Flying in face of negative sentiment, U.S. private equity giant forms natural gas company in Canada


CALGARY – Eyeing an opportunity in Canada’s troubled natural gas sector, U.S. private equity giant KKR & Co. Inc. and a partner have created a $1.15 billion Calgary-based company focused on natural gas processing assets in Alberta.

Partners KKR and Tulsa-based SemGroup Corp. said Thursday they are injecting capital into SemCAMS Midstream ULC, and spending $600 million to snap up Alberta gas processing assets from Denver-based Meritage Midstream ULC.

The combined $1.75 billion on Canadian natural gas assets “flies in the face” of negative sentiment about the Canadian energy sector, SemCams president David Gosse said.

“I know that we’re going to see an acceleration in the pace of our growth,” Gosse told the Financial Post.

SemCAMS will own natural gas gathering pipelines and a combination of existing and under-construction gas processing facilities capable of handling 2.1 billion cubic feet of natural gas per day from the prolific Montney and Duvernay formations.

“We have been an active investor in the Canadian energy space for the last decade and are big believers in the Montney as a growing low-cost natural gas play that is relevant on a global scale,” KKR head of North American infrastructure Brandon Freiman said in a release.

The investment comes even as other companies have slashed capital spending over concerns about commodity prices, including Seven Generations Energy Ltd., which announced a $1.25-billion capital budget on Thursday, which is $500 million lower than the budget it announced for 2018.

Freiman added the new company and the acquisition of the Meritage assets “creates a leading platform in the core of the Alberta Montney that is well positioned to serve its growing infrastructure needs.”

KKR will own 49 per cent of the new company and SemGroup will own 51 per cent. SemGroup has been quietly investing in Canadian gas processing assets in recent years and chose to spin out its Canadian division with KKR to accelerate the unit’s growth.

Last year, SemGroup spent 56 per cent of its capital budget on Canadian growth projects. The company has yet to announce a budget for 2019, but a company spokesperson said future spending in Canada will be announced in partnership with KKR.

The company plans to invest in new natural gas processing facilities in northwestern Alberta to process the liquids-rich natural gas in the region and is also planning additional acquisitions, according to Gosse.

We know there are … producer-owned assets and competitor-owned assets that will be coming on the market and that we’ll be interested in

SemCams President David Gosse

The gas produced in the region comes out of the ground saturated with liquids like butane, ethane, propane and hexane, which is then removed and sold separately. Frequently, those liquids are more valuable than the natural gas.

“We do see and we know that there are assets out there today that are producer-owned assets and competitor-owned assets that will be coming on the market and that we’ll be interested in,” Gosse said.

A number of smaller midstream and pipeline companies are looking to grow in the Montney and Duvernay formations despite the presence of larger players Pembina Corp. and Keyera Corp. in the region, Canaccord Genuity analyst David Galison said.

Tidewater Midstream and Infrastructure Ltd. and Wolf Midstream, which is backed by the Canada Pension Plan Investment Board, have been investing in midstream infrastructure in the shale-rich area, carving out niche opportunities for themselves, Galison said.

“The Canadian market is not very fragmented compared with the U.S. market, but there are opportunities,” he said.

He said the $40-billion LNG Canada project to export natural gas and reduced tolls on pipelines moving natural gas out of Alberta will help drive further growth in the Western Canadian natural gas business in the coming years.

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