Kelcy Warren Misses Out on Oil Rally as Investors Punish Deal
Energy Transfer Is Back to Dealmaking With SemGroup Buy
(Bloomberg) -- On a day when the biggest oil rally in more than a decade boosted most U.S. energy stocks, billionaire Kelcy Warren’s plan to acquire a rival wiped out $1.5 billion of his pipeline giant’s market value.
Energy Transfer LP’s announcement Monday that it agreed to purchase SemGroup Corp. sent the buyer’s units falling the most in a month. Energy investors have been increasingly restive with anything short of strict financial discipline.
The $17-a-share offer represents a 65% premium to SemGroup’s closing price Friday, according to a statement. The value of the $1.35 billion cash-and-stock deal rises to $5 billion with the inclusion of debt. SemGroup soared 61% on Monday while its suitor fell 4.2%.
For deal-hungry Warren, the transaction is his latest run at a consolidation spree that included last year’s pursuit of NuStar GP Holdings LLC, which fizzled when the target rebuffed the approach.
Energy Transfer was one of the only pipeline operators to fall on a day when oil prices surged the most in a decade after an attack at a Saudi Arabian crude-processing facility.
The “acquisition this morning represents a sharp reversal from recent messaging on portfolio management, capital discipline and accelerated deleveraging,” Tudor Pickering Holt & Co. analysts said in a note to clients.
Investors have been similarly harsh on other notable energy deals this year. Occidental Petroleum Corp. and Callon Petroleum Co. plunged after announcing deals to buy Anadarko Petroleum Corp. and Carrizo Oil & Gas Inc., respectively.
Both buyers now have disgruntled billionaires knocking at the door: Carl Icahn is pushing Occidental to sell the combined company, while John Paulson is urging Callon to scrap the deal and put itself up for sale.
Energy Transfer is unlikely to draw an activist investor given its structure as a master limited partnership, a model employed by many pipeline companies that shields investors from certain taxes but also comes with fewer rights for common unitholders.
Not all analysts disliked the SemGroup deal. While Sanford C. Bernstein’s research team said investors will likely be “disappointed,” analysts led by Jean Ann Salisbury said they “don’t see this deal as a disaster” because $170 million in cost savings Energy Transfer is eyeing are “doable.”
‘A Lot of Frogs’
Warren -- who built his empire scooping up small pipeline companies as the shale boom exploded -- first signaled he could resume buying in August 2018. That was just eight days after the company announced a streamlining move in part meant to improve stock performance.
“We kiss a lot of frogs looking for a prince,” Warren said on a conference call in November. “We are working it hard. I will tell you, though, we are not finding any deals.”
Dealmaking has been a touchy subject for Warren ever since Energy Transfer walked away from a $33 billion agreement to buy Williams Cos., which would have been its biggest acquisition yet.
SemGroup’s crude and products terminal on the Houston Ship Channel is likely the driver behind Energy Transfer’s decision to buy the company, Wells Fargo Securities’ Michael Blum said in a note Monday. Still, “many of the other assets don’t seem to fit ET’s footprint and are of lower quality and we wouldn’t be surprised to see ET divest some of the assets,” he said.
Energy Transfer is already looking to sell a 33% stake in its Rover pipeline that carries Appalachian natural gas to customers across the Midwest, people familiar with the matter said in July.
“From ‘30,000 feet,’ in a market where investors are pushing companies to reduce spending and leverage and increase free cash flow, we’re not sure the optics of this deal will be met with enthusiasm,” Blum wrote of the SemGroup acquisition.
No Call
Energy Transfer is likely to “face investor scrutiny around the asset mix and the merits of the transaction, though at first glance, it passes our litmus test on accretion,” Citigroup Inc. analyst Timm Schneider wrote in a note to clients.
“We wish we could ask some questions, but there is no conference call,” Schneider said.
While Energy Transfer is offering a big takeover premium, Tulsa-based SemGroup has seen its stock fall by more than half in the last year. The company had previously worked with an adviser on alternative options to raise capital, people familiar with the matter said earlier this year.
For SemGroup, the deal offers “a nice exit ramp for the company following a strategic review that could have gone in many directions,” Wells Fargo’s Blum said.
Jefferies LLC acted as exclusive financial adviser to SemGroup, while Bank of America Merrill Lynch advised Energy Transfer.
To contact the reporter on this story: Rachel Adams-Heard in Houston at radamsheard@bloomberg.net
To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Joe Carroll
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