USCA Equity Research
SEMG – July 24, 2013 Overview
SEMGROUP CORPORATION SemGroup Corporation (SEMG) provides gathering, transportation, processing, storage, SEMG distribution, marketing and other midstream services. Assets are located primarily in the Mid -Continent and Rocky Mountain regions, but SEMG also generates ~25% of their CURRENT PRICE: $56.40 EBITDA from international assets (Canada, Mexico and the UK). SEMG owns 58% of the LP units as well as the 2% GP interest in Rose Rock Midstream (RRMS) and owns 9.1mm TARGET PRICE: $60.00 LP units (13.9%) and a 6.42% interest in the GP stake in NGL Energy Partners (NGL). RECOMMENDATION: HOLD SEMG filed for bankruptcy in 2008, after incurring $3B+ in oil trading losses. They filed
petitions for reorganization later that year, emerged from bankruptcy in late 2009, and Key Stats IPO’d the new company in 2010. A new board of directors was appointed and the cur rent management team was brought on as part of the reorganization. As part of the Market Cap: $2.4B bankruptcy, SEMG sold their General and Limited Partner interests in SemGroup Energy Enterprise Value: $2.5B Partners (now BlueKnight Energy Partners) to Vitol. Additionally, SEMG either sold or EPU (2012A): $0.52 EPU (2013E): $1.90 sh ut down a number of their non-core operating segments. P/E (2012A): 108.5x We are initiating coverage of SemGroup with a Hold rating and a $60/sh price target. P/E (2013E): 29.7x EV/EBITDA (2013E): 14.9x Investment Thesis DPS (2013E): $0.60 Growth forthcoming, but largely priced in: Adjusted EBITDA is set to grow ~25% in Current Yield: 1.35% 3-Yr DPU Growth Rate: 27.9% ’13 based on management guidance, and we estimate that ’14 should follow with Beta: 0.95 another 30% gain. However, it appears the market is factoring in this growth given their 14.9x EV/ ‘13E EBITDA multiple that compares to their peers that trade at an
average of 11.5x.
Current low yield reflects above-average dividend growth rate: SEMG recently
announced their first quarterly dividend (19c/sh) since filing for bankruptcy and has
targeted double-digit dividend growth over the next three years. With ~$2B of
dropdowns planned for RRMS over the next five years, we see an average ~28% dividend growth rate through ’17. We think the well below peer, 1.35% current yield,
reflects that growth.
Leverage to Mississippi Lime play adds risk: We consider the Mississippi Lime to be a
lower-tier basin for E&P operators. Thus, gas and crude production from this basin is
likely to be more subject to commodity prices and geographic risk than higher-tier basins like the Eagle Ford or Bakken. This risk is amplified by the fact that the
Mississippi Lime’s growth is driven by SandRidge (SD) and Chesapeake (CHK), two companies who have undergone recent CEO changes, which could lead to changes in strategy.
Analyst Contacts This isn’t your older brother’s SemGroup: A new, higher quality management team and a much more conservative philosophy dominate the post-bankruptcy SemGroup.
James Carreker For an in-depth account of SemGroup’s 2008 bankruptcy, read Louis Freeh’s report 713-366-0558 here (same investigator from Penn State’s recent scandal). Basically, their former [email protected] CEO had free reign over their Trading Desk and made numerous short bets on crude in early ‘08, only to see it continue to climb towards $147/bbl. Becca Followill Valuation 713-366-0557 [email protected] We value arrive at our $60/sh price target using the sum of the parts valuation below. We mark LP units to market and value RRMS’s future GP cash flows assuming the
1 ** Important Disclosures on pages 9-10 of this report **
USCA Equity Research
SEMG – July 24, 2013
dropdown schedule outlined in our RRMS initiation and also shown below our NAV chart. We model NGL GP cash flows assuming NGL management distribution guidance for their FY’14 and assume growth of 1c/quarter thereafter. We value SEMG’s undropped assets at multiples of ’15 EBITDA, giving a slight premium for crude-based assets. We chose ’15 EBITDA as our base year as SEMG has several growth projects coming online in ’14, so that ’15 is the first year that provides a full run rate. In addition to LP/GP values and segment EBITDA multiple values, we also add and subtract value for SEMG’s undesignated growth projects, warrant dilution, and net debt. We risk-adjust SEMG’s outlined but undesignated growth projects (most recent presentations show $115mm in ’13 and $205-$305mm in ’14 of undesignated capex; we use 50% of those amounts to risk-adjust) assuming they can build at a 6x EBITDA multiple and create a 10x EBITDA value once completed. Previously undesignated growth projects that have added significant value include the Glass Mountain and Wattenberg pipelines as well as the White Cliffs pipeline expansion. We subtract value for potential dilution based on the ~2.1mm warrants issued and outstanding related to SEMG’s bankruptcy filing (strike price of $25/sh). We also take into account the stand-alone net debt at the SEMG level at YE’14 (when major identified growth projects are completed), backing out RRMS level debt. We currently assume a breakeven value to SEMG’s prospective $300mm acquisition of CHK’s mid-con assets, assuming they paid full price for an asset that likely had multiple suitors, including ACMP, who had exclusive negotiating rights thru March 1st, 2013 (SEMG announced acquisition May 1st). See SemGas section below for more discussion.
Net Asset Value Shares outstanding 42.3mm
MLP Assets Units Price Value Value/sh RRMS LP Units 12.6mm $35.66 $448 $10.6 RRMS GP Ownership $275 $6.5 NGL LP Units 9.1mm $28.92 $264 $6.2 NGL GP Ownership (6.42%) $8 $0.2 Subtotal $995 $23.5
Other Assets Multiple '15 EBITDA Value Value/sh White Cliffs Pipeline (34%) 11.0x $53.2 $586 $13.8 Glass Mountain 11.0x $19.7 $217 $5.1 Wattenburg 10.0x $5.0 $50 $1.2
SemGas ex-CHK Assets 10.0x $44.8 $448 $10.6 CHK Assets $300 $7.1 SemCAMS 10.0x $35.4 $354 $8.4
Logistics/Mexico/G&A 10.0x ($10.0) ($100) ($2.4)
Undesignated Growth Projects $123 $2.9 Warrant Dilution ($66) ($1.6) Net Debt - YE'14 ($384) ($9.1)
Total $2,523 $60 Source: Company Reports, USCA
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USCA Equity Research
SEMG – July 24, 2013
USCA Estimated Drop Downs for RRMS from SEMG Forward EBITDA Asset Price (est) Timing EBITDA (est)* Multiple White Cliffs Pipeline (17%) $274 $20.4 13.4x Q1'13 Glass Mountain Pipeline (50%) $237 $19.7 12.0x Q1'14 Wattenberg Pipeline $50 $5.0 10.0x Q1'14 White Cliffs Pipeline (17%) $311 $28.3 11.0x Q1'15 White Cliffs Pipeline (17%) $317 $28.8 11.0x Q1'16 SemGas (50%) $544 $54.4 10.0x Q1'17 SemGas (50%) $544 $54.4 10.0x Q1'18
*Estimated EBITDA for asset year after dropdown
Segment Overview SEMG conducts their business through six business segments. An “Other” category, which is primarily corporate
overhead, allows the associated percent of EBITDA below to foot to 100%.
Crude (60% of ‘13E EBITDA) – includes their LP and GP stakes in RRMS, another 34% stake in the White Cliffs crude oil pipeline, and additional crude oil assets under development;
SemCAMS (20%) – fee based gas processing in Canada; SemGas (16%) – Mid-Continent and Texas gas gathering and processing; SemStream (12%) – holds their LP and GP stakes in NGL Energy, formerly their propane assets;
SemMexico (5%) – Mexico-based asphalt services company; and SemLogistics (0%) – U.K.-based company which owns petroleum products storage.
Crude (60% of ‘13E EBITDA)
SEMG’s Crude business consists primarily of their LP and GP stakes in RRMS (see associated coverage initiation piece on RRMS), along with their remaining 34% interest in White Cliffs crude oil pipeline. White Cliffs is a 70 mbpd crude line from the DJ Basin to Cushing, OK that is expanding to 150 mbpd in Q2’14. SEMG plans on spending ~$102mm for the pipeline expansion (and another $49mm at RRMS level).
In addition, they have a JV with Gavilon to build the Glass Mountain Pipeline, a 210-mile, 140 mbpd crude oil pipeline in western and north central Oklahoma to transport Mississippi Lime and Granite Wash production to an interconnect with Gavilon’s Cushing storage. Total SEMG capex for the project should be ~$130mm, and the pipe is expected to go into service in Q4 ‘13. CHK signed a long-term agreement for capacity, which provided the economic incentive to build the pipeline. Specific contracted volumes have not been disclosed, but we are assuming that volumes will gradually ramp up to 125 mbpd by ’16, at which point we believe the pipeline will have achieved SEMG’s target of ~$20mm (net to SEMG)
annual EBITDA. PAA is also building a Mississippi Lime crude oil pipeline, anchored by SandRidge Energy production and has announced a 55-mile extension of the line into southwest Kansas. The other major growth project for the Crude segment is the Wattenberg Oil Trunkline, a new crude oil gathering system
in the DJ Basin. The $39mm system will extend 37 miles north from RRMS’ Platteville Station (the starting point of the White Cliffs Pipeline) and will connect with Noble Energy’s production area. Expected in-service is also Q4’13. Segment Outlook: We model Crude segment EBITDA growing from ~$75mm of EBITDA in ’12 (71% of SEMG total), to $134mm by ’16 (54% of SEMG total), driven by the White Cliffs expansion and the new Glass Mountain and Wattenberg Trunkline projects. The segment accounts for ~55% of SEMG capex in ’13 (including RRMS’ share of White Cliffs capex).
Beyond currently outlined projects, we believe SEMG’s could expand its marketing operations with additional trucks
3 ** Important Disclosures on pages 9-10 of this report **
USCA Equity Research
SEMG – July 24, 2013
and/or loading/unloading facilities or could make a move further upstream to become a more active crude gatherer, particularly in the Bakken or DJ Basin regions.
SemCAMS (20% of ‘13E EBITDA) SemCAMS owns four gas processing and gathering facilities in Alberta (mainly Montney and Duvernay shales), with capacity of ~700 mmcf/d and average throughput of ~450 mmcf/d over the last two years. SemCAMS’ plants are not
traditional gas plants used to strip out NGLs from the gas stream; instead they are used primarily as conditioning plants to remove certain contaminates before the gas enters mainlines. Revenues are fee based, plus they are able to recover plant turnaround costs. Approximately 27% of SemCAMS volumes come from dedicated acreage production and the remainder from spot volumes.
Segment Outlook: While margins on processed volumes have been relatively consistent (~30c/mcf), low gas prices have slowed Western Canada gas production, leaving SemCAMS unable to fully utilize existing capacity. Plans to build an additional $200mm plant were put on hold indefinitely in conjunction with SEMG’s Q4’12 earnings (original 2015 in- service). Near-term, we don’t see any impetus to drive Canadian gas production higher, and so we model flat volumes and margins.
SemGas (16% of ‘13E EBITDA)
SemGas has 980 miles of gathering in Kansas, Oklahoma and Texas, a 23 mmcf/d processing plant in E. Texas and three processing plants in N. Oklahoma with a combined capacity of 200 mmcf/d, including a new 125 mmcf/d plant that came online in May. Historically, processing contracts have been largely percent of proceeds (PoP), but SEMG has recently transitioned volumes to a hybrid 50% fee-based, 50% PoP structure. Additionally, SEMG has announced their intention to purchase CHK’s Mississippi Lime gathering and processing assets for $300mm (expected to close Q3’13). Access
Midstream (ACMP) had exclusive rights to bid on these assets prior to March 1st, 2013. Segment Outlook: Given the recent plant in-service, more than doubling existing processing capacity, and expected CHK acquisition, the SemGas segment should be the second biggest driver of growth at SEMG (behind Crude segment). We are modeling a gradual ramp in volumes on the new 125 mmcf/d plant, with it filling up by ’16. SEMG has guided that the now fee-based portion of their volumes will be margin neutral to their previous PoP volumes, assuming commodity prices
roughly equivalent to those in Q1’13 (we’re at $1.10/mcf for fee-based volumes). Most of SemGas’ processed volumes are associated gas volumes from crude-directed drilling in the Mississippi Lime formation. So while SemGas doesn’t have any direct crude price sensitivity, processed volumes will be dependent on
drilling activity (largest operators currently CHK and SD), which will in turn be driven by crude prices. While wells here are currently economic, they are lower-tier when compared with Eagle Ford or Bakken wells; so, should crude take a
sustained dive to ~$80/bbl or below (deteriorating well economics), we would expect volumes to flatten or potentially decline. CHK Acquisition: Financial details regarding the $300mm CHK acquisition are still minimal as management intends to
provide an update once the acquisition has closed. We do know that they are acquiring 200 miles of gathering pipelines, a 540k acreage dedication from CHK with an associated 20-year 100% fee-based processing agreement. SEMG will also spend ~$125mm to build two, 200 mmcf/d gas processing plants over the next three years. The first plant is expected to come online Q1’14 with the second in Q1’16. As discussed in the valuation segment, we currently don’t ascribe any value to SEMG for the CHK assets beyond what
they’ve agreed to pay. While we see potential for value accretion ($3-5/sh, depending on timing of plant in-service, volume ramp up, and total capex), we have elected not to include it our current NAV for several reasons. 1) We have little visibility into future cash flows; 2) We assume that a competitive bidding process means that SEMG paid some value for
4 ** Important Disclosures on pages 9-10 of this report **
USCA Equity Research
SEMG – July 24, 2013
future growth opportunities; 3) There is execution risk to that future growth as we don’t expect a full run-rate EBITDA until the late ‘17/early ’18 time frame.
However, that said, should SEMG earn similar economics on their new gas plants as their existing gas plants and CHK meets
production targets, we get that the assets could add ~$75mm of EBITDA once fully ramped. Assuming a 10x EBITDA valuation and costs of $500-$600mm ($300mm acq cost + $125mm capex to complete gas plants + unspecified amount for
well connects and other), the transaction would create $150-$250mm of value uplift, or ~$3-$5/sh.
SemStream (12% of ‘13E EBITDA)
SEMG sold their former propane assets in their SemStream business to NGL Energy Partners (NGL) in November 2011 for 8.9mm LP units (then ~1/3 of NGL LP units), a 7.5% GP stake, $100mm cash, and two board seats. NGL owns midstream wholesale and retail propane storage and distribution, crude oil logistics and water treatment services. Due to various NGL
acquisitions, SEMG now owns 9.1mm LP units and a 6.42% stake in NGL’s general partner.
Segment Outlook: We value NGL LP units at market price, consistent with how we value other companies’ LP stakes. Since their GP stake has almost no impact on our SEMG NAV, to value GP cash flows, we use NGL management’s distribution growth guidance for FY’14 and assume 1c/quarter distribution growth after that. SEMG management has indicated that they may eventually sell their NGL ownership interests, but do not foresee doing so in the near-term.
SemMexico (5% of ‘13E EBITDA)
SemMexico operates a network of 12 asphalt cement terminals and generates revenues by distributing asphalt in Mexico. Pemex is the company’s primary supplier of asphalt. Key drivers are the sustainability of road construction and
maintenance funds from the Mexican government. Segment Outlook: SemMexico EBITDA has been basically flat over the last four years, at ~$10mm/yr, although Q1’13 was lower than expected due to a temporary slowdown in government funding due to a new administration. We look for the
long-term trend to continue at ~$10mm/yr. While not a “core” asset, we don’t see SEMG selling this business as SEMG shouldn’t have a need for cash with their planned dropdowns to RRMS.
SemLogistics (0% of ‘13E EBITDA)
SemLogistics owns the largest independent petroleum products storage facility in the U.K., with 8.7 mmbbls of above- ground storage in Milford Haven (23% of U.K. independent storage) and two deep-water jetties. When crude oil prices
were lower and the Brent crude market was in contango, SemLogistics contributed a healthy ~$20-25mm of EBITDA. Segment EBITDA has since fallen to break even with the crude prices moving higher and into a backwardated market. Chart below shows the contango/backwardated nature of Brent crude prices from ’09-’12, when SemLogistics EBITDA fell from $23mm to nil.
5 ** Important Disclosures on pages 9-10 of this report **
USCA Equity Research
SEMG – July 24, 2013
Source: Bloomberg, USCA
Segment Outlook: We look for SEMG to hang onto this business until there is a rebound to contango markets and then
exit. We assign no value to SemLogistics, although their assets do carry a $174mm book value on SEMG’s balance sheet (potentially $4/sh should they be able to realize that value).
Other Financial
Dividends: Beginning in Q2’13 SEMG will pay a dividend based upon the RRMS and NGL LP and GP distributions they receive, less any taxes due. For Q2, SEMG will pay 19c/sh (currently a 1.35% yield) and is targeting “annual growth rate of double-digits for next three years.” SEMG’s dividend will increase not only from increases in RRMS’ and NGL’s distribution per unit, but also from additional RRMS units SEMG will receive when dropping assets into RRMS.
Assuming our dropdown schedule and that SEMG takes back half of the RRMS units issued, we get that SEMG’s dividend will grow by ~28% annually over the next four years.
Future Capex and Debt Metrics: As of 3/31/13, SEMG had stand-alone net debt of $(46)mm. Since then SEMG has issued $300mm of debt in a private placement to fund its anticipated purchase of the CHK assets and associated capex needs. Outside of that purchase, SEMG also plans to spend ~$350mm (excluding $50mm at RRMS level) in capex in ’13 and an
additional ~$300mm in ’14. SEMG should be able to fund this expansion with retained cash flow and additional debt
issuances, ending 2014 with a consolidated Debt/EBITDA ratio of 3.4x, but declining from there with additional drops to RRMS. As of 3/31, SEMG had $471mm available on their stand-alone revolving credit line while RRMS had an additional
$183mm available. Warrants Outstanding: As part of its bankruptcy reorganization, SEMG issued (or will issue) 2.133 million warrants. The warrants have a strike price of $25/sh, expire 11/30/2014 and trade on the NYSE under SEMGWS. If all warrants utilized a cashless exercise as of today’s price, they would create an additional 1.2mm SEMG shares outstanding or ~3% dilution.
Legal issues outstanding: SEMG has been able to settle most of their bankruptcy-related claims, but still maintains a restricted cash balance of $35mm to handle settlements (restricted cash balance had been $246mm at YE ’09). The largest claimant is currently BlueKnight Energy Partners (BKEP), their former MLP subsidiary, who claims SEMG owes them 141 mbbls of oil (~$15mm) under a previous shared services agreement.
6 ** Important Disclosures on pages 9-10 of this report **
USCA Equity Research
SEMG – July 24, 2013
Risks Company Specific: Major company specific risks for SEMG include demand for petroleum products, storage lease rates and renewal levels, crude, gas and NGL prices, drilling activity in DJ Basin and Mississippi Lime, hedge effectiveness, level of FERC-index rate increases, ability of Rose Rock Midstream and NGL Energy Partners to make distributions to GP and LP unitholders, and ability to sell assets to RRMS at attractive multiples.
Industry Wide: Competition for MLP capital and ability for industry to access capital markets, competition for projects and acquisitions, project execution, interest rates, changes in regulatory, environmental and tax laws and policies, leaks, explosions and mechanical problems related to infrastructure and potential for required additional maintenance capex.
Models for SEMG and RRMS available upon request.
7 ** Important Disclosures on pages 9-10 of this report **
USCA Equity Research
SEMG – July 24, 2013
SEMG USCA C-Corp Coverage Peer Comparison Commodity/Index Performance
WMB-Defined Peers Price Price Market Cap USCA EV/ EBITDA Consensus PE Ratios USCA P/CFFO Company Name Ticker Rating Yield Period WMB DiversifiedsTarget 7/23/2013Utilities ($mm)E&P 2012 2013ENG1 2014E 2015ECL1 2012 2013EUTY2014E 2015EXNG2012 2013E S&P2014E 2015E C Corps3 month 32% 20% 7% 24% -4% 14% 4% 19% 11%
Cheniere6 month Energy Inc LNG 63%Overweight $3534% $ 29.84 0.0%6% $ 7,201 48% 11% 30% 3% 36% 24% EQT Corp EQT Buy $90 $ 82.27 0.1% $ 12,376 14.6x 10.5x 9.0x 6.6x 58.1x 33.7x 26.0x 19.6x 15.1x 10.8x 9.4x 6.9x Kinder 2011Morgan ytd Inc KMI 22% Hold $3414% $ 39.30 4.1%4% $ 40,70212% -8% 54.1x7% 33.5x 25.5x2% 20.2x 26.6x11% 22.4x 20.8x5% 18.6x Kinder %Morgan from Management 52-wk Hi KMR -1% Hold $76-1%$ 83.45 -2%6.3% $ 31,940 -1%18.6x 15.4x -22%14.6x 13.8x 0%nm 35.3x 34.9x-1% 29.8x 16.4x0% 17.7x 18.1x-2% 17.2x National Fuel Gas Co NFG Overweight $69 $ 63.43 2.4% $ 5,296 9.6x 8.0x 7.5x 6.8x 25.4x 20.7x 20.2x 19.1x 7.9x 7.1x 6.6x 6.0x NiSource% from 52-wk Lo NI 71% Hold $2747% $ 31.15 24%3.2% $ 9,720 65%10.9x 10.0x 23%9.2x 8.5x 44%21.7x 20.0x 18.6x14% 17.3x 7.1x41% 8.0x 7.9x29% 7.6x ONEOK Inc OKE Buy $58 $ 43.75 3.3% $ 9,017 8.2x 8.3x 6.5x 5.5x 26.8x 26.6x 20.5x 17.1x 13.8x 11.7x 9.5x 7.9x SemGroup SEMG Hold $60 $ 56.40 1.3% $ 2,370 18.3x 14.9x 11.1x 9.5x 102.5x 27.4x 20.9x 22.1x 30.0x 13.4x 17.8x 15.6x Spectra Energy Corp SE Overweight $35 $ 35.98 3.4% $ 24,078 13.1x 12.2x 11.2x 10.4x 25.2x 23.6x 22.4x 20.4x 13.0x 12.6x 12.3x 10.5x Targa Resources Corp TRGP Hold $68 $ 69.10 3.1% $ 2,925 5.2x 5.2x 4.1x 3.5x 80.1x 43.1x 31.7x 33.4x 37.1x 28.6x 24.6x 20.9x Williams Companies Inc WMB Hold $35 $ 34.29 4.1% $ 23,410 10.2x 11.1x 8.1x 7.2x 30.8x 47.6x 27.5x 24.6x 14.4x 18.2x 15.9x 15.7x Average 3.1% 12.1x 10.6x 9.0x 8.0x 47.2x 31.2x 24.8x 22.4x 18.2x 15.0x 14.3x 12.7x
Position Change % SEMG Crude Assets SEMG Business Mix Largest SEMG Shareholders (000) (000) O/S
Lone Pine Capital 3,906 1,733 9.2% Wellington Management 3,417 (24) 8.1% Blackrock 2,509 194 5.9% Vanguard Group Inc 2,206 56 5.2% Soroban Capital 2,000 (750) 4.7% Jennison Associates 1,866 1,866 4.4% Senator Investment 1,661 0 3.9% Iridian Asset Management 1,370 1,370 3.2% New Mountain Vantage 1,073 (973) 2.5% Third Avenue Management 1,004 3 2.4% Columbus Hill Capital 995 122 2.4% Halcyon Offshore 957 107 2.3% Halcyon Asset Management 957 957 2.3% Natixis 919 (0) 2.2% Renaissance Technologies 887 385 2.1% Invesco Ltd 886 58 2.1% State Street 806 18 1.9% Dimensional Fund Advisors 799 112 1.9% D E Shaw & Company 793 44 1.9% Royal Capital Management 755 (310) 1.8%
8 ** Important Disclosures on pages 9-10 of this report ** Sources: Bloomberg, Company Reports, USCA
USCA Equity Research
SEMG – July 24, 2013
Analyst Certification:
We, Becca Followill and James Carreker, do hereby certify that the recommendations and opinions expressed in this presentation accurately reflect our personal views about any and all of the subject securities or issues discussed herein. Furthermore, no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. As of the date of this presentation Becca Followill does hold shares, within a managed account, of Kinder Morgan Inc (KMI - $39.30 – Hold - $34PT). Becca Followill does not own shares directly of KMP or KMR. Neither we nor any member of our households serves as an officer, director or advisory board member of any company that is subject to this presentation.
Employees of U.S. Capital Advisors LLC (“USCA” or “the Firm”) not involved in the preparation of this report may
have investments in securities or derivatives of securities of companies mentioned in this report, and may buy, sell, or trade them in ways different from, or in a manner inconsistent with, the recommendations and opinions expressed in this report.
Important Disclosures:
Analysts’ compensation is not based on investment banking revenue and the analysts are not compensated by the subject companies. In the past 12 months, USCA has not received investment banking or other revenue from the companies mentioned in this report. However, within the next three months USCA may attempt to seek compensation for investment banking services from the companies mentioned within this report.
Opinion Key:
USCA uses a Buy, Overweight, Hold, Underweight and Sell rating system.
BUY - The stock has among the best combination of risk/reward and positive company specific catalysts within the sector. Stock is expected to trade higher on an absolute basis and be a top performer relative to peer stocks over the next 12 months.
OVERWEIGHT - The stock has above average risk/reward and is expected to outperform peer stocks over the next 12 months.
HOLD - The stock has average risk/reward and is expected to perform in line with peer stocks over the next 12 months.
UNDERWEIGHT - The stock has below average risk/reward and is expected to underperform peer stocks over the next 12 months.
SELL - The stock's risk/reward is skewed to the downside with possible negative company specific catalysts or excessive valuation. The stock is expected to trade lower on an absolute basis and be among the worst performers relative to peer stocks over the next 12 months.
Risks that may impede achievement of price target(s):
Industry wide risks include but are not limited to environmental and regulatory for both pipeline and E&P, aging
infrastructure and availability of midstream infrastructure to accommodate new production. Competition for and availability of service crews and drilling rigs. Commodity prices, the economic outlook, access to capital markets. Interest rates. Asset recontracting. Cost overruns.
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USCA Equity Research
SEMG – July 24, 2013
Price Target Methodology:
For C-Corps, our price targets are, generally, based on a traditional sum of the parts analysis. For companies with E&P assets, we perform a discounted cash flow analysis where we produce out proved developed producing reserves, put in capital to develop proved undeveloped reserves within the 5-yr SEC window and estimate development plans for probables and possibles using current and projected rig counts, EURs and decline curves. For traditional pipes and midstream assets, we value at 7-12x EBITDA multiples (usually current year unless it doesn’t represent a good run rate). LP units are marked to current market. GP values are determined using a discounted cash flow of projected distributions and then tax effected.
For MLPs, we average three different valuations as we have yet to find one pure way to value MLPs that captures the many nuances – current yield, growth, GP IDRs, equity to fund growth, etc. For all three methods, we start with six-year projections of LP distributions and assume a terminal growth rate. The three valuation methods – Traditional CAPM, Growth Adjusted Cash Yield, and GP Adjusted Distribution Discount Model – each yield a different cost of equity, which is then used as the discount rate against the projected distributions and terminal growth rates. Traditional CAPM is a straight forward traditional use of the Capital Asset Pricing Model. Growth Adjusted Cash Yield uses projected yield plus an adjustment for expected long-term distribution growth. GP Adjusted Distribution Discount Model uses average annual forecasted distributions for both the GP and LP for the next three years divided by the average number of forecasted LP units over the next three years divided by the current LP unit price. In our view, this method helps account for the higher cost of capital associated with GP IDRs.
Distribution of Ratings (as of July 24, 2013):
Investment Banking Recommendation Count Percent Relationship Count Percent Overweight/Buy 29 51% Overweight/Buy 1 3%
Hold 27 47% Hold 0 0% Underweight/Sell 1 2% Underweight/Sell 0 0%
Historical Ratings and Price Targets may be found by clicking the link below: USCA Rating and Price Target History
For hard a hard copy of our price target/ratings history, please call 888-601-USCA (8722), or write to U.S. Capital Advisors, 1330 Post Oak Blvd., Suite 900, Houston, TX, 77056.
A list of common terms and abbreviations may be found by viewing our Glossary.
©Copyright 2013 U.S. Capital Advisors LLC, all rights reserved. This information is confidential and may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of USCA. This communication is based on information which USCA believes is reliable; however, the Firm does not represent or warrant its accuracy. The viewpoints and opinions expressed in this communication represent the views of the authors as of the date of this report. These viewpoints and opinions may be subject to change without notice and USCA will not be responsible for any consequences associated with
reliance on any statement or opinion contained in this communication. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who
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10 ** Important Disclosures on pages 9-10 of this report **