Rose Rock Midstream, L.P. (RRMS)

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Rose Rock Midstream, L.P. (RRMS)

Q1 2013 Earnings Conference Call

May 9, 2013 11:00 ET

Executives

Alisa Perkins - Investor Relations

Norman Szydlowski - Chief Executive Officer

Bob Fitzgerald - Chief Financial Officer

Peter Schwiering - Chief Operating Officer

Analysts

Brain Zarahn - Barclays

Brad Olsen - Tudor Pickering

Curt Launer - Deutsche Bank

Will Frohnhoefer - BTIG

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the SemGroup Corporation and Rose Rock Midstream First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Alisa Perkins. Please go ahead.

Alisa Perkins

Thank you for joining us today. The presentation for today’s call is available under the Investor Relations section of our website at semgroupcorp.com and rrmidstream.com.

Before we begin our prepared remarks, I would like to bring your attention to slides 2 and 3 for certain disclaimers and other cautionary statements, as remarks within our presentation may contain forward-looking statements. Also included in the presentation are various non-GAAP financial measures, such as adjusted gross margin, EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP financial measure are included in the presentation and can also be found on our website.

With that, let me turn the call over to Norm Szydlowski, our Chief Executive Officer.

Norman Szydlowski

Thanks Alisa. In addition to Alisa, I am joined by Bob Fitzgerald, our Chief Financial Officer and Pete Schwiering, Chief Operating Officer for Rose Rock Midstream.

Before I talk about first quarter results, let me address a couple of recent events. On growth opportunities, we announced a proposed agreement to acquire Chesapeake’s gas-gathering and processing assets in the Mississippi Lime play. These assets are strategically situated for exceptional growth and will nearly triple our presence in the Mississippi play, while adding to our inventory of potential dropdowns for Rose Rock. The assets include 200 miles of gathering pipeline that are in service today and they will ultimately include 400 million cubic feet per day in cryogenic processing. The first 200 million cubic feet per day plant is expected to come online in the first quarter of 2014. This plant will be in Woods County, where our Northern Oklahoma Hopeton plant is, and we anticipate connecting the plants to gain operating efficiencies and flexibility. The second 200 million cubic feet per day plant also in the same county is committed to the manufacturer and is expected to come online in the first quarter of 2016. We expect to spend approximately $125 million of capital for the completion of the two plants.

Additional capital will be required for future well connects. The plants and gathering systems are supported by approximately 540,000 net acre dedication in the core of the Mississippi Lime play and Chesapeake Energy is committed to a 20-year 100% fee-based gathering and processing agreement. We agreed to pay $300 million plus make the future capital investments associated with the build-out of these assets. And we will use the SemGroup credit facility to fund the acquisition. We anticipate closing by the third quarter this year. And at that time, we will be able to give you additional detail on the transaction.

Although we won’t be providing specifics today on the growth profile, future EBITDA generation and the multiple to be paid to these assets is expected to be comparable to the results from our SemGas 125 million cubic feet per day plant once the build out is completed and the anticipated volumes are flowing through plants. This proposed acquisition will make us one of the largest processors in the Mississippi Lime, and we are very excited about the future growth in this highly attractive celebrity oil and gas play.

On beginning dividend payments, SemGroup’s Board of Directors declared the first quarterly cash dividend to common shareholders of $0.19 per share to be paid May 30, 2013. The company is targeting a 10% increase in dividends paid in 2013 and anticipates an annual growth rate of double-digits for the next three years. This dividend complements our continued growth story and is an important part of our commitment to return value to our shareholders. It reflects our desire to pay out the distributions from Rose Rock Midstream and NGL Energy Partners, adjusted for tax obligations.

SemGroup and Rose Rock were off to a solid start. For 2013, we are right on track with the execution of our strategic plan. However for the first quarter, we have mixed financial results. SemGroup’s adjusted EBITDA for the first quarter was $35.5 million. Rose Rock reported adjusted EBITDA of $16.4 million. Crude results were better than expected but offset by lower performance in the SemCAMS and SemMexico units and Bob will cover that in more detail. Our guidance for SemGroup’s full year earnings remains unchanged at $165 million to $175 million of adjusted EBITDA which does not include any contribution from the proposed Chesapeake acquisition.

We also continued to be on track with capital spending. The White Cliffs Pipeline expansion is on schedule with pipe delivery starting last month. The Healy de-bottlenecking project has experienced some equipment delay and is now expected to be completed in June. Pipe is currently being laid in Colorado for the Wattenberg Oil Trunkline which is on schedule for completion in the fourth quarter. Tanks are being erected along the Glass Mountain Pipeline route. The pipe is being delivered to the construction sites and will begin construction on a new project for two unloading facilities next month. The truck unloading facilities will be located at Alva and Arnett, Oklahoma the origin points for the Glass Mountain Pipeline. These unloading facilities will come online in the fourth quarter when the pipeline is completed.

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