This analysis of Rose Rock Midstream (RRMS) was provided to TradingIPOs subscribers in advance of its IPO. On December 8, 2011 the company announced that its initial public offering of 7 million shares was priced at $20 per share.
Rose Rock Midstream (RRMS) plans on offering 8.05 million units at a range of $19-$21. Barclays (BCS), Citi (C) and Deutsche Bank (DB) are leading the deal, 8 firms are co-managing. Post-IPO, RRMS will have 17.12 total units outstanding for a market cap of $342 million on a pricing of $20. Parent SemGroup(SEMG) will receive all IPO proceeds in consideration for intial assets. SEMG will use the IPO proceeds to repay debt.
SemGroup (SEMG) will own all non-floated units as well the general partnership. Note that the former CEO of SEMG bankrupted the company in 2008 by essentially gambling in the oil futures market. The RRMS assets were also part of the assets that the former SemGroup IPO'd in 2007 as SemGroup Energy Partners. Somehow, the former CEO of SemGroup has never been charged with a criminal act and settled with the SEC for just a $250,000 fine. Civil suits are due to begin trial in 2012.
The assets of RRMS are protected post-bankruptcy from any civil damages. SEMG set aside money for additional claims and believes that reserve is sufficient as most claims have been settled either by cash or a stake in the post-bankruptcy SEMG. SEMG's financial footing is pretty solid here heading into 2012 with just $200- $250 million in total debt once RRMS IPO proceeds are booked.
The takeaway: While SEMG (and RRMS assets) went into bankruptcy in 2008, it had nothing to do with the assets or the business. The former CEO gambled that oil prices would fall, by leveraging the assets of the two public entities. He was early and bankrupted the company. SEMG is now run by a different team post bankruptcy. In my opinion, the former CEO should be in jail for failing to disclose that he was leveraging the public companies in his futures trading. Apparently, a $250,000 fine was all he received for bankrupting shareholders of two solid public companies.
RRMS is in a similar business to 2011 IPOs TLLP and OILT. As of this writing, each of those is among the strongest of the 2011 IPOs performance-wise, making new highs the Friday before this piece was written. Those two companies both have strong parents and minimal debtload. We shall see below how RRMS compares. This has been a strong niche in 2011, and really over the past decade as well.
Distribution: RRMS plans on distributing $0.3625 quarterly, $1.45 annually. On an annualized basis, RRMS would yield 7.25% on a $20 pricing.
Here is a quick look at similar public companies. Note that all are at or near 52 week highs currently. Again, this has been a very good spot to be in 2011. All the media attention has been focused on the online IPOs in 2011, while TLLP/OILT have quietly made investors money while paying a healthy yield as well.
SXL - 4.8% yield. $2.85 billion market cap, $1.2 billion debt.
TLLP - 4.7% yield, good balance sheet.
PAA - 6.10% yield, lot of debt.
HEP - 6.5% yield, average debt.
OILT - 4.7% yield at $20, below average debt for group
Assuming the balance sheet is solid and cash is sufficient to pay yield and capex, RRMS at a 7.25% yield in a strongly performing sector is a strong recommend. A 'no brainer' recommend, actually, as the two similar IPOs this year pay roughly the same distribution as planned by RRMS and now yield much lower thanks to price appreciation.
Note also that Plains All American Pipeline (PAA) made an unsolicited bid for SEMG in 10/11 at $24 a share. That bid includes the assets of RRMS. SEMG rejected the bid as 'under market'. SEMG currently trades at $26 a share.
This is a 'hot sector' that's about as under the radar as you can get.
From the prospectus:
We are a growth-oriented Delaware limited partnership recently formed by SemGroup to own, operate, develop and acquire a diversified portfolio of midstream energy assets.
100% oil focused. Oil gathering, transportation, storage and marketing in Colorado, Kansas, Montana, North Dakota, Oklahoma and Texas.
Involved in the Bakken Shale in ND/MT, the Rocky Mountain Region and the Granite Wash and Mississippian formations in TX/OK/KS
Assets: Cushing storage- Storage terminal in Cushing with 5 million barrels of oil storage capacity. 95% is committed under long term contracts. RRMS is currently constructing additional facilities for 1.95 in additional storage capacity which will come online in 2012. Note that Cushing is the designated point of delivery specified in all NYMEX crude oil futures contracts and is one of the largest crude oil marketing hubs in the United States.
KS/OK Pipelines and storage - 640 mile pipeline system and 670,000 storage capacity. Pipelines deliver to RRMS Cushing storage facility.
Bakken Shale - Gathering, storage and transportation business in ND/MT. Small, 6,200 barrels per day.
Platteville - Truck unloading facility in CO. 31,600 barrels per day throughput in 2011.
Note that 75% of RRMS adjusted gross margins come from fee based/fixed margin transactions which means minimal oil price risk 3/4 of operations. Of some concern here is that 25% of gross margins come from oil marketing activities. All well and good assuming RRMS does not get carried away and get in trouble heavily long or short oil contracts at the wrong time.
Growth - The Cushing addition of 1.95 barrel capacity will grow RRMS operations there by 40%. In addition RRMS has plans to increase capacity in their other operations as well. Expect a dropdown or two from parent SEMG too.
Customers include Sunoco (SUN) (25% of revenues), Gavilon, and Parnon.
RRMS plans on borrowing to fund their storage expansion in Cushing and elsewhere. At the end of 2012, RRMS will have approximately $35 million in debt solid balance sheet overall.
2011 - $400 million in revenues. 5% operating margins, $1.16 EPS.
Cash flows are all that matter with these type deals. RRMS forecasts for the 12 months ending 12/31/12: Revenues of $427 million. Note that normally we like to see cash flows sufficient to pay distributions as well as maintenance and expansion capex. In this case, the balance sheet on IPO is clean and expansion capex is going directly to grow the Cushing storage capacity by 40%. In effect it is akin to borrowing the fund an acquisition and even so RRMS will have a solid balance sheet by end of 2012. If we roll out the $33 million in expansion capex, RRMS is forecasting coverage of 110% for the 12 months ending 12/31/12. This includes all maintenance capex as well.
At the end of 2012, the additional 40% expansion in Cushing should be online and paid for by the $33 million in expected 2012 borrowings. All in all pretty solid. Keep an eye on 2013 expected expansion capex as it should be relatively small compared to 2012. with the additional capacity, 2013 should see sufficient cash flows to pay distributions and all capex.
Conclusion - Solid deal in an under the radar 'hot sector'. Balance sheet is pristine on IPO which allows RRMS to add some debt to grow capacity and revenues by the end of 2012. 7.25% yield in a strong sector is very attractive. May be a sleeper due to stigma of a bankruptcy just three years prior. That bankruptcy, though, had nothing to do with the performance of these assets and everything to do with gambling in the future market of a previous CEO. Easy recommend here.
Not as strong as OILT/TLLP. Those two have much better parents and their business is embedded into a strong parent operation. However at 7 1/4% annual yield compared to 4.7% for OILT/TLLP, there is plenty of room here for appreciation from $20 to still be valued in-line with the other companies. Should pay a higher yield than OILT/TLLP but not this large a spread.