HOUSTON and MIDLAND, Texas - Archrock, Inc. (NYSE: NYSE:AROC), a major player in natural gas compression services, has agreed to purchase Total Operations and Production Services, LLC (TOPS), a Permian Basin-focused provider of contract gas compression services. The acquisition, valued at $983 million, includes approximately 580,000 horsepower of electric motor drive compression assets and is expected to be immediately accretive to Archrock's earnings and dividends per share.
The transaction, which is anticipated to close by the end of 2024, will enhance Archrock's footprint in the Permian Basin by 30%, bringing its total operating horsepower in the region to about 2.2 million. This acquisition is in line with Archrock's strategy to upgrade its fleet for higher profitability and sustainability, as it increases the company's electric compression horsepower to approximately 648,000.
Brad Childers, President and CEO of Archrock, expressed enthusiasm for the acquisition, highlighting the strategic fit and growth potential. "This transaction will accelerate the meaningful progress we’ve made advancing our strategy of high-grading our fleet, improving profitability, expanding our operations in basins with strong long-term growth prospects and helping our customers achieve their emissions reduction goals," said Childers.
The acquired assets from TOPS are expected to generate roughly $136 million of third quarter 2024 annualized adjusted EBITDA, excluding any anticipated synergies. Archrock will issue about 6.87 million new common shares and intends to fund the $826 million cash portion of the consideration with a mix of equity and debt financing.
Brian Green, CEO of TOPS, also commented on the merger, noting the strategic and complementary nature of the deal for both companies. Following the transaction's completion, Green will continue to lead TOPs, and no changes to the organization, personnel, or operations are planned.
Archrock's pro forma operating horsepower will increase to approximately 4.1 million, with a pro forma enterprise value exceeding $6 billion. The purchase price represents a transaction multiple of 7.3x third quarter of 2024 annualized adjusted EBITDA.
In other recent news, Archrock, a natural gas compression services company, has been making notable strides in the market. The company recently reported a substantial increase in net income and adjusted EBITDA for the first quarter of 2024, with net income rising to $41 million from $16 million in the same period last year. In response to these strong financial results, Archrock has raised its adjusted EBITDA guidance for the full year.
RBC Capital has also increased its price target for Archrock shares from $21.00 to $22.00, maintaining an Outperform rating on the stock. The firm cites robust market dynamics in the natural gas compression sector as a key driver for Archrock's potential to improve pricing and utilization rates. RBC Capital analysts anticipate that Archrock will benefit from these market conditions and its ongoing digital transformation initiatives, which are expected to enhance efficiency and reduce operating costs.
InvestingPro Insights
Amidst the strategic acquisition of TOPS by Archrock, Inc. (NYSE: AROC), insights from InvestingPro reveal several key metrics that could interest investors monitoring the company's performance and potential. Archrock's stock has been trading near its 52-week high, with a price percentage of 99.62% of that high. This aligns with the company's robust year-to-date price total return of 51.33%, and an even more impressive one-year price total return of 122.06%. Such figures may reflect investor confidence in the company's growth trajectory and its recent strategic moves, including the TOPS acquisition.
InvestingPro Tips suggest that while the stock might be in overbought territory, as indicated by the RSI, Archrock has been trading at a low P/E ratio relative to near-term earnings growth, which stands at 28.29. This could suggest that despite the stock's recent gains, it may still be valued attractively in terms of its earnings potential. Additionally, the company has maintained dividend payments for 11 consecutive years, which could be appealing for income-focused investors, especially considering the dividend yield of 2.88%.
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