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RRMS: Is Organic Spending and Distribution Growth Potential Enough?

11/03/2015 9:18 am EST

Focus: MLPS

Michael Berger

President & Founder,

Given that this MLP could generate a distribution growth of at least 15% in 2016 and 2017, Michael Berger, of, believes that it is undervalued at current levels and sees significant upside potential.

The master limited partnership (MLP) sector has seen heavy weakness due to the weak oil price environment and this has scared a lot of investors out of the market. The Alerian MLP Index (AMZ) is comprised of a diversified group of 50 MLPs and it is often used to measure the strength of the industry. During 2015, the index has substantially underperformed the broader equity market, declining 27.3%, relative to a 2.1% gain in the S&P 500 (SPX).

While commodity price volatility should continue to act as a headwind, we recommend incorporating MLPs into any diversified portfolio. Although the MLP industry is risky, investors can find value in many partnerships. MLPs are able to create value and grow in very unique ways.

Asset Dropdowns Create Growth Opportunities

A unique growth opportunity for MLPs is through asset dropdowns from its general partner (GP). In a dropdown transaction, the MLP’s general partner transfers assets or ownership interests to the MLP. The consideration for these assets is typically cash, equity, or a combination of both.

We view asset dropdown transactions as catalysts for MLPs. Rose Rock Midstream (RRMS) is an MLP that we have been following closely and possesses this catalyst. We view RRMS as an attractive long-term investment opportunity due to the following:

  • Strategically-located, predominantly fee-based (more than 80%), crude oil logistics-focused asset base
  • Visible growth trajectory and sizeable dropdown backlog
  • Strong balance sheet
  • Mutually beneficial relationship with its general partner, SemGroup Corporation (SEMG)

Our positive view of RRMS stems from its positive relationship with its general partner who continues to execute on its own organic growth initiatives and dropdown strategy. One of the catalysts for both SEMG and RRMS is the transitioning of SEMG from a hybrid operating/general partner holding company to a pure-play general partner holding company.

Organic and Inorganic Growth Potential

We expect to see RRMS grow through both organic and inorganic initiatives. Its growth potential is supported by organic growth initiatives as well as asset dropdowns from SEMG. RRMS is not only deploying a lot of capital toward the development of diverse cash flow streams that generate above average returns, but growth spending at the general partner level is set to help RRMS grow inorganically via dropdown transactions.

In terms of dropdowns, we expect SEMG to drop SemGas down to Rose Rock in late 2015/early 2016. We also expect to see SEMG drop Maurepas down to RRMS in late 2016.

Significant Distribution Growth Potential

Continued execution on organic growth initiatives, coupled with large asset dropdowns positions RRMS to post attractive distribution growth rates over the next several years.

We think RRMS could generate a distribution growth of at least 15% in 2016 and 2017 just through organic spending and growth of the base business.

With these positive characteristics, we believe that RRMS is undervalued at current levels and see significant upside potential.

Michael Berger, Founder and President,

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