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Buying Opportunities

By Roger S. Conrad on Dec. 4, 2014

Shell Midstream Partners LP, the first MLP to be created by one of the major integrated oil companies, went public on Oct. 28 and rallied 45 percent on its first day of trading.

We had highlighted the initial public offering (IPO) as an excellent buy and added the stock to our MLP Portfolio when the energy sector sold off on Dec. 1. (See What to Buy in the Selloff.)

The publicly traded partnership’s sponsor, Royal Dutch Shell (LSE: RDSA, RDSB; NYSE: RDS A, RDS B), has embarked on an effort to monetize non-strategic assets and expects to complete US$14 billion to US$15 billion worth of divestments by the end of 2015.

New CEO Ben van Beurden initiated this restructuring after the international oil company announced fourth-quarter 2013 earnings that fell about US$2 billion short of analysts’ consensus estimate.

Management attributed this shortfall to soaring capital expenditures for finding and developing new oil and gas resources; the company’s exploration and production bill hit US$42.6 billion this year–a huge jump from US$26.3 billion in 2011.

Royal Dutch Shell has already written down the value of its shale gas properties in the US because of the depressed price of this commodity. And the firm shelved plans to build a US$20 billion plant on the Louisiana’s Gulf Coast that would covert natural gas into liquid fuels.

Creating a vehicle to monetize its US midstream infrastructure will enable the energy behemoth to achieve a higher valuation for these assets, which previously had been lumped into its Americas Upstream and Americas Downstream operating segments.

Shell Midstream Partners’ initial asset base comprises interests in four crude-oil and refined-product systems:

  • A 43 percent interest in the Zydeco Pipeline Company, which wholly owns the Houston-to-Houma (Ho-Ho) crude-oil pipeline system. Royal Dutch Shell reversed the flow of this pipeline late last year, providing domestic producers with a much-needed outlet for shipping the growing glut of crude oil building in Houston and Port Arthur, Texas, to refineries in Louisiana and Mississippi. But even with the planned expansions to the Ho-Ho pipeline over the next two years, questions remain about whether there will be sufficient capacity to accommodate the influx of volumes from the Permian Basin, Eagle Ford Shale, the Bakken Shale and Canada’s oil sands. Ownership of this critical pipeline gives Shell Midstream Partners and its sponsor a foundation for additional growth opportunities.
  • A 28.6 percent interest in the Mars Oil Pipeline Company, which owns a 42.9 percent interest in a major crude-oil pipeline network that transports offshore production from the deepwater Mississippi Canyon to onshore markets. This system stands to benefit from Royal Dutch Shell’s robust drilling activity in the deepwater Gulf of Mexico.
  • A 49 percent interest the Bengal Pipeline Company, which owns a refined-products pipeline that connects four refineries on Louisiana’s Gulf Coast to storage tankage in Baton Rouge, Louisiana. This system also connects to the Plantation and Colonial pipelines, providing a connection to the East Coast fuel market. The MLP’s sponsor retains a 1 percent ownership interest in the Bengal Pipeline Company.
  • A 1.612 percent ownership interest in the Colonial Pipeline Company, a joint venture with four other partners that owns the largest refined-products pipeline system in the US and delivers about half of the East Coast’s fuel supply. The MLP’s sponsor retains a 14.508 percent interest in the Colonial Pipeline Company.

This impressive initial asset base doesn’t take into account Royal Dutch Shell’s other midstream infrastructure in North America, which would be potential candidates to drop down to Shell Midstream Partners.

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