In 2008, before Lehman, before Freddie Mac and AIG, there was SemGroup. One of the largest closely held companies in the US, the midstream giant filed for bankruptcy in July of that year after losing $2.4 billion on bets that crude would drop from triple-digits-per-barrel amid a gathering global recession.

As usual with such “no-brainers,” the bettor wasn’t wrong, just slightly (and terminally) early. Just after SemGroup went belly up, crude began the precipitous decline that would take it as low as $35 per barrel the next year. Subsequently, allegations surfaced that SemGroup’s trading partners, notably Goldman Sachs, had worked to bankrupt it.

In any case, a messy struggle for control of SemGroup’s far-flung assets ensued, before the much slimmed-down company owned largely by its predecessor’s creditors emerged from Chapter 11 in December 2009, and went public in November 2010.

The new SemGroup (NYSE: SEMG) is a midsize midstream operator specializing in crude gathering, transport and storage and the processing of natural gas from some of the fastest-growing shale plays in North America.

Assets include the general partner and majority of limited-partner interests for Rose Rock Midstream (NYSE: RRMS), the rapidly expanding master limited partnership gathering crude in the Bakken, Denver-Julesburg, Niobrara, Mississippi Lime, San Juan, Granite Wash, Permian and Eagle Ford plays and shipping some of it to Cushing, Oklahoma, where it owns oil tanks with the storage capacity of 7.6 million barrels, almost all of it leased through 2016.

Together with Rose Rock, SemGroup owns 51 percent of the White Cliffs Pipeline running crude from Colorado down to Cushing, which will more than double its capacity to 150,000 barrels per day (bpd) by August in response to growing shipper demand. Rose Rock is projecting growth of 12 to 20 percent in shipping volumes for the year.

It also owns a 50 percent stake in the Glass Mountain pipeline transporting crude from the Granite Wash and the Mississippi Line in Western Oklahoma to Cushing. This pipeline, completed in February, is now operating at 44 percent of its 140,000 bpd capacity.

In addition, SemGroup, has gas gathering and processing assets in western Alberta in Canada as well as northern Oklahoma and southern Kansas. The US segment operates 1,200 miles of gathering lines and four processing plants with a combined capacity of 363 million cubic feet per day (mmcf/d), currently processing about 65 percent of that maximum. SemGroup’s Canada segment has 600 miles of pipes and four plants with a capacity of 694 mmcf/d, recently running at 68 percent of that number.

Source: company presentation

Other crumbs from the empire gambled away in 2008 include a significant minority stake in NGL Energy Partners (NYSE: NGL) (as well as that master limited partnership’s general partner), gained in exchange for the SemStream natural gas liquids logistics assets; a major oil (and more recently gasoline) tank storage farm on the UK’s Welch coast capable of storing 8.7 million barrels, and a Mexican asphalt business whose 15 plants sold 103,000 metric tons of the stuff in the most recent quarter.

The crude segment made up of Rose Rock and pipeline interests that haven’t yet been dropped down is the main attraction, accounting for just over half of the adjusted corporate EBITDA in the first quarter and growing revenue 71 percent year-over-year. Impressively gas gathering and processing has grown even faster, and accounted for 36 percent of adjusted corporate EBITDA in the last quarter. Year-over-year, the Canadian segment’s EBITDA better than doubled, while that of the Oklahoma gas processing complex tripled.

The rapid growth is driving big increases in distributions. Rose Rock is aiming to hike its payout 15 percent this year with a 1.1x-1.2x coverage ratio, with SemGroup getting a 51 percent (and growing) cut. SemGroup, in turn, expects to improve its modest 1.5 percent yield by raising the dividend 25 to 30 percent year-over-year.  

The debt to capitalization ratio is a modest 36 percent and net debt is a reasonable 2.7 times the adjusted EBITDA. That EBITDA is forecast to increase 35 percent this year at the midpoint of the company’s guidance range (which might be a bit low given the excellent quarterly results SemGroup has just reported.)


¹Consolidated with Rose Rock Midstream
Source: company presentation

The current enterprise value works out to about 13 times this year’s expected EBITDA, inexpensive given the growth trajectory.

In addition to all the tangible assets on its books SemGroup has two more that can’t be quantified but I believe will prove very valuable nevertheless.

One is the recently installed CEO Carlin Conner, replacing Norm Szydlowski, who capably led SemGroup out of bankruptcy to renewed prosperity. Conner, 45, oversaw the Oiltanking Partners (NYSE: OILT) IPO and then presided over that partnership’s industry-leading growth as chairman of the general partner. He then returned for a second work stint at the parent company’s Hamburg, Germany headquarters as managing director of Oiltanking GmbH and member of the executive board of its parent, Marquard & Bahls AG.

And though management and ownership have turned over completely since 2008, the other asset is the notorious name and the institutional memory of market risk and its consequences. Conner, steeped in Germany’s conservative business culture, should help reinforce that theme. Fixed-fee contracts account for 86 percent of margin, with processed Oklahoma gas contributing 9 percent and 5 percent from Rose Rock’s crude marketing.

In sum, SemGroup offers fast growth, strong leadership and margins, and exposure to midstream operations in some of the fastest growing shale plays, at a reasonable price. We’re adding it to the Growth Portfolio. Buy SEMG below $75.