Information regarding the directors and executive officers of CSI Compressco's general partner is available in the section titled "Part III. Item 10. Directors, Executive Officers, and Corporate Governance" on page 49 of CSI Compressco's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 13, 2023 (and available at https://www.sec.gov/Archives/edgar/data/1449488/000144948823000007/cclp-20221231.htm#i40c921f80f634f31b68afa431e9e8b34_97). Information regarding Kodiak's directors and executive officers is available in the section titled "Management—Directors and Executive Officers" on page 115 of Kodiak's final prospectus filed in connection with Kodiak's initial public offering and with the SEC on June 30, 2023 (and available at https://www.sec.gov/Archives/edgar/data/1767042/000119312523180561/d454014d424b4.htm#rom454014_10). These documents may be obtained free of charge from the sources indicated above. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the registration statement on Form S-4, the consent solicitation statement/prospectus and other relevant materials relating to Merger to be filed with the SEC when they become available. Security holders, potential investors and other readers should read the consent solicitation statement/prospectus carefully when it becomes available before making any voting or investment decisions.
No Offer or Solicitation
This communication relates to the Merger and is for informational purposes only and is not intended to, and shall not, constitute an offer to sell or the solicitation of an offer to buy any securities, or a solicitation of any vote or approval, pursuant to the Merger or otherwise, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
Cautionary Note Regarding Forward-Looking Statements
This news release contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of Kodiak and CSI Compressco's control. Actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements. Important factors that could cause Kodiak and CSI Compressco's actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: the satisfaction of closing conditions to the transaction in a timely manner, if at all; receipt of all necessary regulatory and/or competition approvals on terms acceptable to Kodiak and CSI Compressco; the ability of the combined entity to realize the anticipated benefits of, and synergies from, the transaction and the timing and quantum thereof; consequences of not completing the transaction, including the volatility of the equity prices of Kodiak and CSI Compressco, negative reactions from the investment community and the required payment of certain; actions taken by government entities or others seeking to prevent or alter the terms of the Transaction; potential undisclosed liabilities unidentified during the due diligence process; the accuracy of the pro forma financial information of the combined entity; the success of business integration and the time required to successfully integrate; the focus of management's time and attention on the transaction and other disruptions arising from the transaction; the ability to maintain desirable financial ratios; the ability to access various sources of debt and equity capital, generally, and on acceptable terms; the ability to maintain relationships with partners and to successfully manage and operate integrated businesses; and such other factors as discussed throughout the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of Kodiak's final prospectus filed with the SEC on June 30, 2023 pursuant to Rule 424(b)(4) and throughout Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A. "Risk Factors" sections of Kodiak's and CSI Compressco's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023.
Any forward-looking statement made in this news release is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by applicable law, Kodiak and CSI Compressco undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future developments or otherwise.
Contacts:
Kodiak Gas Services, Inc.
Graham Sones, VP – Investor Relations
ir@kodiakgas.com
Dennard Lascar Investor Relations
Ken Dennard / Rick Black
KGS@DennardLascar.com
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SOURCE Kodiak Gas Services, Inc.
FAQ
What is the value of the acquisition of CSI Compressco by Kodiak?
What will be the size of the contract compression fleet after the acquisition?
What are the expected cost synergies of the acquisition?
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