Good morning. Welcome to Flowco Holdings Inc.'s conference call to discuss its acquisition of Valiant Artificial Lift Solutions. Today's call is being recorded, and we have allocated one hour for prepared remarks and questions and answers. At this time, I would like to turn the conference over to Andrew Leonpacher, Vice President of Finance, Corporate Development, and Investor Relations at Flowco. Please go ahead.
Morning, everyone, and thank you for joining us to discuss Flowco's acquisition of Valiant Artificial Lift Solutions. Before we begin, I'd like to remind you that today's call includes forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. These risks are described in the press release we issued this morning announcing the transaction, as well as in our SEC filings, which are available on our website. We undertake no obligation to update these statements except as required by law. We'll also reference certain non-GAAP financial measures, which we believe provide useful insight into the underlying performance of our business. For those joining by phone or via live webcast, the presentation is available on the webcast or for download from our website and can be referenced throughout the discussion.
Joining me on the call today are our President and Chief Executive Officer Joe Bob Edwards and our Chief Financial Officer Jon Byers. Following our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to our President and Chief Executive Officer Joe Bob Edwards.
Thanks, Andrew, and thank you to everyone for joining us today. This morning, we announced that Flowco has entered into an agreement to acquire Valiant Artificial Lift Solutions, a leading pure-play ESP provider in the Permian Basin. This transaction represents an important step forward in our strategy to build a differentiated production optimization platform, one that allows us to deliver the right solutions to our customers throughout the lifecycle of their producing wells. Today, we'll walk through the strategic rationale, the transaction details, and why we believe this acquisition is the right fit for Flowco. Let's start on slide three, and I'll take you through some of the details. We have agreed to acquire Valiant for a total consideration of $200 million, consisting of $170 million in cash and $30 million in newly issued Flowco shares.
This transaction implies an attractive purchase price multiple of approximately 3.9x estimated 2026 Adjusted EBITDA and is expected to be accretive to both earnings and Free Cash Flow. The transaction will be funded with modest borrowings under our existing ABL. Post-transaction net leverage is expected to remain below one turn, consistent with our disciplined approach to capital allocation, with strong Free Cash Flow supporting continued deleveraging throughout the year. We expect the transaction to close in early March, subject to customary closing conditions, including regulatory approval. Following the closing of the transaction, Valiant will operate as part of our production solutions segment, and we plan to report results within the segment subject to the concurrence of our auditors. Turning now to slide 4, let's describe a bit of what Valiant is, and I'll spend a minute on why we're so excited about this opportunity.
We have known Valiant for quite some time, and we've been impressed by what they've built, particularly their focus on execution and operational discipline. Those are attributes that align closely with Flowco's culture. They've grown the business the right way, staying focused on reliability and responsiveness, which has allowed them to take share over time, including with large operators who value a high level of service. While the majority of Valiant's revenue today is derived from the Permian Basin, the team brings meaningful experience operating internationally and has established relationships that provide clear line of sight to opportunities outside the U.S. over time. Operationally, Valiant maintains in-house assembly and repair capabilities and supports its customers with proprietary monitoring and analytics tools that help optimize system performance.
From a financial standpoint, Valiant is expected to generate approximately $52 million of Adjusted EBITDA in 2026, with EBITDA margins around 40%, which are in line with Flowco's margins and are supported by a recurring service-oriented revenue model. Turning now to slide 5, let's talk for a minute about the strategic rationale of this transaction. This acquisition fits well within the long-term strategy that we've adopted at Flowco, where we work with customers to deliver the right artificial lift solution at each point of a well's lifecycle. By expanding into ESP, we are now able to offer both of the early-life lift techniques used by our customers: High-Pressure Gas Lift, where it makes sense, and ESPs, where well conditions are more conducive to that form of lift. Additionally, the transaction creates opportunities to deepen customer relationships through cross-selling across a highly complementary customer base.
Finally, the acquisition reflects our disciplined approach to M&A within production optimization, with a focus on attractive valuations and strong returns. Turning now to slide 6. This slide highlights how the combined Flowco and Valiant offering expands our presence across more artificial lift applications and deepens our customer relationships over time. Flowco already has meaningful touchpoints across the well lifecycle through HPGL conventional gas lift, plunger lift, and our complementary digital solutions, providing insight into well performance and operating conditions. By adding ESPs, we expand that presence across a much broader set of wells, which gives us early visibility into how wells are performing and how operating conditions are changing over time. There are a large number of wells today producing on ESPs, where subsequent artificial lift applications, including conventional gas lift and plunger lift, are natural next steps as well as mature.
By being involved earlier and having better well-level data, we are better positioned to know when those transitions are coming and to support customers with the right solution at the right time. The result is more touchpoints over the life of the well, more opportunities to support our customers, and a more durable solutions-oriented relationship with clients. Maybe taking a step back on slide 7 and looking at the market, the addition of ESPs meaningfully expands Flowco's addressable market, and it allows us to participate in the largest segment of the artificial lift market. In the lower 48 alone, the ESP market represents approximately $2.5 billion annually, and the international opportunity is even larger. With that in mind, we are having regular conversations with customers early in the life of the well, where ESP is the right solution based on well conditions.
Until now, not having an ESP offering has limited our ability to participate fully in those opportunities. By adding ESPs, this is a natural extension of our offering, and it allows us to support customers with the right solution when it's needed. Importantly, this expansion is additive. Our conviction around HPGL remains unchanged. HPGL represents approximately $1.5 billion of annual spend in the onshore U.S. market, where we continue to see strong customer demand and growth, and we believe we are still in the early innings of addressing that market opportunity. With the combination of Flowco and Valiant, we believe the expanded offering and combined customer relationships position us to continue gaining share across the artificial lift market over time. Turning now to slide eight and to provide a little bit of a conclusion here.
In summary, Valiant is a strong fit with Flowco, and it aligns closely with how we operate and create value. Both organizations share a focus on production optimization, operational discipline, and delivering reliable solutions that improve well performance for customers. With Valiant, we believe our expanded offering will allow us to deliver better outcomes for customers while generating attractive returns and strong free cash flow. Just as important, the Valiant team shares Flowco's long-term mindset and commitment to building a durable business, which we believe positions the combined organization well for continued growth and strong returns. With that, I'll turn it back to the operator for Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Derek Podhaizer with Piper Sandler. Please proceed.
Hey, good morning, Joe Bob and team, and congrats on the deal.
Hey, Derek. Thank you. Appreciate it.
So maybe just to kick off, I know at the time of the IPO around this time last year, we talked a lot about ESP being that potential extension for your solution. I think just maybe take some time to remind investors of that. Obviously, you have the HPGL technology that was always talked about as a replacement technology for ESPs, but now you'll have this fuller portfolio. So maybe how do you plan on interacting with your customers between the ESPs and the HPGL, not maybe pushing one over another? Are they this is going to be a new cultural fit for the team? So maybe just how your customers will think about it, how you'll bring that solution approach to your customers.
When we think about HPGL and ESP, and now it's not necessarily a replacement technology but more of an inline with each other as you do the life of the well with your customers.
Yeah, it is truly what you just said, Derek. It is our ability to offer our customers the right solution at the right point in time of every well, right? And if you have both forms of early lift solution in your toolkit, you can truly be dispassionate about offering them a solutions-oriented sale versus just a sale of a product, right? And importantly, I think it's also worth noting that the expansion of our early well market exposure, Derek, gives us that much more value of incumbency. The ability to be early in the life of the well with a customer ensures that we have better data on how that well is producing, and we can work alongside their engineering teams to determine when that well needs to go to a different form of lift. So this just dramatically increases our shots on goal, okay?
Yeah, having the ability to have both allows us to work with the customer to provide the right solution every time.
Got it. That's helpful. And then so Valiant's 100% Permian Basin. You've talked about the opportunities for international expansion. Maybe just help us understand more what that could look like, and maybe just bringing Valiant on the Flowco platform just domestically in the U.S., how you might be able to expand those ESPs across different basins where maybe the ESP is more the preferred solution over an HPGL.
Yeah, happy to do it. So the founding team from Valiant has deep experience in ESPs, really, for their entire career. And in fact, ran a global business under a different banner years ago, started the business from scratch roughly 10 years ago, and grew it to where it is today. So very impressive startup and growth early in their life to lead them to this natural evolution. As we mentioned in our prepared remarks, they've got a history in certain international markets that are quite attractive. It's exactly where shale is being exploited, Derek. So I think it's natural for Flowco to, now that we have a more expanded product offering, to look to new areas overseas for potentially a next leg of growth. And this team would plug right into those efforts, which are ongoing every day within the Flowco team.
Closer to home, yes, they are exclusively in the Permian Basin, but Flowco has, as you know, a footprint across every shale basin in the United States. Many of those shale basins have ESP as part of early lift techniques. The Bakken comes to mind as probably the second largest ESP market in the U.S. Valiant does not have a presence in the Bakken, but we do. That could be a natural step. What's not asked, but I'd be remiss if I didn't mention, is the cross-selling opportunity, Derek, between their customer base and ours. We've got just deep, decades-long experience with customers that they don't have and vice versa. I think this is truly going to be a revenue synergy story, much more so than a cost synergy story.
I'm excited to share more about that as these businesses get integrated over the course of the next year or so.
Great. Appreciate all the comments. Congrats again. I'll turn it back.
Thanks, Derek.
Our next question is from Arun Jayaram with J.P. Morgan. Please proceed.
Good morning, Joe Bob and team. Joe Bob, I was wondering if you could talk a little bit about the capital intensity of the ESP business that you're acquiring. Obviously, you mentioned that you expect the deal to be free cash flow accretive to Flowco. But give us a sense of what type of capital this business you think will need to continue to support your Permian Basin position here.
Yeah, happy to, Arun. And John's here with me too. He can expand. But look, the ESP business in the United States is a mixture of a rental business and an OEM sales business. And as you know, we've got both within Flowco. So our margin profile today at the EBITDA line, as you know, reflects roughly a 40% EBITDA margin. Capital intensity ranges between our businesses. Surface equipment and downhole are slightly different. Valiant's a mix of both, okay? They've got some rental. They've got some sale. What I can tell you is from a free cash flow conversion, when you get from EBITDA down to free cash flow, they are roughly in line with where we are, okay? So I think that's a positive. And John, in terms of specifics around that free cash flow conversion, remind me kind of where we are and where they are.
Yeah, we've run historically in the 40%-50% range. This business has been kind of in the low 30s. In terms of maintenance capital in this business, we expect to be somewhere between $15-$20 million on around $50 million of EBITDA. But overall profile of the business, whether it's rental versus sales mix, return on capital employed, payback on equipment, all of those screen very similar to where we are.
Okay. Maybe, Joe Bob, you could elaborate a little bit on how you'd help us understand maybe the products that you're acquiring. How do these kind of compare to kind of your key all-service peers in terms of technology? Just wanted to know where you'll be competing. Will these products compete at the very high end of the market or a little bit more 80/20 kind of rule? Just a little bit more about the products would be helpful.
Yeah, no, it's a good question. Listen, what I can tell you is that the customer base that Valiant has built over time, which we're not going to talk about name by name, obviously, but I can tell you that those customers are not acquired without leading technology as well as leading service quality. I want to make sure that everybody understands that service quality in this business matters. I think that's where this business has been able to differentiate their ability to work more closely with customers as pumps need to be sized down over time. That's something that they're very proud of. In terms of technology, there are a couple of things that I'd like to point out and give a shout-out to this team for building.
Their proprietary human interface with the system has been built in-house, and it allows their systems to be operated and optimized remotely, much more efficiently than what I would call more commoditized ESPs. That's been something that's been very impressive to us. Then separately, their remote monitoring capability. They've got a facility in Oklahoma City as well as in Midland that allows a team of engineers 24/7 to monitor every well that they are in customer by customer. And it gives them data that they are able to interface with their clients with in real time, predictive analytics that allow the Valiant team to work with customers on changing well conditions and what could happen, to get ahead of the ultimate service call that's going to be required when the well gets to a point and it needs to be serviced.
So they've done a fantastic job of taking technology and incrementalizing it and rolling it out to their customers with really good success. Great. Thank you.
Our next question is from Jack Kindregan with BMO Capital Markets. Please proceed.
Hi, Joe Bob. Hi, Jon. This is Jack on for Phil. Just curious, as you move into the ESP market versus HPGL and BRU, where you're the market leader, you're going up against some pretty large players. Looks like Valiant has grown the business successfully over time, but can you talk about the go-to-market strategy and how to capture additional share in ESP over time?
Yeah, thanks for the question. Happy to. Listen, the onshore U.S. ESP market is one that not only the Valiant team, but the Flowco team knows exceptionally well. And you're right. There are some large players among the largest in our sector that participate in ESPs. But I will reemphasize for the crowd what I think you already know, but is truly the differentiator. And that is that Flowco is the only company that focuses exclusively on the production phase of the well's life, okay? That specialization, that true focus on our customers' well-being in the production phase is really what differentiates us. That's what's going to allow us to continue to take share. It's going to really be the calling card for Flowco to really get in front of all of our clients and say, "Hey, Mr. Customer, guess what?
We now can offer you an additional solution for your production. I'm excited to report in the quarters to come how we're able to do that." Going against some of our larger brethren, while initially might seem intimidating, we're very excited for the challenge. So look forward to it.
Great. Thank you. And then just my follow-up is on the supply chain for Valiant. I'm just curious if it differs at all from other ESP providers and how they have navigated tariffs over the past year and what success they might have had with passing through those costs?
Yeah, good question. The supply chain for every ESP player is complicated. And Valiant is well down the path of mitigating exposures to any one key geography, not just from China, which we've talked about in the past. They're well down the path on the various subcomponents that are subject to international supply chains and so, therefore, potential tariff risks. We're well ahead of it. Now, what I'll also say is that we're a year into this new heightened level of tariff exposure, and the industry itself is more comfortable with the varying tariff exposures that the energy business has and the ESP players have. So whether it's the interactions with customers or those suppliers, the industry is just getting more comfortable dealing with it. And so I would say that Valiant is certainly no worse off than any other player in the ESP business as it relates to tariffs.
I think actually better positioned with a couple of key critical components, which we hope to leverage in the coming months.
Great. Thank you. We'll turn it back.
Our next question is from Jeff LeBlanc with Tudor, Pickering, Holt & Co. Please proceed.
Good morning, Joe Bob and team. Thank you for taking my question.
Hey, Jeff.
I think you referenced in the prepared remarks the expectation to continue gaining market share over 2026. How should we think about the impact the continued consolidation of the upstream industry will have on achieving this goal, particularly when it feels like the broader expectation for Permian production is flattish or slightly down on an exit-to-exit basis? Thank you.
Jeff, are you referring to maybe a potential announcement that happened today among our customer base?
Potentially.
Yeah. Listen, obviously, the consolidation continues amongst our customer base. With the Devon and Coterra announcement this morning, that's something that the entire industry obviously needs to come to grips with and figure out their own path forward. What I can tell you is the consolidations that have taken place to date have been a net positive for Flowco. And I expect the one that was announced today, as well as any incremental ones, that will continue to be the case. And the reason is quite easy to understand. Smaller, more entrepreneurial businesses that tend to be acquired in the consolidation that we've seen among our customer base are usually the early adopters of new techniques and are the proving ground for solutions like high-pressure gas lift, okay?
When a larger company buys a smaller company, immediately they look to the acquired entities for success stories that could be deployed over their larger footprint. The customers that have emerged into today's market have all done that. I don't anticipate that slowing down anytime soon. We've benefited at every turn from customers recognizing our specialty, recognizing the fact that we are innovating, and have worked with us. I think the service industry needs to keep pace. I think that this acquisition represents, I think, an important step for the service sector to continue to build out broader expertise to support the larger oil company customer base. I'm excited to work alongside them and hope that this most recent one is, again, a net positive for us.
Awesome. Thanks for the call, y'all. I'll hand the call back to the operator.
Great.
Thank you. There are no further questions at this time. I would like to hand the conference back over to Joe Bob for closing remarks.
Well, thank you all for tuning in. We look forward to our next scheduled call to talk about our Q4 results in roughly a month's time. In the meantime, everybody have a great week, and thank you.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.