MEG Energy In Sale Of Access Pipeline And Stonefell Terminal For $1.61 Billion

MEG Energy Corp. is selling its 50-per-cent interest in its Access Pipeline and 100-per-cent interest in Stonefell Terminal for $1.61 billion to Wolf Midstream Inc.

According to a news release this morning, MEG will get $1.52 billion in cash and a $90 million credit towards future Access Pipeline expansions, with the company not paying incremental tolls to fund the expansions.

Wolf Midstream nearly two years ago bought out Devon Energy Corporation’s 50 per cent interest in Access (DOB, July 14, 2016). MEG had been looking to unload its 50 per cent interest as well for some time.

Wolf invests in Western Canadian energy infrastructure. The company is backed by the Canada Pension Plan Investment Board (CPPIB), an investment management organization responsible for the investment of Canada Pension Plan (CPP) funds.

MEG is holding a conference call late this morning to discuss its Q4 results, which the DOB will follow.

“We look forward to working with Wolf in the years to come to meet our ongoing transportation and storage needs,” Bill McCaffrey, president and chief executive officer at MEG, stated in the release. “Wolf has proven to be a very reliable partner in our Access Pipeline joint venture over the last two years, and this transaction will enable us to work together in even closer partnership.”

He added: “The divestiture of ourmidstreamassets strengthens our financial position while providing sufficient liquidity to allow MEG to complete its high return growth projects.”

With the deal, MEG intends to increase its 2018 capital budget 37 per cent to $700 million to fund roughly 70 per cent of its Phase 2B brownfield expansion this year at Christina Lake. The transaction comprises the sale of Access Pipeline for total consideration of $1.4 billion, and the sale of Stonefell for $210 million.

As part of the transaction, MEG and Wolf entered into an agreement ensuring MEG’s Christina Lake production and condensate transport to Access Pipeline for 30 years. Further, the agreement establishes commercial parameters to convert 16 inches of unutilized pipeline to transport natural gas liquids. MEG secured a large proportion of this pipeline to support its proprietary enhancedbitumenrecovery process, eMVAPEX, on a long-term basis.

Under this transport service agreement, MEG is assured bitumen-related market-based toll on transported volumes related up to about 113,000 bbls/d, as well as an incentive toll structure where the tolls on additional bbls step down by as much as 60 per cent as crews bring incremental production on stream.

Further, for MEG the deal includes a 30-year lease agreement to secure operational control and exclusive use of the entire Stonefell Terminal’s 900,000-bbl blend and condensate storage facility. The company will pay a fixed lease fee, plus operating expenses, under the terms of this agreement.

“This transaction accomplishes the objectives we set out to achieve in unlocking the value of our midstream assets,” saidMcCaffrey. “Our goal was to surface attractive value and terms that allow us to substantially pay down debt, pursue highly economic growth projects and ensure our future transportation and storage needs are met, all while protecting MEG’s competitive cost position.

“We expect to more than offset the incremental transportation costs related to this transaction as we bring on additional barrels.”

Upon closing, MEG will use net cash proceeds from the transaction to repay about $1.225 billion off its senior secured term loan and to fully fund the $275 million, 13,000 bbl/d brownfield expansion at the Phase 2B facility.

Phase 2B expansion; annualized costs

MEG’s Phase 2B expansion includes adding incremental steam capacity and two well pads. Management expects the expansion to generate about 30-per-cent returns at current strip prices. Production will begin ramping up in the second half of 2019, reaching full brownfield expansion capacity of 13,000 bbls/d in 2020. MEG’s average and exit production guidance for 2018 remains unchanged.

Annualized costs in 2018 related to the deal are roughly $80 million for the transportation of diluted bitumen, $25 million for condensate transport, and $15 million for blend storage at Stonefell. Due to the deal, MEG expects net cash costs to increase by approximately $50 million on an annualized basis, comprised of an increase in transportation and storage costs of about $120 million, offset by a reduction in interest costs of about $70 million.

Future growth beyond 113,000 bbls/d, which further reduces drive cash costs per bbl, will incorporate MEG’s proprietary reservoir enhancement technologies to add about 10 to 15 per cent per annum of production growth in the medium term at very attractive capital cost intensities.

McCaffrey said: “With the resources and technology that are at our disposal, we have the ability to deliver low-cost, continuous growth, which improves the overall profitability and sustainability of the business as we add incremental barrels.”

The company anticipates this week’s deal to close in Q1 2018, subject to regulatory approvals and customary closing conditions. There are no financing or other non-customary closing conditions. BMO Capital Markets and Credit Suisse are acting as financial advisors to MEG. Burnet, Duckworth and Palmer LLP and Latham & Watkins LLP are acting as legal counsel to MEG.

The transaction will be funded at closing by Wolf through an investment by CPPIB of up to $800 million and third-party debt financing.

CIBC Capital Markets acted as lead financial advisor, RBC Capital Markets acted as left lead debt underwriter and also acted as a financial advisor and Norton Rose Fulbright Canada LLP acted as legal advisor to Wolf on this transaction.