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SemGroup (SEMG) & KKR Team Up for Meritage Midstream Buyout

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SemGroup Corporation and U.S. private equity company KKR recently entered into a joint venture (JV) for the development of a Canadian midstream infrastructure platform. The new venture named ‘SemCAMS Midstream ULC’ has signed an agreement to snap up Meritage Midstream ULC and its infrastructure assets for $449 million.

Markedly, Tulsa-based midstream player SemGroup will be contributing all the assets and shares of its SemCAMS unit (which is valued at $860 million) in exchange for 51% ownership in the JV, along with $460 million of cash proceeds. KKR will contribute $385 million for a 49% stake in common equity. Further, it will contribute another $224 million for the ownership of perpetual preferred equity. The transaction is set for closure in the first quarter of 2019.

Notably, the assets to be acquired include a portfolio of 195 million cubic feet per day (MMcf/d) of natural gas processing capacity along with 200 MMcf/d gas processing expansion, which is presently under construction. The assets also comprise 101 miles of gas gathering pipelines, 38 miles of oil gathering pipelines, along with 18 miles of emulsion and gas lift pipelines in the Montney play.

The acquisition of Meritage Midstream will bolster SemGroup’s Montney footprint by the addition of complementary assets and service offerings. Along with boosting the company’s portfolio, the transaction will deleverage and strengthen the balance sheet of SemGroup on the back of the cash proceeds of the JV.

While the transaction is likely to boost the future growth of SemGroup, the company is currently reeling under many challenges. The Supply & Logistics segment of the firm, which is currently plagued by continued pressure on differentials in the key markets, is likely to drag SemGroup down. As it is, the company has narrowed its EBITDA guidance to the band of $385-$400 million. SemGroup has also lowered its targeted annual payout growth rate to a minimum of 5% till 2019, significantly lower than the prior guidance of 10%.

Currently, the firm carries a Zacks Rank #5 (Strong Sell).

Meanwhile, investors interested in the same industry can consider Altus Midstream Company (ALTM - Free Report) , TransCanada Corporation (TRP - Free Report) and Transportadora De Gas Sa Ord B (TGS - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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