SemGroup Boosts Montney Footprint With New KKR JV

SemGroup Corp. (NYSE: SEMG) expanded its footprint in Canada’s Montney shale play last week through an acquisition made by a new joint venture (JV) between the Tulsa, Okla.-based company and global investment firm KKR & Co. Inc. (NYSE: KKR).

The JV, SemCAMS Midstream ULC, will combine assets of SemGroup’s Canadian subsidiary and Meritage Midstream ULC, which SemCAMS Midstream agreed to acquire on Jan. 10 for C$600 million (US$449 million) concurrent with the formation of the JV.

Pro-forma for the acquisition, SemCAMS Midstream will have roughly $1.3 billion of assets in Alberta, analysts with Capital One Securities said in a Jan. 10 research note adding that the JV may also serve as a potential IPO platform in 12 to 36 months, depending on market conditions.

SemGroup will hold 51% common equity ownership in SemCAMS Midstream with KKR owning the remaining 49%.

As part of the JV terms, SemGroup will contribute the shares and assets of its Canadian subsidiary valued at C$1.15 billion (US$860 million) to SemCAMS Midstream and KKR will contribute C$515 million (US$385 million) of cash.

In exchange for its contribution, SemGroup will also receive C$615 million (US$460 million) cash proceeds in addition to the equity stake in the JV.

The JV will also issue C$300 million (US$224 million) of perpetual preferred equity to KKR and enter a C$800 million (US$598 million) underwritten bank credit facility, which will help fund its acquisition of Meritage Midstream.

SemGroup CEO Carlin G. Conner said the JV transaction captures an attractive valuation for the company’s SemCAMS business and accelerates its Canadian strategy in one of North America's “premier energy basins.”

Further, the acquisition of Meritage enables SemCAMS Midstream to create a more attractive Canadian growth platform, Conner said in a statement adding that it also delivers on SemGroup’s commitment to strengthen its balance sheet.

The Meritage deal adds about 195 million cubic feet per day (MMcf/d) of natural gas processing capacity and over 100 miles of gathering pipelines in the liquids-rich Montney. A number of expansion projects are underway, including the 200 MMcf/d Wapiti Plant that Capital One analysts said will be online by the end of January, ahead of scheduled third-quarter 2019 in-service date.

Between the existing SemCAMS and Meritage facilities, the SemCAMS Midstream JV will own about 900 MMcf/d of natural gas processing capacity in the Montney. Total natural gas processing operational capacity will increase to roughly 1.3 billion cubic feet per day following completion of the SemCAMS and Meritage projects under construction, according to the SemGroup press release.

SemCAMS Midstream will be headquartered in Calgary, Alberta, and the management team will be led by SemCAMS’ Dave Gosse as president.

Gosse said in a statement, “Combining the SemCAMS and Meritage portfolios will diversify our customer base and broaden our service offerings to include oil batteries and liquids processing, while considerably expanding our gas processing capacity. Our contiguous asset mix, geographic proximity and operational leverage will allow us to optimize our system while creating increased reliability.”

SemCAMS Midstream’s acquisition of Meritage is expected to close first-quarter 2019.

CIBC Capital Markets was financial adviser to SemGroup, Evercore was financial adviser to SemGroup’s board and TD Securities was financial adviser to KKR with respect to this transaction.

RBC Capital Markets acted as financial adviser to Meritage and Riverstone. Gibson, Dunn & Crutcher LLP and Osler, Hoskin & Harcourt LLP were legal advisers to SemGroup. Torys LLP and Simpson Thacher & Bartlett were legal advisers to KKR. Dentons Canada LLP and Vinson & Elkins LLP were legal advisers to Meritage and Riverstone.

Emily Patsy can be reached at epatsy@hartenergy.com.