Shell’s Midstream Spinoff Set to Swell

One of the most anticipated master limited partnership (MLP) offerings of the year debuts this week. Shell Pipeline Company (SPLC), a midstream subsidiary of Royal Dutch Shell (NYSE: RDS-A) recently formed Shell Midstream Partners (which will trade as SHLX), and units are expected to price late on Oct. 28 with trading kicking off the next morning.

Shell Midstream Partners intends to grow by acquiring more of Shell’s extensive portfolio of midstream assets, investing in expansion projects and potentially pursuing strategic acquisitions of assets from third parties. Most future growth will probably come from further dropdowns of Shell’s midstream assets.

The impending IPO was covered in some detail in the Aug. 11 issue of MLP Profits (“Shell Sells Pipelines by the Seashore.”) With this offering, Shell becomes the first major integrated oil and gas company to launch an MLP. Initial assets of Shell Midstream Partners will include interests in two refined products pipelines and two crude oil pipelines:

  • A 49% interest in Bengal Pipeline Company, which owns a refined products pipeline that connects four refineries in Louisiana

  • A 1.612% ownership interest in Colonial Pipeline Company, which runs a major finished product line connecting the Gulf Coast to the East Coast

  • A 43% interest in Zydeco Pipeline Company, which will own the Houston-to-Houma crude oil pipeline system

  • A 28.6% interest in Mars Oil Pipeline Company, which owns the Mars crude oil pipeline

The Bengal Pipeline is operated by SPLC and connects four refineries in Louisiana with the Plantation and Colonial pipelines, providing market outlets to the East Coast. Colonial Pipeline Company (Colonial) operates the largest refined products pipeline in the United States, traversing 11 states across the southeast and eastern seaboard. Colonial transports more than 100 million gallons per day of refined products, or approximately 50% of refined petroleum products consumed in the East Coast region of the United States, through its 5,500-mile system.

Zydeco Pipeline Company (Zydeco) is currently owned by SPLC. Zydeco will own the Houston-to-Houma Louisiana crude oil pipeline system (Ho-Ho). The Mars Oil Pipeline Company (Mars) operates a major crude oil pipeline in the offshore Gulf of Mexico, originating approximately 130 miles offshore and terminating in salt dome caverns in Clovelly, Louisiana.

The IPO aims to raise approximately $750 million with 37.5 million shares priced between $19 and $21, which would provide an annualized yield of 3.25% at the midpoint. The most recent market talk had shares pricing at $22 or higher.  

While that would push prospective yield below 3%, Shell has a very large portfolio of midstream assets that can drive the growth of the partnership for many years to come. Demand for this IPO is expected to be strong, so expect an opening well above the indicated price range. This will likely be a good long-term portfolio holding for MLP investors, but it is much more appealing for the potential capital appreciation than for investors seeking income.

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