8-K: Summit Midstream to Acquire Tall Oak Midstream, Bolstering Gas Portfolio and Accelerating Shareholder Returns

Summit Midstream Corporation is set to acquire Tall Oak Midstream, a move that will significantly increase its scale, rebalance its portfolio towards natural gas, and accelerate its timeline for returning capital to shareholders.

Summary

• Summit Midstream Corporation (SMC) has announced the acquisition of Tall Oak Midstream for $450 million, consisting of $155 million in cash, $7.5 million in Class B common stock and SMLP common units, and a $25 million earn-out.
• The acquisition is expected to close in the fourth quarter of 2024, subject to shareholder and regulatory approvals.
• The deal is structured as an up-C transaction, allowing Tall Oak's owners to defer taxes on the equity portion of the consideration.
• The Tall Oak system includes over 400 miles of pipeline, two processing plants with a capacity of 440 million cubic feet per day, and 65,000 horsepower of compression capacity.
• The system is currently operating at approximately 50% utilization, with significant capacity for future growth.
• The acquisition is expected to increase Summit's scale by 35% based on 2024 EBITDA and rebalance its portfolio to a 50-50 mix of gas and oil-weighted assets.
• Pro forma leverage is expected to decrease from 4.4x to 3.8x at closing, with a target of 3.5x in the near term.
• The combined company is projected to grow from $250 million of LTM EBITDA in 2024 to over $350 million in 2028, representing an 8% compound annual growth rate.
• The transaction is expected to significantly increase free cash flow generation, enabling the company to consider dividends or share buybacks as early as next year.
• Tailwater Capital will own approximately 40% of the pro forma company and will have four representatives on the expanded 11-member board.

Sentiment

Score: 9

Explanation: The document expresses strong optimism about the acquisition, highlighting its strategic benefits, financial advantages, and potential for shareholder value creation. The management's confidence and the positive outlook for the natural gas market contribute to a very positive sentiment.

Positives

• The acquisition is value accretive, with a purchase multiple of approximately 5.6x 2025 adjusted EBITDA, which is about 1.5 turns below Summit's current enterprise value multiple.
• The transaction is balance sheet enhancing, reducing pro forma leverage from 4.4x to 3.8x at closing.
• The Tall Oak system is primed for strong volumetric and EBITDA growth due to increasing gas demand and pricing.
• The Tall Oak system is fully built out with ample capacity to double current volumes with minimal capital requirements.
• The transaction accelerates the company's ability to begin returning capital to shareholders.
• Tailwater Capital is a long-term investor with a strong track record in the energy sector.
• The Tall Oak system has a strong customer base with long-term contracts.
• The Arkoma Basin offers low drilling costs and improving well results.
• The Tall Oak system is located in a liquids-rich fairway, enhancing producer returns.
• The system has a solid PDP base with over 120 wells connected.

Negatives

• The transaction is subject to shareholder and regulatory approvals, which could introduce delays.
• The Tall Oak system has some commodity price exposure due to NGL recovery and condensate sales.
• There is a wide range for 2025 adjusted EBITDA, from $65 million to $95 million, due to uncertainty in gas prices and well connections.
• The company will incur approximately $20 million in capital expenditures in 2025, excluding integration costs.

Risks

• The transaction is subject to shareholder and regulatory approvals, which could introduce delays.
• There is uncertainty in gas prices, which could impact the financial performance of the Tall Oak system.
• The company is exposed to commodity price risk through NGL recovery and condensate sales.
• The company's ability to achieve its growth targets depends on producer activity and well connections.
• The company may face integration challenges in combining the Tall Oak assets with its existing operations.
• The company's future performance is subject to various risks and uncertainties, as detailed in the Form S-4.

Future Outlook

The company anticipates significant growth in EBITDA and free cash flow, driven by increased natural gas demand and the integration of the Tall Oak assets. They are also considering returning capital to shareholders through dividends or share buybacks as early as next year.

Management Comments

• We are very excited about the strategic and value-enhancing transaction, and we've been looking forward to the opportunity to share it with you.
• We believe the midstream sector was ripe for consolidation and that we see an opportunity-rich environment for Summit to be an acquirer of assets to scale the business and drive value-added growth.
• The transaction is delevering out of the gate, and it adds significant free cash flow to our portfolio.
• The immediately delevering nature of this transaction, combined with the added free cash flow growth profile positions the company to consider turning on a dividend and/or share buyback program as early as next year.
• We see Tailwater as a fully aligned long-term investor in Summit, and we are thrilled to partner with the team that has specialized expertise in midstream energy and environmental infrastructure sectors.
• This deal puts us in a much better position to go do that.

Industry Context

This acquisition aligns with the broader trend of consolidation in the midstream sector. The move to increase exposure to natural gas is also timely, given the anticipated growth in demand for gas due to LNG exports and increased power generation needs. The company is positioning itself to capitalize on these trends.

Comparison to Industry Standards

• The acquisition multiple of 5.6x 2025 adjusted EBITDA is below Summit's current enterprise value multiple, suggesting a value-accretive deal.
• The company's target leverage of 3.5x is in line with industry best practices for financial discipline.
• The projected 8% CAGR in EBITDA is competitive with industry peers.
• The company's free cash flow conversion of 70% plus is considered strong compared to industry averages.
• The company is aiming to trade more in line with its peer group, which currently has an average annual enterprise value multiple of 8.6x, compared to Summit's implied 7.1x.

Management Changes

Stakeholder Impact

• Shareholders are expected to benefit from increased scale, reduced leverage, and potential for dividends or share buybacks.
• Employees may experience changes due to the integration of the Tall Oak assets.
• Customers of both Summit and Tall Oak are expected to benefit from the combined company's increased scale and resources.
• Suppliers and creditors may see changes in their relationships with the company due to the acquisition.

Next Steps

• The company will file a proxy statement with the SEC.
• The company will seek shareholder and regulatory approvals for the transaction.
• The company will work towards closing the transaction in the fourth quarter of 2024.
• The company will integrate the Tall Oak assets into its existing operations.
• The company will evaluate the potential for a dividend or share buyback program.
• The company will continue to pursue organic growth and opportunistic M&A opportunities.

Key Dates

Keywords

Acquisition, Midstream, Natural Gas, EBITDA, Leverage, Free Cash Flow, Shareholder Value, Tall Oak Midstream, Arkoma Basin, Consolidation