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SHLX’s Strong Earnings Growth Potential Makes It Attractive

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Earnings growth

Shell Midstream Partners (SHLX), the midstream MLP subsidiary of Royal Dutch Shell (RDS.A), is in fifth position in terms of earnings growth potential among MLPs. Wall Street expects it to post EBITDA of $155.6 million in the second quarter of 2018. That represents an 88.1% YoY (year-over-year) growth.

SHLX’s YoY EBITDA growth is expected to be driven by the acquisition completed from Shell last year, the recovery of the Zydeco system, the contribution from the Colonial system, and strong volume growth along its crude oil systems. It acquired stakes from Shell in the following five companies last year:

  • 100% interest in Triton West
  • 9% interest in Mars Oil Pipeline
  • 10% interest in Explorer Pipeline
  • 22% interest in Odyssey Pipeline
  • 48% interest in LOCAP

For 2018, Shell Midstream Partners is expected to post 59.8% YoY EBITDA growth. The strong earnings growth momentum is expected to continue in 2019 with 39.3% YoY EBITDA growth.

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Valuations

Shell Midstream Partners was trading at a forward EV[1. enterprise value]-to-EBITDA multiple of 4.3x as of July 23, 2018. That’s significantly below the historical average of 13.6x. It’s also significantly below the industry median of 9.5x.

That indicates a strong buying opportunity for SHLX considering its strong earnings growth expectations, driven by significant drop-down opportunities with its sponsor, Royal Dutch Shell. However, the partnership’s high leverage remains a slight concern.

SHLX recently announced its largest acquisition to date from Shell. It has entered into an agreement with Shell to acquire a stake in Amberjack Pipeline in a transaction valued at $1.22 billion.

According to Kevin Nichols, SHLX’s CEO, “Shell Midstream Partners’ share of Amberjack’s annualized net income estimated using the second quarter of 2018 forecast is nearly $120 million with the second quarter dividend estimated to be about $34 million. Following the completion of anticipated growth projects, our share of Amberjack’s net income is expected to increase to an annual run rate of approximately $145 million by the end of 2018 with an associated quarterly dividend of approximately $40 million.”

Analyst recommendations

About 60% of analysts rate Shell Midstream Partners a “buy,” and the remaining 40% rate it a “hold.” Deutsche Bank last initiated coverage on SHLX with a “buy” rating. SHLX’s average target price of $28 offers a ~19% upside from its current price.

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