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Rose Rock Midstream LP (NYSE:RRMS)

Q4 2013 Earnings Conference Call

February 28, 2014 11:00 a.m. ET

Executives

Alisa Perkins – IR

Norman Szydlowski – President and CEO

Robert Fitzgerald – SVP and CFO

Peter Schwiering – COO, Rose Rock Midstream

Analysts

Bradley Olsen – Tudor, Pickering, Holt & Co. Securities, Inc.

Brian Zarahn– Barclays Capital

Craig Shere – Tuohy Brothers

William Frohnhoefer – BTIG

Michael Gaiden – Robert W. Baird

Selman Akyol – Stifel

Operator

Good morning, ladies and gentlemen, and welcome to the SemGroup Corporation and Rose Rock Midstream Fourth Quarter and Full Year 2013 Earnings Conference Call. (Operator Instructions). As a reminder this call is being recorded.

I would now like to turn the call over to Alisa Perkins. Please go ahead.

Alisa Perkins

Thank you for joining us today. The presentation for today’s call is available under the Investor Relations section of our website at semgroupcorp.com or rrmidstream.com.

Before we begin our prepared remarks, I would like to bring your attention to slides two and three for certain disclaimers and other cautionary statements as remarks within our presentation may contain forward-looking statements. Also included in the presentation are various non-GAAP financial measures, such as adjusted gross margin, EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP financial measures are included in the presentation and can also be found on our website.

With that, let me turn the call over to Norm Szydlowski, our Chief Executive Officer.

Norman Szydlowski

Thanks, Alisa. In addition to Alisa, I’m also joined today by Bob Fitzgerald, our Chief Financial Officer and Pete Schwiering, Chief Operating Officer for Rose Rock Midstream.

Before we review our fourth quarter earnings, let me update everyone on the search for my successor. The board is in the final stages of the search process and expects the new CEO will be announced prior to the end of the first quarter. As I said before, I will continue as CEO to make sure we don’t lose any momentum and to help with a seamless transition. I have been involved in the process and have the highest confidence that we are finding the right person to lead the company.

In the meantime, we are concentrating on execution the strategy we have outlined over the past few years and we will continue to focus on growing our business throughout the coming year in a safe and responsible manner.

Moving to our results. 2013 was an excellent year. SemGroup adjusted EBITDA increased 40% over the previous year and Rose Rock adjusted EBITDA was 73% higher. As you can see on Slide number 4, the companies exceeded initial guidance for both earnings and for capital investment. While we will review the details behind those shortly, but let me highlight a few of the accomplishments.

Many of our existing assets are operating at or near capacity and we continue investing in crude oil and gas infrastructure in support of the growing North American production. It’s important to note that all of our major projects are currently on time and on budget. However there is some expansion carryover related to the timing of the payments.

We completed two drop-down transactions into Rose Rock during the year and increased Rose Rock distributions to unitholders, and initiated a dividend to SemGroup shareholders. Safety is always the focus for us and we maintain our track record of no serious incidents in 2013.

With respect to key projects, the White Cliffs pipeline expansion continues to be on track. Construction is underway. We still expect this project to complete by mid-year 2014. The Wattenberg Oil Trunkline finished on schedule and went into service at the beginning of November. Now we are working on an additional project to extend that pipeline 38 miles northeast connecting the Noble Energy’s East Pony processing facilities. Noble’s entered into a long term agreement to use this asset and while we can’t speak specifically to the EBITDA due to confidentiality agreements, it is similar to other pipeline projects. We anticipate this extension to be operational in the fourth quarter of this year.

The Glass Mountain pipeline ramped up construction and began commercial operation at the beginning of this month. We have increased our capital spending to include more truck and loading base for the pipeline. Our Rose Valley 1 plant in the Mississippi Lime is expected to be in place and in service in March. The Rose Rock – for the Rose Valley 2 plant is built in storage and on-site. It’s currently scheduled to be online in the first quarter of 2016 but those have the option to go online sooner if the volumes warrant.

At Rose Rock, we closed on our Tampa pipeline acquisition in November. This is a 12 mile, 12-inch diameter pipeline that runs from Platteville to the Tampa Colorado rail facility. This acquisition furthers our strategic plan of offering fee based transportation infrastructure while expanding our footprint across an area that’s experiencing rapid growth and strong demand for midstream services. We are already planning another pipeline expansion where we will add a 5 mile segment to the Tampa line to be completed by the end of the second quarter of 2014.

In support of Duvernay opportunity in Canada, we recently announced the construction of a low sour gas gathering line to be named the KA North pipeline. That will connect Duvernay production to our SemCAMS KA plant. The new pipeline is supported with a fee for service gathering and processing agreement with Shell Canada. The 10-inch 10 mile pipeline will be owned 60% by SemCAMs and is expected to be completed later this year.

Turning to Slide 6 of the earnings presentation. We expect adjusted EBITDA for SemGroup in 2014 to be $245 million to $265 million representing approximately a 35% growth over 2013. This was driven by increased volumes in White Cliffs sim gas and the other assumptions are listed to the right.

Montney drilling continues to increase in the Wapiti area and that’s straining the Northwest Wapiti gathering system. There could be upside in Canada should Montney and Duvernay production move along more quickly. However, for 2014, we've assumed only slightly higher volumes in our guidance.

As announced yesterday, the SemGroup Board of Directors declared an increase to the quarterly cash dividend to common shareholders to $0.22 per share, resulting in an annualized distribution of $0.88 per share. This represents a 5% increase from the previous quarterly dividend of $0.21. In 2014, we'll continue with our dividend practice of passing through most of the cash distributions received from our MLP investments, which would imply a 25% to 30% year-over-year increase in 2014 based on our current partnership holdings.

On Slide number 8, you'll see what we continue -- and we continue to find attractive growth projects in both crude oil and natural gas. The company expects to spend $415 million in capital investment in 2014, with more than that -- more than 85% of that being allocated to growth projects. And those projects, we expect to deliver returns in the mid-teens or higher. And as usual, on the following slide, we've provided more detail on all the projects previously discussed.

Now Bob will review our financial performance.

Robert Fitzgerald

Thanks, Norm. Beginning on Slide 10 of our earnings presentation, and as noted in our press release yesterday, we reported solid results for the quarter with adjusted EBITDA of $57.8 million, up 11% compared to the third quarter. On a full year basis, adjusted EBITDA for 2013 was $189 million, an increase of 40% over 2012, and at the high end of our updated guidance range of $180 million to $190 million for 2013.

SemGroup reported net income of $3.3 million for the fourth quarter as compared to a net loss of $1.9 million for the previous quarter. Non-cash items affecting net income in the fourth quarter included an increase of $26.2 million in equity earnings pertaining to NGL Energy Partners, which was essentially offset by a $4.6 million change in our warrant expense due to our stock appreciation and a $20.7 million increase in tax expense related to a true-up of our year-end tax provision.

Focusing specifically on our segment results on Slide 11. On a quarter-over-quarter basis, the increase in fourth quarter adjusted EBITDA was due largely to our crude segment. Crude was up $5.9 million versus the prior quarter, driven by a $3.5 million increase in marketing earnings due to a short-term opportunity to purchase discounted crude barrels in Cushing, along with a 15% increase in White Cliffs pipeline volumes.

We expect the one-time increase in marketing volumes to continue for two months into this year as our ability to utilize excess storage capacity expires in the first quarter. SemGas reported a $1.9 million increase in adjusted EBITDA, primarily due to additional production driving the growth of processing volumes in Northern Oklahoma.

Our SemCAMS division was down $2.2 million, primarily as a result of lower volumes related to pipeline curtailments and lower throughput volumes from producers. In January, our volumes rebounded to normal operating levels.

Next, moving to our capitalization and liquidity position on Slide 12. We ended the year with total consolidated debt of $615 million. SemGroup's consolidated debt-to-capitalization ratio is 34% and net debt-to-adjusted EBITDA leverage ratio is 2.8 times. We ended the year with total liquidity of $811 million.

In December, we amended our revolving credit facility, extending the maturity to December of 2018, while decreasing our borrowing costs.

Moving next to Rose Rock's results on Slide 13. We reported fourth quarter adjusted EBITDA of $21 million, up 34% from the third quarter and more than doubling the fourth quarter of 2012. The fourth quarter results were driven by the previously mentioned increase in marketing volumes, along with higher cash distributions from White Cliffs Pipeline.

Turning to Slide 14. We previously announced our eighth consecutive increase in distribution for a limited partner unit of $0.465 per unit or $1.86 per unit on an annualized basis. Our 2014 guidance for distribution growth is 15% on a year-over-year basis, assuming no further drop-down transactions or acquisitions. We would revisit our distribution guidance should this change. At this stage, we do not envision the next drop-down to occur until after the first half of this year.

As outlined in detail in the appendix of our earnings presentation, our distributable cash flow for the quarter was just under $18 million. Our distribution of $12.8 million declared on January 23 represents a coverage ratio of 1.4x for the quarter and 1.3x for the full year. We are targeting a coverage ratio of 1.1x to 1.2x for the full year of 2014.

Moving to Rose Rock guidance on Page 15. We previously announced we expect to earn $92 million to $97 million in adjusted EBITDA for 2014, which is approximately a 40% increase over our 2013 results. Our adjusted EBITDA guidance assumes no drop-downs or acquisitions during 2014 as mentioned earlier.

I also want to point out that our 2014 guidance assumes a weighted average storage rate of $0.37 per barrel in Cushing, reflecting the impact of contractual rate changes related to prior year contract extensions. This rate will remain in effect through 2015, assuming no additional contract extensions.

Turning to Slide 16. Our 2014 CapEx guidance is $75 million, which includes Rose Rock's share of White Cliffs expansion project, as well as some incremental gathering in the DJ Basin as Norm mentioned earlier.

Rose Rock's capitalization and liquidity position is presented on Slide 17. As announced on December 16, Rose Rock acquired an additional one-third interest in SemCrude Pipeline, which owns a 51% interest in White Cliffs Pipeline for $275 million. This acquisition was funded with $173 million of cash borrowings of Rose Rock's revolving credit facility, along with the issuance of 1.5 million common units and 1.25 million Class A units to SemGroup.

Also during the fourth quarter, Rose Rock exercised the accordion feature of its revolving credit agreement, which increased our total borrowing capacity from $385 million to $585 million. Rose Rock ended the year with $245 million of total consolidated debt and a net debt-to-adjusted EBITDA ratio of 3.4x.

We have total liquidity of $321 million based upon our $585 million revolver.

I will now turn the call back over to Norm for some final comments.

Norman Szydlowski

Thank you, Bob. And looking forward to this year, 2014, I'm convinced that both companies will have another superb year. We'll have a new CEO on board soon. We're focused on safety. We will continue to carefully look at appropriate investments that are in line with our strategic plan. We know that execution is the key to growth, and we'll keep executing on our investments and operations to deliver on the financial targets for the equity-holder returns.

So thank you, again, and Charlotte, can you help us now with taking some questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Bradley Olsen from TPH.

Bradley Olsen – Tudor, Pickering, Holt & Co. Securities, Inc.

My first question regards the capital expenditures outlook. On the third quarter call, I believe you discussed the total Rose Valley buildout as coming to about $600 million by the time as the spending is completed in 2015 or 2016. And I believe about $150 million to $200 million of all that spending was expected to occur between 2014 and 2016 or 2015 and 2016. Now I see that for your current CapEx outlook in the current presentation, the forecast for 2015 seems to have moved almost all of the 2015 and 2016 spending into the category of other and undesignated project. Does that reflect any change in the outlook for opportunities for your gathering or processing system in the Mississippian Lime?

Robert Fitzgerald

Hi Brad. This is Robert. I will take that question. There is really no change in our forecast in our development and growth in Mississippian Lime. We've just reclassified it in how we presented it in the table on Slide 9. We're continuing to expect to spend probably close to $200 million over the next two years going forward. We have the plant that we are putting online that Norm mentioned here in the first quarter, Rose Valley I. And then we're spending somewhere in the neighborhood of $50 million to $75 million a year in gathering compression and related. And then we'll have Rose Valley 2 coming online, targeting right now the first quarter of '16.

Bradley Olsen – Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. Great. And a question about the drop-down strategy. Norm, you alluded to the next drop-down likely being a second half of 2014 event. What's the reason for that pace? It seems like your last drop-down was funded exclusively with equity taken back by SemGroup. And so you're -- you don't seem to be stressing the Rose Rock price with an overhang. And so is it just the difficulties maybe getting through committee processes to get a drop-down done? Or is there another gating factor?

Norman Szydlowski

No Brad. It’s really that we’re just making sure we have got the right maturity on the assets and making sure that they are ready to go, we got good confidence and all the throughput requirements as opposed to waiting for committee activities or mortgaging process. So that’s our best view at this point and one thing that doesn’t change is we are still looking as we have said before to that it is crude assets that we have been completing that will be the next stop. But aside from just making sure that everything is ramping up appropriately that will be the key point in determining the drop time.

Bradley Olsen – Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. Great. And just one final one on the CEO search process, thanks for the update and it’s good to hear that the process is approaching a conclusion. If I remember correctly back in November on the third quarter call, it sounded as though you are getting closer to finding a candidate and for whatever reason it seemed that maybe that process changed or maybe something fell through. How would you compare kind of where you stand today with where you stood in November in terms of feeling confident that we'll have the process wrapped up by the end of the first quarter?

Norman Szydlowski

Yeah. I have really high confidence that we’ll have the new CEO named by the end of the first quarter and Brad, I look at the process as one that's really very deliberate. It wasn't a case of missteps or changes. We've had a lot of good interest in the job. The company, at this point in time, has been very appealing for candidates. And the board has done I think a very, very good job of bringing this to the appropriate conclusion and not letting time drive the process as much as finding the very best candidate. So I would look for end of the first quarter, I have high confidence we'll name the new CEO

Bradley Olsen – Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. Perfect. And just one last one kind of relates to the CEO search, the 25% to 30% dividend growth year-over-year that you're targeting, it sounded as though the Rose Rock distribution growth was exclusive of any future drop-down. So is it fair to assume that there would be upside to the SemGroup dividend growth rate in the event that a drop-down potentially in the second half of the year did occur?

Robert Fitzgerald

Now that's right, Brad. This is Bob, and to the extent that we have not modeled in, in our guidance that we provided here, any additional drops or acquisitions, to the extent that that happens, then those cash flows, those distributions would continue to contribute to an increasing dividend at SemGroup.

Bradley Olsen – Tudor, Pickering, Holt & Co. Securities, Inc.

Great. Thanks so much for the time guys.

Norman Szydlowski

Thanks Brad.

Operator

Thank you. Our next question will come from the line of Brian Zarahn from Barclays. Your line is open.

Brian Zarahn– Barclays Capital

Good morning.

Norman Szydlowski

Hello Brian.

Brian Zarahn– Barclays Capital

I guess following up on the last question, more on the Rose Rock perspective. If you did do a drop-down in the second half of the year, would the inclination be to potentially change the distribution growth guidance, or build up coverage and provide some dry powder for next year?

Norman Szydlowski

Yeah. At this point, Brian, I'd say that what we would expect to do is to see a change in the distribution that we have provided an updated guidance. Of course, we're speculating right now on the timing of what it is and how accretive that type of drop-down would be. But rather than increasing coverage levels, we tend to manage our coverage levels based upon how much marketing or nonrecurring cash flows come in. But I would expect that we would be looking and revisiting our distribution growth rate based on any future drop.

Brian Zarahn– Barclays Capital

And with Wattenberg and Glass Mountain in service and White Cliffs on track for midyear, you have assets of differing size, how should we think about a potential drop in the second half of the year?

Robert Fitzgerald

Yeah. I’ll say that as Norm mentioned, we're looking at some of the crude assets that we're bringing online right now. As we've mentioned, Glass Mountain is coming on now. Wattenberg came on at the end of the year last year. And then we always have the MLP fields. Those assets are going to be the ones that we're going to continue to target for drop-down or some combination thereof, it's the very next one. But we're going to continue to prosecute our drop-down strategy, focus on these crude assets first.

Brian Zarahn– Barclays Capital

And then on your maintenance CapEx guidance for Rose Rock, what accounts for the rise from $5 million in 2013 to $12 million? Was there some timing, some CapEx in '13 shifting into '14? Or is it White Cliffs-related, which accounts for the rest?

Robert Fitzgerald

Yeah, the primary issue there is twofold. There's no carryover really related to that from '13 going into '14. But there's two things. First one is White Cliffs, being the fifth year of its operation, it's going to go through a significant integrity management review, so that could be driving the chunk of that. And then we've added some additional trucks from our field services business that increases some of the maintenance. So a lot of it is going to be those two things, plus just ongoing maintenance or regulatory activities.

Brian Zarahn– Barclays Capital

And just last one for me on White Cliffs. What's your expectation for the volume ramp to get to 125,000 barrels a day?

Robert Fitzgerald

Well, we're not giving guidance on exactly when we're going to hit that 125,000, which obviously would trigger the conversion of the Class A units into common units. But we are anticipating a pretty good growth ramp once we bring the second line on. So between now and when the second line comes on, we're pretty full right now at White Cliffs. So you're not going to see a lot of growth during the first half of this year as a result of that. So it's all going to be back-end loaded in terms of whatever growth rate we see in 2014.

Brian Zarahn– Barclays Capital

Thank you.

Operator

Our next question will come from the line of Craig Shere from Tuohy Brothers. Your line is open.

Craig Shere – Tuohy Brothers

Tuohy Brothers. Morning guys.

Norman Szydlowski

Morning Craig.

Craig Shere – Tuohy Brothers

It doesn't look like 2014 guidance is taking into account commodity price changes over the last couple of months. In particular, there's a little more sensitivity, I think, to NGLs, but at least temporarily, it had some significant upticks. Can you comment on upside potential from that tailwind and your willingness to distribute what could be more volatile commodity-driven earnings?

Norman Szydlowski

Craig, particularly in this whole gas arena and the NGL basket, as we call it, you'll see some -- in our materials, increments of gas price change or NGL basket change and what that would mean in terms of additional EBITDA generation for us through the year. But in terms of guidance, we at this point have been, I would say, deliberate or careful. It's -- I think we're all trying to figure out to what degree the current price challenges and the injection season is going to be to really gauge how sustainable some portion, perhaps, of the increase is going to be. But at present, we haven't changed. I think you'll see in our materials, where one of our assumptions is the gas price, I think it's $3.93.

And then in terms of what you might see in terms of your thesis on how things might continue throughout the year, then we have given you some indication of how that might affect our EBITDA.

Craig Shere – Tuohy Brothers

I guess what I'm asking is if it turns out to be more robust on the EBITDA side because of this issue, would that be impacting your dividend policy?

Norman Szydlowski

I don't think so. And thinking about your question, in terms of the dividends, our dividend practice for SemGroup is essentially to pass through most of those distributions from our ownership in NGL and, of course, in Rose Rock. So my first response is no. It would not affect it.

Craig Shere – Tuohy Brothers

Okay. And piggybacking on the question about the pace of drop-down, maybe you can provide some color on prospects for including a larger cash component moving forward, as Rose Rock gets more size in its own right. And is there a specific long-term retained LP ownership percentage range that you're targeting?

Robert Fitzgerald

Craig, this is Bob. As far as the cash component goes, we'll continue to evaluate the drop-downs. And we're looking the drop independently on a case-by-case basis. We are managing multiple factors when we look at our drop-downs, including the flow, the liquidity of Rose Rock units in the public markets. So that's something we take a look at. There is a desire by the SemGroup board and management team to retain our existing position of LP common units. And I think it's fair to say that at the current level we're at, which is a little bit north of 50%, that we'd continue to look at maintaining that level of position at least in the near term. And then the rest of that, we'll use our cash and debt financing to manage any drop-downs like we've done in the past.

Craig Shere – Tuohy Brothers

Great. And last question, amongst -- you've had some very interesting M&A here and there, both at the C-Corp and at Rose Rock. As you look out across your business lines, is there any particular one where you see a greater need or more opportunity for acquisitions?

Norman Szydlowski

I think it's going to continue to offer a lot of opportunities, Craig, for us, as we have in the past. We've been very careful about this. Obviously, we appreciate the price points that some of these assets are touching at present. But in our footprint, there continue to be things that we look at both in crude oil and gas, and I'll just say Mid-Continent North America. And our effort is going to continue to look at those things carefully, and if the accretiveness is correct, if the price point is correct, it's nice to have a balance sheet that's in a good position. And also, effectively, two currencies in both Rose Rock and SemGroup to be able to continue on M&A, if it's right, if it's good. But to summarize on your question, I think they will -- throughout 2014, there's going to continue to be opportunities that we'll give a close look at. And if it comes together, then we'll act as we have last -- like we did last year.

Craig Shere – Tuohy Brothers

As an addendum to that, since you mentioned the two currencies, is there an interest and do you have active discussions with in terms of partnering with your friends at NGL for acquisitions?

Norman Szydlowski

Well, I can't speculate on those kinds of things, or what potentially we might do, Craig, in that regard. But we're very pleased. Mike Krimbill and the team have done a great job building the business. And certainly, we look forward to more success from them.

Operator

Thank you. Our next question will come from the line of Will Frohnhoefer from BTIG.

William Frohnhoefer – BTIG

So I guess, a lot of the questions I was going to ask have been asked, but I also will actually once again, touch on SemCAMS. And it is good to see the progress there on the new project. I'm wondering again if you guys have been participating in or have seen more discussion of potential opportunities for natural gas export from British Columbia, and whether or not Petronas coming to the marketplace and others are making announcements, Chevron, et cetera, whether or not that has kind of increased the conversations in the Montney, Duvernay, and whether or not you guys see any opportunities potentially developing there?

Norman Szydlowski

I think for us, Will, we do see continued opportunities. It's hard for me to equate those directly to export or the [indiscernible] field, or some of the other activities going on in Kitimat and LNG export. But in the near view, for us, as you know, we are looking for the Duvernay with this new agreement with Shell to help them out with what we call the KA North. But also, looking at the Montney, we have a line that's -- we call it the Northwest Wapiti Pipeline that's operating essentially at maximum at the moment. And we're seeing more and more discussions and more and more interest in trying to loop that line again to help producers in bringing more Montney production.

So on balance, we're optimistic. We think that oil in Canada, sometimes we think it's going to move faster than it actually does. But I think overall, the future for Alberta and gas-gathering, gas-processing is really a good one. And so, for us, we're standing ready and doing some more investment, but also looking forward to more and more of this in the future.

William Frohnhoefer – BTIG

And then also, just another question I had was regarding in the storage business and then Cushing. And one of the comments that really bothered me earlier in -- and given a guidance of roughly $0.37 at the level, and then I think one of the comments that was made there was that would be exclusive of any new contract extensions. And so I'm just wondering what might officially happen there, i.e. would you give up per barrel payments in exchange for contract extension? Is that price give-up in order to get better visibility? Or exactly how do those conversations work and kind of what did that comment mean, I guess, is what I'm asking?

Peter Schwiering

Will, this is Pete. And you're exactly right. We've looked at the entire contract in terms of the amount of storage they were leasing, in terms of what tenure they wanted to increase their term, and they make a decision on pricing.

William Frohnhoefer – BTIG

Okay. That makes sense. And I guess, also, on the same point, can you guys give us any guidance or any indication right now what possibly the average life of contract is right now remaining?

Peter Schwiering

We're contracted through 2015 at a $0.37 rate for all our third-party storage in Cushing.

Operator

Thank you. Our next question will come from the line of Michael Gaiden from Robert W. Baird.

Michael Gaiden – Robert W. Baird

Can I please ask, after these stair-step changes we've seen in marketing and transportation volumes in the fourth quarter, how should we think about the outlook for growth in those two areas in 2014?

Robert Fitzgerald

When we're looking at 2014, I think the safe thing to do is with -- let me start with marketing. As I mentioned in the prepared remarks, we're expecting for at least a couple of months in the first quarter, we'll probably be a little bit higher than normal. But then beyond that, it would go back down to our kind of base normal range, which is roughly around 22,000 to 25,000 barrels a day for our marketing business. Our volumes on our transportation are higher, and the growth you see there in the last quarter, in particular, is really related to the acquisition of the trucking business, the field services trucking business. So those will continue on throughout the year.

Michael Gaiden – Robert W. Baird

Great, Bob. And can I ask, following the acquisition of Barcas, how does this inform your view about potential -- additional third-party M&A in 2014 and beyond?

Norman Szydlowski

The idea when Pete and his team helped us with the Barcas acquisition, Michael, it really does help us a lot in a couple of ways. One is our thesis about following the drill bit and our opportunities to get closer and closer with more producers, both of those are quite a strong benefit. So I think to your overall question of how this might play out in the future, I think it's very additive. And so far, the results have been very good. It allows us to get into areas where we haven't been before, and as I've mentioned, to talk to producers that we hadn't had relationships in the past. So more to come on that.

Operator

Thank you. Our next question will come from the line of Selman Akyol from Stifel.

Selman Akyol – Stifel

Just a couple of quick housekeeping questions, if I could. On your operating expenses, up pretty sharply from the third quarter, and I'm assuming that's Barcas, but is there anymore -- anything other than that?

Robert Fitzgerald

No, it really is related to the Barcas trucking costs. That's going to be continuing to flow through operating expenses. So it does have a little bit of an impact on things like gross margins because -- that you're going to see the revenues up above that and then you're going to see the operating costs below that. So you should expect to continue to see that as we report the trucking business.

Selman Akyol – Stifel

Great. And then the other question I just had was on the depreciation and amortization line, roughly $12 million for the quarter, but guidance for next year is $22 million in total. So was there something that hit the fourth quarter?

Robert Fitzgerald

Yes, there was -- we had an acceleration of depreciation in terms of a couple of smaller segment lines that we had in one of our pipeline systems, that we accelerated that depreciation because they're going to be written down and shut down in the first, second quarter of this year.

Operator

Thank you. And I'm not showing any further questions at this time. I would like to turn the call back over to Norman Szydlowski for any closing remarks.

Norman Szydlowski

Well, thank you all again for participating today and for your interest and continuing interest in SemGroup and Rose Rock. We continue to have a clear road ahead, and we know how to execute well in order to maximize value for our shareholders and we're committed to grow with the growing demand for midstream infrastructure. Thank you all, very, very much. Thank you all again.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

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