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Summit Midstream to Acquire Tall Oak Midstream III in $450 Million Deal

Summit Midstream Corporation, October 2, 2024

Summit Midstream Corporation (NYSE: SMC) ("Summit", "SMC" or the "Company") has announced that it and its wholly owned subsidiary, Summit Midstream Partners, LP (the "Partnership"), have entered into definitive agreements to acquire Tall Oak Midstream Operating, LLC and its subsidiaries (collectively, "Tall Oak" or "Tall Oak Midstream III") from an affiliate of Tailwater Capital LLC ("Tailwater Capital") for a mix of cash and equity consideration. This strategic acquisition marks a significant milestone in Summit's growth strategy, increasing scale in a credit and value accretive manner.

The acquisition of Tall Oak Midstream III, a large-scale gas gathering and processing system in the Arkoma Basin, further enhances Summit's growth outlook and free cash flow generating capabilities, extends its operational footprint and improves Summit's credit profile. The transaction is expected to close in the fourth quarter of 2024, subject to customary closing conditions, shareholder approval and regulatory approvals.

Key Highlights of the Acquisition:

  • Represents a significant step forward in SMC's plan to consolidate assets with exposure to advantaged macro tailwinds at attractive valuations
  • Expands Summit's operations to the Arkoma Basin, adding 440 million cubic feet per day ("MMcf/d") of processing capacity, over 400 miles of pipelines and over 300,000 of dedicated acres with significant undeveloped locations
  • Increases Summit's exposure to natural gas-oriented drilling with access to premium downstream markets with ability to take advantage of growing Gulf Coast gas demand from LNG, Mexican exports and power generation
  • Reduces Summit's pro forma leverage to 3.8x at closing, down from 4.4x, positioning Summit to evaluate additional bolt-on acquisition opportunities, with more financial flexibility to manage consideration mix
  • Accelerates return of capital that allows SMC the financial flexibility to consider resuming preferred and common dividends and/or launch a share buyback program in 2025
  • Allows Summit to maintain control of the Company with a majority of the pro forma Summit Board comprised of existing Summit independent directors and CEO
  • SMC's existing management team will remain in place pro forma for the transaction
  • Value accretive acquisition multiple of ~5.6x 2025E asset-level Adjusted EBITDA based on the midpoint of SMC's forecasted range

Heath Deneke, President, Chief Executive Officer and Chairman, commented, "We are thrilled to announce the acquisition of Tall Oak Midstream, which represents a significant step forward in our strategic growth plan. Tall Oak Midstream's high-quality assets and talented team will complement our existing operations and provide us with an expanded customer base. We look forward to welcoming Tall Oak's employees and integrating their operations to unlock further value for our stakeholders.

We're extremely excited about Tall Oak's growth outlook and shifting Summit's commodity exposure to a more equal weight of oil and natural gas-oriented drilling, particularly as we expect natural gas demand to grow considerably over the next decade. The Tall Oak system in the Arkoma Basin is well positioned, similar to our existing Barnett asset, to help satisfy that demand growth with access to the Gulf Coast, Mexico and key power generation markets.

In addition to the high-quality asset base, we're extremely happy with how this transaction positions Summit with more financial flexibility to continue to execute on our corporate strategy and growth plans. With an anticipated ~$250 million in combined pro forma Adjusted EBITDA for 2024 and ~3.8x expected leverage at closing, Summit is now positioned with more scale, higher free cash flow generation and lower pro forma leverage that we believe will enable the Company to consider returning capital to shareholders for example, through preferred dividends, common dividends and/or share buybacks starting in 2025.

Finally, we look forward to the new strategic relationship with Tailwater Capital, a leading energy and environmental infrastructure private equity firm that has owned Tall Oak Midstream since 2021. We believe Tailwater Capital's pro forma interest in the Company fully aligns them with our public shareholders as we continue to execute our strategic plans to maximize shareholder value. While Summit will continue to be controlled by our majority of independent directors going forward, we look forward to expanding the board room to include four new directors appointed by Tailwater Capital from their deep bench of knowledgeable and experienced energy professionals."

 "This transaction represents a unique opportunity to partner with the Summit organization to support the long-term growth and value creation initiatives already underway at the Company," said Jason Downie, Co-Founder and Managing Partner at Tailwater Capital. "The Tall Oak assets are complementary to Summit's existing gas portfolio, and we believe the Company is well positioned to drive even more value for shareholders over the coming years."

"Our entire Tall Oak team has done an exceptional job delivering high-quality service while prioritizing reliability and safety, and I am confident that the Summit team will continue to execute and capitalize on new and exciting opportunities in the Arkoma Basin. On behalf of the Tall Oak management team we are excited to become a shareholder in Summit and look forward to helping to ensure a smooth integration and transition of the Tall Oak assets for our customers and all Summit stakeholders," said Ryan Lewellyn, President and Chief Executive Officer at Tall Oak Midstream III.

Transaction Details

Pursuant to the terms of the definitive agreements, Summit will acquire 100% of the membership interest in Tall Oak Midstream for $155 million upfront cash consideration, expected to be financed through Summit's credit facility, and approximately 7.5 million shares of a combination of SMC Class B common stock and a corresponding number of common units of the Partnership (in an Up-C structure), representing approximately 40% ownership in the pro forma Company. The Class B common stock and Partnership common units are convertible, at Tailwater's election, into SMC common stock on a 1-for-1 basis. In addition, Summit will pay $25 million contingent consideration in cash over certain measurement periods through March 31, 2026. On a pro forma basis, Tailwater Capital will own approximately 35% interest with a non-Tailwater controlled entity owning an approximately 5% interest. The Summit stock held by Tailwater Capital will be subject to a lock-up period of at least one year. At close, four directors appointed by Tailwater Capital will serve on the pro forma Summit Board, along with SMC's existing board members and CEO.

Tall Oak Midstream III Overview

The Tall Oak Midstream assets, located in central Oklahoma, are comprised of two 220 MMcf/d natural gas processing plants, approximately 244 miles of low-pressure natural gas gathering lines, approximately 167 miles of high-pressure natural gas gathering lines, and approximately 65,000 horsepower of field and plant compression. The gathering agreements for the Tall Oak system include long-term, fee-based contracts with a weighted average term of approximately 13 years. Volume throughput on the Tall Oak system is underpinned by acreage dedications, with an estimated 315,000 leased acres from its key customers. The dedicated acreage spans highly productive, rich gas areas within the Arkoma Basin, with producers primarily targeting the Woodford formation. 

About Summit Midstream Corporation 

SMC is a value-driven corporation focused on developing, owning and operating midstream energy infrastructure assets that are strategically located in the core producing areas of unconventional resource basins, primarily shale formations, in the continental United States. SMC provides natural gas, crude oil and produced water gathering, processing and transportation services pursuant to primarily long-term, fee-based agreements with customers and counterparties in four unconventional resource basins: (i) the Williston Basin, which includes the Bakken and Three Forks shale formations in North Dakota; (ii) the Denver-Julesburg Basin, which includes the Niobrara and Codell shale formations in Colorado and Wyoming; (iii) the Fort Worth Basin, which includes the Barnett Shale formation in Texas; and (iv) the Piceance Basin, which includes the Mesaverde formation as well as the Mancos and Niobrara shale formations in Colorado. SMC has an equity method investment in Double E Pipeline, LLC, which provides interstate natural gas transportation service from multiple receipt points in the Delaware Basin to various delivery points in and around the Waha Hub in Texas. SMC is headquartered in Houston, Texas. For more information, visit www.summitmidstream.com.

About Tailwater Capital

Dallas-based Tailwater Capital is an energy and environmental infrastructure private equity firm with a well-established track record of working constructively with proven management teams to deliver value-added solutions. Tailwater has raised more than $4.7 billion in committed capital since inception and the team has executed more than 180 transactions representing over $26 billion in value. For more information, please visit www.tailwatercapital.com.

Click here to read the full article from Summit Midstream Corporation.


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