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Edited Transcript of SEMG earnings conference call or presentation 5-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 SemGroup Corp Earnings Call

TULSA May 23, 2017 (Thomson StreetEvents) -- Edited Transcript of SemGroup Corp earnings conference call or presentation Friday, May 5, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alisa M. Perkins

SemGroup Corporation - Treasurer

* Carlin G. Conner

SemGroup Corporation - CEO, President and Director

* Robert N. Fitzgerald

SemGroup Corporation - CFO and SVP

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Conference Call Participants

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* Christine Cho

Barclays PLC, Research Division - Director and Equity Research Analyst

* Craig Kenneth Shere

Tuohy Brothers Investment Research, Inc. - Director of Research

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

* Shneur Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Tristan James Richardson

SunTrust Robinson Humphrey, Inc., Research Division - VP

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Presentation

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Operator [1]

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Good morning, and welcome to the SemGroup Corporation First Quarter 2017 Earnings Conference Call. As a reminder, this call is being recorded. (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 M. Perkins, SemGroup Corporation - Treasurer [2]

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Thank you, Andrea. Good morning, everyone. We are glad that you could join us today for our first quarter conference call.

I hope that you've had a chance to review our press release and earnings presentation, which can be found on the website. Today, we also plan to file our 10-Q with the SEC.

I'd 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 presentation and SEC filings for a discussion of those items. These materials contain reconciliations to GAAP financial measures.

Hosting the call today are Carlin Conner, our CEO; Bob Fitzgerald, our CFO; and Dave Minielly, Head of Crude Operation.

With that, let me turn the call over to Carlin.

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [3]

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Thank you, Alisa, and good morning, everyone. We are pleased to be here today to provide you with our first quarter update.

Starting with Slide 4, SemGroup posted first quarter consolidated adjusted EBITDA of $60.7 million. We also declared a quarterly cash dividend to common shareholders of $0.45 per share, resulting in an annualized dividend of $1.80 per share. For the year, we are on track to deliver adjusted EBITDA of between $270 million to $310 million. Due to major projects coming online in the second half of 2017, we are looking at a year-end run rate of $325 million to $340 million in adjusted EBITDA. For clarity, we are not forecasting any EBITDA contribution for either the crude or gas STACK projects as they're expected to come online the first of next year.

Management reaffirms that dividends will be reviewed annually in December and is targeting an 8% dividend CAGR through 2020. Based on our current projections, we expect to recommended to the board in December a dividend increase in the range of 6% to 10% on an annualized basis.

Turning to Slide 5. Our capital expenditure expectations for the year remain at $500 million. Of that, $440 million is growth CapEx to fund key basin diversification and growth projects. The newest addition to our list of projects is the Canton Pipeline, which we announced a few days ago. This project is backed by a long-term firm contract with an investment grade counterparty, resulting in a single-digit EBITDA multiple with returns increasing by year 3. As noted on the CapEx slide, the $60 million for this project was included in our original guidance. The upsized 24-inch diameter high-pressure natural gas line will run from SemGas' Rose Valley gas processing facility in Woods County to north central Blaine County. Initial capacity will be 200 million cubic per day with the ability to expand up to 400 million cubic feet per day with additional compression. We expect the pipeline to be in service by the end of the year.

We're currently in discussions with other potential customers, which could result in incremental opportunities.

Now on to Slide 7 for an update on our major projects that are in execution mode. Maurepas Pipeline is nearing the finish line. All field wells are being completed this month and we are moving into testing and commissioning. We expect this project to be on budget and completed in late second quarter. I very much look forward to starting up Maurepas Pipeline this summer with cash flow expected to begin in July. In addition, we continue to have positive conversations with potential customers about a Maurepas extension, although we don't have anything to report at this time.

Work on our crude STACK extension is progressing well. We have acquired 90% of right-of-way and construction has begun on the Omega and Ruby stations. The pipe is ordered and expected for delivery in June. This project is on schedule to be complete by the fourth quarter of this year.

At SemCAMS, we expect to spend approximately $105 million on growth projects including about $80 million on our Wapiti plant and $25 million on our KA plant. For the Wapiti plant, we've ordered long-lead items and are on scheduled to complete the plant by mid-2019.

Project execution across our footprint is clearly our focus right now. I'm very proud of our team for their dedication to driving these projects forward in a safe and timely manner.

Before I hand the call over to Bob, I'd like to take a moment to comment on the state order in Colorado related to the Firestone incident within the DJ Basin. Based on our review, the order is not applicable to our mainline operations. We are working with shippers to assess any potential volume impacts to our system. It's too early to estimate what, if any, impact there may be on future volumes, but we will continue to monitor. In the meantime, our thoughts are with those impacted by this tragic event.

Now I'd like to turn the call over to Bob who will discuss our financial results in more detail.

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [4]

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Thanks, Carlin. Turning to the first quarter results on Slide 8. SemGroup reported a net loss of $10.3 million compared to net income of $12 million for the fourth quarter of 2016. The net loss in the first quarter was primarily due to a $19.9 million charge related to the refinancing of bonds. The refinancing resulted in lower borrowing costs and extended maturity.

SemGroup posted first quarter consolidated adjusted EBITDA of $60.7 million, $5.5 million less than the prior quarter, largely reflecting the impact of several timing issues I'll describe more fully in my segment reviews.

Turning first to our Crude segment. The Crude - Transportation segment reported slightly lower earnings for the first quarter related to decreased volumes in field services in the absence of Tampa Pipeline volumes, somewhat offset by higher Glass Mountain Pipeline earnings. White Cliffs volumes were down slightly quarter-over-quarter, but we're at the high-end of our expectations. We continue to expect White Cliffs volumes to average 100,000 to 110,000 barrels per day for the year. However, as Carlin noted earlier, it's too early to estimate the potential impact on future volumes related to the recent inspection order.

The Crude - Facilities segment adjusted EBITDA was down about $5 million compared to the prior quarter due to the absence of the annual take-or-pay true-up last December, pertaining to our Platteville truck and loading facility.

Crude - Supply and Logistics adjusted EBITDA dropped $1.6 million compared to the fourth quarter due primarily to the unfavorable timing of inventory costing, which we expect to turn around in the second quarter. Absent this inventory cost timing, our first quarter Supply and Logistics results would have been slightly above breakeven. We still expect margins in this segment to be under pressure throughout the year and are forecasting this business to be about breakeven over the next several quarters.

Notably, our Supply and Logistics volumes spiked by 22% from the fourth quarter as we experienced a temporary increase in volumes due to scheduling issues during the first quarter. In order to resolve this issue, we had to buy and sell barrels at 0 profit in order to meet customer delivery requirement. The situation was isolated during the first quarter and we expect to return to our normal operating volumes of 190,000 to 200,000 barrels per day in the second quarter.

Turning to SemGas. Adjusted EBITDA was just below our previous quarter as the 4% decline in processing volumes were offset by higher commodity prices.

SemCAMS adjusted EBITDA was up over $5 million sequentially, as the fourth quarter was burdened with a onetime incentive payment of $4.5 million to keep a large production unit flowing. In addition, during the current quarter, SemCAMS benefited from an increase in producer volumes. At the end of this month, we plan to take the K3 plant down for a 4-week maintenance project that occurs once every 4 years. We expect K3 volumes to drop by about 40% during the second quarter before returning back to normal in the third quarter.

SemLogistics posted adjusted EBITDA of approximately $4 million, up 18% compared to the prior quarter due to higher storage volumes and throughput revenues.

SemMaterials Mexico EBITDA dropped by 46% from the fourth quarter due to seasonality and lower government road construction funding.

Moving to Slide 9, our leverage and liquidity position. SemGroup ended the quarter with a compliance leverage ratio of 3.6x and total liquidity exceeding $931 million, which will be used to fund our 2017 CapEx program. We continue to target a compliance leverage ratio of 4.5x or better, and based on current projections, we expect to end the year with compliance leverage between 4.5 and 4.75x. Although we may be slightly up over our targeted leverage by year-end, we expect leverage to return to our normal levels quickly due to the significant cash flows being generated from the projects coming online in the near future.

As I've mentioned previously, during the first quarter, SemGroup refinanced its 2021 notes using a tender offer and redemption process in order to capture lower financing costs and to extend maturities. In addition, we amended our revolving credit facility to lower our pricing grid by 25 basis points. The combination of these 2 actions is expected to lower our cash interest expense over the next several years.

I'll now turn the call back over to Carlin for some final comments.

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [5]

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As you can tell, we are off to a busy start this year. We are executing on $500 million in capital projects, several of which we expect to come into service this year. We are capturing new opportunities as well like the gas pipeline in the STACK we just announced. It's another great example of how we are leveraging our footprint to fill regional infrastructure gaps and serve customers while, at the same, time diversifying our basin exposure and optimizing our assets.

In other first quarter developments, we welcome a new director to our board, Bill McAdam. Bill filled the vacancy on the board created by the retirement of John Chlebowski. Bill has more than 4 decades of industry experience including considerable time working in the Canadian energy sector, which will be particularly valuable as we expand our SemCAMS business. I'm excited to have Bill on the board and look forward to his input on our direction and execution.

With that, I'd like to thank you for your time this morning and now turn the call over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christine Cho of Barclays.

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Christine Cho, Barclays PLC, Research Division - Director and Equity Research Analyst [2]

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When we look at guidance that you provided for this year and what it means for 2018, could you discuss what the puts and takes are if we use the 4Q exit rate as a starting point? We have the STACK pipes on the gas and crude side, we have a full year of Maurepas and I think 4Q already includes some step-down in volumes for White Cliffs. Is there anything else that we should think about in S&L or the other businesses?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [3]

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Thanks for the question, Christine. I'll take a shot at that and Bob can probably clean up. First and foremost, I guess, is you rightfully pointed out that the STACK projects are not in that exit run rate of '17, so those will be in addition as we look at '18. Of course, I need to remind everyone that we will be providing the '18 guidance later, but as you try to extrapolate from what we were saying, I think the exit run rate plus the STACK pipelines, and as you say, a derisking of White Cliffs is included in that expectation at this point. I'll let Bob talk a little bit about S&L.

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [4]

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It's probably just as we mentioned in our prepared remarks, we expect to continue to be under some pressure on the margins and that will continue throughout at least the next several quarters as we look forward to it. So that remains to be an option in the future in terms of our ability to generate additional incremental margin in Supply and Logistics next year. The only other thing I'd add to Carlin's comment is we do expect in our SemGas business in the Mississippi Lime that we're running 2 rigs still right now. The producers are -- we expect to add another rig to our (inaudible) area by the second half, so we'll see how that plays out into the next year. Obviously, that's going to be driven a little bit by commodity prices in the producer's view of that.

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Christine Cho, Barclays PLC, Research Division - Director and Equity Research Analyst [5]

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Okay, great. And then just moving over to your gas pipeline project. At your Rose Valley plant, I think you have something a little less than 300 million cubic feet a day of excess capacity, which is sufficient for your initial 200 million a day. But if the STACK gas pipeline has increased to 400 million, what is the thought process in how to accommodate the incremental volumes? Can these plants be expanded? Do they run above the nameplate? I know it's early, but if you can kind of give us an idea of how you would handle that?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [6]

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This is Carlin. Thanks for the question, Christine. Of course, it would be a very positive development if we expand the Canton Pipeline to 400 million a day. We do have capacity opportunities in Rose Valley above nameplate, so we will obviously be looking at those solutions and we will develop as we go forward.

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Christine Cho, Barclays PLC, Research Division - Director and Equity Research Analyst [7]

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Okay. And then last question for me. A couple of quarters ago, we saw a step-up in the rate on the SemGas side, which I thought was going to be evaluated every 6 months or so depending on where the volumes were. Should we assume that stepped-up rate is pretty good for the rest of this year, but maybe steps down next year if volumes increase to a certain threshold? Some color on that dynamic would be helpful.

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [8]

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Sure, Christine. As you mentioned, that rate was stepped up last year. It -- we're still in a step-up position right now. It does get reevaluated every 6 months. Given the current trends, though, I think it's safe to assume that, that rate won't go down anytime this year.

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Christine Cho, Barclays PLC, Research Division - Director and Equity Research Analyst [9]

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What about next year?

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [10]

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Well, we'll have to wait and see what next year holds.

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Operator [11]

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Our next question comes from Tristan Richardson of SunTrust.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [12]

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Just a follow-up question on Rose Valley utilization. When you guys talk about returns for the Canton project, is the anticipation of increased utilization at Rose Valley factored into those returns? Or is it just really returns based on the commitment of the customer for the specific line?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [13]

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When we look at -- this is Carlin, Tristan. When we look at returns, of course, we're looking at the incremental CapEx that we're investing and we are using unused capacity at Rose Valley that helps, obviously, in the commercialization going forward with that pipeline. So I would consider it a project that encompasses the value of the sunk assets at Rose Valley.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [14]

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That's helpful. And then just in terms of you talk about sort of the split for '17 and the dollar gross margin sort of cash flows, take-or-pay fixed fee and sort of the variable component. Can you just talk about maybe sensitivities to commodity price movements and sort of impact on that smaller percentage that is variable with the assumptions you laid out, I think, it's on Slide 12.

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [15]

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Yes, as we talk about commodity prices on 12, I think you're talking about the sub -- the less than 10% that we have that's going to be either our percent of proceeds or accrued marketing. On the margin, as we saw in this past quarter, there's possibilities of getting a little bit more EBITDA or less depending upon what that percent of proceeds impact is in our SemGas business. It's not huge, it's a pretty small percentage. And then the other part of that question, Tristan, I'd say is just what do the commodity markets provide for us with regard to our Supply and Logistics margins and being able to capture margins either via contango or location differentials. And at this point, as I mentioned, we're still looking at about a breakeven for the next several quarters. If that -- if those spreads widened in the year, then there's opportunity maybe to capture some additional upside.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [16]

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So you're saying if S&L is largely breakeven, that the 9% that you talk about on 13, that's largely on the gas side then, is that fair?

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [17]

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Well, we still have gross margins contributing to Supply and Logistics in terms of our overall costs, but it's going to be a combination of both marketing and the commodity price on the POP contracts. And also I want to point out that's the last 12 months, so it's not just the quarter.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [18]

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Okay, that's helpful. And then just one last one minor item. I guess, I may have missed it in your materials last night, but did you give a CapEx spend for the quarter?

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [19]

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Yes. For the quarter, we had total CapEx of $88 million. Of that $88 million, $8 million was on maintenance.

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Operator [20]

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Our next question comes from Shneur Gershuni of UBS.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [21]

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Just I guess wanted to start off with the new project announcement yesterday. Just kind of want to understand, I guess, the cadence a little bit here. Are you expecting to hit your expected return profile immediately as it comes online? And then you sort of, I think, in the press release had talked about over the next 3 years it would continue to improve. Does it take 3 years to get to the return hurdle? Or do you get the return hurdle on day 1 and that's the incremental?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [22]

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Shneur, thanks for the question. This is Carlin. This project's a very strong project. We will get to that -- our return, 5 to 8x, in that first period. We tried to describe is that, that is the kind of the run rate going in and then we will get that and will grow that down to the lower end, even below potentially our range in 3 years.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [23]

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And those 3 years encompasses getting to 400 million or that's just at 200 million?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [24]

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That's just the 200 million.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [25]

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That's just -- okay, got it. And so...

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [26]

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So to be clear, the incremental 200 million that we could possibly have compression to grab, we were out trying to sell that today, that will be -- include incremental CapEx and we will have good economics around that as well.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [27]

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So is it fair to assume that you're getting 100 million, 130 Ms a day on day 1 that supports the return and then you're building to 200 million over the next 2 or 3 years is the formal projection that you're sort of sharing? Is that the way to think about it?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [28]

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We're not going to share volumes at this time. I think the guidance is that we're within our range on the initial-based project and that initial-based contract allows us to grow that down to the low end and even below our range on the multiples.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [29]

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Right, okay. And the way to conceptually think about it from a tariff perspective without obviously sharing that, but conceptually you're basically taking advantage of the fact that it's hard to move things out of the SCOOP/STACK plus your original gathering and processing at the original plant. And sort of net-net, there's effectively a transportation fee in there even though you're just charging them a processing margin, is that sort of the way to think about it? And that's why it's just incremental return on the capital, but it really is just allowing you to utilize the plant more at the end of the day?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [30]

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Well, it's a transportation system. It's a high-pressure truck line. So we're moving gas up to Rose Valley and we're processing. So we're providing both services for fees.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [31]

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Okay. So they're independent. Perfect. Okay. And then just wanted to talk about something that you had said in your prepared remarks. I think you'd mentioned potential Maurepas extension. Is that something that was talked about with whoever you're talking about with the entire time and the discussion has heated up and that's what you're sharing with us? Or is this a new concept that sort of just come up recently just because of market dynamics?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [32]

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No, I think the folks we're talking to in regards to an expansion of Maurepas are the same folks that we have targeted from day 1, and conversations continue to be held and we feel like we'll get something out there at some point. We just wanted to be sure that you guys know that as it comes online July 1 we probably will not have a commercial announcement around the expansion until maybe a little bit later.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [33]

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That's totally fair. And then are there any other smaller type, $50 million, $60 million projects, that you're thinking and talking about with some other producers that could potentially get to a point where you actually have to revise CapEx in 2017? Or is that fairly unlikely at this stage?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [34]

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Well, we're constantly working the commercial side of the business in trying to leverage our existing assets. I believe that the STACK projects provide us fantastic support for 2 existing assets that were underutilized. So we will continue to try to find opportunities like that. I can't handicap whether or not we find another 1 or 2 or 3 that will impact the '17 spend, but these are good projects that if we do find those kind of projects, then we will have to discuss our CapEx plan and leverage and all the other implications of those projects coming up being spent in '17.

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Operator [35]

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Our next question comes from Ryan Levine of Citi.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [36]

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With PEMEX selecting a winner for a previously delayed product pipeline and storage open season in Mexico, do you see any near-term opportunities for SemGroup in Mexico?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [37]

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Yes. I think, the -- Ryan, this is Carlin. I think, as we've always said, the pace of play in Mexico is tough to get a good cadence on, but -- and we find it positive that things are starting to move. We're talking and working several opportunities and I can't really say much more, but we believe that, that's a positive sign.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [38]

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Okay. And then shifting to Supply and Logistics. Would you be able to quantify or provide any color around the inventory timing adjustment mentioned in the presentation material?

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [39]

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I think, as a brief summary on that, Ryan, is that at the end of the quarter, we always have to kind of lock in where we're at. We have to adjust to what the inventory cost is and it's kind of flowing through and that happens about every quarter. This quarter, what happened is we had to take that hit in the first quarter and then we'll get the benefit of that in the second quarter simply because of when we're hitting that cost of the inventory.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [40]

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Is any quantification or dollar amount associated with the adjustment for the quarter?

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [41]

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For the quarter, it was just a little bit over $4 million.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [42]

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Okay, great. And then in terms of the Maurepas expansion opportunities, should we be looking for late this year in terms of as things play out in terms of when a decision will be made as you move forward with some of the expansion opportunities? Or could this be a multiyear process?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [43]

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Well, it's an asset that we obviously are excited about getting online. It's a multi-decade contract. We're going to be operating it for a long time. So I can't say that it's going to happen in the first year of operation, but I also can't say that it will not happen in the first year of operation. We will always be looking to optimize the system. The 24-inch was built. It was oversized for this very purpose. And as crude flows change and as refineries desire more optionality and St. James becomes more liquid-able market, we believe that, that unused capacity is growing in value. So we will continue to monitor it and talk to folks and see what happens.

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Operator [44]

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Our next question comes from Craig Shere of Tuohy Brothers.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [45]

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Any incremental color around SemCAMS' growth project opportunities besides what's already been announced?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [46]

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Craig, this is Carlin. If you're referring to anything outside of the Wapiti in the comments we've made about some of the Kaybob plants, yes, we're not in position to share anything more than what we've already disclosed. We continue to feel like the producers are very constructive to pointing to the need for more infrastructure in our key areas in the Montney and the Duvernay, and we continue to have those very good conversations there as well.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [47]

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Do you see consolidation in the industry in Canada impacting you one way or the other?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [48]

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That's a great question. We obviously read about the recent deal up there and we continue to look at the landscape. We feel like we have a very strong position with our sulphur recovery capabilities as the gas that is being produced to liberate the liquids for oil sands used for diluent is becoming -- remaining high sulphur, and even in the Duvernay, there are some hints of sulphur, we believe we have a very strong position there. So we're going to do the smart thing going forward and if that means joint venturing, doing a lot -- maybe putting together an alliance to try to accomplish more, we will consider that. But our position, our footprint is very strong.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [49]

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Understood. And I appreciate the comments about the tragic situation in Colorado with the rig explosion. One quick question, is it possible that the implications of that or any follow-on regulatory issues could possibly trigger a force majeure for any of your long-term contract at White Cliffs volumes? In other words, your shippers won't be obligated because something beyond their control's happened.

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [50]

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Craig, we are reviewing all those agreements, and as we noted in the script, it's an evolving situation. We feel like we're in pretty good shape. But it is Colorado. I think, the concern there is always anti-industry sentiment, and having this very tragic incident happened, may fuel their fire a little bit. And that's -- we're trying to make sure that we do all the right things from a compliance point of view, which we are very confident to say that we are, and hopefully our customers are also following that lead.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [51]

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Understood. Last question. Obviously, if you're looking at some vastly improving free cash flow into 2018 and you're focused on perhaps roughly a mid-level 8% dividend CAGR target, how do you think about allocation of free cash flow beyond this methodical dividend growth given these projects coming online, especially in Maurepas, but more coming online at the end of the year. How do you think about share buybacks, prospects for expanding for growth projects over the next couple of years? Some color would be great.

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [52]

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Craig, this is Bob. I'll take that. The allocation of capital remains to be the same that we've always taken a look at. One thing we look at, as you mentioned, is what type of opportunities do we have to grow at good return expectations. And things like we've announced, the STACK projects, Maurepas, et cetera, those are all great opportunities. We'll always be looking for those to reinvest in. And reinvesting free cash flow is the best return we can get for that. We'll also continue to manage our balance sheet. So the delevering that we expect to occur at the year-end as these projects come online and generate the free cash flow is something that we're very focused at. And then we get beyond that, we're going to monitor our return to shareholders via dividends, via other opportunities. The board will always consider those options and we'll take it to them as appropriate. But I'd say our priority is looking at good quality, high-return projects and to measure our balance sheet remains in that position that we're comfortable in, in terms of our leverage position.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [53]

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Do you think your footprint can sustain maybe a $300 million to $500 million consistent annual growth CapEx opportunity for some years going forward?

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [54]

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Well, as we've talked about in the past, we see a lot of opportunity in Canada, significant opportunity. And we'll see how that plays out. We think we'll get more than our fair share of the infrastructure investment needs that are going to be, I think, coming to us the next couple of years. And yes, we continue to find ways to further expand our footprint. So is $300 million, $350 million the right number? We always talk about every year, we start the year with a new CapEx number and it seems to always be pretty significant. So I would be -- it'd be premature to say what the number is, but I do believe that we have significant opportunity around our existing footprint to continue to invest CapEx.

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Operator [55]

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Our next question comes from Michael Blum of Wells Fargo.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [56]

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Just a couple. Can you -- I just want to confirm that when Maurepas comes on in July, is that -- do you have an immediate like run rate cash flow payment? Or is there some sort of ramp to the cash flows that come on?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [57]

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It's immediate. When we -- we're modeling July 1, full run rate cash flows coming in.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [58]

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Okay, great. And then so in terms of the rest of this year, so you pointed out obviously you've got a pretty big spend assuming you don't issue equity or see leverage kind of tick up, but then you expect to come down as EBITDA comes on early next year. How do you think about managing that? I mean, would you -- are you comfortable with that leverage kind of ticking up to that range? Or do you think it's more likely you will hit the ATM to kind of manage that in the interim period till those projects come on.

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Robert N. Fitzgerald, SemGroup Corporation - CFO and SVP [59]

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We believe that we're going to run that right a little bit above -- slightly above the 4.5x coverage that we're looking and targeting to have. As we've indicated in the past, our goal is to be at or below that number. And we feel pretty confident that we'll be able to handle that with our current plans with our liquidity that we have today without having to do any kind of an equity offering. So we're comfortable with that. The important thing here, Michael, is the fact that we do have great line of sight to that future cash flow coming out from these projects. These are not highly volatile projects. Maurepas, as Carlin just said, is going to be generating cash immediately as soon as it's operational and there's no volatility to that and similar with some of the other projects that we have coming on as well. So we've got great visibility into bringing that leverage out.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [60]

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Okay. And then my last question is just, obviously, you've been very focused on inorganic, high-return projects. There's clearly been a lot of M&A in the sector in the last few months. Just want to get your latest thoughts in terms of what your appetite is for that? How active you've been looking at the deals that have been coming across? And kind of what's your outlook on all that?

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Carlin G. Conner, SemGroup Corporation - CEO, President and Director [61]

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Thanks, Michael. This is Carlin. We're still very active. We're targeting certain assets in certain areas that we think would be additive to our plan and hit our key strategic initiatives, but we're also looking at some of the auctions. I would tell you that the recent trend with more deferreds and it seems to be there is some risk sharing going on, but there's still some very high valuations floating around. So it's a mixed bag for us as a strategic, but we continue to look at everything and run it through and figure out if it's a fit or not. I would tell you that we're being very diligent around that side of the business.

Thank you for all your support and thank you very much for joining us today. We appreciate your continued interest. Have a great weekend.

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Operator [62]

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