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Shell Midstream Partners Is Top MLP Pick despite High Leverage

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Jan. 12 2018, Updated 4:40 p.m. ET

Shell Midstream Partners

Shell Midstream Partners (SHLX), a midstream MLP formed by Royal Dutch Shell (RDS-A) to provide crude oil, refined products, and NGL (natural gas liquids) transportation and terminaling services, traded in negative territory for most of 2017. The partnership has recovered slightly over the past month. SHLX could continue to gain in 2018, considering its valuation and strong earnings. However, SHLX’s high leverage remains a slight concern.

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Valuations

SHLX was trading at a distribution yield of 4.2% as of January 8, 2018. That’s higher than the historical average of 3%. Its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 7.2x is below the historical average of 14.9x.

Leverage

Shell Midstream Partners ended 3Q17 with a net debt-to-EBITDA of 4.7x. That’s slightly higher than the industry standard. MLPs generally target a leverage ratio between 4.0x and 4.5x.

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Earnings growth

Shell Midstream Partners is expected to post EBITDA CAGR (compound annual growth rate) of 43.9% during the 2018–2020 period. That’s expected to translate into strong distribution CAGR of 16.4% during the same period.

Analyst recommendations

About 70% of analysts rate SHLX a “buy,” while the remaining 30% rate it a “hold.” SHLX’s peers Phillips 66 Partners (PSXP) and Andeavor Logistics (ANDX) have “buy” ratings from 80% and 78.6% of analysts, respectively. SHLX’s average target price of $33 implies a ~9% upside potential from the current price levels.

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