Good day, and thank you for standing by. Welcome to the Enerflex Transaction Conference Call. At this time, all participants are on a listen mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during that session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Stefan Ali, Vice President of Investor Relations and Strategy. Mr. Ali, the floor is yours.
Thank you, operator, and thanks to everyone joining us today. This morning, Enerflex announced plans to combine with Exterran to create a leading global energy infrastructure platform. On this morning's call are Marc Rossiter, Enerflex's President and Chief Executive Officer, and Sanjay Bishnoi, Enerflex's Senior Vice President and Chief Financial Officer. In addition to this morning's press release, Enerflex has posted an investor presentation on its website, which we'll refer to in this morning's comments. Today's discussion will include forward-looking statements regarding expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties, and the stated expectations could differ materially from actual results or performance. For more information, please see the advisory comments within our news release and presentation. Also note that all financial figures in the presentation and being discussed today are in U.S. dollars, unless otherwise stated.
We'll proceed on the basis that you've all taken the opportunity to read this morning's press release. I'll now turn the call over to Marc.
Thanks, Stefan, and good morning, everyone. We're very excited today to announce the execution of an agreement to combine Enerflex and Exterran, two global leaders in modular energy solutions, each with decades of experience, diversified operations, and outstanding safety and operational performance. This transaction is exciting for a multitude of reasons. First, I'll address the financial benefits to shareholders. The transaction approximately doubles adjusted EBITDA, is over 50% accretive to Enerflex's cash flow per share, and subject to final price allocation, is roughly 50% accretive to earnings per share, while presenting significant opportunities to improve efficiencies. We are targeting at least $40 million of annual run rate cost synergies to be fully realized within 12 - 18 months following transaction close. Second, our respective platforms are highly complementary. For decades, we have conducted business in similar geographies, harnessing our respective expertise in modularized energy solutions.
For Enerflex, our core competence as a single-source supplier of natural gas compression, gas processing, refrigeration, and electric power generation equipment will be enhanced by Exterran's expertise in cryogenic applications and produced water reuse and recycling. In addition, the combined entity will have greater financial and operational capabilities required to address both core natural gas markets and energy transition initiatives, including carbon capture, utilization, and storage, renewable natural gas, hydrogen, and electrification. For our customers, the increased breadth of our offerings provides unparalleled flexibility, positioning us as a premier supplier for their Energy Infrastructure needs. Similarly, the added depth to our After-Market Services businesses ensures the continuation of quality and timeliness that our customers have come to expect.
By combining, we are bringing together the best of our businesses from an operations and skill set perspective, improving our cost competitiveness in the markets where we participate and leveraging our respective histories of technical excellence in modularized energy solutions. Third, for over seven years, Enerflex has executed upon its strategic priority of increasing recurring revenues to lessen the impact of industry cycles on its earnings profile. We've done so by investing in global Energy Infrastructure assets that generate stable, predictable recurring revenues. Our goal was to generate at least 50% of mid-cycle revenues from recurring sources. As shown on slide 10 of our presentation, the combined business will achieve that goal on a gross margin basis, and the higher margins associated with our expanded Energy Infrastructure platform will strengthen our resiliency, improve earnings power, and enhance value for our shareholders.
Our manufacturing and service divisions will remain key pillars to Enerflex's value proposition, adding additional depth in cryogenic gas processing and water reuse and recycling technologies, and differentiating us through our unparalleled global service capabilities. Lastly, to believe in Enerflex is to believe in natural gas. Natural gas is a growth fuel that, together with renewables, will reduce global greenhouse gas emissions. This demand strength is evidenced by our Q4 2021 Engineered Systems bookings of over $300 million, our highest bookings quarter since 2018. As illustrated on slide 7 of the presentation, this transaction deepens our presence within key natural gas growth regions, particularly those that are still progressing towards reliable electricity access for their citizens. Concurrently, as the global energy landscape evolves, so will the needs of our customers, including those who seek lower carbon energy transition solutions.
Enerflex has served these markets for nearly 40 years with an extensive resume of solutions handling carbon dioxide, biofuels, hydrogen, and electricity. With this transaction, our portfolio of environmental solutions expands to include the cost-effective treating of produced water, where Exterran brings over 20 years of experience and treatment of over 5 billion barrels of produced water globally. Today's transaction will be structured as an all-share deal where each outstanding common stock of Exterran will be exchanged for 1.021 shares of Enerflex. The transaction value represents an 18% premium to Exterran's enterprise value as at January 21, 2022, and implies a 2022 estimated enterprise value to adjusted EBITDA of 3.6 times, including synergies.
Upon closing of the transaction, the combined company will have approximately 124 million shares outstanding, of which 72.5% will be held by Enerflex shareholders and 27.5% will be held by Exterran shareholders. The combined entity will carry on business under the Enerflex name, and we plan to be dual-listed on both the Toronto Stock Exchange and either the New York Stock Exchange or the Nasdaq. Headquarters for our global enterprise will remain in Calgary, Alberta, Canada, and I'm honored to continue as President and CEO, together with Sanjay Bishnoi as Senior Vice President and CFO. Enerflex will also welcome to its board of directors one member of Exterran's board. The deal has been unanimously supported by both companies' boards and subject to necessary approvals. We anticipate closing the transaction in Q2 or Q3 of 2022.
Regarding the pro forma business, Enerflex will benefit from a capital structure that will provide financial flexibility and ample liquidity. The resiliency of our Energy Infrastructure platform underpins a new bank-adjusted total net debt to EBITDA covenant of 4.5x, and our expected net debt to EBITDA of approximately 3.0x at transaction close is expected to decline to between 2.5x to 3.0x within 12 - 18 months of closing. I'll also draw your attention to slide 14. As illustrated, funding of in-flight capital projects will result in 2022 expenditures exceeding cash generated by the combined entity's operations. However, beginning in 2023, we expect the combined entity to generate approximately $200 million-$250 million in excess free cash flow, inclusive of synergies.
Recall that these are U.S. dollars with further improvement expected in the following years. Excess free cash flow will prioritize balance sheet strength, shareholder returns of capital, and disciplined investment in that order. In closing, this transaction results in improved scale, financial flexibility, downside resiliency, and robust free cash flow generation after 2022. We firmly believe in the merits of the transaction and are excited for the opportunity to move forward as a more efficient company that is better positioned to serve our global markets. Thanks for joining us today. We will now be happy to take any questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. Stand by as we compile the Q&A roster. Our first question comes from Aaron MacNeil of TD Securities. Your line is open.
Good morning, all. Congrats on what I'm sure was a lot of hard work putting this all together. On the synergies, can you provide any additional details in terms of what the $40 million actually entails? Obviously, I saw the slide and the breakdown there and can realize there's some sensitivities around synergies. I guess what I'm really trying to get out of your answer is your confidence level in meeting or exceeding the figure, timing in terms of, you know, again, saw the 12-18 months, but if a portion of the synergies could be realized a bit more quickly, and, you know, if there are any, you know, redundant facilities that you might be able to monetize in the near term.
Well, Aaron, this is Marc. Thanks a lot for the question. We're highly confident in the $40 million number. We're gonna keep the timeframe at 12-18 months, and that $40 million is largely overhead and corporate synergies. We're not really prepared at this time to talk about any facility rationalization of any kind. Just to answer your question more directly, $40 million, we're confident, and 12-18-month timeframe is what we're gonna talk about.
Understood. From an equipment sales perspective, my understanding is that Exterran doesn't really have a Canadian presence. It's focused on the processing and not the compression side of the U.S. market and, you know, is largely focused on infrastructure internationally. So I guess, is that the correct way to think about it? And then on the Engineered Systems side, do you have any sense of what your combined processing market share would be in the U.S., and are there any other areas where you may have consolidated your market share with the transaction?
Aaron, I don't have a specific market share number for you for U.S. gas processing. I mean, the good news is I think we're at the beginning of a 3- to 5-year upcycle in that business, and it's been quite quiet throughout the pandemic. I would like to correct you. The Exterran experience in cryogenic gas processing, a lot of the expertise resides in the U.S., but they've really been serving global cryogenic gas processing markets for a long time, for decades. So it is the right way of thinking about it. Some of the Exterran doesn't have a compression packaging operation in the U.S. Enerflex certainly does. Enerflex has been engaged in gas processing for some years, but we definitely don't have the expertise or the experience, at least, especially in cryogenic gas processing.
In Canada, we call it deep cut gas processing that Exterran does. We're really excited at the possibilities of having those two companies come together and offer the full suite of solutions to global customers, frankly.
Okay, great. Last question for me, on the potential for a new note issuance. I mean, should we expect something relatively quickly in light of expectations for rising interest rates? Or do you feel like the facility in place gives you enough flexibility to maybe wait until you've flushed out some of the other synergies and other financial factors, I guess?
Hey, Aaron, it's Sanjay. Our intention is to, you know, issue notes in conjunction with the closing of the transaction, which we anticipate Q2, Q3. We actually even though we've got the bridge financing in place and that would convert to a five-year term loan, so we've got a lot of runway on the committed financing, we do anticipate, you know, if market conditions are right, going to market and replacing that with a more permanent solution.
Okay, great. That's all for me. I'll turn it over. Thanks.
Thank you. Next question comes from Tim Monachello of ATB Capital Markets. Your line is open.
Hey, good morning, everyone. Congrats on this transaction here. Aaron touched on a lot of the questions that I had, so I'll keep it a little bit shorter here. In terms of competition reviews, you know, obviously not a lot of overlap in Canada, a little bit more in the U.S. You know, internationally, it's a little bit muddy for investors to see, you know, where the overlap is. Is there any international markets where a competition review might be more pertinent? Or, can you speak a little bit about any potential competition review issues within the portfolio?
Yeah, Tim, thanks. We're not gonna get into specific countries. We've done a lot of due diligence in preparing for the deal and this announcement today to try to digest that. We don't see any roadblocks from the regulatory front. It doesn't mean that we don't have to do work, but we've done a pretty thorough analysis of the regulations in the different countries within which we operate, and we feel good about our ability to, you know, pass those regulatory hurdles in the next 4-6 months.
Okay. In terms of, I guess, top line synergies, can you speak a little bit about one, how the water solutions business fits in with, Enerflex's longer term strategy? Two, if there's any projects that you see operational synergies in terms of execution, given Exterran's international footprint?
Well, sure. It's a little bit too early to talk about operational synergies on existing projects. As it pertains to the water business and how it fits into Enerflex's strategy, Exterran has a couple of great ECO projects, which we traditionally call BOOM, but frankly, they're multiyear take-or-pay asset ownership Energy Infrastructure projects. We like Energy Infrastructure, we like the counterparties, very stable cash flows. That all fits into the strategy very clearly. We've learned a lot about the water business throughout due diligence, and the more we learn, the more we like and the more we're impressed at the work that the Exterran team has done. You know, one of the things that's interesting is it serves the same customers we currently serve with natural gas solutions.
To that point of view, it's quite nice that it's the same people looking to us for solutions. In a lot of ways, the water business is modular too, which is, you know, comes down to our core competency in modularized solutions. It fits quite well, and we're interested in learning more and seeing those two big BOOM projects in the Middle East get executed over the coming year.
Okay, great. This one for Sanjay. Long term, can you just talk a little bit about where you see the capital structure, you know, finding a home in terms of amount of, you know, total leverage that you're targeting for the business, and how much do you think will be on the term and how much will be on the bank side of it?
Yeah. You know, we expect to close the transaction, as we mentioned, around 3x leverage. That'll go up, you know, to the mid-3s as we complete some of these in-flight projects. You know, very quickly, within 12-18 months of closing, we anticipate paying down leverage to about 2.5-3x. We think that's a really healthy range for leverage. You know, I'd say that our plan is to have a lot of liquidity through the revolver.
I think the current structure as it's structured now with $925 million of more sort of term like debt and then $600 million of revolver capacity will be plenty of liquidity for the business go forward. You know, as Mark mentioned in his introductory comments, when we get to 2023 and we're on the other side of these projects, there's a tremendous amount of cash flow, and we think that gives us a lot of optionality in the business to either pursue other growth avenues or to return money to shareholders.
Okay, appreciate that. I'll turn it back. Thanks, guys.
Thank you. Our next question comes from Keith Mackey of RBC Capital Markets. Your line is open.
Hi, good morning, and thanks for taking my question. I'm just curious about the close process. You mentioned Q2, Q3, but you're not expecting any major regulatory issues as well. Can you maybe just discuss a little bit more broadly the work that's involved in closing the transaction and sort of what goes into the timeline that you've identified?
Yeah, sure, Keith. So, you know, logistically speaking, there's a couple of key steps to get through. Both Exterran and Enerflex need to go through shareholder votes. We also have a handful of countries that we need to file regulatory filings in each of those countries. You know, it's really just we've allocated enough time to sort of deal with the, you know, with any sort of timeframes that each of those jurisdictions may require. We don't anticipate, you know, any issues with those filings at this time. The guidance we're giving is really to allow for enough time to judiciously get through each of those reviews.
Perfect. Yeah, that's it for me. Thanks very much.
Thank you.
Sorry, I just wanted to add one comment. We did find a typo in our prepared remarks that we referred to all figures being in U.S. dollars. The one figure that we found in the comments that was in Canadian dollars is our fourth quarter Engineered Systems bookings of CAD 300 million. That CAD 300 million is in Canadian dollars.
Thank you, sir. Again, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the key. Our next question comes from Sunil Sibal of Seaport Global Securities. Your line is open.
Hi, good morning, everybody, and congratulations on the transaction. I was just curious, you know, if you could talk a little bit about how this transaction came about. Obviously, you know, equity markets have been somewhat volatile. Is that something you have been, you know, this combination something that you've been in the works for some time or kind of, you know? Just curious how this came about.
Sure, Sunil, this is Marc. I think we've thought about a business combination between the two companies, you could go back a decade. You know, there's just so much commonality in the culture and the capabilities and the business, you know, and the markets we serve. We started looking at it seriously over a year ago. We felt that we had a certain amount of certainty that the pandemic-induced downturn in our businesses was nearing a bottoming. We sort of processed it and had conversations together over that last year, culminating in the announcement today.
Okay, got it. You know, obviously you've provided guidance for 2023. I was just curious, you know, how do you see the combined enterprise, you know, growth potential beyond that? Should we be thinking more like, you know, low- to mid-single-digit kind of a growth? Or do you see, you know, potential to expand on the top line further than that?
Well, Sunil, we definitely undertook this transaction thinking about future growth opportunities for the business, for our people, for our capabilities. We do think past 2023, there are significant opportunities to use this, the enhanced scale. We feel like we're gonna have the right cost structure, the right capital structure to serve our customers globally, throughout 2022 and into 2023. It'd be too early to give any predictions about specific top-line growth, but we're definitely doing it to set the company up for growth, you know, for the right kind of sustainable growth.
Okay, got it. One last one, more of, you know, macro question. How do you see, you know, the industry structure? You know, obviously, this is a significant transaction in the space, but do you have any views on how the industry structure evolves from here on?
Not really, Sunil. You know, I think that throughout the pandemic and after the shale boom of 2016 - 2019, there was a lot of calls from shareholders for returns, for focus on profitability. I think that led a lot of industry watchers to say, you know, this might be the right time for consolidation so companies can get the right cost structures, the right capital structures to serve all their stakeholders, shareholders, employees, customers. I think that's all very logical. In a lot of ways, you can frame this transaction in those terms.
I feel that in energy services, in energy transition companies that are looking to serve the energy transition markets, people that are trying to reduce the water intensity of the oil field and other industrial users, I think it makes a lot of sense for companies to have the scale to take on these challenges that are gonna be big challenges. They're gonna be meaningful challenges. They need the right cost structure to do it, to serve those customers. That's the way I would see the industry going forward, and we're happy to be part of it.
Got it. Thanks for taking my questions.
You're welcome.
Thank you. We have a follow-up from Tim Monachello of ATB Capital Markets. Your line is open.
Hey, just a quick follow-up regarding the bookings number for Q4. That would include bookings associated with the $165 million Middle Eastern gas processing project announced subsequent to Q3, correct?
Are you talking about the Enerflex Q3 announcement?
Yeah.
Yeah. Yeah.
Yeah, it would include that. Okay, great.
It does include that, Tim. I didn't quite hear the number that you repeated for that deal. Do you mind just saying that again? It sounded high to me.
Well, I believe the revenue number for the deal over the ten-year term was $165 million.
Oh, okay. Yeah. Yeah.
Yeah.
That's the revenue.
No, the bookings number would be different, yeah.
Correct. Yeah. Correct.
Yeah. Okay. Perfect. Thanks, guys.
Thank you. Speakers, I see no further questions in the queue. I will turn it back over to Marc Rossiter for closing remarks.
Thank you, operator, and everyone joining us for the call. I'll close by saying that I'm as curious about the equipment we build, service, install and operate today as I was in September 1996 when I joined the company. It was the smell of the welding materials in the shop and the machine tools in the shop, the loud noises of people making vessels and using impact tools to build the packages, and frankly, the overall energy of the engineers, designers, tradespeople, all working together to create these solutions for our customers that attracted me to this industry in the first place. This transaction is transformational in scale. It is about creating as positive a future for our shareholders, customers, and suppliers as it is for providing the same positive future for the people at Exterran and Enerflex that will soon be teammates.
The transaction is rooted in a profound respect for our collective histories, for the equipment, and for all the people that lay their skilled hands on the equipment to provide energy security for our communities and our world. I would like to once again thank you for joining us on the call and wish you all a good day.
This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.