Texas service companies Kodiak Gas Services and CSI Compressco LP have executed a definitive merger agreement in which Kodiak will acquire CSI in an all-equity transaction valued at approximately $854 million, including the assumption of $619 million of net debt, the companies said Dec. 19.

Kodak’s addition of CSI Compressco's fleet will give Kodiak the largest contract compression fleet in the industry, with 4.3 million revenue-generating horsepower, including 2.8 MMhp in the Permian Basin. The deal also extends Kodiak's service offerings deeper into the natural gas value chain through CSI Compressco's treating, gas cooling and aftermarket services businesses.

“This enhanced scale will allow Kodiak to continue to provide the highest level of service in the industry and deepen its industry-leading footprint in key operating areas such as the Permian Basin and Eagle Ford Shale,” the companies said. “Like Kodiak, CSI Compressco's natural gas compression revenues are supported by fixed-revenue contracts with inflation-protection mechanisms intended to drive stable cash flows through commodity price cycles.”

The combined entity is expected to generate 2024 adjusted EBITDA of approximately $630 million after the expected annual run-rate cost synergies of at least $20 million.

The companies said the transaction is expected to be immediately accretive to Kodiak's discretionary cash flow and free cash flow per share. The deal will be leverage-neutral to Kodiak after expected synergies, according to a press release. In addition, Kodiak continues to expect to achieve its long-term leverage target of 3.0x to 3.5x by yearend 2025.

The value of the transaction is partially based on the closing price of Kodiak's stock on Dec. 18.

Under the terms of the agreement, CSI Compressco unitholders will receive 0.086 shares of Kodiak common stock for each CSI Compressco common unit owned. 

For CSI Compressco unitholders, the Kodiak stock received in the transaction is expected to provide an enhanced dividend and greater trading liquidity and research coverage.

The transaction has been approved by Kodiak and CSI’s boards. Certain unitholders of CSI Compressco, including Spartan Energy Partners LP, which controls the CSI Compressco GP LLC, Merced Capital LP and Orvieto Fund—that collectively own more than 50% of CSI Compressco's outstanding units—have entered into support agreements in which they have agreed to vote in favor of the merger.

Kodiak's CEO Mickey McKee said the acquisition of CSI Compressco will be highly accretive and leverage-neutral that “we believe will unlock significant value for both Kodiak shareholders and CSI Compressco unitholders,” according to a press release. “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 projected 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, McKee said.

John Jackson, CSI Compressco's CEO, said the combination 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."

Barclays acted as sole financial adviser to Kodiak. King & Spalding LLP acted as legal counsel.

Jefferies LLC acted as sole financial adviser to CSI Compressco and Vinson & Elkins LLP acted as legal counsel.