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Energy Transfer Boosts Midstream Services Via SemGroup Buyout

Zacks Equity Research

Energy Transfer LP ET announced that it has entered into a definitive merger agreement to acquire SemGroup Corporation SEMG in a unit-and-cash transaction valued at $17 per share. The total value of the deal is nearly $5 billion, based on the closing price of Energy Transfer common units on Sep 13, 2019.

Merger Consideration

Energy Transfer will pay $6.80 in cash and 0.725 of its common unit for each outstanding share of Class A Common Stock of SemGroup. The merger consideration reflects a 65% premium to the closing price of SemGroup shares as of Sep 13, 2019.  

The merger is expected to close in late 2019 or early 2020, subject to necessary approvals. Post-merger, SemGroup’s shareholders will own nearly 2.2% of Energy Transfer’s outstanding common units.

Rationale Behind the Merger

SemGroup’s existing complementary assets are the reason behind the acquisition of this oil & gas midstream business operator. SemGroup’s Houston Fuel Oil Terminal (“HFOTCO”) will expand crude export opportunities of Energy Transfer. In addition, Energy Transfer’s connectivity to resource-rich regions of the United States will increase via SemGroup’s assets. The acquisition will support Energy Transfer’s operations in the prolific Permian Basin region.

The merger is expected to be immediately accretive to the firm’s distributable cash flow per unit and result in an annual merger synergy in excess of $170 million.

New Pipeline Will Enhance Benefits

Energy Transfer announced plans to construct a 75-mile crude oil pipeline between the Houston Ship Channel and Nederland, TX. This will provide a strategic connection between two of the largest crude oil terminals in the United States.

The new pipeline will give producers in this region an opportunity to utilize the services of these two terminals and export crude oil. The pipeline will provide immediate access to more than 1 million barrels per day of crude oil export capacity. It has plans to further expand the capacity to more than 2 million barrels.

Rise in Crude Oil Production

The U.S. Energy Information Administration (EIA) forecasts U.S. crude oil production to average 12.2 million barrels per day (b/d) in 2019, indicating an improvement of 1.2 million from the 2018 level. Crude oil production is further estimated to rise 1.0 million b/d in 2020 to an annual average of 13.2 million. Permian Basin production will be a major contributor to the rising liquid production.

No doubt, midstream operators will transfer the crude oil from the production area to refineries and terminals. Firms like Energy Transfer, with its existing assets, will play a crucial role in this regard.

Other prominent midstream operators like Plains All American Pipeline PAA are making considerable investments to expand operations in the resource-rich Permian Basin. The firm announced the formation of the W2W Pipeline joint venture with ExxonMobil’s XOM subsidiaries and Lotus Midstream, LLC to transport crude oil from multiple locations in the Permian basin to the Texas Gulf Coast.

Price Movement & Zacks Rank

Units of Energy Transfer have underperformed its industry in the past 12 months.


 

Currently, Energy Transfer has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
SemGroup Corporation (SEMG) : Free Stock Analysis Report
 
Energy Transfer LP (ET) : Free Stock Analysis Report
 
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