(By Balaseshan S) Deutsche Bank analyst Curt Launer upgraded his rating on shares of SemGroup Corp. (NYSE:SEMG) to "Buy" from "Hold" and increased his price target to $36 from $33.
Yesterday, Plains All American Pipeline L.P. (NYSE:PAA) announced that it had notified SEMG management that it was withdrawing its long-standing $24 per share bid to purchase SEMG.
Launer has long regarded the bid as inadequate to the value of SEMG, which hasn't traded below $24 since the bid was made, but adopted a cautionary stance with the view that SEMG's share price had to catch up fundamentally to the speculative valuation it received.
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The analyst believes that recent developments for SEMG in terms of its Cushing storage expansion and the potential for growth with its White Cliffs pipeline show that fundamentals at SEMG have supplanted the speculative interest to support the current valuation and an upside to the future.
With an enhanced view of SEMG fundamentals and the performance of its 60% owned MLP Rose Rock Midstream L.P. (NYSE:RRMS) the analyst upgraded his rating and increased price target.
Launer raised his estimate of White Cliffs' EBITDA to $49 million from $29 million in 2013 driven by increased White Cliffs volumes. SEMG owns 51% of the White Cliffs pipeline, the only major pipeline to transport oil from the rapidly growing Niobrara and Wattenberg oil fields to Cushing.
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While the White Cliffs capacity was increased from 30,000 barrels per day to 70,000, the oil supply behind it, fueled by the increased drilling by Anadarko Petroleum Corp. (NYSE:APC), Noble Energy (NYSE:NBL) and others continues to expand.
SEMG is currently considering options including additional pumping capacity and "twinning" the line to double or triple its capacity and the analyst expects to hear more about the ongoing contract negotiations when SEMG reports Q1-2012 earnings on May 9.
Launer values SemGroup's interest in RRMS at $8.00/share and the stand-alone crude oil related business value to $13.70/share based on incremental EBITDA from the White Cliffs expansion.
The analyst values the SEMG its interest in NGL Partners at $4.80/share, and its gas gathering and processing operations at $3.60/share, the sour gas gathering and processing facilities are valued at $9.35 per share.
Launer said his overall valuation is reduced by about $3/share for other operations and corporate overhead. The risk for SEMG is mostly related to the potential for lower oil prices to impact storage rates at Cushing or drilling activity in the Niobrara.
SEMG is trading up 1.91% at $30.47 on Wednesday.