(CSI Compressco, 19.Dec.2023) — Kodiak Gas Services, Inc. (NYSE: KGS) and CSI Compressco LP (NASDAQ: CCLP) executed a definitive merger agreement under which Kodiak will acquire CSI Compressco in an all-equity transaction valued at approximately $854mn, including the assumption of $619mn of net debt, based on the closing price of Kodiak’s stock on 18 Dec. 2023.
Highlights:
- All-equity acquisition to create the industry’s largest contract compression fleet of 4.3mn revenue-generating horsepower
- Deepens Kodiak’s position in key operating areas, including over 2.8mn horsepower in the Permian Basin
- Expected annual run-rate cost synergies of at least $20mn
- 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 per unit based on the closing price of Kodiak’s stock on 18 Dec. 2023
- 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 19 Dec. 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 4.3mn 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 $630mn in 2024 Adjusted EBITDA after the expected annual run-rate cost synergies of at least $20mn. The transaction is expected to be immediately accretive to Kodiak’s Discretionary Cash Flow and Free Cash Flow per share, and leverage-neutral to Kodiak after expected synergies. In addition, Kodiak continues to expect to achieve its long-term leverage target of 3.0-3.5x by year end 2025. For CSI Compressco unitholders, the Kodiak stock received in the transaction is expected to provide an enhanced dividend, while also providing greater trading liquidity and research coverage.
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 U.S., consistent with Kodiak’s core operating philosophy. We look forward to continuing these efforts as we combine these companies and welcome the talented employees of CSI Compressco into the Kodiak family.”
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 14% of the combined company on a fully diluted basis.
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 50% of CSI Compressco’s outstanding units have entered into support agreements, pursuant to which they have agreed to vote their CSI Compressco units in favor of the merger upon effectiveness of the S-4 Registration Statement with the SEC.
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 19 Dec. 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.
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