Royal Dutch Shell Plc (RDSA) will sell shares in a U.S. pipeline business in the second half of this year as Europe’s largest oil company takes advantage of investor appetite for North America’s energy infrastructure.
Shell Midstream Partners LP’s assets are expected to consist of ownership interests in four onshore and offshore pipelines located primarily in Texas and Louisiana, according to a filing today. The Houston-based partnership will trade on the New York Stock Exchange under the ticker SHLX.
Pipeline companies structured as tax-exempt master limited partnerships, or MLPs, have attracted investors by returning almost all their income to shareholders. Share prices have soared amid a boom in oil and gas production from U.S. shale fields. Shell Midstream forecasts $96.5 million of cash available for distribution to investors over the next 12 months.
“Everybody and their dog has got an MLP now in the U.S.,” Iain Reid, a London-based analyst for BMO Capital Markets who rates Shell a buy and owns none of the shares, said today by phone. “The majors have kind of shied away from it, so this may be breaking new ground.”
The announcement comes two days after Williams Cos. (WMB) said it will pay $6 billion to buy control of Access Midstream Partners LP (ACMP), the pipeline operator taken public in 2010 by Chesapeake Energy Corp. (CHK) under ousted chief executive officer Aubrey McClendon. The shale wildcatter now plans to invest in pipelines and processing plants through a midstream unit of his American Energy Partners LP, according to a statement today.
“Now you’ve got the first major and that’s got us excited,” Matt Sallee, who helps manage $17.5 billion at Tortoise Capital Advisors in Leawood, Kansas, including the first closed-end fund focused on MLPs. “It would not be surprising to see others follow suit. Shell’s putting a seal of approval on the MLP space today.”
Shell didn’t say how much cash it will raise from the initial public offering. It’s proposing to sell a 49 percent stake in the partnership that will own the assets and a 2 percent stake in the unit that will run the operation.
The company appears to be following the well-worn path of initially offering stakes in MLP with a few assets, then selling it more pipelines and processing plants in so-called “drop downs,” harvesting cash while adding operations that increase investor payouts, Sallee said.
Shell’s U.S. assets suitable for MLP ownership are extensive enough to rival the likes of Enterprise Products Partners LP. (EPD) Enterprise market cap is $69 billion, it pays investors a 3.8 percent return on the current share price, and that payout has risen by 5.7 percent over the past five years, according to data compiled by Bloomberg.
The Cushing 30 MLP index, which tracks the partnerships, has produced total returns of 24 percent over the last year, beating the Standard & Poor’s 500 Index’s 20 percent total return, which includes reinvested dividends.
Shell would be the largest oil company to launch a master-limited partnership. It ranks behind Exxon Mobil Corp. (XOM) in market value.
Barclays Plc (BARC) and Citigroup Inc. (C) are managing the proposed share sale, Shell said. The banks are the two leading advisers on North American pipeline deals this year, according to data compiled by Bloomberg.
Assets Shell will put into the partnership include stakes in the Ho-Ho network linking Houston and Houma in Louisiana, an offshore pipeline from the Mars field in the Gulf of Mexico and the Bengal and Colonial pipelines, which deliver fuel through the eastern U.S.
Shell Chief Executive Officer Ben van Beurden is selling assets to focus capital on projects with highest returns for investors. Yesterday the oil major announced it would raise $5 billion by selling a stake in Woodside Petroleum Ltd., Australia’s largest oil and gas producer.