Business Context and Reporting Period
This Form 8-K Current Report, dated June 23, 2019, details material definitive agreements entered into by Archrock, Inc. (Archrock) and its wholly-owned subsidiary, Archrock Services, L.P. The filing announces two simultaneous asset transactions involving compression services assets, expected to close in the third quarter of 2019.
Key Financial Metrics and Transaction Details
The filing outlines two primary transactions with the following financial terms:
- Elite Acquisition: Archrock will acquire substantially all assets of Elite Compression Services, LLC (Elite), including approximately 430,000 horsepower of compression assets.
- Total Consideration: $410 million.
- Payment Structure: $205 million in cash and 21,656,683 newly issued shares of Archrock common stock.
- Counterparty: Elite is a portfolio company of JDH Capital Company, controlled by Jeffery D. Hildebrand (Executive Chairman of Hilcorp Energy Company, an Archrock customer).
- Harvest Acquisition: Archrock Services will sell approximately 80,000 active and idle compression horsepower to Harvest Four Corners, LLC (Harvest), an affiliate of Hilcorp.
- Total Consideration: $30 million in cash.
The filing does not provide specific revenue, profit, cash flow, margin, debt, or liquidity metrics for the reporting period, as this is a transactional filing rather than a periodic financial report.
Material Changes and Corporate Governance
Upon closing of the Elite Acquisition, the following material changes are expected:
- Board Expansion: The Board of Directors will increase from eight to nine members. Jeffery D. Hildebrand will be elected as a new director, conditioned on JDH holding at least 7.5% of Archrock's outstanding common stock.
- Related Party Transactions: For the fiscal year ended December 31, 2018, affiliates of Mr. Hildebrand paid approximately $8.9 million to Archrock affiliates for compression services. Mr. Hildebrand will not receive compensation for his service as a director.
- Equity Issuance: The issuance of 21,656,683 shares to JDH is unregistered, relying on Section 4(a)(2) of the Securities Act. JDH has agreed to a six-month holding period.
Outlook, Risks, and Contingencies
Closing Conditions: The transactions are subject to customary closing conditions, including:
- Expiration or termination of the Hart-Scott-Rodino (HSR) Act waiting period.
- Consummation of the Harvest Sale (the sale to Harvest is a condition for the Elite Acquisition).
- Consent of certain third-party customers of Elite.
- Accuracy of representations and warranties.
Timeline: The parties have agreed to use reasonable best efforts to consummate the Elite Acquisition no later than August 31, 2019. The agreement may be terminated if closing does not occur by this date (subject to extension) or due to material breaches.
Indemnification: Archrock Services will obtain a buyer-side representation and warranty insurance policy to cover breaches by Elite, with costs paid by Archrock Services.
Investor Verification Checklist
- Verify the final closing date and whether the August 31, 2019 deadline is met or extended.
- Confirm the receipt of necessary third-party customer consents for the Elite Acquisition.
- Monitor the status of the HSR Act waiting period expiration.
- Review the impact of the $205 million cash outflow on Archrock's liquidity and debt covenants.
- Assess the dilution impact of the issuance of 21,656,683 new shares to JDH.
- Confirm the successful consummation of the Harvest Sale, as it is a condition precedent to the Elite Acquisition.