Shell Midstream Partners LP (NYSE: SHLX)
Shell Midstream Partners LP filed its initial S-1 registration form on June 18, setting the stage for the first MLP to be created by one of the major, integrated oil companies.
The prospective 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 will comprise 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.
For example, the Shell Pipeline website lists a number of MLP-eligible assets in the US:
- Delta Pipeline, an offshore system with throughput capacity of 300,000 barrels per day that gathers crude oil from producers in the Main Pass, Viosca Knoll, South Pass, Breton Sound and Mississippi Canyon areas of the Gulf of Mexico.
- Amberjack, a joint-venture pipeline system that can handle up to 350,000 barrels of crude oil per day from producers in the Green Canyon, Ewing Bank, Ship Shoal, South Timbalier and Grand Isle plays in the Gulf of Mexico.
- Eugene Island, a coastal pipeline system that connects to the Houma Terminal and can handle more than 170,000 barrels per day from the Boxer, Joliet, Amberjack and South Marsh Island pipeline systems.
- Ship Shoal, a coastal pipeline system that boasts more than 390,000 barrels per day from the Tarpon/Central Gulf Gathering, Auger, Whitecap/Cougar and Plains pipelines in the Gulf of Mexico.
- Auger, a coastal pipeline system that can handle up to 200,000 barrels per day and connects the Poseidon pipeline to the Ship Shoal system.
- Sugarland Terminal, a crude-oil terminal in St. James, Louisiana, that offers access to refineries in the Midwest and Baton Rouge.
- Lockport Terminal, a storage facility southwest of Chicago that can accommodate up to 2 million barrels and is the origination point for outbound pipelines that deliver Canadian crude oil to area refineries and the distribution hub in Patoka, Illinois. This asset boasts a number of organic growth opportunities.
- San Pablo Bay Pipeline Company, which maintains more than 400 miles of heated pipeline capacity that delivers heavy and light crude-oil barrels from producers in Kern County, California, to refiners in San Francisco.
Note that this list excludes Royal Dutch Shell’s extensive gas-related infrastructure and its Canadian midstream assets.
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