MEG Energy Announces the Sale of Access Pipeline and Stonefell Terminal for $1.61 Billion

All financial figures in Canadian dollars ($ or C$) unless otherwise noted

CALGARY, Feb. 8, 2018 /CNW/ - MEG Energy Corp. (TSX:MEG) ("MEG" or the "Company") is pleased to announce that it has entered into an agreement with Wolf Midstream Inc. ("Wolf") for the sale of the Company's 50% interest in Access Pipeline and 100% interest in Stonefell Terminal (the "Transaction") for cash and other consideration of $1.61 billion, representing 13.4x 2018 annualized EBITDA.

MEG will receive $1.52 billion in cash at closing, and a credit of $90 million toward future expansions of Access Pipeline whereby MEG will not pay incremental tolls to fund such expansions.

As part of the Transaction, MEG and Wolf have entered into a Transportation Services Agreement ("TSA") dedicating MEG's Christina Lake production and condensate transport to Access Pipeline for an initial term of 30 years. In addition, under the TSA, commercial parameters have been established for the conversion of Access Pipeline's 16" unutilized pipeline to transport natural gas liquids. MEG has secured a substantial proportion of the rights to this pipeline on a long-term basis to support its proprietary enhanced bitumen recovery process known as eMVAPEX. The Transaction also includes a Stonefell Lease Agreement ("SLA") which is a 30-year arrangement that secures MEG operational control and exclusive use of 100% of Stonefell Terminal's 900,000 barrel blend and condensate storage facility. Under the TSA, MEG has secured a market-based toll on transported volumes related to MEG's bitumen production up to approximately 113,000 barrels per day (bpd) and an incentive toll structure where the tolls on additional barrels step down by as much as 60% as incremental production is brought on stream. The Company will pay a fixed lease fee, plus operating expenses under the terms of the SLA.

"This transaction accomplishes the objectives we set out to achieve in unlocking the value of our midstream assets," said Bill McCaffrey, MEG's President and Chief Executive Officer. "Our goal was to surface attractive value and terms that allow us to substantially pay down debt, pursue highly economic growth projects and ensure our future transportation and storage needs are met, all while protecting MEG's competitive cost position. We expect to more than offset the incremental transportation costs related to this transaction as we bring on additional barrels."

Upon closing, the net cash proceeds from the Transaction will be used to repay approximately C$1.225 billion of MEG's senior secured term loan and to fully fund the Company's $275 million highly economic 13,000 bpd brownfield expansion at the Phase 2B facility.

MEG intends to increase its 2018 capital budget from $510 million to $700 million to fund approximately 70% of the Phase 2B brownfield expansion in 2018. The expansion includes the addition of incremental steam capacity at the Phase 2B facility and two well pads and is expected to generate returns of approximately 30% at current strip prices. Production is anticipated to begin ramping up in the second half of 2019 to reach the full brownfield expansion capacity of 13,000 bpd in 2020. MEG's average and exit production guidance for 2018 remains unchanged. 

The Transaction comprises the sale of Access Pipeline for total consideration of $1.4 billion, and the sale of Stonefell for $210 million. 2018 annualized costs related to the Transaction are approximately $80 million for the transportation of diluted bitumen, $25 million for condensate transport, and $15 million for blend storage at Stonefell. As a result of the Transaction, MEG expects its net cash costs to increase by approximately $50 million on an annualized basis, comprised of an increase in transportation and storage costs of approximately $120 million, offset by a reduction in interest costs of approximately $70 million.

"With the resources and technology that are at our disposal, we have the ability to deliver low-cost, continuous growth which improves the overall profitability and sustainability of the business as we add incremental barrels," commented Bill McCaffrey. "The divestiture of our midstream assets strengthens our financial position while providing sufficient liquidity to allow MEG to complete its high return growth projects. Looking forward to 2020, we anticipate our debt to EBITDA to come into the range of 2 to 3 times while generating free cash flow at current prices."

Future growth beyond 113,000 bpd, which will drive cash costs per barrel down further, will incorporate MEG's proprietary reservoir enhancement technologies, adding 10 to 15% per annum of production growth over the medium term at very attractive capital cost intensities.

"We look forward to working with Wolf in the years to come to meet our ongoing transportation and storage needs," added Bill McCaffrey. "Wolf has proven to be a very reliable partner in our Access Pipeline joint venture over the last two years, and this transaction will enable us to work together in even closer partnership."

The Transaction is expected to close in the first quarter of 2018, subject to regulatory approvals and customary closing conditions. There are no financing or other non-customary closing conditions.

BMO Capital Markets and Credit Suisse are acting as financial advisors to MEG. Burnet, Duckworth and Palmer LLP and Latham & Watkins LLP are acting as legal counsel to MEG.

A conference call to discuss the Transaction and the Company's fourth quarter and full year 2017 results has been scheduled for the new time of 9:30 a.m. Mountain Time (11:30 a.m. Eastern Time) on Thursday, February 8, 2018. The North American toll-free conference call number is 1-888-231-8191. The international conference call number is 647-427-7450.

A recording of the call will be available from 12:30 p.m. Mountain Time (2:30 p.m. Eastern Time) on February 8, 2018 until 9:59 p.m. Mountain Time (11:59 p.m. Eastern Time) on March 8, 2018. To access the recording, dial toll-free 1-855-859-2056 or local 403-451-9481 and enter the pass code 8358159.

ADVISORY

Non-GAAP Measures

Certain financial measures in this news release including EBITDA, annualized EBITDA, net debt and free cash flow are non-GAAP measures. These terms are not defined by International Financial Reporting Standards ("IFRS") and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

Forward-Looking Information         

This news release may contain forward-looking information within the meaning of applicable securities laws. Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate", "target", "scheduled", "potential", or other similar words, or statements that certain events or conditions ''may'', "should'', ''might'' or ''could'' occur.

Such forward-looking information may include but is not limited to: expectations of future production, revenues, expenses, cash flow, operating costs, reliability, profitability and capital investments; the anticipated reductions in operating costs as a result of optimization and scalability of certain operations; and the anticipated sources of funding for operations and capital investments. Without limitation, this news release contains forward-looking information with respect to: our 2018 annualized EBITDA and the multiple that the purchase price represents thereof; our expectations regarding the terms of the TSA and SLA; the benefits that we expect to derive from the transaction; our expectation that we can offset the incremental transportation costs related to the Transaction; the completion of the Transaction, the timing thereof and the expected use of proceeds and debt reduction resulting therefrom; forecast capital expenditure levels, the components of our capital expenditure program, and anticipated returns therefrom and production guidance; anticipated increases in future net cash costs and reductions in interest costs; our ability to deliver low-cost, continuous growth and improve overall profitability and sustainability of our business; the ability of the Transaction to allow us to complete our high return growth projects; anticipated future debt to EBITDA levels and the generation of free cash flow; our expectations for annual production growth over the medium term and ability to further drive down cash costs. Such forward-looking information is based on management's expectations and assumptions regarding future growth, results of operations, production, future capital and other expenditures, plans for and results of drilling activity, environmental matters, business prospects and opportunities.

By its nature, such forward-looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: risks associated with the oil and gas industry, for example, the securing of adequate supplies and access to markets and transportation infrastructure; the availability of capacity on the electricity transmission grid; the uncertainty of reserve and resource estimates; the uncertainty of estimates and projections relating to production, costs and revenues; health, safety and environmental risks; risks of legislative and regulatory changes to, amongst other things, tax, land use, royalty and environmental laws; assumptions regarding and the volatility of commodity prices, interest rates and foreign exchange rates, and, risks and uncertainties related to commodity price, interest rate and foreign exchange rate swap contracts and/or derivative financial instruments that MEG may enter into from time to time to manage its risk related to such prices and rates; risks and uncertainties associated with securing and maintaining the necessary regulatory approvals and financing to proceed with MEG's future phases and the expansion and/or operation of MEG's projects; risks and uncertainties related to the timing of completion, commissioning, and start-up, of MEG's future phases, expansions and projects; the operational risks and delays in the development, exploration, production, and the capacities and performance associated with MEG's projects; and the risks associated with the Transaction being completed on the expected terms and timing, including the risk that applicable regulatory approvals are not received or that other conditions precedent to the closing of the Transaction are not satisfied or waived and that the Transaction does not close.

Although MEG believes that the assumptions used in such forward-looking information are reasonable, there can be no assurance that such assumptions will be correct. Accordingly, readers are cautioned that the actual results achieved may vary from the forward-looking information provided herein and that the variations may be material. Readers are also cautioned that the foregoing list of assumptions, risks and factors is not exhaustive.

Further information regarding the assumptions and risks inherent in the making of forward-looking statements can be found in MEG's most recently filed Annual Information Form ("AIF"), along with MEG's other public disclosure documents. Copies of the AIF and MEG's other public disclosure documents are available through the SEDAR website which is available at www.sedar.com.

The forward-looking information included in this document is expressly qualified in its entirety by the foregoing cautionary statements. Unless otherwise stated, the forward-looking information included in this document is made as of the date of this document and MEG assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.

MEG Energy Corp. is focused on sustainable in situ oil sands development and production in the southern Athabasca oil sands region of Alberta, Canada. MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods. MEG's common shares are listed on the Toronto Stock Exchange under the symbol "MEG".

For further information, please contact:

Investors
Helen Kelly
Director, Investor Relations
403-767-6206
helen.kelly@megenergy.com

Media
Davis Sheremata
Senior Advisor, External Communications
587-233-8311
davis.sheremata@megenergy.com

SOURCE MEG Energy Corp.