LATAM ENERGY ADVISORS

MIDSTREAM NOTES FROM TPH

·          SEMG unveils Gulf Coast project ($77.50 – B) – SEMG alluded to this project on their Q4 call when questioned on capex step-change & has confirmed $500mm build-out of crude pipes to support Motiva refineries in LA.  Pipes will connect Norco & Convent refineries along with St. James interconnect, targeting in-service Q4’16.  At TPHe 8x EBITDA, project will add ~$60mm to SEMG giving the company line-of-sight to ~$550mm of EBITDA by 2018.  We like the project as it executes on the strategy of diversifying from basin level exposure to downstream oriented projects.  As highlighted previously, producer facing projects will be hard to come by until commodity recovery (& sometime after) making a foothold in downstream universe more valuable.

·          SEMG stock thoughts (SEMG $77.50 – B, RRMS $45.40 – B) – Stock shrugged off CHK rig cut and this project announcement gets the market looking ahead.  SEMG guided 50-60% dividend growth in 2015 & 30-40% through 2017, and we think they can hit the high end of the range plus maintain the pace into 2018.  Given SEMG’s strategy of paying out all LP/GP cash flows from RRMS, as drops are completed (TPHe Q1’18) the dividend ramps in step with RRMS payout.  We see SEMG’s dividend exceeding $5/sh by 2018 while de-levering to consolidated 1.6x Net Debt/EBITDA.  Underlevered balance sheet offers dry powder as SEMG straddles tweener space of being both an acquirer & target.  With company trading just over 11x on 2018 EV/EBITDA (inc. future capex and RRMS publics), we view SEMG as one of the cheapest midstream names with added option value from balance sheet, asset footprint.

Source: Tudor, Pickering, & Holt.

Latam Energy Advisors is an Energy Consulting Firm