Calgary – In a move that will shake up the natural gas processing sector in Saskatchewan, Steel Reef Infrastructure Corp. bought Crescent Point Energy Corp.’s gas infrastructure assets within Saskatchewan for $500 million on Nov. 14.
Each of the companies made the announcement after the closure of the markets that afternoon.
The move is significant in that Crescent Point had largely developed its own organic gas processing infrastructure as it grew to be the largest producer in both southeast and southwest Saskatchewan. Now their gas production will be handled by Steel Reef. This sale will contribute substantially to Crescent Point’s efforts to reduce its debt load.
The acquisition is a major one for Steel Reef, substantially increasing its footprint and processing capacity.
“Through the sale of these gas infrastructure assets, we will unlock value for our shareholders and further strengthen our financial position. We have now entered into agreements to sell, or have sold, in aggregate approximately $1.45 billion of assets in 2019,” said Crescent Point president and CEO Craig Bryksa in a release. “This sale is also aligned with our strategy, as it allows us to further focus on our core competencies to strengthen our corporate returns."
“This attractive investment is in line with Steel Reef’s responsible growth model and secures long-term benefits for our valued shareholders and customers,” said Scott Southward, president and CEO of Steel Reef. “We are pleased to further strengthen our relationship with Crescent Point in a best-in-class resource base.”
Steel Reef said in a release the purchase price will be satisfied by their existing investors and financers.
Through the sale of the assets, Crescent Point will monetize nine natural gas gathering and processing facilities and two gas sales pipelines currently in operation within Saskatchewan. These gas processing facilities and associated sales gas lines have a total throughput capacity of more than million cubic feet per day (MMcf/d). The assets do not include any oil-related infrastructure.
The impended sale was alluded to in Crescent Point’s third quarter financial report, released on Oct. 31.
Under the terms of the agreement, Crescent Point will enter into certain long-term take-or-pay commitments with Steel Reef in exchange for Steel Reef granting Crescent Point processing rights at the facilities. The expected annual cash flow to Steel Reef is estimated at approximately $47 million, excluding cash flow from third parties. Steel Reef will operate the assets.
Within Saskatchewan, Steel Reef already owns and operates facilities at North Portal, Alameda, Steelman, Nottingham, Kisbey, Glen Ewen, and Coleville and the Plato pipeline. It also has the Lignite, North Dakota gas plant just across the international border from its North Portal plant, the Gordondale clean products terminal and a sweet oil battery at Kaybob, Alberta.
As part of the agreement, Steel Reef has committed to fund an upcoming 12 MMcf/d expansion of one of the gas processing facilities, reducing the need for capital that would otherwise be required by Crescent Point. Steel Reef's cost to construct this expansion is estimated to be approximately $30 million, which will be in addition to the purchase price of $500 million. This facility expansion is expected to begin in 2020 and be completed within approximately 12 to 18 months following closing of the Asset sale. The expansion is expected to further enhance sales volumes while also reducing the facility's emissions intensity.
RBC Capital Markets acted as exclusive financial advisor to Crescent Point on this sale. GMP FirstEnergy represented Crescent Point as its strategic advisor. The transaction is expected to close in first quarter 2020, subject to customary closing conditions and regulatory approvals.
Crescent Point also reported that it continues to advance negotiations for third party development of a new sales oil pipeline. This pipeline is expected to enhance the company's market access and realized pricing for its southeast Saskatchewan oil production. Crescent Point’s management expects that the new sales oil pipeline will take approximately 12 months to construct and bring in service, once an agreement is finalized.
Where Crescent Point is putting the money
Crescent Point said its “disciplined capital allocation is centered on returns with a priority on continued balance sheet strength.”
Upon closing of the sale of the assets, Crescent Point expects that its net debt will be reduced from approximately $2.8 billion at year-end 2019 to approximately $2.3 billion while also reducing Crescent Point's net debt to adjusted funds flow ratio by approximately 0.3 times. Crescent Point said it continues to retain significant liquidity and unutilized credit capacity with no material near-term debt maturities.
Crescent Point currently expects to allocate approximately $50 million of proceeds from this disposition for additional share repurchases subsequent to closing and subject to market conditions. Given the anticipated timing for closing of the sale of the assets in first quarter 2020, the company's 2019 budget continues to assume a total of approximately $125 million of share repurchases. Crescent Point continues to be active in achieving this 2019 target and has repurchased, for cancellation, approximately 16.3 million shares year-to-date 2019 for total consideration of approximately $83 million, up to and including November 13, 2019.