EXTN stock rose more than 37% in early trading on January 24, 2022, after the company announced a merger with Enerflex to form a global energy company.
Enerflex Ltd. and Exterran Corporation to Combine, Creating a Premier Integrated Global Provider of Energy Infrastructure
On January 24, 2022, Enerflex Ltd. (TSX: EFX) and Exterran Corporation (NYSE:EXTN) announced a business combination (the “Transaction”) to create a premier integrated global provider of energy infrastructure. The company will operate as Enerflex Ltd. and will remain headquartered in Calgary, Alberta, Canada. Through greater scale and efficiencies, the transaction will strengthen Enerflex’s ability to serve customers in key natural gas, water, and energy transition markets, while enhancing shareholder value through sustainable improvements in profitability and cash flow generation.
The companies will combine in an all-share transaction pursuant to which Enerflex will acquire all of the outstanding common stock of Exterran on the basis of 1.021 Enerflex common shares for each outstanding share of common stock of Exterran, resulting in approximately 124 million Enerflex common shares outstanding upon closing, representing an implied combined enterprise value of approximately US$1.5 billion. The transaction value for Exterran is approximately US$735 million, which represents an 18% premium to Exterran’s enterprise value as at January 21, 2022. The transaction value paid for Exterran implies an EV/2022E Adjusted EBITDA of 3.6x and Price/2022E Cash Flow of 1.9x, including synergies, respectively. Upon closing of the Transaction, Enerflex and Exterran shareholders will respectively own approximately 72.5% and 27.5% of the total Enerflex common shares outstanding. Enerflex will continue to trade on the Toronto Stock Exchange (“TSX”) and intends to apply to either the New York Stock Exchange (the “NYSE”) or the NASDAQ exchange (“NASDAQ”) for the listing of Enerflex common shares to be effective upon Transaction close.
“This is an exciting day in the history of our companies. The Transaction is immediately accretive to shareholders; enhances our presence, offerings, and scale across our regions; and importantly, executes upon our years-long strategic goal of increasing recurring revenues to improve the profitability and resiliency of our platform,” said Marc Rossiter, Enerflex’s President and Chief Executive Officer. “Enerflex and Exterran each have a long history of global expertise in the delivery of modular energy solutions. Together, we are more efficient and better positioned in global capital markets. The Transaction will improve our ability to partner with an expanded set of customers to solve their growing energy infrastructure challenges with integrity, creativity, commitment, and success.”
“We are excited about the ability to create shareholder value through this Transaction and improving our product and service offering. The scale and efficiencies this combination brings is the right path for Exterran and brings significant opportunities for accelerated growth in produced water treatment and energy transition products and services,” said Andrew Way, President and Chief Executive Officer of Exterran.
- Creates a Premier Integrated Global Provider of Energy Infrastructure.
- Highly complementary product lines, geographies, and asset bases provide enhanced scale, efficiencies, and expanded offerings for customers.
- The pro forma geographic exposure will be well-balanced with approximately 25-35% of revenues from each of North America, the Middle East, and Latin America.
- Accelerates Growth of Gross Margin from Recurring Segments:
- Combination significantly accelerates the generation of predictable, recurring gross margin from energy infrastructure and after-market services platforms.
- Over 70% of the combined entity’s gross margin will derive from recurring sources, strengthening its margin profile and reducing cyclicality.
- Improved Operational Efficiencies:
- Expect to realize at least US$40 million of annual run-rate synergies within 12 to 18 months after closing through overhead savings and operating efficiencies.
- Accretive to Shareholders:
- Expected to approximately double Adjusted EBITDA and be over 50% accretive to cash flow per share and approximately 50% accretive to earnings per share (subject to purchase price allocation to be determined upon closing), for Enerflex shareholders.
- Enhanced scale with pro forma 2023E Adjusted EBITDA of US$360 million to 400 million, inclusive of synergies.
- Meaningful excess free cash flow beginning in 2023 that supports debt reduction, shareholder returns, and continued growth.
- After close, Enerflex expects to maintain its quarterly dividend of CAD$0.025 per common share.
- Transaction Benefits From a Long-Term, Stable Capital Structure:
- The combined entity will benefit from a capital structure that provides ample liquidity.
- In conjunction with the Transaction, Enerflex has entered into a binding agreement with the Royal Bank of Canada to provide Enerflex with a fully committed financing consisting of a US$600 million 3-year revolving credit facility and a US$925 million 5-year bridge loan facility. The bridge loan will provide financing to backstop an anticipated issuance of new debt securities prior to closing of the Transaction. The committed financing is sufficient to fully repay existing Enerflex and Exterran notes and revolving credit facilities and support putting in place a new capital structure, provide for capital expenditures and other ordinary course capital needs, and provide significant liquidity for the pro forma business.
- The new revolving credit facility will be subject to a bank-adjusted total net debt to EBITDA covenant of 4.5x, stepping down to 4.0x by the fourth quarter of 2023.
- Enerflex targets a bank-adjusted net debt to EBITDA ratio of 2.5x – 3.0x within 12 to 18 months of closing.
- Following capital project commitments in 2022, the combined entity’s capital allocation in 2023 onwards will prioritize: (i) balance sheet strength; (ii) sustainable shareholder returns; and (iii) disciplined growth focused on full-cycle earnings.
- Commitment to Sustainability:
- Aligns strong cultures emphasizing the health and safety of our global workforce and corporate citizenship.
- Global coverage enhances the ability to deliver sustainable natural gas, water, and energy transition solutions, including carbon capture utilization and sequestration, biofuels (including renewable natural gas), produced water reuse and recycling, and electrification.
One Exterran director will be appointed to Enerflex’s Board of Directors at closing. Mr. Marc Rossiter will continue to serve as Enerflex’s President and Chief Executive Officer and a member of the Board of Directors of Enerflex and will oversee all aspects of integration. Mr. Sanjay Bishnoi will continue to serve as Enerflex’s Chief Financial Officer. Enerflex’s Executive Management Team will continue to serve in their current roles.
The Transaction is expected to close in the second or third quarter of 2022, subject to, among other things: the approval of the Transaction by Exterran stockholders; the approval by Enerflex shareholders of the issuance of Enerflex common shares pursuant to TSX requirements in connection with the Transaction; regulatory approvals; and other customary closing conditions, including those of the TSX and the NYSE or NASDAQ, as applicable.
Copies of the Transaction Agreement and related materials will be filed by Enerflex with the Canadian securities regulators and will be available for viewing under Enerflex’s profile on www.sedar.com. Enerflex shareholders are urged to read the information circular once available as it will contain important information concerning the Transaction.
The Boards of Directors of Enerflex and Exterran have each unanimously approved the Transaction and recommend that their respective shareholders vote in favour of the Transaction.
All of the funds managed by Chai Trust Company, LLC that own common stock of Exterran and all of Exterran’s directors and officers have entered into voting agreements with Enerflex pursuant to which they have agreed to vote their respective shares in favour of the Transaction at the meeting of Exterran shareholders.
All of the directors and officers of Enerflex have entered into voting agreements with Exterran pursuant to which they have agreed to vote their respective Enerflex common shares in favour of the issuance of Enerflex common shares pursuant to the Transaction at the meeting of Enerflex shareholders.
“The timing is right for this Transaction as it strengthens our positioning while global energy markets recover from the pandemic-induced lows. Natural gas is a transition fuel that, together with renewables, will lead the world toward a lower carbon future. The world’s continued reliance on natural gas is evidenced by strong fourth quarter 2021 Engineered Systems bookings of over CAD$300 million, our highest bookings quarter since 2018,” said Rossiter. “This month, we also successfully commissioned a gas infrastructure facility in the Middle East that will further strengthen our asset ownership portfolio. The recovery remains widespread, and we are optimistic that overall market strength will continue in 2022.”
“We expect fourth quarter results to be in-line with our guidance provided on our third quarter call. Net debt and cash flow for the fourth quarter were favorable to our forecast, putting us in a good position as we enter the new year. The macro environment continues to be supportive of strong bookings in the first half of 2022,” said Way. “We continue to execute well on our two water ECO projects along with the large processing facility in the Middle East, all of which are expected to commence operations on time.”
Enerflex will host a conference call today, January 24, 2022 starting at 6:30 am MST (8:30 am EST).
To participate, please call toll free 1.844.231.9067 or 1.703.639.1277. Please dial in 10 minutes prior to the start of the call. No passcode is required. The live audio webcast of the teleconference will be available via www.enerflex.com. The webcast will be archived for approximately 90 days.
An investor presentation has been posted and is available on Enerflex’s website under the Investors section.
RBC Capital Markets is acting as exclusive financial advisor to Enerflex and has provided an opinion to Enerflex’s Board of Directors to the effect that the consideration to be paid under the Transaction is fair, from a financial point of view, to Enerflex and is subject to the assumptions made as well as the limitations and qualifications, which will be included in the written opinion of RBC Capital Markets.
Norton Rose Fulbright US LLP and Norton Rose Fulbright Canada LLP (transaction counsel) and Davies Ward Phillips & Vineberg LLP and Cravath, Swaine & Moore LLP (financing counsel) are acting as Enerflex’s legal advisors.
TD Securities and Scotia Capital acted as strategic advisors to Enerflex.
Wells Fargo Securities, LLC is acting as exclusive financial advisor to Exterran.
King & Spalding LLP and McCarthy Tétrault LLP are acting as Exterran’s legal advisor.
Enerflex Ltd. is a single source supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power generation equipment – plus related engineering and mechanical service expertise. The Company’s broad in-house resources provide the capability to engineer, design, manufacture, construct, commission, operate, and service hydrocarbon handling systems. Enerflex’s expertise encompasses field production facilities, compression and natural gas processing plants, gas lift compression, refrigeration systems, and electric power equipment servicing the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 2,000 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint ventures operate in Canada, the United States, Argentina, Bolivia, Brazil, Colombia, Mexico, the United Kingdom, the United Arab Emirates, Oman, Bahrain, Kuwait, Australia, New Zealand, Indonesia, Malaysia, and Thailand. Enerflex’s shares trade on the Toronto Stock Exchange under the symbol “EFX”. For more information about Enerflex, go to www.enerflex.com.
Exterran Corporation (NYSE: EXTN) is a global systems and process company offering solutions in the oil, gas, water and power markets. Exterran is a leader in natural gas processing and treatment and compression products and services, providing critical midstream infrastructure solutions to customers throughout the world. Exterran Corporation is headquartered in Houston, Texas and operates in approximately 25 countries.
📺 Exterran Overview
📺 Enerflex Overview Video
📈 EXTN Stock Technical Analysis
Before the announcement of the merger on January 24, 2022, both the long and short-term trends were negative. EXTN is one of the lesser performing stocks in the Energy Equipment & Services industry. 88% of 103 stocks in the same industry do better.
There is a support zone ranging from 2.83 to 2.91. This zone is formed by a combination of multiple trend lines in multiple time frames.
There is a resistance zone ranging from 3.40 to 3.44. This zone is formed by a combination of multiple trend lines and important moving averages in the daily time frame. There is resistance at 4.59 from a trend line in the weekly time frame. There is also resistance at 4.99 from a trend line in the daily time frame. Finally, there is a resistance zone ranging from 5.18 to 5.29. This zone is formed by a combination of multiple trend lines in multiple time frames.
EXTN has a poor technical rating and the quality of the setup is also only medium at the moment. EXTN stock has a Setup Rating of 4 out of 10 before the merger was announced. Price movement has been a little bit too volatile to find a nice entry and exit point.