Today, Shell Midstream Partners, L.P. (NYSE:SHLX) (the “Partnership” or “SHLX”) announced it has signed an agreement with its general partner to eliminate all incentive distribution rights (“IDRs”) and economic general partner (“GP”) interest in SHLX. SHLX has also entered into a Purchase and Sale Agreement with affiliates of its sponsor, Royal Dutch Shell plc (“Shell”), to acquire (i) Shell’s 79% interest in Mattox Pipeline Company LLC, which owns the Mattox Pipeline, and (ii) certain logistics assets at the Shell Norco Manufacturing Complex. As consideration for the assets and the elimination of IDRs, the sponsor will receive 160 million newly issued SHLX common units, plus $1.2 billion of Series A perpetual convertible preferred units (the “preferred units”) at a price of $23.63 per unit.
"Today is an important day in our journey as an MLP," said Kevin Nichols, CEO of Shell Midstream Partners GP LLC. "This transaction positions the Partnership well for the future, simplifying our structure and lowering our cost of capital. Our diversified portfolio continues to deliver sustainable growth – and I’m pleased with the addition of the Mattox Pipeline and Norco logistics assets, which will enhance our strategic position both onshore and offshore."
SHLX and the sponsor agree to eliminate all IDRs and economic GP interest in the Partnership.
The Partnership acquires a 79% interest in the Mattox Pipeline Company LLC, which owns the Mattox Pipeline. The Mattox Pipeline serves the Shell operated Appomattox platform and transports oil into the Proteus and Endymion systems, which ultimately connect to onshore markets via the Clovelly, LA storage hub.
SHLX acquires certain Norco logistics assets, which contain crude, chemicals, intermediate and finished product pipelines, storage tanks, docks, truck and rail racks, and supporting infrastructure.
SHLX agrees to issue 160 million newly issued SHLX common units to the sponsor.
The newly issued SHLX common units are anticipated to receive distributions beginning with those made for the second quarter of 2020. The current distribution structure for the IDRs is anticipated to remain in place for the distributions made for the first quarter of 2020.
SHLX issues $1.2 billion of preferred units at a price of $23.63 per unit, which pay a 4.0 percent annual coupon rate. The units are convertible, at the sponsor’s option, after approximately two years, and, at the Partnership’s option, after approximately three years, in each case subject to certain conditions.
In addition, the sponsor has agreed to waive $20 million of common unit distributions per quarter for four quarters, anticipated to begin with the distribution made for the second quarter of 2020.
Acquisition from Sponsor
The Mattox Pipeline is a 90-mile, 24-inch system with a 300,000 barrel per day capacity that will move produced crude oil from Appomattox westward to the Proteus and Endymion pipeline systems and then onshore. The Mattox Pipeline is backed by a long-term contract with a monthly minimum quantity (“MMQ”) at a fixed transportation rate for the Appomattox and Vicksburg fields. The Mattox Pipeline is also strategically located for potential future tie-backs to the Appomattox host, such as Rydberg, Dover, Fort Sumter and other exploration projects. These potential fields are not subject to the MMQ and could present upside in the future.
The Norco logistics assets to be acquired by SHLX consist of certain midstream assets at the Shell Norco Manufacturing Complex and are comprised of crude, chemicals, intermediate and finished product pipelines, storage tanks, docks, truck and rail racks, and supporting infrastructure. These assets are backed by take-or-pay contracts with wholly owned subsidiaries of Shell with an initial term of fifteen years and an option to extend for an additional five-year term. The acquisition of these manufacturing and chemicals midstream assets builds upon the Partnership’s strategy to access assets across Shell’s broad asset base.
The transaction is expected to close in the second quarter of 2020 and is subject to regulatory approvals, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary closing conditions.
Post-closing, SHLX’s general partner will hold a non-economic GP interest in SHLX and approximately 270 million common units, representing approximately 69 percent of the total outstanding common units in SHLX.
The terms of the acquisition and IDR elimination were approved by the Board of Directors of the general partner of SHLX based on the approval and recommendation of its conflicts committee, which consists entirely of independent directors. The conflicts committee was advised by Evercore Group, L.L.C. as to financial matters and Latham and Watkins LLP as to legal matters. The sponsor engaged Barclays Capital Inc. as its financial advisor and Baker Botts L.L.P. as its legal advisor.
Below is a summary of SHLX’s expectations for 2020:
Distributions will be held at the current level of $0.46 per common unit per quarter, with the intent to build greater resilience as SHLX becomes a more sustainable entity.
Combined with the waiver offered by the sponsor, SHLX intends to utilize internally generated cash flow to fully fund the 2020 distributions, as well as the vast majority of 2020 discretionary spending, with no need to access equity markets.
Following the completion of the transaction described herein, the Partnership’s estimated coverage ratio is approximately 1.1x, with the intent to improve over time as SHLX moves to a self-sustaining entity.
Based on current estimates, SHLX expects the interest in the Mattox Pipeline Company LLC and the Norco logistics assets to contribute between $125 million and $135 million of cash flow from operations during the twelve-month period following the closing of the acquisition.