Pembina-Veresen deal adds to energy sector’s made-in-Canada era

It’s amazing what happens when a chief executive finds a little more time on his hands.

Pembina Pipeline Corp. president Mick Dilger was co-chair of the 2016 Calgary United Way campaign, an undertaking which raised $57.7 million for the community.

When that chapter closed at the end of 2016, Dilger had more time to focus on building — and diversifying — Pembina’s asset base. The company had not done a deal of size since buying Provident Energy for $3.2 billion in 2012.

That deal was seen as transformational for Pembina, which on Monday announced a $9.7-billion acquisition of Veresen Inc.

In an interview, Dilger said an initial approach was made last year to Veresen, which first needed to complete the sale of its power assets. The conversations re-started in late February, with both sides “banking up” and looking at how best to make the transaction a reality, he said.

Pembina coveted the Veresen assets, and interest in the company grew with the development of projects such as the Sunrise natural gas processing plant in northeast British Columbia completed through Veresen Midstream.

Sunrise, with 400 million cubic feet per day of processing capacity, was the largest gas plant commissioned in Western Canada in 30 years and significantly expanded Veresen’s presence in the Montney play.

Until Monday, Pembina was 87 per cent levered to crude oil and natural gas liquids.

Now, with the Veresen deal, it can play on both the oil and natural gas sides. It also gains exposure to the hot natural gas plays in Canada — the Duvernay, Montney and Deep Basin. Those are areas with tremendous potential and, as Dilger said Monday, they’re in the early innings of development. Pembina’s asset mix is now one-third oil, one-third natural gas and one-third natural gas liquids.

The deal also comes with significant transportation exposure, including a 50 per cent interest in the Alliance and Ruby pipelines. It also gains a 43 per cent ownership in the Aux Sable midstream business, among other gas-gathering assets.

There is also fractionation capacity across the natural gas liquids hubs of Edmonton, Sarnia, Ont. and the U.S. Midcontinent, making Pembina the largest, third-party natural gas processor in the Western Canadian sedimentary basin.

The deal also offers growth potential. The merged company has $6 billion of value in terms of sanctioned projects, with the potential for an additional $20 billion in ‘unsecured’ projects not yet approved.

Not only does Pembina gain a bigger presence in the U.S. Midwest, it also gets exposure to Jordan Cove, the big ticket proposed LNG project in Oregon.

While the Obama administration wasn’t keen on Jordan Cove, the head of the U.S. National Economic Council, Gary Cohn, last month said approval was forthcoming. The general consensus is that it would have been difficult for Veresen to finance construction of Jordan Cove.

“We were balance sheet constrained,” Veresen CEO Don Althoff said on a conference call to discuss the transaction.

Now, as part of Pembina, there is a higher likelihood the project can get off the ground.

“There is new wind in the sails for that project. I like it, I think it will work,” Dilger said on the call.

The question is whether Veresen will transform Pembina as the Provident acquisition did.

The market appeared somewhat unconvinced of the merits of Monday’s deal, with Pembina’s shares falling $1.45, or 3.3 per cent, to $42.05 at Monday’s close.

Whether that’s a function of how the financing is structured — with Pembina using its balance sheet — or doubts that it’s a one-plus-one-equals-four transaction, as Althoff suggested, remains to be seen.

The conclusions coming out of this are relatively straightforward, however.

The complexity and challenges surrounding the development of new pipeline infrastructure reinforces current thinking that it makes more sense to buy existing pipe than to build it. Another is that scale matters in the midstream sector as much as it does on the exploration and production side of the business. Size means a lower cost of capital.

What’s really exciting is the Canadian presence in the North American midstream business. Take the combined enterprise value of Enbridge, TransCanada, Enbridge Income Fund and the merged Pembina and the number is $300 billion. Add the capital projects each company has planned and the number surpasses $400 billion within a decade.

Not long ago there was a lot of hand-wringing over U.S. companies picking off Canadian energy companies. That’s no longer the case.

Whether it’s the deals struck by the midstream players, Suncor’s purchase of Murphy Oil’s Syncrude stake, the recent acquisitions by Cenovus to buy the ConocoPhillips assets or Canadian Natural buying Shell’s oilsands properties, a made-inCanada era is taking shape in the energy sector.

That’s not something anyone would have thought possible just 18 months ago.