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Summary

  • Royal Dutch Shell recently announced the creation of a MLP which will own all of the company's American midstream assets.
  • The pipelines that the company will own all have growth potential and are in great locations.
  • The MLP plans to distribute nearly $100 million in dividends in the first fiscal year.

Royal Dutch Shell (RDS.A, RDS.B) announced that it is planning to spin off several U.S. pipelines into a publicly-traded partnership. This MLP, which will be called Shell Midstream Partners LP, will present a great opportunity for investors both through dividends and capital appreciation. In this article, I will walk through why Shell is forming this MLP, details about the new entity, and give some reasons as to why investors should be interested.

A Little Perspective

Ever since CEO Ben van Beurden took over the reins of the company at the beginning of the year, he has been trying to cut costs and make the company more focused in its operations. Under Beurden's leadership, the company has planned about $15 billion in divestitures by the end of next year.

This coming IPO is a small part of Shell's larger mission to slim down the company. After this MLP is created, most of the costs that have to do with midstream assets will no longer show up on Shell's financials. There is no word on how much this will save the company in the long run.

The IPO

The initial public offering is expected to occur in the second half of this year. Shell expects to offer a maximum of $750 million in common units. The company will plan to list under the New York Stock Exchange with the symbol "SHLX."

Shell could be spinning off their midstream assets because the company believes they are undervalued when compared to the rest of the market. Fadel Gheit, an analyst at Oppenheimer & Company, said Shell's midstream assets are "significantly undervalued relative to the market, and one way to monetize that is to put it into an MLP."

About the Pipelines

Shell Midstream Partners will operate, develop, and acquire pipelines and other midstream assets. The company will be based in Houston. The company will own four pipelines in Texas and Louisiana. Here are descriptions of all four with a graphical aid at the bottom.

The Zydeco (Ho-Ho) pipeline starts near Houston and stretches across the bottom of Louisiana ending in the southwestern part of the state. Originally, this pipeline carried crude from east to west but the company has since converted it to the other direction because of a change in the supply of oil. The company will own 43% interest in the pipeline and projects that it will make up 64% of the cash distributed by the company in the first year of operation.

The Mars pipeline is located in the high-growth area of offshore Gulf of Mexico and connects offshore drilling rigs to an onshore facility in Clovelly, located in the southwestern part of Louisiana. This pipeline serves as a corridor for a few other pipelines in the area (Amberjack, Medusa, Ursa) which are trying to transport oil to refineries on shore as well. The company will own 28.6% interest in the pipeline and projects that it will contribute about 19% of the MLP's available cash to distribute.

The Bengal pipeline, the shortest of all four, connects four oil refineries to a storage tank in Baton Rouge. The company will have 49% ownership interest in the pipeline and projects that it will contribute 13% of the cash available for distribution.

The Colonial pipeline, which is the longest of all four, starts near Houston, cuts through Louisiana, and continues up the east coast all the way through Baltimore and New York City. Colonial is the largest refined products pipeline in the United States. It transports more than 40 different refined products including gasoline, diesel fuel, and jet fuel. The company will own a measly 1.6% ownership in the Colonial pipeline. Shell Midstream expects this pipeline to contribute 4% of the cash available for distribution.

(click to enlarge)

Source: S-1 Filling

Why Investors Should Take a Look

1. Room to grow

According to a recent study done for the Interstate Natural Gas Association of America, companies will need to invest $641 billion in midstream infrastructure through 2035 to keep up with growing oil and gas production within the United States. $272 billion of this amount will be needed to transport crude oil across the country.

With so much investment needed, Shell's new MLP will have tons of room to grow both in the south east region where the company is currently located as well as across the country.

In their S-1 filing, Shell describes a few possible areas of expansion:

  1. Ho-Ho: A surge in onshore production has led to a bottle neck of crude oil around the Houston area. This has increased demand for more pipelines like the Ho-Ho pipeline which transports crude from Houston to refineries in Louisiana.
  2. Ho-Ho: Installation of new pump stations and the addition of a new connection at Nederland, which is just to the west of where the pipeline crosses the Texas / Louisiana border.
  3. Mars: The Mars pipeline recently completed an expansion project in February of this past year. With many new off shore platforms being built, the company is optimistic about the future growth prospects for this pipeline.

2. Possible Distributions

Master limited partnerships are tax advantaged entities which aren't taxed at the corporate income tax rate and give much of their extra cash back to their shareholders through quarterly distributions, much like a stock dividend. For this reason, MLPs are favored by income investors or anyone looking for a nice dividend yield.

The company predicts that most of the cash distributions will be supplied by the Zydeco (Ho-Ho) pipeline. In terms of specific numbers, the company is projecting that it will be able to distribute $96.5 million during the fiscal year ending on June 30, 2015. Because the S-1 filling was just filled and there is no word on how many shares the company will offer during the IPO, it impossible to say how much each share will receive in dividends.

(click to enlarge)

Source: Data from the S-1 filing, graph made by myself

Pipeline

Cash Available for Distribution (millions)

Zydeco

71.8

Mars

20.8

Bengal

14.7

Colonial

4.5

Insurance, General / Administrative, Interest

(15.3)

Total Cash Available for Distribution

96.5

Conclusion

Investors have reason to be interested in Shell Midstream Partners. This new MLP will own parts of 4 pipelines that are located in Texas and Louisiana. These pipelines boast stable cash flows and room to grow. The possibility of dividends are also intriguing with $96.5 million being planned to be distributed within the first fiscal year.

Source: Shell's New Midstream MLP To Deliver Value And Dividends To Investors