THE HEDGEYE EDGE
THESIS SUMMARY: SemGroup Corporation (SEMG) is a $2B market cap, diversified midstream C-Corp. SEMG’s hodgepodge collection of assets is challenged. The Company does not earn its cost of capital (~5% ROIC ex. White Cliffs), has no scale or competitive advantages in its operating areas, has limited opportunities for organic growth, and its largest assets have material risks to current cash flows – notably its DJ Basin and Miss Lime-facing businesses. And SEMG has virtually no exposure to the lowest cost US shale plays, the Permian and Marcellus/Utica.
The midstream sector is coming off of a major boom and organic growth has slowed industry-wide. In this environment it is essential to have a large, integrated footprint (scale) in order to capture new investment opportunities at an attractive return on capital, or steal market share from a competitor. SEMG is overly-diversified with no scale or competitive advantage in any particular geography or service; SEMG is a market share donor.
Despite these issues, SEMG is trading around 40x 2017 earnings. In our view, SEMG is worth $15/share based on our DCF, SoTP, and earnings-based valuation analyses.
Reviewing the 2Q17 Results…
Not a good quarter. Excluding one-time items, SEMG reported EBITDA of $59MM vs. consensus of $61MM. EBITDA ticked down in every segment sequentially, expect for S&L which held flat at a $(3)MM cash loss and is underperforming expectations. Clean EPS was $0.10 was consensus $0.06. SEMG took down EBITDA guidance for the year to a range of $270MM - $290MM from the prior $270MM - $310MM, while the HFOTCO EBITDA was guided to $60MM vs the prior range of $60MM - $65MM. 2017 EBITDA guidance for the combined entity now sits at $330MM-$350MM down from $330MM - $375MM.
The existing business EBITDA guide-down was attributed largely to Maurepas timing delays and continued weakness in crude marketing, while the HFOTCO guide down was chalked up to a delay in closing. CapEx was guided up $75MM to $575MM due to previously-announced HFOTCO growth projects. SEMG’s 2017 organic funding gap is now nearing $500MM.
In our view, SEMG easily needs another $1B to get its balance sheet in proper shape. Management discussed a deleveraging plan on the call, they are looking at some combination of non-core asset sales, JVs, or structured equity, while characterizing an equity offering as “not preferred nor expected.” We estimate that SEMG’s net debt at year end (including the deferred payment to Alinda) will be over $3B, with debt / EBITDA around 8x. While EBITDA will grow in 2018+ due to growth projects and a full year of HOFTCO, the debt balance will also grow due to SEMG's high CapEx and dividend requirements.
Further, the next few years will be challenging for White Cliffs, as it will lose volumes to contract step-ups on Saddlehorn, and then its $5.20/bbl tariffs will begin to expire and reprice lower. Saddlehorn recently published a new tariff to move condensate from the DJ to Cushing for $1.50/bbl. In short, material, organic deleveraging is years away (if ever possible), and it will be a grind. What SEMG needs to do is sell assets (SemLogistics and SemMexico is a start), raise equity, and then cut the dividend.
ONE-YEAR TRAILING CHART
