Rose Rock to Buy Transportation Assets - Analyst Blog

Rose Rock Midstream, L.P. RRMS continues to pursue a steady inorganic growth strategy to expand its operations. The partnership has inked an agreement with a unit of Chesapeake Energy Corporation CHK to acquire crude oil trucking assets. The transaction is expected to close in second-quarter 2014, subject to conditions.

Per the agreement, Rose Rock Midstream will acquire several assets located in Ohio, Oklahoma and Texas, including 124 trucks, 122 trailers and various other equipment. The partnership will also add around 200 employees. Notably, the terms of the agreement will be calculated at market rates with Chesapeake Energy's subsidiary Chesapeake Energy Marketing, Inc.

If approved, the latest acquisition will help Rose Rock Midstream increase its operating truck count to over 250 and employee base will stand at around 350. The transaction will also allow the partnership to enjoy the benefits of Chesapeake Energy's service agreements.

Rose Rock Midstream is a wholly-owned subsidiary of SemGroup Corporation SEMG with assets across several mineral-rich territories such as Eagle Ford Shale, Bakken Shale and Permian Basin. Upstream firms including Murphy Oil Corporation MUR and its peers are actively drilling in these regions. The exploration and production activities to uncover more reserves are expected to increase in the future.

We note that Rose Rock Midstream's transportation volume in first-quarter 2014 increased sequentially as well as year over year. Considering the current scenario, we view the proposed acquisition as a positive move for the partnership's future growth. Subsequently, the transaction will enable Rose Rock Midstream to meet increasing service demand from the exploration and production companies.

It is evident from past records that Rose Rock Midstream follows a strategic acquisition program. The partnership generally takes over assets with similar lines of operations, which prove accretive immediately. In keeping with this, Rose Rock Midstream's previous acquisitions have strengthened its core offerings.

In 2013, Rose Rock Midstream completed several inorganic transactions, including acquisitions of additional interest in White Cliffs Pipeline from SemGroup and transportation assets from Barcas Field Services. In first-quarter 2014, the acquisition of White Cliffs Pipeline provided $13.6 million as cash distributions to Rose Rock Midstream.

Rose Rock Midstream continues to maintain a strong cash generation capacity. In the first three months of 2014, the partnership's cash flow from operating activities increased to $18.4 million from $9.9 million in the year-ago comparable period. As of Mar 31, 2014, the partnership had total liquidity of $301 million, including cash balance of around $3 million and revolver availability valued $298 million. A favorable financial position backed by stable cash generation capacity supports Rose Rock Midstream's disciplined investment in inorganic growth ventures.

Rose Rock Midstream currently has a Zacks Rank #3 (Hold).