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Edited Transcript of SEMG earnings conference call or presentation 24-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 SemGroup Corp Earnings Call

TULSA Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of SemGroup Corp earnings conference call or presentation Friday, February 24, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alisa Perkins

SemGroup Corporation - Head of IR

* Carlin Conner

SemGroup Corporation - CEO

* Bob Fitzgerald

SemGroup Corporation - CFO

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Conference Call Participants

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* Christine Cho

Barclays Capital - Analyst

* Tristan Richardson

SunTrust Robinson Humphrey - Analyst

* Shneur Gershuni

UBS - Analyst

* Elvira Scotto

RBC Capital Markets - Analyst

* Michael Blum

Wells Fargo Securities - Analyst

* Justin Jenkins

Raymond James - Analyst

* Ryan Levine

Citigroup - Analyst

* Craig Shere

Tuohy Brothers - Analyst

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Presentation

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Operator [1]

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Good morning ladies and gentlemen and welcome to the SemGroup Corporation fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to SemGroup's Head of Investor Relations, Alisa Perkins. Please go ahead.

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Alisa Perkins, SemGroup Corporation - Head of IR [2]

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Thank you Austin. Good morning everyone. And we are glad that you could join us today for our fourth-quarter and full-year 2016 conference call. I hope that you had a chance to review our press release and earnings presentation that can be found on our website. Today we also filed our 10-K with the SEC.

I would like to remind everyone that today's presentation may contain projections and forward-looking statements, as well as certain non-GAAP financial measures. We encourage you to read our full disclosures in our latest press release, slide presentations, and SEC filings for a discussion of those items. These materials contain reconciliation to GAAP financial measures. Hosting the call today is Carlin Conner, our CEO, and Bob Fitzgerald, our CFO. With that, let me turn the call over to Carlin.

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Carlin Conner, SemGroup Corporation - CEO [3]

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Thank you Alisa. And good morning everyone. We are pleased to be here today to review SemGroup's financial performance in 2016, and to share our expectations for 2017. Yesterday, we released SemGroup's 2016 fourth-quarter and full-year earnings results. We also announced a quarterly dividend.

On slide 4 of our earnings presentation, we provide a summary of our financial results and highlights for the year. Overall, I would characterize 2016 as a year of achievement, in spite of continued pressure on our customers and in our markets. Even with these headwinds and lower asset utilization, adjusted EBITDA came in within our guidance range for the year and we delivered stable returns back to our shareholders. Capital expenditures for 2016 also came in within our expectations with a portion of our CapEx being pushed out to 2017 related to the timing of certain projects.

I will go into more detail on CapEx in a few moments, but first, I would like to provide an overview of our major projects and accomplishments for the year. Construction on the Maurepas project continues to progress. Our cost estimates remain on budget and we expect project construction completion in late second quarter. In Alberta, construction on our 200 million cubic feet per day Wapiti Gas Plant in the Montney is moving forward as the site is cleared and preparations are being made for the installation phase.

In the STACK, work is underway on our 16 inch crude pipeline that will connect Glass Mountain pipeline to the STACK, bringing crude to Cushing. This growing area has strong economics for producers. And we are busy working another crude and other gas projects that will leverage our existing infrastructure in the region. We successfully merged Rose Rock midstream into SemGroup to simplify our corporate structure. In addition, we completed our first ever SemGroup equity offering. We took these proactive measures to keep our balance sheet strong and enhance our flexibility to capture organic growth opportunities and potential M&A.

Now to slide 5. This slide gives a more detailed look at our 2016 capital expenditures, which came in little over $300 million. Including $52 million related to maintenance CapEx. As you can see from the chart, the majority of the growth CapEx was spent on the Maurepas pipeline project. With other major spending including the completion of our Isabel pipeline and [Sem Kansas] expansion projects. The decrease from guidance of approximately $45 million is primarily related to the timing of expenditures from Maurepas pipeline.

Before I hand the call over to Bob, I want to provided a brief update on our Mexican asphalt business. As you know, we ran a marketing process for the sale of the asphalt business and received interest. However, ultimately, we have decided to hold that asset and focus on enhancing its value as we move forward. Now Bob will provide a review of our 2016 results and highlight our 2017 guidance.

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Bob Fitzgerald, SemGroup Corporation - CFO [4]

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Thanks, Carlin. Turning to the fourth-quarter results on slide 6, SemGroup reported net income of $12 million, compared to a net loss of nearly $5 million for the third quarter 2016. SemGroup posted fourth quarter consolidated adjusted EBITDA of $66.2 million. About $5 million less than the prior quarter, based largely on lower SenCAMS contributions. On a full year basis, adjusted EBITDA in 2016 was $282.8 million, compared with $305.3 million for 2015. And well within our guidance range of $270 million to $320 million. Nonoperating factors negatively impacting our 2016 results compared to our guidance, included the absence of NGL Energy Partners cash distributions of approximately $16 million. And unfavorable foreign currency impact of $4 million.

Now turning to our operating results. The crude transportation segment reported slightly lower earnings for the fourth quarter. Although we posted higher volumes for Glass Mountain pipeline in our field services business, these were offset by higher G&A costs, largely due to a change in our allocation methodology following the merger of Rose Rock Midstream. This change in corporate overhead allocations impacted all three crude segments during the quarter. Fourth-quarter volumes for Glass Mountain pipeline were up nearly 6000 barrels per day sequentially. Reflecting the completion of pipeline repairs and bringing online a new truck and loading facility in November.

White Cliffs pipeline posted fourth quarter volumes of 115,000 barrels per day, in line with our expectations. The crude facility segment adjusted EBITDA was up about $4 million compared to the prior quarter. Due to an annual take-or-pay true up in December pertaining to our Platteville truck and loading facility. Crude supply and logistics adjusted EBITDA dropped by $5 million sequentially as contango and marketing margins were significantly pressed during the last half of the year.

For the full-year, we made over $20 million in adjusted EBITDA in our supply and logistics segment. We, like others in the industry, are dealing with challenging margin realizations. As lower production volumes in key basins, coupled with growing producer minimum volume commitments are sharpening competition for leased barrels. I will provide more comments on our future expectations for this segment during the guidance update in a moment.

Turning to SemGas, adjusted EBITDA was consistent with previous quarter as processing volumes remain flat, with an uptick in October volumes offset by adverse weather conditions and slower well completions in December. SemCAMS adjusted EBITDA was down $6 million compared to the third quarter. And slightly higher volumes were more than offset by higher operating expenses, as well as a net unfavorable impact of one-time items of approximately $3 million.

During the fourth-quarter, we made a one-time incentive payment of about $4.5 million to producers to keep a large production unit flowing. This agreement is subject to a partial [plavix] provision through 2018. Somewhat offsetting this payment was a $1.4 million one-time payment received by SemCAMS, from a customer pertaining to a project completion payout.

Fourth-quarter adjusted EBITDA for SemLogistics was flat compared to the prior quarter, as all available capacity is contracted. SemMaterials Mexico EBITDA was up slightly due to higher sales volumes. Lastly, corporate and other adjusted EBITDA was favorable to the prior quarter due to the change in corporate allocations to our crude segments mentioned earlier.

Moving on to slide 7, our leverage and liquidity position, SemGroup ended the year with a deck compliance leverage ratio of 3.1 times and total liquidity exceeding $1 billion. We intend to use our liquidity to fund our growth projects including Maurepas pipeline, the Wapiti Sour Gas Plant in Canada and the Crude STACK project.

Now to our 2017 guidance on slide 8. SemGroup anticipates 2017 adjusted EBITDA between $270 million and $310 million. Key assumptions underpinning our guidance are outlined on this slide. We expect the Maurepas pipeline system to be completed late second quarter.

We are forecasting our non-joint venture transportation volumes to increase by 5% to 10%, driven by increasing field services volumes, as well as higher volumes on our Wattenberg Oil Trunkline. During 2017, we expect White Cliffs' volumes to average 100,000 to 110,000 barrels per day. With volumes remaining relatively steady during the first nine months, before we expect to see a minor step down in volumes in the fourth-quarter due to commitments on a competitors pipeline.

West Mountain pipeline volumes are projected to average 75,000 to 80,000 barrels per day for the full year. Our northern Oklahoma gas processing volumes are forecasted to average 280 million to 300 million cubic feet per day. As we expect to volumes to drop slightly during the first half of the year, before producers begin to deploy additional rigs starting this summer.

In Canada, our forecast includes a one month plant turnaround during the second quarter. These large plant maintenance projects occur once every four or five years. And this year we will be bringing down our K3 plant. The turnaround will have a negative impact on our total average processing volumes for the year. Management expects to deploy approximately $500 million of capital expenditures in 2017, which includes approximately $60 million for maintenance projects and $180 million for the completion of Maurepas. I will now turn the call over to Carlin for some final comments.

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Carlin Conner, SemGroup Corporation - CEO [5]

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Thanks, Bob. In summary, we had a productive 2016, and I would like to thank our teams for their contributions during the year and for the tremendous that progress we have made to drive SemGroup forward. We simplified our corporate structure, and we prefunded our capital needs for 2017. We persevered through the challenges of a rather weak energy market, conservatively managed our balance sheet and delivered returns back to shareholders. We remain focused on growing our business in a very disciplined manner. Consistent with our growth strategy, we leveraged our footprint to capture new opportunities in two of the most active resource plays in North America. The Montney and the STACK, where we are investing more than $250 million in new infrastructure.

These two projects are excellent examples of the type of smart, high-value growth opportunities we are executing in and around our operating footprint. We continue to target organic growth projects in the 5 to 8 times EBITDA range.

This brings me to our thoughts about SemGroup's dividend growth rate. As we highlighted last May, we remain committed to targeting annual dividend growth of 8% over the next several years. Our challenge is to balance the opportunities to reinvest in high return growth initiatives like Maurepas, Wapiti and the STACK pipeline while maintaining balance sheet flexibility and providing returns to shareholders.

To better manage this process, we are changing our approach from an incremental quarterly dividend increase to an annual dividend step up policy. I want to stress that this is not a mutually exclusive exercise of choosing to reinvest in the Company or return capital to shareholders. We believe that we can do both and we will do both in 2017.

We believe that this is also consistent with more traditional C Corp companies. We expect to review our dividend policy later this year. And will shape our annual dividend increases based upon our businesses environment. While keeping a close eye on our longer-term dividend growth targets.

We remain extremely active on the M&A front. It's still a very competitive environment and we continue to diligently pursue opportunities in line with our strategy to achieve basin and customer diversification, as well as leverage existing assets. On a day-to-day basis, our focus for 2017 remains unchanged. Our highest priority remains to safely and reliably serve our customers with a variety of midstream services and offerings.

As our customer base diversifies, and the market continues to show signs of strengthening, I am confident that SemGroup will sustain and build upon the stable long-term value that our shareholders have come to expect. With that, I would like to thank you for joining us today. I would now like to turn the call over for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Christine Cho, Barclays.

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Christine Cho, Barclays Capital - Analyst [2]

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I wanted to start with the dividend devaluation for later this year. Can you give more color on the thought process there? As we move through the year, do you think that CapEx good increase for alternatively decrease from current levels?

Seems like you had $60 million of unidentified CapEx in the natural gas segment. So I am not sure what you are baking in.

Does leverage and or dividend coverage have to be certain levels? Any updates on how you're thinking about that would be helpful?

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Bob Fitzgerald, SemGroup Corporation - CFO [3]

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Hi Christine this is Bob. I'll take that. Carlin may add a couple comments here. But as we look at our capital program, I would say we're pretty comfortable with the capital forecast that we provided.

As you noted, we have fully committed pretty much all of the $500 million that we guided to other than there's $60 million there that we've got a placeholder on a project that we are very comfortable with. We are close to finalizing it. We will have more information on that in the future.

I don't think capital is going to be changing that much going through the year. If anything, it's an opportunity to increase it going forward. The dividend guidance that Carlin was talking about is something we want to look at. How we are reinvesting into other growth projects that might come up in the future.

What our balance sheet looks like. What our leverage position looks like. But we are committed to growing the dividend. We're just not going to be doing it incrementally.

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Christine Cho, Barclays Capital - Analyst [4]

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Okay. And then, on the leverage. CapEx is higher this year versus last year while the midpoint of the EBITDA is modestly up. Should we think that you are willing to go above the target leverage as long as you have line of sight to come back down? And how long are you willing to stay at elevated levels?

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Bob Fitzgerald, SemGroup Corporation - CFO [5]

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With a $500 million CapEx program, we clearly are expecting to see sequential growth in our leverage position over the years. We tap into the $1 billion of liquidity to fund our growth projects. We expect to be around that targeted threshold range of 4.5 times during the year.

And we're comfortable with that as you say. As long as we have good visibility in watching the leverage come back down. We have a lot of key growth projects that are going to come online towards the end of the year that is going to generate a significant amount of cash going forward.

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Christine Cho, Barclays Capital - Analyst [6]

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Okay and last question. In the prepared remarks you talked about what happens with the sale of the Mexican business. What are the things you can do to enhance the Mexican business that could make it more attractive for sale later on?

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Carlin Conner, SemGroup Corporation - CEO [7]

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This is Carlin. I think the main focus for us, once you go through a process, to take a step back and try to look at the market that you are in. And figure out what can we do better to increase the value.

We are the market leader in asphalt supply in Mexico by [4X]. We have a great research and development team, we are working with the government in developing road paving standards. We have a lot of good things to work off of.

And we're going to continue to leverage that. And we will see where we go from here.

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Christine Cho, Barclays Capital - Analyst [8]

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Great. Thanks so much.

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Operator [9]

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Tristan Richardson, SunTrust.

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Tristan Richardson, SunTrust Robinson Humphrey - Analyst [10]

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I'm just curious. I appreciate the comment around the puts and takes in the Canadian business in the fourth quarter. I am curious if renegotiations in that segment have any impact on either rates or per volume profitability for the segment either in 2017 or longer-term?

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Bob Fitzgerald, SemGroup Corporation - CFO [11]

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Hi Tristan this is Bob. We don't really see any rate changes going on within that business. Other than the one-time item that we talked about here on our prepared remarks. That we made a payment to keep a big production unit flowing.

Other than that, our regular rate that we are incurring is we're doing or processing and gathering, we expect those to remain the same going forward. We do expect obviously, some volume volatility for SemCAMS in 2017. Driven obviously, by the turnaround that we're going to have at K3 in the second quarter.

In that regard, I would tell you that we expect our volumes in the first half to be a little bit volatile as we get ready for the turnaround. And then execute the turnaround during the first half. And then they are going to grow, I think sequentially throughout the rest of the year in the second half. As we bring in some projects, particularly some of the KA expansion and de-bottle necking projects that we have been working on since last year.

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Tristan Richardson, SunTrust Robinson Humphrey - Analyst [12]

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Great, Bob, that's helpful. And just lastly, another cut at the dividend question. Curious, moving to more of an annualized discussion. Or rather than quarter by quarter. Should we take that to mean your commentary for growth of 8% in 2017 is maybe more of an exit growth rate target?

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Carlin Conner, SemGroup Corporation - CEO [13]

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Well when we talk about, this is Carlin by the way, Tristan. When we talk about targeting an 8% growth rate over the next several years, and that we're going to be reviewing the dividend late this year, we will be taking a look at that time. Not before. Whether or not at what level we will increase the dividend.

And it will be based on the business circumstances. We firmly believe that reinvesting capital back in the business at the attractive multiples that we have been able to achieve is the best use of that capital. Short of having that availability, then we will take a look at what we need to do with that capital.

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Tristan Richardson, SunTrust Robinson Humphrey - Analyst [14]

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Great. Fair enough. Thank you guys very much.

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Operator [15]

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Shneur Gershuni, UBS.

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Shneur Gershuni, UBS - Analyst [16]

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I was wondering if we could start off with your outlook with respect to CapEx. Understand that you have outlaid the numbers for your expectations for this year. And you've got a placeholder in there as well too.

I was wondering if you could talk about projects that are not quite at the development stage or ones you're not ready to FID yet. Thinking about the shadow backlog. When you think about what you've got and what you are evaluating, it something that in that $200 million to $300 million pocket for the next couple years? Or is it something that is more like $700 million to $1 billion I was wondering if you could give a little bit of color on the shadow backlog.

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Carlin Conner, SemGroup Corporation - CEO [17]

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This is Carlin, good question. I think as we have talked about in the past, we really don't like to talk to the size of projects that are, as you call it, in the shadow backlog. We have good line of sight on opportunities in and around our footprint that we feel pretty good about executing.

Can't really give you the quantum of CapEx or even range of CapEx at this point. But it's significant. And we really are excited about the opportunities that are unannounced at this point. That are driving some of the -- in our minds, some of the planning going forward and the optimism that we have.

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Shneur Gershuni, UBS - Analyst [18]

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Okay. And so tied together, the last four dividend questions that you just got, what kind of message are you sending with an 8% growth rate for this year? If you think about future years. Is that a baseline number that you think you can direct in the coverage ratios that you have in terms of that scale of the backlog that you are contemplating?

If the backlog ends up being less than what you are thinking? Does that result in a higher dividend growth? Wondering if you could talk to how you optimize your coverage ratio, your growth rate, your dividend growth rate versus reinvesting in the Company itself.

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Carlin Conner, SemGroup Corporation - CEO [19]

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This is Carlin again. If you recall back in May when we talked about the 8% growth rate we also talked about targeting a coverage of 1.5 times. As we move into reviewing this dividend policy and the business evolves and as opportunities that were in our model either become part of the execution plan or fall off we will obviously have new numbers to review.

We will take a look at that point in time what those cash flows took like and what the internal needs for capital will be and manage that. Leverage, of course, is very important to us as well managing it. It's managing all of those metrics collectively. And then looking at our projects at the same time.

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Shneur Gershuni, UBS - Analyst [20]

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Right. Is it fair to conclude that you would expect to be funding the equity portion of your CapEx going forward out of your excess coverage? And we really shouldn't [even see you] in the equity market for larger projects because of this coverage (technical difficulties) opportunity?

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Carlin Conner, SemGroup Corporation - CEO [21]

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As we have said, we are funded for 2017. Depending on the size of projects beyond that, we will have to take a look at what's the best way to finance those projects. But the idea would be that we would definitely try to use as much capital internally generated as possible. Balancing the different objectives of returning some returns to our shareholders, managing leverage, but also being very efficient with our capital.

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Shneur Gershuni, UBS - Analyst [22]

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That makes perfect sense. Happy to hear that. Just wondering if you could talk about your 2017 outlook?

You've got Maurepas coming on line, you've got Glass Mountain and so forth. I would have thought that your 2017 guide would have been a little bit higher than where it [shook out] I think about the midpoint. I realize that the recovery is not balanced.

Is there some areas in your footprint that are not recovering as fast as others? And where you [seeing it lagging]? Is it specifically the trend rate you talked about in your prepared remarks? Wondering if you could discuss bottom, top end of the range where the sensitivities are that we should be thinking about?

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Bob Fitzgerald, SemGroup Corporation - CFO [23]

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This is Bob I will take that one. Great question. As we look at our 2017 EBITDA guidance I would say the one area that I point to the we do believe and we forecasted to be pretty soft in 2017 obviously is our crude supply and logistics. In essence, when we look at the first half of the year at least, we're not expecting to generate much of any EBITDA contributions from that segment.

Those margins have been very compressed. We do get some value from our supply and logistics activity in our other crude segments. Most of the barrels we touch in supply and logistics actually utilize our facilities and utilize our transportation networks whether those be pipelines or trucks.

So it still a good business. We do think it's going to be pretty tough in the next six months at least. Much like we saw in the last six months of 2016.

And right now, our forecast thinks it's going to recover slightly in the back half of the year. But we're going to wait and see on that. We are not going too far out over our skis in how we see that growth happening in 2017.

Beyond that, it's going to be the usual volume sensitivities that we can to talk about over time. Which we think we give some pretty good ranges on the slide.

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Shneur Gershuni, UBS - Analyst [24]

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Okay and one final question. It seems like there is some capital being invested in the DJ, [we should see folks] stepping up a little bit? How would that translate for you?

Could you be above the minimum volume commitments unlike with -- toward fourth quarter of 2017 into 2018? Or is this still too much capacity [left for] the amount of [uptick that we see]?

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Carlin Conner, SemGroup Corporation - CEO [25]

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This is Carlin. We really are encouraged by the capital that is flown back into the DJ on the E&P side. And some of that maybe reflected in our forecast. I think there is upside to our numbers with respect to DJ.

We are above our [NBCs]. We talk about 100,000 to 110,000 barrels a day in our forecast. Which as you know our NBCs are 77 a day.

We will see what happens in the back half of the year when Saddle Horn comes deck online with their next tranche of NBCs. But we feel fairly confident that we will retain a lot of barrels. Our very prescriptive and very focused tariff response last year to try to make sure we attract heavy producer volumes or large volumes that are produced in large quantities with our shippers.

Was very successful. We hope that we can continue to use that program going forward.

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Shneur Gershuni, UBS - Analyst [26]

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Great. Thank you very much guys. Have a great weekend.

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Operator [27]

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Elvira Scotto, RBC Capital.

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Elvira Scotto, RBC Capital Markets - Analyst [28]

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Going to apologize in advance for another dividend question. But I am really trying to reconcile your comments. So at the end of the year, you will review the dividend policy but then at the same time you are targeting annual dividend growth for approximately 8% over the next several years.

How should we be thinking about this dividend growth? Are we looking at numbers that can jump around from 2% growth to 10% growth to 5%? Or, can we expect something a little more maybe 6% to 10%. I don't know just help me reconcile these two comments on evaluating at year end and targeting 8% over the next several years.

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Carlin Conner, SemGroup Corporation - CEO [29]

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Yes, I think what we're trying to say Elvira is at the end of the year we take a step back and look at where we are with our projects. We look at what's coming down the path for us going forward.

Looking on our leverage. Looking at all those key metrics. We will make a determination what that dividend growth rate needs to be in 2017 -- if any.

Obviously, we see strong cash flows coming in the back half of the year. That's a discussion we're going to have at the end of the year. Really I don't think we are saying anything inconsistent.

We are saying exactly what we said last May. That our model shows 8% growth rate over the next several years.

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Elvira Scotto, RBC Capital Markets - Analyst [30]

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Okay. So is this something then you would do every year? Evaluate at the end of the year what that growth rate is and whether just to take that cash and pay it out or grow the dividend? Is that how we should be thinking about this?

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Carlin Conner, SemGroup Corporation - CEO [31]

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We definitely today have said that we are no longer going to be looking at this quarterly. We are moving to what we call a step up policy that we will look at once a year at the end of the year. That's what we're going to do.

And again, taking into consideration all the factors that -- [would that] govern good dividend policy?

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Elvira Scotto, RBC Capital Markets - Analyst [32]

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Okay. Great. Thanks. And then can you quantify either the time or the volume impact of the K3 turn around?

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Bob Fitzgerald, SemGroup Corporation - CFO [33]

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Sure, Elvira, this is Bob. Right now, we are looking at potentially 75 million to 100 million cubic feet a day reduction in the second quarter. Depending upon how well we can move some of those volumes around. But that should give you a ballpark number for the impact in 2017.

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Elvira Scotto, RBC Capital Markets - Analyst [34]

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Okay. Great. Thanks a lot for that and then just my last question is what is the latest thinking on the UK business?

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Carlin Conner, SemGroup Corporation - CEO [35]

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This is Carlin. It's going very well. All of our available capacity is spoken for. So we continue to do well in the UK.

As we have talked about before, it is not a core asset. And we will continue to grow the value of that business. And I think we will take a look strategically on what our next steps will be sometime later this year.

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Elvira Scotto, RBC Capital Markets - Analyst [36]

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Great. Thanks. That's all I had.

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Operator [37]

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Michael Blum, Wells Fargo.

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Michael Blum, Wells Fargo Securities - Analyst [38]

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I have more dividend questions. I am sure you are excited by that.

The first is a simple question. Which quarter is the one quarter now that you will be evaluating whether to increase or not, or how much, et cetera?

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Carlin Conner, SemGroup Corporation - CEO [39]

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Well we talk about late this year so it's going to be third, fourth quarter.

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Michael Blum, Wells Fargo Securities - Analyst [40]

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Okay. And I just wanted to also clarify. Would you also be contemplating a potential dividend cut? Or is that off the table?

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Carlin Conner, SemGroup Corporation - CEO [41]

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Again, we will be reviewing everything. I can't imagine a cut. We will review everything at the end of the year -- in the second half of the year when we take the time to take a step back, look at the business, and make sure we are very disciplined in our dividend policy.

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Michael Blum, Wells Fargo Securities - Analyst [42]

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Okay. And then, conceptually would you are thinking about here, is if you find, let's say a whole bunch of additional projects that you can bring to the finish line that your thought is you would rather devote free cash flow to funding that rather than necessarily dividend increases? Is that conceptually the right idea?

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Carlin Conner, SemGroup Corporation - CEO [43]

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A balanced approach. I think we talk about we would like to reinvest, but we also know we need to return to our shareholders capital as well. So it's a balanced approach.

Is how we look at this. In shaping the dividend base on the expectations of the business the needs per capital. And again being very disciplined about the dividend policies.

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Michael Blum, Wells Fargo Securities - Analyst [44]

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Okay. Thanks a lot.

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Operator [45]

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Justin Jenkins, Raymond James.

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Justin Jenkins, Raymond James - Analyst [46]

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I think we have covered most of what I had. And I think we have had enough fun with the dividend for one day. But on the Maurepas pipeline you mentioned late Q2 completion. Is that construction completion or is that when you expect the pipe to start up? Or are they one and the same?

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Carlin Conner, SemGroup Corporation - CEO [47]

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Currently in our numbers, we have the pipeline generating earnings for the back half the year. Back six months.

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Justin Jenkins, Raymond James - Analyst [48]

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Okay. Perfect thanks for that any update on getting additional commitments to expand the project further down stream to other customers?

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Carlin Conner, SemGroup Corporation - CEO [49]

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We continue to have great conversations. I think the recent developments around pipelines getting approved and potentially cap line being reversed creates more liquidity in St. James of some of the desired crudes some of the refiners we're talking to today really desire. I am very optimistic we will be able to do something with the expansion.

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Justin Jenkins, Raymond James - Analyst [50]

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Great. Thanks, Carlin. Last one for me. The Glass Mountain volume guidance looks robust to me. Especially relative to the 4Q run rate. A much of that uplift is from Isabel connection and the [Neustadt] connection versus maybe just better regional volumes that would have [fund into] the system anyway?

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Bob Fitzgerald, SemGroup Corporation - CFO [51]

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We have seen some Isabel contributions already in the last two months of 2016 so that will continue going forward. I think, Justin, the way to think about that the increase is three-fold. One is we will the growing organically some volumes with new contracts and commitments that we are negotiating.

Two is that there is a step up in minimum volume commitment from a key shipper that we have that will be triggered this year in 2017. And then lastly, with regard to the Stack there's nothing in 2017 for the Stack.

But that pipeline will be finished, we are targeting it at the end of the year, in the fourth quarter. So we haven't put anything in this year for that.

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Justin Jenkins, Raymond James - Analyst [52]

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Perfect. Thanks for the color, Bob, and have a great weekend.

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Operator [53]

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Ryan Levine, Citigroup.

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Ryan Levine, Citigroup - Analyst [54]

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Regarding Maurepas. It seems like the language in your presentation changed from Q2 to late Q2. Should we be reading into that subtle change? Or is everything on time and on schedule?

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Carlin Conner, SemGroup Corporation - CEO [55]

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Yes, well, we have always said second quarter. And I think as we get closer we are zeroing in a little more focus. Now we are looking at late second quarter construction complete. And as I mentioned, as we modeled those cash flows, we are showing this cash flows coming on for the back half of the year.

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Ryan Levine, Citigroup - Analyst [56]

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Okay. And then regarding Maurepas expansion opportunities. Is the uncertainty around US tax policy weighing into any of your conversations with the refiners in the region?

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Carlin Conner, SemGroup Corporation - CEO [57]

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I do not believe that has come up at all in these conversations.

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Ryan Levine, Citigroup - Analyst [58]

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Okay. And then last question for me regarding the [100,000 to 110,000] barrel per day on White Cliffs assumption, is there a recount assumption in that backs that forecast?

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Carlin Conner, SemGroup Corporation - CEO [59]

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Right now we have forecasted, which I think based on the public comments made by some of the key producers we've got, Anadarko's running six rigs. We've got Nobel running a couple rigs. Both are very bullish about their capital funding going to future.

So, we do expect there to be some additional growth and volume coming through there. We are basically expecting that we will keep holding on to what we have. The volume is going to remain sticky until we hit that fourth quarter change. That's going to happen with Saddlehorn [NBC stepping up].

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Ryan Levine, Citigroup - Analyst [60]

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Great. Thank you.

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Operator [61]

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Craig Shere, Tuohy Brothers.

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Craig Shere, Tuohy Brothers - Analyst [62]

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On the CapEx questioning for incremental projects. Any color around the timing you might expect some of this to roll in? You mentioned that $160 million that's already baked into the 2017 guidance. But there could be upside from there. And are we still focused on opportunities around the Maurepas bolt-ons SemCams Duvernay and SemGas Stack opportunities? Is there much more outside of that?

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Bob Fitzgerald, SemGroup Corporation - CFO [63]

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This is Bob, Craig. I think with regard to our future capital as we were mentioning earlier, and as you noted we are very confident in the ones we have. As far as any additional projects, those areas that you talked about we tend to look at our key footprint areas for expansions that aren't included in the $500 million. Whether that's in the Stack as you mentioned or off the Maurepas or up in Canada.

Those are key areas that we do continue to focus on. But it's a little premature right now to say how much and when and what that could look like. We are working through it with our [BD] groups and we will continue to focus on that.

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Craig Shere, Tuohy Brothers - Analyst [64]

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Okay. I am sorry, maybe I didn't pick up on everything in the SemCams discussion but it seems like volumes were a couple percent sequentially. But even after $3 million of net one-time items EBITDA was off sequentially for third quarter.

Any more color around the drivers for fourth-quarter performance? And any kind of direction or color into 2017? I know you gave some guidance there about that volume metric impact on the turnaround of the second quarter but any more color would be helpful.

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Carlin Conner, SemGroup Corporation - CEO [65]

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Looking at the fourth quarter of 2016. In addition to approximately $3 million of one-time items that were unfavorable in the quarter, we also had higher operating costs that we weren't able to pass-through. Operating expenses up in Canada tend to be a bit volatile. Depending on activities that [go on in power] et cetera.

Depending upon where we are at, we tend to have that either as an increase or decrease quarter over quarter. So it creates a little volatility. Looking at 2017, the best guides I give you right now is to focus on page 8 of this slide deck where we have the volumes forecasted with the turn around.

So I expect to be pretty lumpy during the first half the year in terms of EBITDA generation. And then, sequentially growing in the last two quarters of the year.

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Craig Shere, Tuohy Brothers - Analyst [66]

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Okay. Mexican US relations are not exactly on a high note at the moment. Carlin do see this impacting efforts to pursue energy deregulation growth opportunities south of the border?

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Carlin Conner, SemGroup Corporation - CEO [67]

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We have not seen any evidence of that yet. Of course we are paying attention to those relations, and how that could impact projects on the energy reform front. We are actually making great progress on energy reform. We look forward to hopefully having to talk about some of our successes down there soon.

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Craig Shere, Tuohy Brothers - Analyst [68]

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Okay. So it sounds like that could be one of these non disclosed opportunities that could come up this year. Are we talking something that could be meaningful at least north of $50 million in terms of investment?

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Carlin Conner, SemGroup Corporation - CEO [69]

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It could be and we are not going to talk about CapEx that's unannounced at this point.

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Craig Shere, Tuohy Brothers - Analyst [70]

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Okay. And I think that does it for me.

You all have commented already I think Bob said that on supply and logistics you have about zero in the first half. Was there some more color about what you are assuming the second-half?

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Bob Fitzgerald, SemGroup Corporation - CFO [71]

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No more color, Craig other than I wanted to highlight that we don't expect a significant turnaround in the first half. When we look at the second-half, we do think there's a possibility for some level of improvement of the differentials. But that will be very back-end loaded.

We are not putting a lot of contribution on that segment for the whole year.

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Craig Shere, Tuohy Brothers - Analyst [72]

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Okay. Thank you very much.

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Operator [73]

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This concludes our question-and-answer session. I would like to turn the conference back over to Carlin Conner for any closing remarks.

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Carlin Conner, SemGroup Corporation - CEO [74]

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Thank you again for your time today. We appreciate your continued interest and support of SemGroup. Have a good weekend.

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Operator [75]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.