IPO Report: Shell Midstream Partners, L.P. (SHLX)

Shell Midstream Partners, L.P. ($SHLX) is a fee-based, growth-oriented master limited partnership recently formed by Shell to own, operate, develop, and acquire pipelines and other midstream assets. It is headquartered in Houston, TX.

Two other new companies are scheduled for the week of Oct. 27, 2014. The full IPO calendar is available at IPOpremium.

Manager, Joint-managers: Barclays, Citigroup, Morgan Stanley, and UBS Investment Bank.

Co-managers: Credit Suisse, Goldman Sachs, J.P. Morgan, Wells Fargo Securities, RBC Capital Markets, and Credit Agricole CIB.

SHLX scheduled a $750 million IPO with a market capitalization of $2.76 billion at a price range midpoint of $20 for Wednesday, Oct. 29, 2014 on NYSE. SEC filings

Shell Midstream Partners IPO Report

Overview

SHLX is a fee-based, growth-oriented master limited partnership recently formed by Shell to own, operate, develop and acquire pipelines and other midstream assets.

Valuation

Glossary

Conclusion

Positive, C+, 7

SHLX's general partner is Shell's principal mid-stream sub in the US.

SHLX's partnership is a growth vehicle for Shell's US midstream assets.

Projected yield for Sept '15 12 mos is 3.25%, at $20.

Business

SHLX is a fee-based, growth-oriented master limited partnership recently formed by Shell to own, operate, develop and acquire pipelines and other midstream assets.

References to “SPLC” refer to Shell Pipeline Company LP, a wholly owned subsidiary of Royal Dutch Shell plc ($RYDAF), and its controlled affiliates, other than SHLX, SHLX's subsidiaries and SHLX's general partner.

SPLC is Shell’s principal midstream subsidiary in the United States, is SHLX's general partner and a significant limited partner of SHLX.

Shell

Shell is one of the world’s largest independent energy companies in terms of market capitalization and operating cash flow, and Shell and its joint ventures are a leading producer and transporter of onshore and offshore hydrocarbons as well as a major refiner in the United States.

As one of the largest producers in the Gulf of Mexico, Shell is currently developing several deepwater prospects and associated infrastructure.

In addition to its offshore production, Shell has significant onshore exploration and production interests and produces crude oil and natural gas throughout North America. Shell’s downstream portfolio includes interests in refineries throughout the United States with a combined refining capacity over 1.8 million barrels per day.

Initial assets

SHLX’s initial assets consist of interests in entities that own crude oil and refined products pipelines serving as key infrastructure to transport growing onshore and offshore crude oil production to Gulf Coast refining markets and to deliver refined products from those markets to major demand centers.

SHLX generates substantially all of its revenue under long-term agreements by charging fees for the transportation of crude oil and refined products through its pipelines. SHLX does not engage in the marketing and trading of any commodities.

SHLX  owns interests

SHLX will initially own interests in two crude oil pipeline systems and two refined products systems.

The crude oil pipeline systems, which are held by Zydeco and Mars, are strategically located along the Texas and Louisiana Gulf Coast and offshore Louisiana.

These systems link major onshore and offshore production areas with key refining markets.

The refined products pipeline systems, which are held by Bengal and Colonial, connect Gulf Coast and southeastern U.S. refineries to major demand centers from Alabama to New York.

Relationship with Shell

Shell is one of the world’s largest independent energy companies in terms of market capitalization and operating cash flow, and Shell and its joint ventures are a leading producer and transporter of onshore and offshore hydrocarbons as well as a major refiner in the United States.

As one of the largest producers in the Gulf of Mexico, Shell is currently developing several deepwater prospects and associated infrastructure.

In addition to its offshore production, Shell has significant onshore exploration and production interests and produces crude oil and natural gas throughout North America.

Shell’s downstream portfolio includes interests in refineries throughout the United States with a combined refining capacity over 1.8 million barrels per day.

Shell’s portfolio of midstream assets provides key infrastructure required to transport and store crude oil and refined products for Shell and third parties.

Shell’s ownership interests in transportation and midstream assets include crude oil and refined products pipelines; crude oil and refined products terminals; chemicals pipelines; natural gas processing plants; and LNG infrastructure assets.

SPLC is Shell’s principal midstream subsidiary in the United States.

Growth plan

Following this offering, SPLC will own SHLX's general partner, a significant limited partner interest in SHLX and all of the incentive distribution rights.

As a result, SHLX believes Shell is motivated to promote and support the successful execution of SHLX's  business strategies, including using SHLX's partnership as a growth vehicle for its midstream assets.

Shell has an expansive portfolio of midstream infrastructure, including additional interests in SHLX's  assets, which could contribute to SHLX's future growth if acquired by SHLX.

SHLX may also pursue acquisitions jointly with Shell or its affiliates. Neither Shell nor any of its affiliates is under any obligation, however, to sell or offer to sell SHLX additional assets or to pursue acquisitions jointly with SHLX, and SHLX is under no obligation to buy any additional assets from them or to pursue any joint acquisitions with them.

Competition

SHLX’s pipeline systems compete primarily with other interstate and intrastate pipelines and with marine and rail transportation.

Some of SHLX’s competitors may expand or construct transportation systems that would create additional competition for the services SHLX provides to its customers.

In addition, future pipeline transportation capacity could be constructed in excess of actual demand, which could reduce the demand for SHLX’s services, in the market areas SHLX serves, and could lead to the reduction of the rates that SHLX receives for its services.

As a result of a substantial majority of SHLX’s capacity being reserved on a long-term, fixed-rate basis, its revenue is not significantly affected by variation in customers’ actual usage.

5% shareholders pre-IPO

Shell 100%

Dividends

Under its current cash distribution policy, SHLX intends to make minimum quarterly distributions on its common and subordinated units of $0.1625 per unit, or $0.6500 per unit on an annualized basis, to the extent SHLX has sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to its general partner.

Use of proceeds

SHLX expects to receive $771 million for its IPO and use it for the following:

$423.3 million of the net proceeds of this offering to make a cash distribution to SPLC; $188.0 million of the net proceeds of this offering to make a cash distribution to SPLC and a contribution to Zydeco, which will then make a cash distribution to SPLC, both to reimburse SPLC for capital expenditures incurred prior to this offering related to Zydeco; and $100.0 million for general partnership purposes, including to fund