Shares of SemGroup Corp. (NYSE:SEMG) declined as investors sold down the Master Limited Partner (MLP) group aggressively. SemGroup is a midstream transportation company that owns the General Partner stake in MLP Rose Rock Partners. Specific worries regarding SemGroup stem from its midstream exposure to independent E&P companies who may cut production or seek pipeline rate reductions. Also, investors worried about the potential competition for SemGroup’s White Cliffs pipeline serving the Denver-Julesburg basin. While there is potential for production softness and rate pressure if oil prices remain at current low levels, we feel the market is overlooking the power of SemGroup’s in place assets.
The midstream fractionation assets will be required for any E&P production and thus will have solid negotiating power, and similarly, the White Cliffs pipeline has excess capacity that can be marketed to be competitive with new entrants and thus serve as a deterrent to irresponsible capital expansion by peers.
Apart from these fears, the market is overlooking the new asset growth of SemGroup, including the Maurepas pipeline which will begin service this year and add roughly $63 million in EBITDA. Finally, SemGroup is well capitalized with over $1 billion in available capacity on its revolver, has no need to access the capital markets for growth projects and has the ability to monetize non-core assets in SemMexico or SemLogistics to further strengthen the balance sheet; as such we see the shares as oversold at current levels.
From the Third Avenue Value Fund 1st quarter 2016 letter.
