Archrock will acquire Total Operations and Productions Services LLC (TOPS) for US$983 million. The deal includes roughly 580,000 hp (462,680 kW) of mostly electric motor-driven gas compressor packages located in the Permian Basin. Headquartered in Midland, Texas, with offices in Carlsbad, New Mexico, and Yukon, Oklahoma, TOPS has more than 200 employees. Its services include electric and gas drive compression rental and sales, compressor field service and support, remote monitoring and control, and more.
“This transaction is an exciting milestone for Archrock that builds on the meaningful progress we’ve made orienting our business for the future and for long-term success,” said Brad Childers, president and chief executive officer of Archrock during an investors’ call discussing the deal. “We believe this transaction will further solidify our position as the premier contract compression services company and enable us to continue serving customers’ growing demand for lower carbon solutions. With TOPS, we’re adding 580,000 horsepower of young compression assets, including approximately 500,000 operating horsepower (373,000 kW) and a substantial and contracted backlog of new equipment, and doing so in a way that reinforces our best-in-class capital allocation and financial strategy makes this an incredibly compelling opportunity for Archrock and our investors.”
Childers breaks the acquisition into four key value drivers. “First, the acquisition of high-quality assets with contracted cash flows adds meaningful, low risk growth. Second, the acquisition enhances our scale and complements our existing Permian Basin compression capacity. Third, this acquisition accelerates the growth of our electric motor drive fleet and augments our internal electrical expertise,” said Childers. “And fourth, this transaction is consistent with our financial and capital allocation priorities.”
Expanded Operations
The acquisition of TOPS increases Archrock’s Permian Basin compression capacity by 30%, bringing its operating horsepower in the region to about 2.2 million (1.6 million kW). Archrock’s assets in the Permian Basin represent approximately 52% of its total operating horsepower. In addition, TOPS’ assets bolsters Archrock’s electric compression fleet to approximately 648,000 hp (483,408 kW).
“Since 2016, we’ve worked continuously to upgrade our fleet, markets, customer relationships, and technology,” said Childers. “The average age of the TOPS fleet is three years, making it cost-effective and efficient. Next, TOPS equipment has market leading technology, having installed remote monitoring on its electric units. Adding TOPS’ capabilities to our fleet further advances our technological capabilities.”
The acquired assets are exclusively serving customers in the Permian, where Archrock already has a complimentary presence. “Not only are these assets located in a high growth area, but they will round out our service offering in the Permian Basin, given TOPS focus on gas lift,” said Childers. “Substantially all of TOPS horsepower is deployed on gas lift, where compression is used to re-inject natural gas into producing wells to help lift liquids to the surface. These applications use a wide variety of horsepower. Low- to mid-range horsepower equipment is located at or near the wellhead or large horsepower compression equipment for centralized gas systems servicing multiple wells. TOPS is focused on mid-range electric horsepower, with approximately two-thirds of the fleet ranging between 300 and 1000 horsepower (223 and 746 kW) per unit.”
Childers continued, “Gas lift compression is directly tied to oil production compared to pure gas production, gathering, and transportation. It’s used like an electric submersible pump or other artificial lift technology to help relieve the pressure in the wellbore to facilitate oil production. We see strong US oil growth ahead, especially in the Permian where production is expected to grow 30% over the next decade. We expect this should drive steady demand for gas lift going forward.”
According to Childers, the percent of Archrock’s fleet utilized in gas lift operation was about 21%. “Bringing TOPS onto the Archrock platform takes it up to about 30%,” he said.
Expanded Customer Base
The units being acquired by Archrock are currently 95% utilized and are backed by fee-based contracts. “TOPS currently serves an outstanding group of customers. Roughly 75% of TOPS’ horsepower is contracted with the company’s top 10 customers. These are major blue chip Permian producers and integrated players. At Archrock, we are looking forward to strengthening and expanding our relationships with some of these shared customers and adding new, key, long-term relationships,” said Childers.
“We’re focused on powering a cleaner America and helping our customers reduce their emissions footprint. This strategy has informed the organic expansion of our own electric motor-drive horsepower over the last several years, as we’ve seen demand steadily grow across geographies, horsepower categories, and customers,” continued Childers. “We further electrified our fleet through high-return new build investments and by converting some of our existing units to electric motor drive. With favorable long-term industry trends toward electric compression, we believe this transaction represents a unique opportunity to jumpstart our electric motor-drive compression capabilities and enhance Archrock’s position and electric motor drive-compression. Through this acquisition, we anticipate an increase in Archrock’s electric compression fleet to approximately 648,000 horsepower. On a pro forma basis, electric compression assets will comprise 15% of our fleet.”
Childers sees advantaged to electric motor-driven compression over gas-driven compressors beyond emissions reduction. “First is superior uptime. We believe customers benefit from higher mechanical runtimes with electric motor drive compression compared to gas-driven engines,” said Childers. “Second is reduced maintenance. Electric motor-drive equipment can be simpler to maintain, with fewer moving parts, resulting in longer major overhaul intervals and lower maintenance expenses. We’ve seen both benefits with our own electric compression assets and look forward to more fully capitalizing on these benefits through this transaction.
“We’ve been operating electric motor-drive horsepower for more than 10 years,” added Childers. “In the past, the primary market that looked for electrification and electric motor drive was in the Rockies, for emissions reasons. They were kind of ahead of everybody on the emissions front, for regulatory reasons. Now, with a much higher focus on emissions, the Permian is the main growth driver for oil and gas production in the United States. The Permian Basin is leading the charge on the move for more electrification. We do expect over time that more plays will electrify as the grid expands and power becomes available, but it’s going to require a significant investment in power infrastructure in all of the plays in order to facilitate that. Today, we’re seeing those investments primarily in the Permian and the Rockies.”
What’s Next
The TOPS acquisition has been unanimously approved by the Archrock’s board of directors and is now subject to customary regulatory approvals and closing conditions. Archrock anticipates the transaction to be completed by the end of 2024.
“We expect that TOPS will operate much as it does today, as a subsidiary of Archrock,” said Doug Aron, senior vice president and chief financial officer at Archrock. “We are confident in our ability to effectively integrate the acquired assets into our existing business. Led by CEO Brian Green, TOPS has a talented team of employees committed to delivering cleaner energy across the US. We’re excited to welcome Brian and the TOPS team to Archrock.”
“One of the key benefits to the transaction is the complimentary footprint to operations,” said Childers. “One thing we know is that we get tremendous cost benefits by increasing density in our operations. The more units you have in a concentrated geography creates more efficiency for the mechanics, for the workforce, for the number of trips and the efficiency of touches when we must visit a unit. That increased density is something that we believe will yield synergies over time. But what we really want to emphasize is that this is a very well-priced, very accretive transaction out the gate. It is not dependent upon synergies for its value creation. It is value enhancing from day one. The compression business is in growth mode. We are not trying to look for cost cuts to drive this business. We’re looking to expand and grow this business.”
