SemGroup Shares Surge On Takeover Deal By Energy Transfer

SemGroup Corporation (NYSE:SEMG) recently announced that it has entered into a $5.1-billion contract to be acquired by pipeline giant Energy Transfer (NYSE:ET) . The stock soared 61% in yesterday’s trade while units of Energy Transfer fell more than 4%.

The deal, which includes the assumption of debt and liabilities, comprises $6.80 in cash and 0.7275 units of Energy Transfer for each outstanding share of SemGroup, which also implies 40% cash and 60% equity. The transaction values SemGroup’s shares at $17, accounting for a 65% premium to the closing price prior to announcement.

The buyout agreement is expected to unlock significant value for shareholders of the combined entity, generating anticipated annual run-rate synergies of approximately $170 million consisting of $80 million of commercial and operational synergies, $50 million of financial savings and $40 million of Expense savings.

For the oil and natural gas midstream company in particular, the transaction is a win-win proposition for its shareholders in which they receive a substantial premium and get the opportunity to participate in one of the biggest midstream operators in the country with access to all major U.S. production basins.

The merger, if successful, will boost Energy Transfer’s crude oil shipping and export prospects with the inclusion of the Houston Fuel Oil Terminal having 18.2 million barrels of crude oil storage capacity. The acquisition deal will also augment this Dallas, TX-based partnership’s energy infrastructure system by adding SemGroup’s crude gathering facilities to Colorado’s DJ Basin and Oklahoma’s Anadarko Basin. Moreover, this takeover will bring the oil and NGL pipelines between DJ and Anadarko Basins together with crude oil terminals in Cushing, OK.

However, the stock’s dip on a day when share prices of most energy players spiked following an attack on Saudi Arabia's oil production facilities is noteworthy and is indicative of the pressure from unitholders on capital discipline.

The pact is expected to be completed by this year-end or early next year, subject to customary conditions. Upon the contract’s closure, SemGroup shareholders are predicted to hold nearly 2.2% of Energy Transfer’s outstanding common units.

Zacks Rank & Key Picks

SemGroup carries a Zacks Rank #3 (Hold). Better-ranked players in the energy space include BP (LON:BP) Midstream Partners (NYSE:BPMP) and Dril-Quip, Inc. (NYSE:DRQ) , each carrying a Zacks Rank #2 (Buy). You can the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BP Midstream’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters.

Dril-Quip earnings beat the Zacks Consensus Estimate in three of the previous four quarters.

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