-- U.S. midstream energy company SemGroup has reduced debt while
modestly improving its business risk profile, primarily through the sale of its
wholesale propane business.
-- We are raising our corporate credit rating on the company to 'B+' from
'B'. We are also raising our issue-level rating on the company's senior
secured revolving credit facility to 'BB-' from 'B' and revising the recovery
rating on this debt to '2' from '3'.
-- The stable rating outlook reflects our view that SemGroup will
maintain adequate liquidity, keep financial leverage below 4.0x, and continue
to successfully execute its organic growth projects.
On May 29, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on U.S. midstream energy company SemGroup Corp. to 'B+' from
'B'. The rating outlook is stable. At the same time, we raised our rating on
the company's senior secured revolving credit facility to 'BB-' from 'B'. We
revised the recovery rating on this debt to '2' from '3', based on recent
changes to the capital structure leading to a higher secured recovery value.
The '2' recovery rating indicates that secured lenders can expect substantial
(70% to 90%) recovery if a payment default occurs. As of March 31, 2012,
SemGroup had total balance sheet debt of about $124 million.
The upgrade reflects SemGroup's lower financial leverage coupled with a modest
improvement in its business risk profile. The company paid off its $75 million
term loan A and $200 million term loan B with proceeds from the divestiture of
its SemStream assets (wholesale propane distribution) and the IPO of master
limited partnership (MLP) Rose Rock Midstream L.P. (Rose Rock).
SemGroup's "weak" business risk profile under our criteria reflects the
company's small scale and modest commodity price exposure. In our view, the
company's formation of Rose Rock partially offsets the benefits it achieved
from deleveraging because the MLP is incentivized to pay out most of its cash
flow after maintenance capital spending to unitholders each quarter. SemGroup
owns 100% of the general partnership and 57% of the limited partnership
interest in Rose Rock. Further, we view the November 2011 sale of the
SemStream assets to NGL Energy Partners as credit enhancing due to the
commodity price sensitivity inherent in the wholesale propane distribution
business that makes it difficult to forecast future cash flows.
In our base-case forecast, we assume margins associated with the SemGas and
Crude operations will remain strong due to favorable market conditions in the
Mid-Continent region. At the same time, we expect a 10%-15% drop in volumes at
the SemCAMS unit from 2011 as low natural gas prices leads to reduced demand
for sour gas processing services. As a result, we anticipate SemGroup's 2012
debt to EBTIDA and EBITDA interest coverage ratios to be conservative for the
rating, around 2.0x and 9.0x, respectively. However, we expect leverage to
gradually increase to about 3.5-4.0x as management pursues growth
opportunities over the next few years.
SemGroup filed for bankruptcy protection in June 2008 after wrong-way trades
in crude oil hurt its trading operations, and the company was under
considerable pressure to post margin. SemGroup emerged from bankruptcy in
December 2009 after it retooled its business model to focus on fee-based
operations, and the successor company has virtually no financial exposure to
the ongoing bankruptcy proceedings. The new management team has stated that
the company will refrain from speculative-trading activity, and will use
financial derivatives solely to hedge underlying commodity exposure.
SemGroup owns, operates, and develops midstream energy assets that provide
gathering, processing transportation, and storage services for natural gas,
natural gas liquids, and crude oil products. The company generates around 85%
of its gross margin from fixed-fee, predominantly volume-sensitive, contracts.
SemGroup operates in three commodity-driven businesses: NGL and natural gas,
crude oil, and products, which represent about 35%, 50%, and 15% of SemGroup's
2011 EBITDA, respectively.
In December 2011, SemGroup contributed its Crude assets (excluding the White
Cliffs pipeline) to Rose Rock. The crude oil business generates relatively
stable cash flows mainly due to the take-or-pay nature of its pipeline and
storage contracts. We expect above-average operating performance in 2012 in
part as a result of the high price of crude, which benefits Rose Rock's
marketing efforts. In addition, we expect the company to realize cash flow
generated from 1.95 million barrels of oil (mmbbl) of new-build, 100%
contracted, Cushing-based crude storage by mid-2012. Finally, SemGroup has a
51% ownership interest in the White Cliffs pipeline, a 70,000-barrels-per-day
crude oil pipeline that the Federal Energy Regulatory Commission regulates.
The pipeline benefits from medium-term take-or-pay contracts, while the
Kansas- and Oklahoma-based gathering lines are subject to volume risk. The
company also uses a small amount of storage capacity for proprietary purposes,
allowing it to generate some profits during contango market conditions.
Most cash flow in the natural gas liquids (NGL) and natural gas business comes
from the company's fee-based sweet and sour gas gathering and processing
services in Alberta. Although SemGroup benefits from a relatively entrenched
customer base that lacks alternatives, we expect cash flows to decline in
2012. When sour gas processing economics are weak, as in the current
environment, asset utilization levels tend to be low. In this business,
SemGroup also gathers and processes natural gas for producers in the
Mid-Continent region under mostly percentage-of-proceeds and
percentage-of-index contracts. We consider this aspect of SemGroup's business
to be the most volatile given that the company does not hedge its long
exposure to natural gas and NGLs. Therefore, these cash flows will fluctuate
as commodity prices change.
In the product business, the company maintains 8.7 million barrels of
above-ground storage tanks in addition to two deepwater jetties in the U.K.
Refined products, including gasoline, jet fuel, and diesel, are delivered to
the tanks, stored, and redelivered via ships to Europe, the U.S., and Africa.
The business generates cash flows from volume-sensitive, fee-based contracts.
Recently, the high price of Brent crude and backwardated market conditions has
resulted in lower demand for storage, which will hurt the company's EBITDA in
the near to medium term.
Liquidity is "adequate" under our criteria, with sources exceeding uses by
about 1.2x during the next 12 months. The company's primary sources of cash
include $80 million of forecast funds from operations (FFO), $100 million of
availability under SemGroup's $300 million revolver, and $100 million of
availability under Rose Rock's $150 million revolver. We expect SemGroup's
main use of cash will be for growth and maintenance capital spending between
$180 million to $200 million and distributions of around $25 million. SemGroup
has no significant debt maturities until the revolvers come due in 2016.
Financial covenants on SemGroup's revolving credit facility include a minimum
interest coverage ratio of 2.5x and a maximum total leverage ratio of 4.5x. As
of March 31, 2012, SemGroup was in compliance with these covenant test levels,
and we expect the company to remain in compliance through 2012.
The rating on SemGroup's senior secured debt is 'BB-' (one notch above the
corporate credit rating), and the recovery rating is '2', indicating our
expectation that lenders would receive substantial (70% to 90%) recovery if a
payment default occurs. (For the recovery analysis, see the recovery report on
SemGroup to be published shortly.)
The stable rating outlook reflects our view that SemGroup will maintain
adequate liquidity, with a ratio of debt to EBITDA below 4.0x, and will fund
growth projects in a balanced manner. We could consider an upgrade over time
if the company grows its size and diversity while maintaining current leverage
metrics. We could lower the rating if one or more of the company's business
segments underperforms, or if the company primarily uses debt to finance an
acquisition or growth-related capital spending, such that debt to EBITDA
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Rating Criteria For U.S. Midstream Energy Companies, Dec. 18, 2008
Upgraded; Recovery Rating Revised
Corporate Credit Rating B+/Stable/-- B/Stable/--
Senior Secured BB- B
Recovery Rating 2 3
Not Rated Action
US$200 mil sr secd term B bank ln NR B
Recovery Rating NR 3
US$75 mil sr secd term A bank ln due NR B
Recovery Rating NR 3