KKR makes new $8.9bn bet on growth in natural gas market

Private equity giant KKR and Pembina Pipeline have agreed to merge their western Canadian natural gas processing assets in a $8.9bn deal that will create a natural gas processing heavyweight and aims to take advantage of rising prices for the commodity.

The transaction illustrates KKR’s continued interest in the oil and gas industry, while many other large investors have been shifting away from traditional energy in recent years.

Buyout giant Blackstone, which has long been a major backer of fossil fuel deals, has told clients its PE and credit funds will no longer make investments in the upstream segment of the oil and gas industry, Bloomberg reported this month.

Private equity shops have been offloading their fossil fuel assets amid increased financing costs for oil and gas exploration and production projects, price volatility and the growing appetite for climate-friendly investments.

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Those moves, however, offer opportunities for private capital managers still willing to invest in traditional oil and gas, as they can acquire production assets at attractive valuations, according to Rebecca Springer, a private equity analyst at PitchBook.

The deal last year in which KKR merged its portfolio company Independence Energy with Contango Oil & Gas in a $5.7 billion transaction was an example of KKR’s eagerness to take advantage of this opportunity, she said.

The natural gas processing capacity of the company formed in the KKR-Pembina transaction, called Newco for now, is expected to hit 5 billion cubic feet per day and generate pro forma adjusted EBITDA of $950 million in 2022, Pembina said in a statement.

Under the agreement, Pembina will own 60% of Newco, while KKR’s global infrastructure funds will own the rest. Pembina will operate and manage the new entity.

The new company will include Pembina’s field-based processing assets, as well as Veresen Midstream business, in which funds managed by KKR have a 55% stake, while Pembina owns the rest.

The combined entity will also acquire Energy Transfer LP’s 51% stake in Energy Transfer Canada. KKR’s funds already own the remaining stake.

Oil and natural gas prices have surged in recent weeks driven by tensions ahead of Russia’s invasion of Ukraine, economic factors such as rising inflation, and supply chain problems. New sanctions on Russia have raised the prospect of restricted commodities exports from the nation.

Source: Pitchbook

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