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MEG Energy’s Christina Lake project.

MEG Energy Corp. is selling its interest in an oil-sands pipeline for $1.61-billion, a long-awaited deal aimed at reducing its heavy debt load while maintaining access to transport capacity for its growing northern Alberta bitumen production.

With the transaction, Wolf Midstream Inc. gains full control of Access Pipeline in the latest acquisition of oil and gas gathering and processing systems by a company backed by a major private-equity fund – in this case, Canada Pension Plan Investment Board (CPPIB).

Wolf's purchase includes MEG's 50-per-cent interest in the pipeline for $1.4-billion as well as its wholly owned 900,000-barrel Stonefell oil storage facility for $210-million. Wolf, led by chief executive officer Gord Salahor, bought its initial 50-per-cent interest in the pipeline from Devon Energy Corp in 2016, also for $1.4-billion.

MEG will transport its oil-sands production on the pipeline system under a 30-year contract. The line extends 345 kilometres to Edmonton from MEG's Christina Lake project south of Fort McMurray, Alta. It transports diluted bitumen as well as the condensate blended with the heavy crude so it can flow through pipelines.

MEG has had its interest on the market for about three years, as it worked to rethink its plans after the collapse in crude oil prices in 2014 led to industry-wide cutbacks in spending and staff levels. This year, global oil prices have risen sharply, with benchmark West Texas Intermediate settling at US$61.15 a barrel on Thursday. However, Canadian heavy crude has remained under pressure due to tight export pipeline capacity.

MEG shares rose nearly 13 per cent on Thursday.

The company has insulated itself from much of the domestic price pressure through active hedging, its long-term capacity on a major pipeline between Illinois and Oklahoma, as well as extensive rail-shipment contracts, said Chris Cox, analyst at Raymond James. He upgraded the stock to "market perform" from "underperform."

Now, MEG says, its long-term debt will fall by $1.2-billion to $3.4-billion.

"With the announced sale of the Access Pipeline and Stonefell Terminal, we see sufficient line of sight toward a more palatable leverage level for investors, alongside visible and meaningful production growth driving a compelling margin expansion story," Mr. Cox wrote in a note to clients.

MEG'S overall expenses will increase by a net $50-million annually as a result of the transaction, although that will be absorbed by lower per-barrel costs as it boosts production, vice-president John Rogers told analysts.

The company announced the deal as it reported a fourth-quarter net loss of $1-million, or nil per share, compared with a year-earlier loss of $305-million, or $1.34 a share. Revenue rose 33 per cent to $755-million from $566-million.

Wolf and Canada Pension Plan established their partnership in 2015 to buy processing plants, gathering systems, pipelines and storage terminals, with CPPIB providing the funding.

The sale is similar to others that have paired private-equity investors with midstream companies in deals that have become alternative financing tools for exploration and production companies. An early entry was the partnership of Kohlberg Kravis Roberts and Co. L.P. and Veresen Inc., which bought gas processing assets in British Columbia from Encana Corp. Others in the industry have followed suit.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
DVN-N
Devon Energy Corp
+1.46%50.18
MEG-T
Meg Energy Corp
+0.81%31.1

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