8-K: Summit Midstream Corporation Announces Transformative Acquisition of Tall Oak Midstream III

Summit Midstream Corporation has agreed to acquire Tall Oak Midstream Operating, LLC for a mix of cash and equity, expanding its operations into the Arkoma Basin.

Summary

• Summit Midstream Corporation (SMC) is acquiring Tall Oak Midstream Operating, LLC for $155 million in cash and approximately 7.5 million shares of Class B common stock and corresponding partnership units.
• The deal includes a potential $25 million earnout payable in cash through March 31, 2026.
• The acquisition will expand SMC's operations into the Arkoma Basin, adding 440 MMcf/d of processing capacity and over 400 miles of pipelines.
• The transaction is expected to reduce SMC's pro forma leverage to 3.8x at closing.
• The acquisition is expected to be accretive with a multiple of ~5.6x 2025E asset-level Adjusted EBITDA.
• The transaction is expected to close in the fourth quarter of 2024, subject to customary closing conditions, shareholder approval and regulatory approvals.

Sentiment

Score: 8

Explanation: The document expresses a highly positive outlook on the acquisition, highlighting its strategic benefits, financial accretion, and growth potential. The management comments are enthusiastic, and the transaction is presented as a significant step forward for the company.

Positives

• The acquisition is expected to be accretive to Summit Midstream.
• The transaction is expected to reduce Summits pro forma leverage.
• The acquisition expands Summits operations into the Arkoma Basin.
• The deal increases Summits exposure to natural gas-oriented drilling.
• The transaction provides Summit with more financial flexibility to consider returning capital to shareholders.
• The Tall Oak system has long-term, fee-based contracts with a weighted average term of approximately 13 years.

Risks

• The transaction is subject to customary closing conditions, shareholder approval and regulatory approvals.
• The earnout payment is contingent on Tall Oak and its customers meeting certain development requirements.
• The transaction may not achieve the expected financial results.

Future Outlook

The acquisition is expected to enhance Summits growth outlook and free cash flow generating capabilities, and the company is positioned to consider returning capital to shareholders in 2025.

Management Comments

• Heath Deneke, President, Chief Executive Officer and Chairman, stated that the acquisition represents a significant step forward in their strategic growth plan and that Tall Oak Midstreams high-quality assets and talented team will complement their existing operations.
• Jason Downie, Co-Founder and Managing Partner at Tailwater Capital, stated that the Tall Oak assets are complementary to Summits existing gas portfolio and that the Company is well positioned to drive even more value for shareholders over the coming years.
• Ryan Lewellyn, President and Chief Executive Officer at Tall Oak Midstream III, stated that they are excited to become a shareholder in Summit and look forward to helping to ensure a smooth integration and transition of the Tall Oak assets for their customers and all Summit stakeholders.

Industry Context

The acquisition aligns with the trend of consolidation in the midstream energy sector and increases Summits exposure to natural gas-oriented drilling, which is expected to benefit from growing Gulf Coast gas demand.

Comparison to Industry Standards

• The acquisition multiple of ~5.6x 2025E asset-level Adjusted EBITDA is below SMCs current EV / 2025E Adjusted EBITDA trading multiple of ~7.1x.
• The pro forma leverage of 3.8x at closing is below the peer average of ~4.4x.
• The expected Adjusted EBITDA growth of ~8% is above the peer average of ~5%.

Management Changes

Stakeholder Impact

• Shareholders are expected to benefit from the increased scale, higher free cash flow generation, and potential return of capital.
• Employees of Tall Oak Midstream will be integrated into Summit Midstream.
• Customers of both companies are expected to benefit from the combined operations.

Next Steps

• The transaction is expected to close in the fourth quarter of 2024, subject to customary closing conditions, shareholder approval and regulatory approvals.
• Summit will host a conference call on October 2, 2024, to discuss the acquisition.
• Summit will file a proxy statement with the SEC regarding the proposed transaction.

Key Dates

Keywords

acquisition, midstream, natural gas, Arkoma Basin, processing, pipelines, Summit Midstream, Tall Oak Midstream, Tailwater Capital, leverage, EBITDA