For many energy firms, unlocking shareholder value has been done with three little letters — MLP. Master limited partnerships allow sponsoring firms to avoid taxes on certain midstream and infrastructure assets, while still getting big-time profits from these operations via cash distributions. That tax avoidance and hefty payouts has energy firms from a variety of oil & gas sectors jumping in on the MLP bandwagon.
In fact, the largest integrated majors were only ones not singing the praises of MLPs. That is … until a few days ago.
After struggling over the last year, Royal Dutch Shell (RDS.B) has finally announced that it will spin off some of its midstream portfolio into an MLP. For investors, the Shell MLP mean a chance to directly own some of the largest pipeline and gathering networks in North America, which could usher in a new wave of MLP launches from its other major integrated rivals.
Shell Midstream Partners LP
In what could only be seen as a landmark decision, Shell has finally decided that the riches of the MLP tax structure are too great to ignore. Following the lead of Marathon (MRO) and ConocoPhillips (COP), Shell announced that it will sell a stake in its U.S. pipeline business in the second half of this year. RDS will sell 49% of the limited partnership and 2% of the general partner to the public. The new firm will be dubbed Shell Midstream Partners and will trade under the ticker SHLX.
Shell hopes to raise nearly $750 million from the sale.
SHLX will initially own stakes in a portfolio of pipelines and midstream assets that run along the coasts of Texas and Louisiana as well as offshore in the Gulf of Mexico. Additionally, the MLP will own a series of refined petroleum products pipelines linking Shell’s refineries to storage and energy trading activities. A crown jewel in SHLX’s portfolio is a stake in the Colonial Pipeline, which is the only pipeline that moves oil from Cushing storage depot in the center of the country towards the East Coast.
This small portfolio of midstream assets under SHLX’s estimations should throw out about $96.5 million worth of cash for distributions to investors over the next 12 months. However, that is just a drop in the bucket when it comes to the Shell MLPs potential. RDS and SHLX are going to benefit from the parent/MLP “drop-down” relationship in a big way.
After acquiring new pipelines or gathering facilities, general partners often will pass along some of the prime assets into their MLPs. These asset sales are priced at a level that guarantees cash flow accretion for the MLPs and enables the MLPs to raise distributions at a faster rate. SHLX has already announced in its IPO prospectus that plans to use proceeds from the offering to acquire stakes in some pipeline companies owned by Royal Dutch Shell.
And those assets are a doozy…
Shell’s midstream assets feature nearly 60 products terminals, 960 storage tanks, and roughly 15,500 miles’ worth of fully/partially owned pipelines. Overall, RDS manages to ship more than 40 different kinds of crude oil and more than 20 different grades of gasoline through that system.
Add in diesel, jet fuel, chemicals, ethylene and other natural gas liquids (NGLs) and Shell moves around 2 billion barrels worth of energy each year through its midstream assets. That network size puts it on par with current midstream leader Enterprise Products Partners LP. (EPD) when looking at actual assets.
And almost of that has the potential to be “dropped down” in SHLX over the next few years, creating plenty of juicy gains for investors.
Get Ready To Buy The Shell MLP
With Shell being the first integrated super major to consider creating a MLP for its midstream assets, I suspect that investors will go gaga over the new company. Based on history, SHLX is going to be a monster. When Marathon and Phillips 66 (PSX) spun off their midstream assets — as MPLX (MPLX) and Phillips 66 Partners (PSXP), respectively — the deals were oversubscribed and the MLPs traded at some of the lowest initial yields in history.
Given that RDS is actually bigger than both of those firms, the Shell MLP should follow suit and have an amazing first year. And like MPLX and PSXP, the new Shell MLP should be able to quickly grow its distribution as it buys more midstream assets from its parent. That’s a huge win for investors, whether they buy it on the IPO or subsequent following weeks. I also suspect that SHLX will eventually be included in top MLP indices like the Alerian over time.
All in all, SHLX should prove to be a great long-term pick in the MLP space for investors. Its dropdown potential is enormous as will its cash flows over the longer haul.
It also raises the question when rival super majors Exxon Mobil (XOM) and Chevron (CVX) will follow suit and launch their own MLP units. CVX has recently announced a strategic “realignment” of its gas and midstream businesses, which means it’s probably just a matter of time.
As investors wait for that launch, the Shell MLP should be a great income and growth pick when it finally goes public.
As of this writing, Aaron Levitt was long MPC.