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New MLP Shell Midstream Partners LP Zooms on 1st Day

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Shell Midstream Partners LP (ticker:SHLX) began trading today.  The shares were IPO’ed at $23 for 40,000,000 shares (plus 6,000,000 overallotment shares).  The original guesstimated range for the offering was $19-21/unit.  Shares rocketed higher and closed today at $33.55.

Now it is fine if folks want to buy this issue–but you are buying a MLP that pays a damned meager distribution–slated to be 16.25 cents per quarter–65 cents per year.  So you are getting a 1.9% current yield if you buy it now.  Hardly an issue for serious income investors.

Let’s take a look at what this MLP is comprised of to start out.  The partnership owns 43% of the Zydeco pipeline–a 350 mile pipeline,  28.6% of the Mars piepline–163 miles, 49% of the Bengal pipeline–158 miles and lastly 1.61% of the massive Colonial pipeline–5500 miles.  All of these are either crude oil or refined product pipelines and located in Texas, Louisiana or Mississippi.

2013 pro forma revenue was 91.6 million with 52.1 million in net income.  This is equal to around 65 cents/unit net income–adding back depreciation it would be a little higher—a dime.

Now it is obvious that with Royal Dutch Shell as the parent there will be tons of opportunities for ‘drop down’ assets—but the value assigned to these initial assets in this initial IPO is totally RIDICULOUS.  With around 138 million units outstanding (1/2 common and 1/2 subordinated units) the value is over 3 billion–for 400 million in assets and 52 million in net.  Now maybe we are just stupid, but paying a dollar for 1.5-2 cents of income seems just a tad bit much.

We have seen these things happen before–and they will happen again, but we think the Shell nameplate got the best of investors on this one.  We would have been happy to have flipped some shares (if we could have gotten them), but beyond that this is simply a bad, bad deal for investors.

You can read the gory details here.

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