SemGroup Corp. and private-equity giant Kohlberg Kravis Roberts & Co. LP are bucking a gloomy investment climate in Canada’s energy sector by forming an infrastructure joint venture and spending $600-million to snap up rival natural gas processor Meritage Midstream.
Oklahoma-based SemGroup said the venture, called SemCAMS Midstream ULC, will concentrate on oil and gas gathering and processing in the Montney and Duvernay regions of Alberta, an operating base for numerous producers and widely seen as the future of the country’s natural gas industries.
Both investors already have sizable operations in Western Canada, and see the new business as a jumping-off point to more acquisitions and an eventual initial public offering. The venture is acquiring the Canadian operations of Meritage, a company backed by Riverstone Holdings LLC.
Investment in the energy sector, especially by U.S. and other foreign companies, has recently ground to a near halt amid concerns over Canada’s inability to expand badly needed export capacity owing to regulatory and legal delays to major pipeline proposals.
The slowdown spells opportunity for corporate investors and private-equity players that have staying power, said Carlin Conner, chief executive of SemGroup. The company operates pipelines, processing plants, storage facilities and deep-water marine terminals in the United States and Canada.
“We believe in this market. Yeah, it’s a rocky road today, but we believe that, long-term, this will be a very nice addition to our portfolio and it really help SemCAMS unleash its potential,” Mr. Conner said in an interview.
SemGroup will fold its Canadian operations, which it values at $1.15-billion, into the new venture to get a 51-per-cent stake. KKR will contribute $515-million in cash to secure a 49-per-cent interest and will also buy $300-million in preferred shares. SemGroup will pocket cash proceeds of $615-million from the deal which it will use for debt reduction.
Meritage operates 195 million cubic feet a day of gas processing capacity, as well as oil and gas pipelines, in the Montney, a prolific play known for liquids-rich gas. Another 200 million cubic feet a day of capacity is due to be in operation by the third quarter of this year. In total, the new venture will own about 900 million cubic feet a day of capacity when the deal closes some time in the current quarter.
The assets fit well with SemGroup’s own operations in the region, Mr. Conner said.
“We have a long-term belief that this area will be a very good producing area," he said. “We consider it a top-quartile production area in North America, sitting right next to some of the Permian … basins [in Texas and New Mexico] that everyone talks about. We see this area being that good.”
For its part, KKR formed a Montney joint venture three years ago called Veresen Midstream, which has already spent about $1-billion. That deal began with the acquisition of assets from Encana Corp.
Private equity has an advantage in an energy industry where public markets are affording traditional operators little investment capital to make acquisitions. Last year, Brookfield Infrastructure Partners LP made a splash by acquiring Enbridge Inc.’s Canadian gas gathering and processing assets for $4.3-billion.
“Private equity can shoulder risk and work through some of these down years knowing that the cycles will repeat themselves and there will be boom years again as well,” said Dave Gosse, president of SemCAMS Midstream.
The companies said they could launch an IPO for the new operation sometime in the next one to three years, depending on market conditions.
Canadian Imperial Bank of Commerce was financial adviser to SemGroup and Evercore Group LLC was adviser to SemGroup’s board, while Toronto-Dominion Bank advised KKR. Royal Bank of Canada was financial adviser to Meritage and Riverstone.