Tidewater Midstream and Infrastructure Ltd. Announces Strategic Expansion of its Liquids Value Chain with the Acquisition of Prince George Refinery Including a Five-year Investment Grade Product Offtake Agreement Which Results in Over 50% Accretion

Source Press Release
Company Tidewater Midstream and Infrastructure Ltd.Husky Energy Inc. 
Tags Debt Financing, Financing, Asset Deals, Deals, Refining & Marketing Activities
Date October 04, 2019

Tidewater Midstream and Infrastructure Ltd. ("Tidewater" or the "Company") (TSX: TWM) is pleased to announce that it has entered into a purchase and sale agreement ("PSA") to acquire  Husky Energy Inc.'s ("Husky") light oil refinery located at Prince George, British Columbia ("B.C.") (the "Acquisition") thereby expanding Tidewater's liquids value chain.

The Prince George Refinery ("PGR") is a 12.0 Mbbl/d light oil refinery that predominantly produces low sulfur diesel and gasoline, in addition to other products, to supply the greater Prince George region. PGR has significant onsite storage capacity of greater than 1.0 MMbbl and flexible logistics, with pipeline, rail and truck connectivity in place. The Prince George region is generally in short supply of refined products. The PGR's location within the Prince George region makes it a critical piece of infrastructure with a significant logistical advantage to address the demand for these products.

The Acquisition purchase price is $215 million (subject to closing adjustments) plus acquired inventory (estimated at approximately $62 million, primarily related to light oil feedstock, line fill and refined product in storage). Transaction costs and taxes are estimated at $11 million. The purchase price is also subject to contingency payments as further described below.

Tidewater intends to finance the Acquisition through an increase of its existing credit facility up to $600 million and a $100 million second lien term loan.

PGR reported Adjusted EBITDA of approximately $100 million in 2018 and Tidewater management estimates PGR 2020 Adjusted EBITDA of $75 million, which implies an attractive acquisition multiple of 2.9x Adjusted EBITDA prior to synergies(1). Tidewater expects this transaction to be over 50% accretive to distributable cash flow in the first full year of operations based on Tidewater management's estimates. Overall the Acquisition provides improved future distributable cash flow per share which is expected to reduce the Company's debt levels.

Tidewater has entered into a 5-year offtake agreement with Husky for 90% of the nameplate capacity on diesel and gasoline volumes produced at PGR.  The offtake agreement reflects certain take-or-pay characteristics relating to committed volumes that Husky has agreed to purchase and contains pricing review mechanisms.

The obligations of Tidewater and Husky to complete the Acquisition are subject to a number of closing conditions, including approval under the Competition Act (Canada).  The Acquisition is expected to close in the fourth quarter of 2019 and is effective upon closing.

PGR Asset is a Highly Strategic Vertical Expansion of Tidewater's Supply Chain with Attractive Investment Rationale

  • Regional demand is robust and short supply of refined product, having historically been driven by local energy intensive industries including forestry, mining and oil and gas. Tidewater expects demand to continue to be strong as various large-scale infrastructure projects are developed in B.C.
  • Current crude oil/condensate feedstock for the PGR can be supplied by existing light oil and condensate production from B.C. and Alberta, which Tidewater can readily access with its existing and planned midstream footprint, including the recently commissioned Pipestone Sour Gas Plant ("Pipestone"). Crude oil feedstock is currently delivered by pipeline from Taylor, B.C. PGR has optionality to receive feedstock supply by pipeline, rail and truck.
  • PGR product yields of approximately 45% diesel and approximately 40% gasoline are primarily sold through Husky retail gas stations and via exchange agreements with other Husky retail partners, in addition, approximately 15% of additional yields are LPG and heavy fuel oil.

Visible Synergistic Opportunities through Expanding Tidewater's Liquids Value Chain

  • Pipestone is projected to produce 15.0 Mbbl/d of 45° API condensate and, correspondingly, 45°  API condensate is the optimal and current feedstock for the 12.0 Mbbl/d PGR. PGR's top two customers are two of Tidewater's customers at Pipestone. There is a significant overlap between producers supplying the PGR and the counterparties that are committed as customers of Pipestone.
  • PGR will provide value-add liquids services to existing clients and help capture premium pricing optionality for the approximate 15.0 Mbbl/d of liquids processing at Pipestone, which are optimally suited to be used as refinery feedstock.
  • Tidewater plans to utilize its crude by rail infrastructure to transport incremental inputs to PGR should economic/arbitrage opportunities present themselves.
  • Future optionality exists around transforming the PGR and the related 1.0 MMbbl of storage into a long-term tolling and infrastructure asset supported by long-term contracts and customers. Options could include long-term storage contracts as well as longer-term agreements with producers for fixed tolls where producers realize the benefit of having exposure to diesel and gasoline prices.

Key Terms of the Acquisition

  • The Acquisition has a base purchase price of $215 million, an incremental inventory payment of approximately $62 million and is subject to a number of closing conditions.
  • In the event PGR's Adjusted EBITDA exceeds $100 million in 2020 or 2021, Tidewater will pay Husky 50% of the incremental Adjusted EBITDA above the $100 million threshold, up to a maximum of $30 million per year.
  • Tidewater plans to retain 100% of the core asset team at PGR, which has demonstrated a successful operating track record, top-decile safety standards, and an average management experience of 18 years at the facility.
  • Tidewater has entered into a 5-year offtake agreement with Husky for 90% of the nameplate capacity on diesel and gasoline volumes produced at PGR. The offtake agreement reflects certain take-or-pay characteristics relating to committed volumes that Husky has agreed to purchase and contains pricing review mechanisms.

Financial Highlights

  • Tidewater anticipates greater than 50% accretion to 2020 distributable cash flow per share, before synergies. Forecasted 2020 corporate distributable cash flow is estimated to be between $105 - $115 million.
  • In 2020 and beyond, the Acquisition provides Tidewater additional flexibility to allocate distributable cash flow towards further debt reduction, organic growth projects and/or other accretive acquisitions.
C$ millions  Tidewater Stand-Alone  Pro Forma PGR 
2019E Net Debt(2)  $520 - $530  $800 - $810 
2020E Adjusted EBITDA(1)(2)  $130  $205 
2020E Distributable Cash Flow(2)  $60 - $70  $105 - $115 
  • Tidewater has conservatively modelled a three-year turnaround schedule going forward.
  • A non-refundable deposit equal to 10% of the purchase price was paid by Tidewater to Husky upon signing of the PSA.

2020 Guidance

  • With the commissioning of the Company's 2018/2019 organic projects, and the Acquisition of PGR, Tidewater has increased 2020E Adjusted EBITDA guidance to approximately $205 million.
  • Tidewater expects to exit 2020 with Net Debt (including outstanding convertible debentures, the existing notes, the second lien term loan issued associated with the Acquisition and the drawn credit facility) of $700.0 million to $725.0 million.
  • Tidewater remains committed to a long-term goal of targeting Net Debt to Adjusted EBITDA of 2.5x-3.0x.

Credit Facility and Term Loan

In conjunction with the Acquisition and the operational update, Tidewater has received approval, subject to satisfactory completion of documentation, to expand its current credit facility from $350 million to $420 million and will receive a subsequent increase to $600 million at the time of closing of the Acquisition.

Also in conjunction with the Acquisition, Tidewater has received approval for $100 million second lien term loan, through ATB Financial subordinated to the senior credit facility, which matures on October 21, 2022 and bears interest at a bankers' acceptance rate + 450 bps ("ATB Term Loan"). Interest on the ATB Term Loan will increase at a rate of 50 bps per quarter to a maximum of the bankers' acceptance rate + 750 bps.

Impact of Bellatrix CCAA process on Tidewater

On October 2, 2019, Bellatrix Exploration Ltd. announced its commencement of proceedings under the Companies' Creditors Arrangement Act ("CCAA").  Tidewater estimates that its trade receivables from Bellatrix are less than $100,000.

Pipestone Plant update

On September 23, 2019 Tidewater announced commissioning of the Pipestone Montney, sour deep-cut gas processing complex ("Pipestone Gas Plant").  Tidewater is pleased to announce that the Pipestone Gas Plant is currently processing approximately 40 MMcf/day of sour gas with ramp up to full capacity of 100 MMcf/d expected by the end of 2019.

Advisors

National Bank Financial Inc. and CIBC World Markets are acting as Financial Advisors to Tidewater with respect to the Acquisition and AltaCorp Capital Corp. is acting as a Strategic Advisor to the transaction.

Conference Call

In conjunction with this Acquisition announcement, investors will have the opportunity to listen to Tidewater senior management discuss this news release via conference call on October 7, 2019 at 11:00 am MT.

To access the conference call by telephone, dial 647-427-7450  (local / international participant dial in) or 1-888-231-8191  (North American toll-free participant dial in).

A question and answer session for analysts will follow management's presentation.

A live audio webcast of the conference call will be available by following this link: https://event.on24.com/wcc/r/2108463/DCAB87AE1AF3ACBFECDC6483D1C75452 and will also be archived there for 90 days.

For those accessing the call via Cision's investor website, we suggest logging in at least 15 minutes prior to the start of the live event.

Source: EvaluateEnergy® ©2020 EvaluateEnergy Ltd