Energy Transfer LP agreed on Sept. 16 to acquire SemGroup Corp. in a multibillion-dollar acquisition that analysts claim “flies in the face” of recent messaging from the Dallas-based midstream company.

In a release, Energy Transfer said it offered a sizable premium to acquire the Tulsa, Okla.-based company in a $5.1 billion cash and stock deal that includes the assumption of $5 billion of debt. According to the company release, the transaction values SemGroup at $17 per share, representing a 65% premium to its closing share price on Sept. 13.

Though both companies justified the transaction with over $170 million of expected annual synergies, analysts with Tudor, Pickering, Holt & Co. (TPH) called the SempGroup acquisition a setback for Energy Transfer.

“No way around it, [the SemGroup] acquisition this morning represents a sharp reversal from recent messaging on portfolio management, capital discipline and accelerated deleveraging,” TPH analysts wrote in a research note on Sept. 16. “While [Energy Transfer’s] valuation has screened attractively, we saw deleveraging and continued improvements in messaging around governance as the key gating events to attracting incremental capital.”

The analysts noted progress seen in the third-quarter as Energy Transfer had reduced 2019 capital spend and indicated a willingness to evaluate asset sales.

Energy Transfer owns and operates one of the largest and most diversified portfolios of energy assets in the U.S., with a strategic footprint in all of the major domestic production basins.

The company said it expects the acquisition of SemGroup will increase its scale across multiple regions and provide increased connectivity for Energy Transfer’s crude oil and NGL transportation businesses. SemGroup’s key areas of operation and growth include western Canada, the Midcontinent and the Gulf Coast.

In particular, Energy Transfer said the SemGroup acquisition will significantly strengthen its crude oil transportation, terminalling and export capabilities with the addition of the Houston Fuel Oil Terminal (HFOTCO), a crude oil terminal on the Houston Ship Channel with 18.2 million barrels of crude oil storage capacity, five deepwater ship docks and seven barge docks.

To enhance this optionality, Energy Transfer also launched plans on Sept. 16 to construct a new crude oil pipeline, the Ted Collins Pipeline, to connect HFOTCO to Energy Transfer’s Nederland Terminal.

“While [the SemGroup] acquisition offers potential for Gulf Coast terminal integration, we view the deal as a step back for the [Energy Transfer] rerate story,” concluded TPH analysts in the firm’s note.

Energy Transfer and SemGroup complementary assets. (Source: Business Wire)
Energy Transfer and SemGroup complementary assets. (Source: Business Wire)

Energy Transfer noted that the transaction will increase the company’s portion of fee-based cash flows from fixed-fee contracts and is expected to be immediately accretive to distributable cash flow per common unit. Also, beyond the equity issued for the transaction, no common equity issuances are expected, according to the company release.

Per the acquisition agreement, SemGroup shareholders will receive $6.80 in cash and 0.7275 of an Energy Transfer common unit for each SemGroup share. The transaction is comprised of 40% cash and 60% equity and assumes the assumption of about $5 billion of debt.

In a separate release, SemGroup CEO Carlin Conner commented on the transaction saying the deal underscores the strength of SemGroup’s assets as the company had been searching for ways to increase shareholder value.

“SemGroup has been exploring a range of strategic alternatives aimed at increasing shareholder value, and determined that this combination with [Energy Transfer] is in the best interests of shareholders—providing immediate value, a significant premium, and opportunity to participate in the future upside of the combined business,” Conner said in a statement on Sept. 16.

Upon closing, expected in late 2019 or early 2020, SemGroup stockholders are projected to own about 2.2% of Energy Transfer’s outstanding common units.

Jefferies LLC was exclusive financial adviser to SemGroup for the transaction and Kirkland & Ellis LLP acted as its legal counsel. BofA Merrill Lynch acted was exclusive financial adviser to Energy Transfer and Latham & Watkins LLP was its legal counsel.