On the Deal Q&A: Crystal-ball Gazing

Lawyers pondered the future in negotiating Wolf and MEG’s transportation services agreement

Within a few short weeks, the deal teams from Wolf Midstream Inc. and MEG Energy Corp. closed Wolf’s $1.52-billion acquisition of MEG’s 50-per-cent ownership interest in Access Pipeline and its 100-per-cent ownership interest in the Stonefell Terminal. More than just a simple purchase and sale transaction, the parties entered into a long-term relationship that includes an initial 30-year commitment from MEG applying to transportation services on Access Pipeline and the use of Stonefell Terminal. Such long-term transportation services agreements (TSAs) pose complex and challenging issues for both sides of a deal, including a great many unknown future situations.


LEXPERT: First off, can you give me a sense of how this deal came about?

Richard Borden, Norton Rose Fulbright Canada LLP (for Wolf Midstream Inc.): Both MEG and Devon were initially collectively, and then separately, pursuing marketing efforts to sell their respective 50-per-cent interests in Access Pipeline. Devon’s marketing initiative was further advanced and therefore Wolf Midstream Inc. was able to acquire a 50-per-cent ownership interest in Access Pipeline in October 2016. However, given the synergies [which are described in more detail below], Wolf always focused on acquiring the remaining 50-per-cent ownership interest from MEG Energy Corp. if and when the opportunity arose.


LEXPERT: How does Wolf Midstream’s acquisition of MEG’s 50-per-cent ownership interest in Access Pipeline and 100-per-cent ownership interest in the Stonefell Terminal fit into each company’s overall strategy going forward?
KayLynn Litton, Norton Rose Fulbright Canada LLP (for Wolf Midstream Inc.):  Owning 100 per cent of Access Pipeline gives Wolf greater business development opportunities and operational flexibility. A key business development opportunity for Wolf is to expand Access Pipeline’s capacity for bitumen blend and diluent to serve third-party customers in addition to the original pipeline owners (Devon and MEG). In addition, the Stonefell Terminal connects MEG’s production facilities, through the Access Pipeline, to additional distribution connections, serving as a launch point for large volumes of blended products to reach multiple markets.
Carolyn Wright, Burnet, Duckworth & Palmer LLP (for MEG Energy Corp.): The sale of MEG’s midstream assets to Wolf Midstream enabled MEG to pay down debt in order to pursue highly economic growth projects. The sale also ensured protection of MEG’s competitive cost position while satisfying its future long-term transportation and storage needs.

LEXPERT: There were several elements to this deal, including an amendment and restatement of Wolf’s senior secured credit facilities and a 30-year lease agreement for MEG. I’d like to get a better sense of how the deal was structured and what each company will gain. Can you go into more detail about that?
Borden: Wolf had an existing senior secured credit facility, which was established to fund a portion of the acquisition of 50 per cent of the Access Pipeline from Devon. Given the similar nature of MEG’s 50-per-cent interest in the Access Pipeline, this facility was upsized to fund a portion of the acquisition of 50 per cent of the Access Pipeline from MEG. Given the importance of the Access Pipeline to MEG — this pipeline transports 100 per cent of their current production to market — it was important to preserve these transportation arrangements over a lengthy term. The economic terms of these tolling arrangements were also a significant factor in establishing the purchase price.
Alicia Quesnel, Burnet, Duckworth & Palmer LLP (for MEG Energy Corp.): Prior to the transaction, each of Wolf and MEG owned a 50-per-cent interest in the Access Pipeline System. MEG owned 100 per cent of the Stonefell Terminal. Pursuant to the Transaction, MEG sold its 50-per-cent interest in the Access Pipeline System to Wolf and entered into a long-term (30-year) transportation services agreement (TSA) with Wolf for the provision of diluent and condensate transportation services. Additionally, MEG sold its 100-per-cent working interest in the Stonefell Terminal to Wolf and entered into a long-term (30-year) lease with Wolf for the exclusive use of the Stonefell Terminal.

LEXPERT: What was your experience of working on the acquisition? What were the negotiations like?
Litton: It was challenging. The transactions and agreements were complex as the parties were entering into a long-term relationship and not a simple purchase and sale transaction. We were working with a tight timeline as the parties formally began negotiating a term sheet just before the holidays and there was a strong desire by both parties to complete the transaction in the first quarter of 2018.
Borden: For reasons that are confidential, both parties were incented to sign the purchase and sale agreement within roughly six weeks of when we started our serious negotiations.
Litton: One saving grace was that those involved in the negotiations, on the business side and the legal side respectively, know each other well. This familiarity helped us to identify and address issues likely to be “hot buttons” for the other side before they became overly contentious and to resolve the inevitable impasses that arose during our negotiations.
Borden: There were also more face-to-face negotiating sessions as the parties were of the view that it was more efficient to actively discuss most major points as opposed to exchanging drafts.
Quesnel: It was a great experience. Long-term TSAs present complex and challenging issues for the business and legal teams on each side of the deal. The achievement of “immediate” gains needs to be balanced against the requirement to satisfy long-term objectives of both parties. As a result, negotiations were general cooperative and highly solutions-oriented.

LEXPERT: What was the most challenging aspect of this deal?
Litton: This wasn’t just a purchase and sale transaction; the parties were also negotiating a transportation services agreement with an initial term of 30 years. When negotiating a business relationship that will last that long, you’re obviously dealing with a lot of unknowns — such as, what will each party’s business, the markets and the regulatory landscape look like in 10 or 20 years? As a result, we spent a lot of time trying to look through a crystal ball to ensure that the agreements provided the parties with the certainty their businesses need while being flexible enough to deal with whatever the future brings. It likely would have been challenging for a larger, more regimented pipeline company to accommodate some of the more custom provisions that were negotiated by the parties in the transportation services agreement.
Quesnel: Wolf had acquired Devon’s —MEG’s former partner — 50-per-cent interest in the Access Pipeline System and entered into a long-term transportation services agreement (TSA) with Devon the year prior. As a result, Wolf had to be very mindful to ensure that the MEG TSA was compatible with the Devon TSA, and in particular, that the terms of the MEG TSA would not require Wolf to breach its obligations to Devon under the Devon TSA. In that respect, even though Devon did not directly or indirectly participate in the negotiations, it was, nonetheless, another “party” in the room.

LEXPERT: What types of regulatory approvals were needed for this transaction?
Wright: The transaction required Competition Act approval, which was obtained by the end of February 2018 in the form of a No-Action Letter issued by the Competition Bureau. In addition, the parties obtained typical normal course regulatory approvals and notifications relating to the transfer of the assets.

LEXPERT: What did you learn from this deal that you can apply to the next one?
Borden: That each deal has its own unique nuances and you need to tailor both the style of the negotiations — in-person meetings versus conference calls versus exchanging drafts — and the individuals at the negotiating table to the perceived requirements of each particular deal.
Wright: That there are significant opportunities for producers and midstream companies to establish long-term mutually beneficial relationships.

LEXPERT: How would you characterize the tone of the negotiations? Was there a quick agreement on terms or a more drawn-out negotiation?
Litton: Notwithstanding the tight timeline, the negotiation was still fairly drawn-out given the underlying complexities. However, the tone of the negotiations was almost without exception amicable and cooperative. As noted, the teams involved in negotiations know each other quite well and have histories of sitting across the table from one another in other roles and transactions, including, in the case of the Wolf and MEG business people, on matters relating to their joint ownership of the Access Pipeline prior to this transaction. While there will always be tense moments in negotiations between parties with competing interests, their general familiarity with each other assisted us in working through most of these issues fairly quickly.
Quesnel: The negotiations were highly respectful and solution-oriented. Both MEG and Wolf appreciated the complexities inherent in their post-closing relationship and worked hard to understand the drivers that were important to one another. As a result, they worked together in a spirit of accommodation with a view to ensuring the long-term success and resiliency of their post-closing relationship.

LEXPERT: What was the most memorable or unusual aspect of this deal?
Borden: Although every transaction has its nuances, this deal was memorable because of the unique personalities of the individuals negotiating this transaction, the complexity of the “crystal ball” analysis that was required and the tight timeline under which the parties were operating.
Quesnel: It was a pleasure working with the business and legal teams for MEG and Wolf.

 For a summary and full list of legal advisors, click here.

Lawyer(s)

Richard P. Borden KayLynn G. Litton Alicia K. Quesnel Carolyn A. Wright

Firm(s)

Norton Rose Fulbright Canada LLP Burnet, Duckworth & Palmer LLP