8-K: Archrock to Acquire Total Operations and Production Services for $983 Million

Archrock, Inc. has announced a definitive agreement to acquire Total Operations and Production Services, LLC for $983 million in a cash and stock transaction.

Summary

• Archrock, Inc. will acquire Total Operations and Production Services, LLC (TOPS) for $983 million.
• The transaction includes approximately 580,000 horsepower of compression assets, predominantly young electric motor drive equipment.
• The purchase price consists of $826 million in cash and 6.87 million newly issued shares of Archrock common stock.
• Archrock intends to fund the cash portion through a combination of equity and debt.
• The acquisition is expected to be immediately accretive to Archrock's earnings per share and cash available for dividend per share.
• The transaction is anticipated to close by the end of 2024, subject to customary approvals.
• The acquired assets are expected to generate approximately $136 million of third quarter 2024 annualized adjusted EBITDA.
• The purchase price represents a transaction multiple of 7.3x third quarter of 2024 annualized adjusted EBITDA.

Sentiment

Score: 8

Explanation: The document is very positive, highlighting the strategic and financial benefits of the acquisition. The language used is optimistic and forward-looking, suggesting a high level of confidence in the transaction's success.

Positives

• The acquisition expands and diversifies Archrock's contract compression operations.
• It increases Archrock's sustainability efforts by adding electric motor drive equipment.
• The transaction is expected to create significant value for Archrock shareholders.
• TOPS has a highly-utilized and young asset base with a substantial contracted backlog.
• The acquisition enhances Archrock's ability to meet growing demand for lower carbon solutions.
• The transaction will enable Archrock to continue investing in its business while increasing shareholder returns and maintaining a strong balance sheet.

Risks

• The transaction may not be completed or the anticipated benefits may not be realized.
• Management's time may be diverted on transaction-related issues.
• The required approvals to complete the transaction may not be obtained.
• Archrock may not be able to access the capital markets on acceptable terms to fund the cash portion of the transaction.
• Changes in customer, employee or supplier relationships of Archrock or TOPS could occur.
• Local, regional and national economic and financial market conditions may impact Archrock, TOPS and their customers.
• Future regulatory conditions, including changes in tax laws, could affect the transaction.
• Conditions in the oil and gas industry, including changes in supply, demand or prices, could impact the transaction.
• The financial condition of Archrock's or TOPS' customers could affect the transaction.
• Archrock may not be able to successfully integrate the operations of TOPS.
• The retention of certain key employees of TOPS may be a challenge.

Future Outlook

The transaction is expected to be immediately accretive to Archrock's earnings per share and cash available for dividend per share. The company expects to continue investing in its business while increasing shareholder returns and maintaining a strong balance sheet. The transaction is expected to close by the end of 2024.

Management Comments

• Our acquisition of TOPS is an exciting opportunity to expand and diversify our contract compression operations, increase sustainability and create significant value for Archrock shareholders.
• This transaction will accelerate the meaningful progress weve made advancing our strategy of high-grading our fleet, improving profitability, expanding our operations in basins with strong long-term growth prospects and helping our customers achieve their emissions reduction goals.
• We are buying a rapidly growing business with a substantial and contracted backlog.
• The transaction is expected to be more than 10% accretive to earnings per share and more than 20% accretive to cash available for dividend per share in 2025.
• We have deep admiration for the TOPS team and the innovative company, brand and culture that theyve built.
• We look forward to welcoming TOPS to the Archrock family, expanding our presence in the Permian Basin, and working together to pursue our shared mission of delivering energy to help power a cleaner America.
• We are excited to join together with Archrock during an important time for our company and our industry.
• TOPS horsepower is contracted with blue-chip customers in the Permian Basin, making the addition of our electric motor business highly strategic and complementary for Archrock.
• We look forward to joining the Archrock team and working together to serve more customers across the country while driving continued growth and value creation.

Industry Context

This acquisition reflects a trend in the energy industry towards consolidation and a focus on lower-emission solutions. Archrock is positioning itself to capitalize on the growing demand for electric motor drive compression, particularly in the Permian Basin.

Comparison to Industry Standards

• The acquisition of TOPS will increase Archrock's operating horsepower to approximately 4.1 million, making it a larger player in the contract compression market.
• The addition of 648,000 electric motor drive horsepower will significantly increase Archrock's capacity in this area, which is becoming increasingly important for emissions reduction.
• The transaction multiple of 7.3x third quarter of 2024 annualized adjusted EBITDA is within the range of comparable transactions in the energy infrastructure sector.
• The expected accretion to earnings per share and cash available for dividend per share is a positive sign for investors, indicating that the acquisition is expected to be financially beneficial.
• The focus on the Permian Basin aligns with the industry's focus on this key production area.

Stakeholder Impact

• Shareholders are expected to benefit from increased earnings per share and cash available for dividend per share.
• Employees of TOPS are expected to join the Archrock team with no planned changes to the organization, personnel or operations.
• Customers of both Archrock and TOPS are expected to benefit from the combined company's enhanced capabilities and expanded presence.
• Suppliers of both Archrock and TOPS are expected to continue their relationships with the combined company.

Next Steps

• Archrock will seek regulatory approvals for the transaction.
• Archrock will work to complete the financing for the cash portion of the acquisition.
• Archrock will integrate TOPS into its operations.
• Archrock will continue to pursue its strategy of high-grading its fleet and expanding its operations in key basins.

Key Dates

Keywords

acquisition, contract compression, electric motor drive, Permian Basin, EBITDA, natural gas, Archrock, Total Operations and Production Services, TOPS, Apollo Global Management