Shell Midstream: Shareholders Slammed With Dilution

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About: Shell Midstream Partners, L.P. (SHLX), Includes: RDS.A, RDS.B
by: Michael Boyd
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Michael Boyd
Long/short equity, contrarian, medium-term horizon, mid-cap
Summary

Shell Midstream, after relative inactivity, has come out with a massive equity raise. Many investors feel this comes when the midstream sector is trading below intrinsic value.

Unfortunately, this couldn't be avoided. The company's current debt facilities have little liquidity, and payments were due on the company's revolver.

All of the company's debt is currently via loan agreements with Royal Dutch Shell; covenants restrict Shell Midstream from raising more than $600M in debt from outside sources.

Simply put, there was no way around tapping equity markets given the current structure if management wanted to keep the dropdown plan on path.

Look for an amendment in the company's credit facilities to open up doors in 2018 and 2019; the capital structure will shift towards more debt-funded acquisitions with time.

In what will likely be viewed as an aggravating move to retail investors reading their portfolio feeds, Shell Midstream (SHLX) announced a massive 25M offering of limited partner (“LP”) units (subject to an