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What you need to know about Shell Midstream Partners IPO

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Investors have been awaiting Shell’s launch of their midstream master limited partnership, which is expected to price on October 28th.  Shell Midstream Partners (SHLX)  has indicated pricing between  $19-$21 with a target midpoint yield of 3.25% and 37,500,000 units offered to the public.  SHLX will be majority controlled by Shell Pipeline Company LP,  a subsidiary of Royal Dutch Shell.

 

Why has the market been so interested in this offering?  Shell has some of most desirable onshore and offshore pipelines across the United States and Gulf of Mexico, with many new projects to increase capacity.  Shell operates 7 tank farms across the U.S and transports more than 1.5 billion barrels of crude oil and refined products annually through 3800 pipeline miles across the Gulf of Mexico and 5 states.  Shell also has interests in various non-operated assets which add an additional 8000 pipeline miles to their midstream network.    As a result, Shell Midstream will have access to the largest set of EBITDA  inventory ($1.5B) in the industry, providing long term investors with an opportunity to receive high growth income and unit appreciation, with minimal event risk, such as a GP or LP sale which could trigger an undesirable tax event.  Shell Midstream Partner’s peer group will include Valero Partners (VLP), MPLX LP (MPLX) and Phillips 66 Partners (PSXP), which all share high coverage ratios, low yields, and double digit distribution growth expectations.

 

 

 

 

Current Assets

 

Shell Midstream will have minority ownership interests across four midstream assets

 

Zydeco/Ho-Ho Pipeline:  43% interest in Houston to Houma 350 mile crude pipeline situated in the largest refining market in the US. 87% contracted with an average remaining term of 8 years

 

Mars Pipeline – 28.6% interest in Gulf of Mexico offshore pipeline which exclusively handles 55% of shipper volumes.  Pipeline originates 130 miles offshore and terminates at salt dome caverns in Clovelly, Louisiana

 

Bengal – 49% interest in refined products pipeline connecting four refineries in LA to long haul transportation pipelines.  67% of capacity contracted for average remaining term of 2.5 years

 

Colonial -  1.612% interest in refined products pipeline, which transports over 40 different refined products and over 100MM gallons per day to the East Coast across 5500 miles of pipeline.  This pipeline provides the east coast with 50% of the refined products consumed in the region.  Shipper terms are confidential.

 

The above assets will generate the  minimum quarterly distribution of .65/unit per the following allocations

 

 

The expansion of the Ho-Ho and Mars pipeline will provide organic EBITDA growth in 2015 and 2016 as demand for pipeline capacity expands in both the offshore Gulf market as well as planned storage in Houston seeking demand outlets. 

 

Drop Down Assets

 

Apart from increasing the ownership interests in the existing asset set, Shell Pipeline Company (SPLC) has additional assets which generate approximately $1B of EBITDA, while another $500MM of midstream assets could be dropped down into Shell Midstream, for an aggregate value of $15B, assuming a 10x EBITDA multiple.   Shell’s drop down inventory is larger than that of it’s peer group, which all launched their MLPs in 2013.  The list of potential drop down assets are listed below

 

 

While it is speculative to assume when drop downs will occur to generate distribution growth, Sponsors have been shortening the window for drop downs into newly launched MLP vehicles.  As an example, here are PSXP’s transactions since their listing date of July 23, 2013

 

07/23/14      $300MM Public IPO

02/14/14     $700MM drop down

10/22/14     $330MM drop down

 

The estimated distribution growth rate for PSXP is 20%, which has been supported by the dropdowns to date.  Market conditions will dictate the pace and timing of the dropdowns, but Shell Midstream is expected to manage to a similar +20% CAGR distribution growth rate.

 

Conclusion

 

Shell Midstream will be most attractive to total return investors given their expected 2% yield and +20% growth rate.  We expect units to open trading around $30/unit and trade higher on strong institutional and retail demand.  Such demand may lead to a rotation (and buy opportunity) out of peer group alternatives such as VLP, PSXP and MPLX, which have similar growth and EBITDA inventory profiles.  Although Shell Midstream will be a core holding to a diversified MLP portfolio, investors should be careful to avoid paying a premium to wait for growth in 2016 and beyond.

 

 

 

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