MEG Energy Corp. (TSX:MEG) announced that it has entered into an agreement with Wolf Midstream Inc. for the sale of the company’s 50 percent interest in Access pipeline and 100 percent interest in Stonefell terminal for $1.61 billion.
As quoted in the press release:
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.
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 millionhighly 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.
Bill McCaffrey, president and CEO, commented:
This transaction accomplishes the objectives we set out to achieve in unlocking the value of our midstream assets. 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.