Pembina Pipeline to Acquire Veren's Midstream Assets in C$400M Deal

Pembina Pipeline Corporation PBA, a Canada-based oil and gas storage and transportation company, has announced a major acquisition through its joint venture Pembina Gas Infrastructure Inc. ("PGI"). This agreement with Veren Inc. VRN involves acquiring its Gold Creek and Karr area oil batteries, coupled with a significant investment in future infrastructure development.

The strategic acquisition represents a key milestone in Pembina's growth, expanding the company's infrastructure footprint and strengthening its partnership with VRN, a prominent player in the Montney and Duvernay regions.

Details of the Agreement Between PBA & VRN

The acquisition involves four batteries in the Gold Creek and Karr areas, contributing significantly to PGI's existing infrastructure. These batteries boast a natural gas handling capacity of 320 million cubic feet per day and liquids handling capacity of 53,000 barrels per day. The natural gas processed from these batteries is directed to PGI's Patterson Creek Gas Plant, with the batteries and the plant integrated into Pembina's Peace Pipeline system.

Calgary-based VRN will play a major operational role with the newly acquired assets. According to the agreement, this Canadian oil and gas exploration and production company will manage the newly acquired batteries and the existing PGI-owned batteries in the region. Under this arrangement, VRN will handle all operating costs and maintenance capital, establishing itself as the primary operator for these facilities.

PGI will invest up to C$300 million and approximately one-third of this funding has already been committed, which reflects the seriousness of the collaboration. VRN, as part of this agreement, will oversee the construction and operation of the batteries, while PGI focuses on the high-pressure gathering pipelines that support this infrastructure.

Key Financial Aspects of PBA's Acquisition

The net purchase price is C$400 million (C$240 million net to Pembina), a considerable investment that highlights the company's commitment to expanding its gas processing and handling capacity. This acquisition is expected to generate an initial annual adjusted EBITDA of approximately C$50 million (C$30 million net to Pembina), with further capital deployment anticipated to yield additional contracted EBITDA through enhanced plant utilization and corresponding fees.

PBA's Long-Term Take-or-Pay Agreement

A critical component of this transaction is the 15-year take-or-pay agreement signed between the two companies. This long-term contract provides security for PGI, with VRN committing to processing capacity at the newly acquired batteries. Additionally, the agreement includes a dedicated area, which is situated in the Gold Creek and Karr regions, where VRN is obligated to use PGI's gathering and processing services for all volumes produced.

This acquisition is not only a financial transaction but a strategic move that strengthens Pembina's existing relationships and infrastructure capabilities. VRN is a leading producer in Montney and Duvernay, two prolific gas-producing formations in Western Canada, with more than 20 years of premium drilling inventory. This transaction ensures that PGI continues to collaborate with a top-tier counterpart in the energy sector.

The transaction also involves extending the existing legacy agreements between Pembina and VRN. Under the new structure, all the purchased batteries, existing assets and future infrastructure developments will be amalgamated into a single, simplified contract structure. This streamlined approach eliminates redundant administrative processes and provides clearer, long-term commitments between the parties.

Moreover, PGI has taken steps to eliminate future non-revenue-generating capital obligations tied to previous agreements, further optimizing its financial exposure. This move reduces operating expenses and ensures that all capital deployed has a direct impact on revenue generation.

This transaction enables VRN to manage the upstream gathering and battery infrastructure, while PGI will maintain operations at the Patterson Creek Plant. This arrangement supports the ramp-up of drilling activities and the associated increase in volumes outlined in VRN's development plan, leveraging the existing unused capacity at PGI's Patterson Creek Gas Plant.

Integration and Future Plans for PBA Stock

The transaction is part of Pembina's broader strategy to enhance its infrastructure and logistics chain. Liquids from the new batteries and Patterson Creek Gas Plant will continue to be transported via the Peace Pipeline system and natural gas liquids will be processed at Pembina's Redwater Facility, ensuring smooth integration with existing operations.

To finance this acquisition, PGI will use its existing credit facility, which highlights the company's strong financial position. This deal is expected to close in the fourth quarter of 2024, subject to customary closing conditions and regulatory approvals. This acquisition aligns with Pembina's long-term goals for growth and solidifies its role as a leading midstream service provider in Western Canada.

VRN's Gold Creek and Karr area oil batteries' acquisition by PBA is a strategic transaction that extends its reach into critical gas-processing regions. This collaboration with VRN ensures stable and long-term growth trajectory. The transaction brings together expanded operational capacity, enhanced infrastructure alignment and integration into Pembina's existing value chain, creating an opportunity for both companies to benefit from increased efficiencies and growth in the energy landscape of Western Canada.

Zacks Rank and Key Picks

Currently, PBA and VRN each have a Zacks Rank #3 (Hold).

Investors interested in the energy sector might look at some better-ranked stocks like VAALCO Energy, Inc. EGY and Core Laboratories Inc. CLB, each carrying a Zacks Rank #2 (Buy) at present.

Houston, TX-based Vaalco Energy is valued at $568.51 million. The oil and gas exploration and production company currently pays a dividend of 25 cents per share, or 4.56%, on an annual basis. EGY is an independent energy company principally engaged in the acquisition, exploration, development and production of crude oil and natural gas.