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September 16, 2019 2:45 PM, EDT

Energy Transfer Is Back to Dealmaking With SemGroup Buy

Pipelines in Oklahoma Pipelines run near oil storage tanks at the Enbridge Inc. Cushing storage terminal in Cushing, Okla., in 2015. (Daniel Acker/Bloomberg News)

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U.S. pipeline giant Energy Transfer agreed to acquire rival operator SemGroup Corp. for about $1.35 billion in a stock and cash deal, building out billionaire Kelcy Warren’s empire even as investors demand financial discipline.

Energy Transfer is buying SemGroup for $17 a share, 65% higher than SemGroup’s closing price Friday, according to a statement. It’s the latest consolidation move by deal-hungry Warren, who last year made a run at NuStar GP Holdings but was rejected when the target company said it was sticking to a plan to simplify its corporate structure.

Energy Transfer shares fell as much as 4.4% on a day when peers rose after an attack at a Saudi Arabian crude-processing facility sent oil prices surging. Despite comments last year that Warren was on the hunt for deals, some analysts said the move came as a surprise given the company’s low stock price and efforts to cut debt.

Sharp Reversal

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.

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.

Warren — who built his empire scooping up small pipeline companies as the shale boom exploded — first signaled he could soon get back to buying in August of last year. 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.”

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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.

“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.

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.

Pipeline developers have struggled to raise funding in the capital markets following the oil-price collapse that began in 2014. The industry also was hammered by a change in U.S. tax policy that affected crude and natural gas companies structured as master limited partnerships.

The total acquisition value including debt is about $5 billion, according to the statement. Jefferies acted as exclusive financial adviser to SemGroup, while Bank of America Merrill Lynch advised Energy Transfer.

While Energy Transfer is offering a big takeover premium, Tulsa-based SemGroup has seen its stock fall by more than half in the past year. The company had previously worked with an adviser on alternative options to raise capital, people familiar with the matter said earlier this year.

SemGroup rose as much as 65% on Monday morning. “This is a nice exit ramp for the company following a strategic review that could have gone in many directions,” Wells Fargo’s Blum said.

The agreement comes as Energy Transfer looks 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.