[Editor's note: This story was updated at 9:24 a.m. CDT June 25.]

Archrock Inc. revealed a series of A&D transactions June 24 that included Hilcorp Energy Co. Founder Jeffery D. Hildebrand joining the Houston-based company’s board.

In its first transaction, Archrock agreed to the cash-and-stock acquisition of Elite Compression Services LLC worth roughly $410 million. Elite, a rival of Archrock, is a portfolio company of JDH Capital Co. based in Victoria, Texas.

Elite: hp by Geography Graph (Source: Archrock Inc. June 2019 Investor Presentation)
Elite: hp by Geography Graph
(Source: Archrock Inc. June 2019 Investor Presentation)
2) As of May 31, 2019.

The Elite acquisition includes about 430,000 of predominately large-horsepower (hp) compression assets located primarily in the Eagle Ford Shale. In conjunction with the transaction, Archrock said it will sell about 80,000 active and idle compression hp to Harvest Midstream Co. for $30 million in cash.

Additionally, the company said energy industry veteran Hildebrand, currently serving as executive chairman of Hilcorp which is affiliated with both JDH Capital and Harvest Midstream, will join its board of directors upon closing of the transactions.

“Archrock and Elite have been fantastic service providers of ours for many years, and we are pleased to be partnering with a company that is aligned with our strategy of natural gas production growth and best in class midstream operations,” Hildebrand said in a statement June 24. “They have sufficient scale, experience and capabilities to grow with us over time.”

The addition of Elite increases Archrock’s compression asset base to about 4.4 million total hp from 4 million as of March 31, according to analysts with Capital One Securities. The analysts estimate roughly 90% of the new hp revenues are generated by Hilcorp or Marathon Oil Corp.

“[The Elite] transaction is accretive to earnings and free cash flow per share and should enable [Archrock] to continue its plan of deleveraging, reaching less than 4x debt/EBITDA in 2020 while also increasing the dividend 10%-15% on an annual basis through 2020 with a dividend coverage ratio greater than 2x,” the analyst wrote in a June 24 research note.

The Capital One analysts also believe the Elite footprint complements Archrock’s existing portfolio of assets.

Elite’s hp assets are mostly located in the Eagle Ford and South Texas region with smaller percentages in the Permian Basin, Scoop/Stack and Marcellus/Utica. The units are over 80% contracted for 3 or more years with “blue-chip customers,” said Brad Childers, Archrock’s president and CEO.

“This transaction adds basin density in our core areas, with more than 70% of the units deployed in the Eagle Ford and South Texas region, and the concurrent sale of noncore equipment further standardizes our asset portfolio,” Childers said in a statement on June 24.

Childers added the acquired Elite assets are estimated to add roughly $55 million of annual EBITDA, including $5 million in cost synergies.

Contract Operations Chart (Source: Archrock Inc. June 2019 Investor Presentation)
Contract Operations Chart (Source: Archrock Inc. June 2019 Investor Presentation)
1) Chart represents operating HP for outsourced compression (in thousands).
As of March 31, 2019. Elite as of May 31, 2019. Based on SEC filings and management estimates.
Archrock shown pro-forma for Elite acquisition and noncore asset sale. 

Archrock expects to close the transactions during third-quarter 2018. The company will fund the Elite acquisition with roughly $205 million in cash and about 21.7 million new Archrock shares issued directly to the seller.

Citi is exclusive financial adviser to Archrock for the transactions. Latham & Watkins is the company’s legal adviser. Meanwhile, Intrepid Partners LLC is exclusive financial adviser and Kirkland & Ellis is legal adviser to JDH Capital and Elite.

Emily Patsy can be reached at epatsy@hartenergy.com.