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Shell Midstream Partners – Reliable Yield During The Downturn

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Shell Midstream Partners IPO – Bidness ECT

The Value Portfolio: Sept 2, 2016

Shell Midstream Partners (NYSE: SHLX) is a master-limited partnership formed by Royal Dutch Shell (NYSE: RDS.A) (NYSE: RDS.B). The company was formed for the purpose of purchasing midstream assets and renting them out for reliable fee-based income. This fee-based income provides investors with a secure dividend which currently amounts to more than 3% and has a strong history of growth.

Shell Midstream Partners has had a difficult time recently, though not as a difficult of a time as all the other oil companies. Since mid-2015, when other midstream companies such as Kinder Morgan (NYSE: KMI) began to take a big hit, Shell Midstream Partners has seen its stock price drop from almost $48 per unit to just over $30 per unit, a drop of almost 40%. This drop means that Shell Midstream Partners has seen its yield almost double to more than 3% per unit.

More importantly, Shell Midstream Partners fees are very reliable. Unlike other major oil companies that have seen their profits take an enormous hit as oil prices fell by more than 70%, Shell Midstream Partners fees are based on the oil moving through its pipelines – not the value of that oil. That means that Shell Midstream Partners will continue earning money and both paying and growing its dividend. In the current low interest environment, this will continue to provide stable fees to interested investors.

Shell Midstream Partners Strategy and Track Record

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The above image provides a top tier overview of Shell Midstream Partners’ strategy. We already discussed it above, but basically the company focuses on organically growing (read: no massive amounts of debt) its portfolio of high quality assets. These assets are vital to sale of oil and as a result achieve stable fee-based cash flows. These cash flows are then paid out to investors in the form of reliable dividends.

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Shell Midstream Partners Dividend Increases – Shell Midstream Partners Investor Presentation

The above image shows Shell Midstream Partners’ success in carrying out this game plan. Over the 6 quarters, the company has managed to increase its dividend by 7% quarter over quarter from $0.1625 per quarter in 4Q 2014 all the way up to $0.25 per quarter 2Q 2016. The company anticipates top tier growth of around 25% in 2016 in the midst of one of the worst oil crashes in history.

This growth has come from a number of profitable acquisitions. Since its initiation, Shell Midstream Partners has spent more than $2 billion on various acquisitions that have helped the company to significantly increase its fee-based earnings. As the company’s fee-based earnings continue to increase so will the dividends that it will be able to pay to investors. That means the company will be able to continue its trend of high single-digit quarterly dividend increases.

Royal Dutch Shell Alignment

Now that we have discussed Shell Midstream Partners game plan along with the company’s strong track record of dividend increases, it is now time to discuss Shell Midstream Partners connection to its sponsor, Royal Dutch Shell.

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Shell Midstream Partners Pipeline Opportunities – Shell Midstream Partners Investor Presentation

Royal Dutch Shell is currently heavily investing in expanding its oil portfolio, an investment anticipated by the company’s recent acquisition of the BG Group. Royal Dutch Shell’s two major areas of focus have multi-billion barrel potential and the current Appomattox project is expected to provide 175 thousand barrels per day. The company also has several other pipelines including a new 89 mile pipeline in the Gulf of Mexico that will have a capacity of 300 thousand barrels per day.

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Shell Midstream Partners Recent Acquisitions – Shell Midstream Partners Investor Presentation

These new assets that Royal Dutch Shell are building will be dropped down to Shell Midstream Partners as evidenced by recent acquisitions. The company has been funding these acquisitions from a combination of cash, debt, and equity offerings. These strategic plans leave Royal Dutch Shell with stable earnings that will continue to provide strong dividends. More so, these recent acquisitions show Shell Midstream Partners ability to get new assets that will increase its cash available for dividends.

Let us take a look at how this dividend growth can help investors in Shell Midstream Partners for the long term. We will assume the company continues its trend of 7% quarterly dividend increases (31% annually) up until 2020 – a relatively short time.

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As you can see, Shell Midstream Partners has already shown a track record of being able to increase its dividend for the past two years. Should the company manage to keep that dividend increase rate for just another four years – twice as long as it has been doing – an investor who invests today will have shares with a yield on cost of almost 10%.

That represents a strikingly good investment option for an investor in today’s low interest environment.

Conclusion

Shell Midstream Partners has had a difficult time recently watching its share price fall by almost 40% from its mid-2015 highs. Despite this, the company continues to offer a secure fee-based dividend yield of more than 3%. That is a dividend that the company has a very strong history of increasing – a rate that has hovered at more than 30% year over year since the company’s inception in late 2014.

More importantly, the potential rewards for an interested investor are huge should the company maintain its impressive rate of dividend increases. Should the company be able to maintain this rate of dividend increases for just another four years that would mean a yield on cost of almost 10% for investors who invest today. That is an incredible yield in the present low interest environment and one I recommend interested investors take advantage of.

Disclosure: I am/we are long KMI, RDS.A, SHLX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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