According to a filing with the SEC, Lone Pine Capital has acquired a total of 2.2 million shares of SemGroup Corp (NYSE:SEMG), an oil and gas pipeline and storage company with a market capitalization of $1.6 billion. Our database of 13F filings shows that Lone Pine had not owned any of the company’s stock at the end of June, so this was a relatively recent decision by the hedge fund to get involved in the stock. Lone Pine is managed by billionaire Stephen Mandel, who previously worked at Julian Robertson’s Tiger Management, and has about $17 billion in AUM. See Lone Pine’s favorite stocks from the second quarter.
In SemGroup’s report for the second quarter of 2012, it announced revenue figures that were slightly down from the second quarter of 2011. Because the company’s interest expenses were down, however, it turned a $12 million net loss from a year ago into $7 million in net income (comprehensive income did remain negative). For the first half of the year, SemGroup Corp reported 9 cents in earnings per share partly because of a bad Q1; despite improvement in the bottom line, cash flow from operations was down due to changes in operating assets and liabilities. The stock currently trades at 26 times forward earnings estimates, as Wall Street analysts predict that its business will do considerably better in 2013. There is certainly some opportunity for growth as continuing drilling activity in the U.S.- where SemGroup does most of its business- must be matched by accompanying midstream infrastructure, but we’re wary of seeing quite this much dependence on improved earnings.
At the end of June, Doug Silverman’s Senator Investment Group reported a position of 2.5 million shares of SemGroup Corp in its 13F portfolio; this was a 23% increase from what that hedge fund had owned at the beginning of April (find more stock picks from Senator Investment Group). Third Avenue Management, which is managed by Marty Whitman, increased its stake slightly to a total of 1.5 million shares (research more stocks that Third Avenue has been buying).
Other pipeline companies in the same size range as SemGroup (between $1 billion and $3 billion of market cap) include Copano Energy, L.L.C. (NASDAQ:CPNO), Genesis Energy, L.P. (NYSE:GEL), Atlas Pipeline Partners, L.P. (NYSE:APL), and Tesoro Logistics LP (NYSE:TLLP). Of these four peers, Atlas and Tesoro have forward P/E multiples in the high teens. Atlas’s third quarter results are in- that company had its revenue decline 21% versus a year earlier, and once again underperformed earnings expectations- while Tesoro’s second quarter was characterized by much higher numbers in both sales and net income. With Tesoro also having a relatively low trailing earnings multiple as well, at 20, we’d watch to see how the last quarter looked for it. Copano and Genesis carry forward P/Es of 32 and 24, respectively; Copano’s business was down in the second quarter compared to the same period in 2011, while Genesis saw modest increased in revenue and earnings. As a result Genesis might be a good pipeline stock to follow as well. All four of these peers have high dividend yields: Tesoro is the only one paying below 5.5% at current prices, with a yield of 4.2%, and Copano pays a very generous 7.4% to investors. As such these companies would be good for an income investor to take a closer look at (though we would note that their betas are often around 1 or even considerably greater).
We think that there might be better opportunities in the pipeline industry than following Lone Pine into SemGroup. Genesis and Tesoro look like relatively better buys than their peers, though their valuations are still quite high and we’d probably only recommend them if an investor places considerable weight on dividend payments.