Kodiak Gas Services, Inc. (NYSE: KGS) (“Kodiak”), a prominent player in contract compression services, and CSI Compressco LP (NASDAQ: CCLP) (“CSI Compressco”), a key provider of compression and related services, have announced a definitive merger agreement. This all-equity transaction, valued at approximately $854 million, including the assumption of $619 million in net debt, will see Kodiak acquire CSI Compressco, creating an industry powerhouse with an unparalleled contract compression fleet. This strategic move is poised to deliver significant benefits to both Kodiak shareholders and CSI Compressco Partners, marking a new chapter in the energy infrastructure sector.
Strategic Advantages of Kodiak and CSI Compressco Partnership
The merger of Kodiak and CSI Compressco will forge the largest contract compression fleet in the industry, boasting an impressive 4.3 million revenue-generating horsepower. This expanded scale positions the newly formed entity to offer an even broader suite of services, extending deeper into the natural gas value chain. CSI Compressco’s expertise in treating, gas cooling, and aftermarket services perfectly complements Kodiak’s existing strengths, creating a comprehensive service portfolio. For customers and partners, this means access to a more robust and integrated service offering, ensuring operational efficiency and reliability across their natural gas operations. The combined entity will solidify its leading presence in crucial operating regions, most notably the Permian Basin, where they will command over 2.8 million horsepower, and the Eagle Ford Shale, guaranteeing exceptional service delivery in these key areas. Like Kodiak, CSI Compressco’s revenue model, anchored by fixed-revenue contracts with built-in inflation protection, ensures stable cash flows, a critical advantage in navigating commodity price fluctuations.
Financial Synergies and Benefits for Compressco Partners
The financial outlook for this partnership is exceptionally strong. Projections based on Wall Street consensus estimates indicate a combined Adjusted EBITDA of approximately $630 million for 2024, factoring in anticipated annual run-rate cost synergies of at least $20 million. This merger is expected to be immediately accretive to Kodiak’s Discretionary Cash Flow and Free Cash Flow per share, while maintaining Kodiak’s leverage neutrality after accounting for synergies. Kodiak remains confident in achieving its long-term leverage target of 3.0-3.5x by the end of 2025. Crucially, CSI Compressco partners, specifically unitholders, are set to gain significantly. The Kodiak stock they will receive as part of the transaction promises an enhanced dividend, alongside improved stock trading liquidity and broader research coverage, creating substantial avenues for long-term value appreciation. This financial structure is designed to reward CSI Compressco partners for their commitment and investment.
Leadership Perspectives on the New Partnership
Mickey McKee, CEO of Kodiak, expressed his enthusiasm about the acquisition: “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 further acknowledged the transformation of CSI Compressco under the leadership of John Jackson and his team, highlighting their success in improving fleet utilization, increasing EBITDA, and reducing leverage by focusing on large horsepower, infrastructure applications in premier basins. He welcomed CSI Compressco employees into the Kodiak family, anticipating continued success through combined efforts.
John Jackson, CEO of CSI Compressco, also commented on the merger’s positive implications: “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.”
Understanding the Transaction for Compressco Partners and Stakeholders
Under the merger agreement, CSI Compressco unitholders will receive 0.086 shares of Kodiak common stock for each CSI Compressco common unit they own. The merged entity will operate under an “Up-C” structure post-closing. Eligible CSI Compressco unitholders will have the option to receive 0.086 limited liability company units in Kodiak’s operating subsidiary, coupled with non-economic voting preferred stock, for each CSI Compressco common unit. These units will be redeemable for Kodiak common stock after a six-month lock-up period, subject to certain conditions. Upon the transaction’s completion, CSI Compressco unitholders are projected to hold approximately 14% of the combined company on a fully diluted basis, ensuring their continued stake and participation in the growth of the new entity. This structure is designed to be beneficial for all stakeholders, particularly Compressco partners, as they transition into shareholders of a larger, more robust organization.
The transaction has already secured approvals from the Board of Directors of both Kodiak and CSI Compressco GP LLC. Key CSI Compressco unitholders, including Spartan Energy Partners LP, Merced Capital LP, and Orvieto Fund, collectively owning over 50% of CSI Compressco’s outstanding units, have pledged their support for the merger, signaling strong confidence in the strategic direction.
Investor Confidence in Kodiak and Compressco Partnership
Alex Darden, Partner and Head of EQT Infrastructure Advisory Team Americas, President of EQT Partners Inc. and Kodiak board member, emphasized the value creation potential of this merger: “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.” This endorsement from a major investor underscores the market’s positive reception of the merger and its anticipated success.
A Stronger Future for Kodiak, CSI Compressco, and Their Partners
The acquisition is expected to finalize in the second quarter of 2024, pending regulatory approvals and standard closing conditions, including Hart Scott Rodino Act clearance. Kodiak intends to launch a senior notes offering in the first quarter of 2024 to refinance CSI Compressco’s debt at closing. This merger represents a transformative step for both Kodiak Gas Services and CSI Compressco, creating a market-leading entity poised for continued growth and success. The partnership promises enhanced service capabilities for customers, significant financial benefits for shareholders and unitholders (compressco partners), and a stronger, more stable presence in the dynamic energy landscape. The combined strengths of Kodiak and CSI Compressco are set to drive innovation and efficiency in the contract compression sector, benefiting all stakeholders involved.
