Kodiak Gas Services and CSI Compressco have officially entered into a definitive merger agreement. According to the terms of the agreement, Kodiak will complete the acquisition of CSI Compressco through an all-equity transaction, with an estimated total value of around $854m.

This valuation includes taking on approximately $619m in net debt. The calculation is based on the closing price of Kodiak’s stock as of 18 December 2023.

The inclusion of CSI Compressco’s fleet will position Kodiak as the industry leader with the largest contract compression fleet, boasting 4.3 million revenue-generating horsepower. This strategic move not only expands Kodiak’s reach but also delves further into the natural gas value chain by incorporating CSI Compressco’s treating, gas cooling, and aftermarket services businesses. The augmented scale achieved through this merger enables Kodiak to uphold its commitment to delivering top-notch service and reinforces its dominant presence in key operational regions like the Permian Basin and Eagle Ford Shale. Notably, both Kodiak and CSI Compressco rely on fixed-revenue contracts with inflation-protection mechanisms, ensuring resilient cash flows even amidst commodity price fluctuations.

Based on Wall Street consensus estimates for both entities, the merged company is anticipated to generate approximately $630m in 2024 Adjusted EBITDA, factoring in the anticipated annual cost synergies of at least $20m.

Kodiak CEO Mickey McKee said: “I am excited to announce the acquisition of CSI Compressco, a highly accretive and leverage-neutral transaction that we believe will unlock significant value for both Kodiak shareholders and CSI Compressco unitholders.

“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.”

According to the terms outlined in the merger agreement, CSI Compressco unitholders are set to receive 0.086 shares of Kodiak common stock for each CSI Compressco common unit they possess. Following the completion of the merger, the combined company will adopt an “Up-C” structure. CSI Compressco unitholders who meet specific criteria will have the option to choose 0.086 limited liability company units, representing economic interests in Kodiak’s operating subsidiary, along with an equal number of shares of non-economic voting preferred stock of Kodiak, for each CSI Compressco common unit they hold. These units can be redeemed at the holder’s discretion for one share of Kodiak common stock, along with the cancellation of a corresponding share of preferred stock, after a six-month post-closing lock-up period and subject to certain conditions. Upon the merger’s completion, CSI Compressco unitholders are expected to own approximately 14% of the combined company on a fully diluted basis.

The merger has received approval from both the Board of Directors of Kodiak and the Board of Directors of CSI Compressco GP. Notably, key unitholders of CSI Compressco, such as Spartan Energy Partners (controlling the CSI Compressco GP), Merced Capital, and Orvieto Fund, holding a combined ownership of over 50% of CSI Compressco’s outstanding units, have entered into support agreements. As per these agreements, they commit to voting their CSI Compressco units in favour of the merger once the S-4 Registration Statement becomes effective with the SEC. This signifies a substantial level of support and alignment among major stakeholders for the successful completion of the transaction.

The anticipated timeline for the transaction’s completion is set for the second quarter of 2024. However, this is contingent upon securing various regulatory approvals and meeting other closing conditions, including obtaining clearance under the Hart-Scott-Rodino (HSR) Act.