Overview: Why the new Shell MLP has solid growth potential

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Overview: Why the new Shell MLP has solid growth potential PART 2 OF 7

Must-know: The assets of the Shell Midstream Partners

Shell Midstream Partners’ assets

Shell Midstream Partners expects to own a 43% interest in Zydeco, a 28.6% interest in Mars, a 49% interest in Bengal, and a 1.6% interest in Colonial following the completion of the initial public offering (or IPO) process. The company’s Zydeco and Mars crude oil pipeline systems are strategically located along the Texas and Louisiana Gulf Coast and offshore Louisiana.Must-know: The assets of the Shell Midstream Partners

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What is Ho-Ho and why is it important for the company?

Zydeco is a wholly owned subsidiary of SPLC, the general partner of Shell Midstream. Zydeco owns the Houston-to-Houma (or Ho-Ho) crude oil pipeline system. Ho-Ho serves in the Gulf Coast and Houston refining area and is poised for a major expansion process. After the flow reversal process in Ho-Ho since December, 2013, its current capacity stands at 360 thousand barrels per day of crude oil. The company expects to complete several expansion projects on Ho-Ho, following which capacity is expected to increase to 375 thousand barrels per day.

Following the completion of the capacity enhancement, approximately 87% of its capacity will be subject to fixed contracts for a term of eight years, bringing stability to the cash flows from its operations. Ho-Ho pipelines are regulated by the Federal Energy Regulatory Commission (or FERC).

Expansion program in Zydeco assets

In December, 2013, Zydeco completed a reversal of Ho-Ho. Ho-Ho transports growing crude oil production flows from the oil rich basins of the Eagle Ford Shale, the Permian Basin, and the Bakken Shale to the refineries in the Gulf Coast and to the market hubs in St. James and Clovelly, Louisiana. The company also plans to expand the Ho-Ho pipelines from the Canadian oil sands to the Houston market. In 2014, Shell Midstream’s projects in Ho-Ho also include the installation of new pump stations and the addition of a new connection at Nederland, Texas. By 2015, Shell Midstream looks to add a new third-party connection and new tankage at Port Neches, Texas. 87% of the fully expanded capacity of Ho-Ho is under ship-or-pay contracts for an eight year term, on an average.

Why does the Gulf Coast area require significantly more pipeline infrastructure?Must-know: The assets of the Shell Midstream Partners

For the past few years, crude oil pipeline operators built new pipelines to gain direct access to the refining hubs in the Houston area and along the Gulf Coast, to bypass Cushing Hub—the oil trading hub at Cushing, Oklahoma. The Houston area houses a number of refinery complexes. This new trend alleviated bottlenecks at Cushing Hub, but created a situation of over-supply for the Houston refineries. The vast majority of the increasing onshore crude oil supply is light and sweet, which is domestically produced following the oil shale boom in the past decade. But the Western Coast refineries are more suited to process heavy oil that is imported from Venezuela, Africa, and the middle-East.

Therefore, pipelines like Ho-Ho, which carry light and sweet oil, will find increasing demand from the new refineries of Louisiana which houses refineries that are geared to process light grade oil. In addition, there has been higher traffic for pipeline infrastructure due to higher production in the deepwater exploration and production in the U.S. Gulf area. In the southern Louisiana terminals of Houma, St. James, and Clovelly, such pipelines are in more demand.

Following the completion of the IPO process, Shell Midstream Partners is expected to operate as a master limited partnership (or MLP) in the midstream oil and gas pipeline industry. Royal Dutch Shell (RDS-A), through its subsidiary Shell Pipeline Company L.P. (SPLC) will be the general partner of the company. Other midstream operators in the crude oil and refined products pipeline business include Sunoco Logistics Partners (SXL), Enterprise Products Partners (EPD), and Plains All American Pipeline (PAA). These are components of the Alerian MLP ETF (AMLP). RDS-A is a component of the Vanguard FTSE Developed Markets ETF (VEA).


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