CPPIB’s Wolf Midstream to acquire Access Pipeline and Stonefell Terminal from MEG for $1.61B

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By Ted Liu

MEG Energy Corp. (TSX: MEG) has agreed with Wolf Midstream Inc., a company controlled by Canada Pension Plan Investment Board (CPPIB), for the sale of its 50% interest in Access Pipeline and 100% interest in Stonefell Terminal for cash consideration of $1.52 billion plus capital commitments of approximately $90 million.

Access Pipeline is a 215-mile dual pipeline system, which connects the Christina Lake Project to the Stonefell Terminal and to a large regional upgrading, refining, diluent supply and transportation hub in the Edmonton, Alberta area and includes the Sturgeon Terminal.

Upon closing of the transaction, Wolf Midstream will own 100% of Access Pipeline.

Wolf Midstream acquired its initial 50% ownership interest in Access Pipeline from Devon Energy Corp. for $1.4 billion in October 2016.

Wolf Midstream is an investment vehicle formed by Canada Pension Plan Investment Board in September 2015 with the stated intent to invest more than $1 billion in midstream energy infrastructure assets in Western Canada. CPPIB owns [mepr-active rule=”374″ ifallowed=”hide”]Subscriber ONLY content: read our research and get insight on this and other deals. We offer monthly or yearly recurring or one-time trial subscriptions. Subscribe today and see what you have been missing! [/mepr-active][mepr-active rule=”374″]approximately 99% of Wolf with its $1 billion investment. [/mepr-active]

Wolf Midstream will fund the acquisition through an additional investment by Canada Pension Plan Investment Board of up to $800 million and third-party debt financing.

photo credit: Wolf Midstream

News Release

MEG Energy Announces the Sale of Access Pipeline and Stonefell Terminal for $1.61 Billion

All financial figures in Canadian dollars ($ or C$) unless otherwise noted

CALGARY, ALBERTA (February 8, 2018) – MEG Energy Corp. (TSX:MEG) (“MEG” or the “Company”) is pleased to announce that it has entered into an agreement with Wolf Midstream Inc. (“Wolf”) for the sale of the Company’s 50% interest in Access Pipeline and 100% interest in Stonefell Terminal (the “Transaction”) for cash and other consideration of $1.61 billion, representing 13.4x 2018 annualized EBITDA.

MEG will receive $1.52 billion in cash at closing, and a credit of $90 million toward future expansions of Access Pipeline whereby MEG will not pay incremental tolls to fund such expansions.

As part of the Transaction, MEG and Wolf have entered into a Transportation Services Agreement (“TSA”) dedicating MEG’s Christina Lake production and condensate transport to Access Pipeline for an initial term of 30 years. In addition, under the TSA, commercial parameters have been established for the conversion of Access Pipeline’s 16” unutilized pipeline to transport natural gas liquids. MEG has secured a substantial proportion of the rights to this pipeline on a long-term basis to support its proprietary enhanced bitumen recovery process known as eMVAPEX. The Transaction also includes a Stonefell Lease Agreement (“SLA”) which is a 30-year arrangement that secures MEG operational control and exclusive use of 100% of Stonefell Terminal’s 900,000 barrel blend and condensate storage facility. Under the TSA, MEG has secured a market-based toll on transported volumes related to MEG’s bitumen production up to approximately 113,000 barrels per day (bpd) and an incentive toll structure where the tolls on additional barrels step down by as much as 60% as incremental production is brought on stream. The Company will pay a fixed lease fee, plus operating expenses under the terms of the SLA.

“This transaction accomplishes the objectives we set out to achieve in unlocking the value of our midstream assets,” said Bill McCaffrey, MEG’s President and Chief Executive Officer. “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, the net cash proceeds from the Transaction will be used to repay approximately C$1.225 billion of MEG’s senior secured term loan and to fully fund the Company’s $275 million highly economic 13,000 bpd brownfield expansion at the Phase 2B facility.

MEG intends to increase its 2018 capital budget from $510 million to $700 million to fund approximately 70% of the Phase 2B brownfield expansion in 2018. The expansion includes the addition of incremental steam capacity at the Phase 2B facility and two well pads and is expected to generate returns of approximately 30% at current strip prices. Production is anticipated to begin ramping up in the second half of 2019 to reach the full brownfield expansion capacity of 13,000 bpd in 2020. MEG’s average and exit production guidance for 2018 remains unchanged.

The Transaction comprises the sale of Access Pipeline for total consideration of $1.4 billion, and the sale of Stonefell for $210 million. 2018 annualized costs related to the Transaction are approximately $80 million for the transportation of diluted bitumen, $25 million for condensate transport, and $15 million for blend storage at Stonefell. As a result of the Transaction, MEG expects its net cash costs to increase by approximately $50 million on an annualized basis, comprised of an increase in transportation and storage costs of approximately $120 million, offset by a reduction in interest costs of approximately $70 million.

“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,” commented Bill McCaffrey. “The divestiture of our midstream assets strengthens our financial position while providing sufficient liquidity to allow MEG to complete its high return growth projects. Looking forward to 2020, we anticipate our debt to EBITDA to come into the range of 2 to 3 times while generating free cash flow at current prices.”

Future growth beyond 113,000 bpd, which will drive cash costs per barrel down further, will incorporate MEG’s proprietary reservoir enhancement technologies, adding 10 to 15% per annum of production growth over the medium term at very attractive capital cost intensities.

“We look forward to working with Wolf in the years to come to meet our ongoing transportation and storage needs,” added Bill McCaffrey. “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.”

The Transaction is expected to close in the first quarter of 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.

A conference call to discuss the Transaction and the Company’s fourth quarter and full year 2017 results has been scheduled for the new time of 9:30 a.m. Mountain Time (11:30 a.m. Eastern Time) on Thursday, February 8, 2018. The North American toll-free conference call number is 1-888-231-8191. The international conference call number is 647-427-7450.

A recording of the call will be available from 12:30 p.m. Mountain Time (2:30 p.m. Eastern Time) on February 8, 2018 until 9:59 p.m. Mountain Time (11:59 p.m. Eastern Time) on March 8, 2018. To access the recording, dial toll-free 1-855-859-2056 or local 403-451-9481 and enter the pass code 8358159.


Non-GAAP Measures

Certain financial measures in this news release including EBITDA, annualized EBITDA, net debt and free cash flow are non-GAAP measures. These terms are not defined by International Financial Reporting Standards (“IFRS”) and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

MEG Energy Corp. is focused on sustainable in situ oil sands development and production in the southern Athabasca oil sands region of Alberta, Canada. MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods. MEG’s common shares are listed on the Toronto Stock Exchange under the symbol “MEG”. For further information, please contact:

Helen Kelly
Director, Investor Relations

Davis Sheremata
Senior Advisor, External Communications
587-233-8311 d