Shell - financial data and analysis

Description The set up is very simple. Shell plc is the majority shareholder of a small subsidiary called “Shell Midstream Partners” [$SHLX ] . In early Feb, Shell Plc offered to buy out the remaining public shares of $SHLX for $12.89/share and take the company private. I believe precedent deals suggest Shell is likely to come back with an offer in the $14.50-$15/share range in the next ~3 months. On the low end, that is a ~3-5% premium from today’s price. That leads to the DCF value of $157.34. On top of that premium, investors will be able to rack up $SHLX’s ~$0.30/share/quarter dividend while waiting for the acquisition to finalize, which will add another few percent to the return. All in, I think investors will get 7-10% return in the space of a few months for a deal I think is overwhelmingly likely to happen, with some possible upside if the huge spike in oil/gas prices puts some pressure on Shell to increase their bid. Some background might be helpful for understanding how we got here and why I think this deal is so likely to happen. In the mid-2010s, MLPs were all the crazy. Investors loved buying into these because interest rates were low and MLPs offered a high distribution / dividend yield. MLPs took advantage of this craze; investors were valuing MLPs on dividend yield and growth, so MLPs would issue tons of shares at low implied equity costs to buy lots of assets, which generated growth and let them keep growing the dividend. Dividend growth meant the share price would go up, which let them issue more equity, which let them buy more assets…. Master Limited Partnerships - PrepNuggets So, with the market crazy for MLPs, Shell IPO’d SHLX in 2014 at $23/share. SHLX owned a bunch of Shell’s onshore and offshore pipeline assets (as well as a few other assets). Dividend crazed investors put a huge multiple on SHLX; as the MLP game fell apart, that price proved way too generous and SHLX’s shares have generally languished despite paying a juicy dividend. So the stock hasn’t worked because investors gave it way too generous a multiple initially, but the company did do what they set out to do: acquire assets and grow the dividend. SHLX comes public paying an annual dividend of $0.65/share; in 2020, they did a massive transaction to internalize their GP and alongside that basically froze their dividend at ~$1.84/share/year. 8 Master Limited Partnership Risks - Intelligent Income by Simply Safe Dividends Fast forward to 2021, and in July SHLX cuts their dividend from $0.46/share/quarter to $0.30/share/quarter. SHLX is now a broken MLP; their stock is too cheap to issue equity to acquire assets (it’s hard to accrettively acquire assets when your dividend yield is ~10%!), and without accretive access to the equity markets SHLX has no real reason to exist. In early February 2022, with SHLX continuing to languish at <$13/share (just under a 10% yield), Shell lobs in a no-premium offer to buy the whole company for $12.89/share. These number are discounted to the present using the WACC of 8.8%. That brings us to today. SHLX is trading for ~$13.80/share as I write this, a nice premium to the initial Shell bid. On the low end, I expect Shell will up their bid to the ~mid-$14s in the next few months, and shareholders today will walk away with a nice gross profit and an excellent IRR from today’s levels (SHLX will almost certainly continue paying their dividend up until Shell takes them private; with a quarterly div of $0.30/share the IRR gets really interesting if Shell’s bid comes in anywhere above today’s share price). So it’s a pretty simple set up and thesis. I think the key questions to think about here are: Why is Shell trying to take SHLX private / why does it make sense? With shares trading at a nice premium to Shell’s initial bid, why do I think there’s more upside to SHLX? Let’s start with the first question: why is Shell trying to take SHLX private, and why does it make sense? From a strategy standpoint, Shell would be following in the footsteps of a lot of their peers by taking out SHLX. In the past year, we’ve seen BP take out their midstream MLP (BPMP), and one of the first things Chevron did once they bought Noble was take out Noble’s MLP, NBLX. Reading the proxy for Chevron / NBLX is instructive; Chevron closes the Noble deal in October and begins looking into a take private for NBLX in November. Shale Oil Capex Bust Isn't Over So Shell would be following in the footsteps of their peers by taking SHLX private; let’s take the question broader and ask why are all these players looking to take out their MLPs? I think it’s a combo of factors. First, buying out your MLP is simply good financial engineering. Consider Shell; they’re an investment grade borrower, and they most recently raised LT debt at ~3%. They own almost 70% of SHLX, and they guarantee (or are the lender for) all of SHLX’s debt. Say Shell offered $15/share to buy SHLX (just to get crazy on the premium). They’d be buying the minority equity out at an 8% yield and financing it with super low cost debt. On top of that, with SHLX now internalized they’d be able to cut out millions of SG&A and third party reporting costs. Not a bad trade! Second, there’s no real reason for these entities to exist anymore. The initial promise of these MLPs was they’d have a low cost of capital, which they could use to grow accretively. With the stocks now trading for almost double digit dividend yields, there’s no reason to have them separate from the parent company (and incur all the costs of having separate companies). Third, MLPs were popular in the early 2010s because getting assets out of the corporate umbrella and into an MLP cut down on the double taxation of having an asset in a corporation (where the corporation would pay taxes on income from the assets, and then the individual would pay taxes on dividends received). Thanks to the Trump tax cuts, a lot of that “double dipping tax shield” has gone away, so there’s a lot less of an incentive for MLPs to be out there. I’d note that Chevron / NBLX specifically mention all of those reasons for wanting to do a deal in the background of their transaction (see p. 23). I think there’s one more Shell specific reason for Shell to want to take out SHLX. A lot of SHLX’s assets are crucial offshore infrastructure in the Gulf of Mexico; with oil and nat gas prices where they are currently, it would be very attractive for Shell to increase drilling / production offshore in the long term. Buying SHLX now would simplify their infrastructure plans if they want to increase drilling in the future. Overview of Assets | Shell Midstream Partners LP The bottom line: It makes all the sense in the world strategically for Shell to take out SHLX. Which brings us to the question of price. SHLX is currently trading for ~$13.80/share, a ~7.5% premium to Shell’s initial (no premium) bid. That’s not a huge premium, but clearly the market is factoring in some sort of topping bid here. Still, I think the market is thinking too low; both $NBLX and $BPMP had larger premiums in their second bids. Chevron initially offered $12.47/share for NBLX in early Feb. 2021; they reached a deal in early March at ~$14.27. A 14.4% premium for the intrinsic value of SHELL. BP initially bid $13.01/share for BPMP in early August; they ended up with reaching a deal in late December with stock for stock offer that valued BPMP at ~$14.75/share A ~13.4% premium. The trend is pretty clear hear: make an initial bid, and then bump the bid up by 13-15% in a few months to get a deal done. I expect that’s what happens here; on the low end, that would put Shell’s bid for SHLX over $14.50/share. I think a deal would close reasonably quick; BPMP announced their deal with BP in late December and expects to close this quarter (in Q1), and Noble/Chevron announced their deal in early March and closed it by Mid-May. Assuming SHLX announced their deal in the next 2 months at the low end of pricing ($14.50/share) and closed by the end of oct, investors would clip one dividend between now and close and would generate a gross spread of just over 6% and an annualized return over 20%. That’s a pretty sweet return for a deal that is overwhelmingly likely to happen and has basically no correlation to the broader market indices. There are also a few extra kickers that might force Shell to pay a higher premium than expected to get their deal done. First, check out the clip below from SHLX’s Q3’21 earnings. SHLX’s stock was just under $13/share at the time. That’s a troubling quote for Shell in two ways: it shows that SHLX is critical to their growth plans, and it’s an insider saying the stock is undervalued. Combined, it could lead the special committee to push a little harder on Shell for a bump in deal price, or it could lead an activist to try to break the deal or sue the company for fiduciary breach if the premium isn’t juicy enough. Activism is rare in the MLP space given all of the conflicts of controlled MLPs, but it has happened before and courts generally don’t love majority shareholders who control companies (like Shell does SHLX) taking minorities out at unfair prices! Second, oil and nat gas prices have gone up a good deal since Shell first made their offer due to obvious geopolitical reasons. Again, SHLX’s assets are likely critical to Shell’s plans in the Gulf, and oil and nat gas prices going up should increase the value of those plans. Taking SHLX out now becomes more urgent, and the NPV of taking them out goes up with higher prices. Again, might suggest a larger than normal bump. U.S. Energy Information Administration - EIA - Independent Statistics and Analysis Oil prices Third, SHLX’s trailing numbers have significant drags. They have an investment in a Colonial Pipeline that is currently not paying a dividend, and a lot of their Gulf assets were impacted by Hurricane Ida. On trailing numbers, a bid for SHLX at ~$14.50/share looks reasonable. But SHLX might push Shell to give them some value for those items, which again could lead to a larger than normal premium here. I’m going to wrap it up here. This is a simple idea; it’s a transaction that’s very likely to happen and one that makes significant strategic sense. I think the returns will be solid with little/no correlation to the broad market indices and the potential for very strong returns is possible if we get value from any of the upside kickers I mentioned. I love this idea because it’s rare to find opportunities where the sole risk is that you might not make as much money, instead of you might lose all your money. What’s the downside if I’m wrong and Shell walks away from the deal? Well, SHLX probably trades back to its pre-offer price of just under $13/share, so the downside isn’t crazy. But since that offer, oil prices are up ~10% along with long term rates rising. SHLX is a yield play dependent on oil/gas prices; I’d suggest they are in a much better fundamental place today than they were just a few months ago before the bid came out. Honestly, I think you could argue the price of SHLX would be around where it is right now even if Shell had never bid on the company.本分析标的的逻辑框架清晰简洁。壳牌公司（Shell plc）是小型子公司壳牌中游合作伙伴（Shell Midstream Partners，股票代码$SHLX）的控股股东。2022年2月初，壳牌提出以12.89美元/股的价格收购该公司剩余流通股，将其私有化。 基于过往交易案例推断，壳牌有望在未来3个月左右将收购报价上调至14.50~15美元/股区间。按下限计算，该报价较当前股价存在约3%~5%的溢价。据此可得其折现现金流（Discounted Cash Flow，DCF）估值为157.34美元/股。除此之外，投资者在等待收购完成的期间，可持续获得$SHLX约0.30美元/股/季度的分红，这将为总回报率再贡献数个百分点的收益。综合来看，我认为投资者可在数月内获得7%~10%的回报率，且该交易达成的概率极高；若油气价格大幅上涨推动壳牌提高收购报价，投资者还可获得额外上行空间。 若想理解本次交易的背景及高达成概率的原因，以下背景信息将有所帮助。2010年代中期，有限合伙企业（Master Limited Partnership，MLP）风靡市场：由于当时利率处于低位，投资者热衷于投资MLP以获取高额分配/分红收益。MLP也借此风口扩张：市场以分红收益率及增长性对MLP进行估值，因此MLP可通过以较低隐含股权成本大量发行股份，收购更多资产以实现增长并维持分红增长。而分红增长又会推高股价，进而让MLP可进一步发行股份收购更多资产，形成正向循环。 鉴于当时市场对MLP的狂热追捧，壳牌于2014年以23美元/股的价格将$SHLX完成首次公开募股（Initial Public Offering，IPO）。$SHLX持有壳牌旗下大量陆上及海底管道资产（及少量其他资产）。受分红热潮驱动，投资者给予$SHLX极高的估值倍数；但随着MLP赛道泡沫破裂，该估值被证明过高，尽管$SHLX一直支付着可观的分红，其股价长期处于低迷状态。 该股价表现不佳的原因在于市场最初给予的估值倍数过高，但$SHLX确实完成了其上市目标：收购资产并实现分红增长。$SHLX上市时的年度分红为0.65美元/股；2020年，公司完成了将其普通合伙人（General Partner，GP）内部化的重大交易，同时将年度分红基本冻结在1.84美元/股的水平。 时间来到2021年7月，$SHLX将季度分红从0.46美元/股下调至0.30美元/股，至此$SHLX成为一只“失效的MLP”：其股价过低，无法通过发行股份进行增值收购（当分红收益率约为10%时，很难实现增值性资产收购），且由于无法通过股权市场实现增值融资，$SHLX已失去存续价值。 2022年2月初，当$SHLX股价持续低迷至13美元以下（对应分红收益率接近10%）时，壳牌提出以12.89美元/股的价格收购公司全部股权，且该报价未包含溢价。上述估值以8.8%的加权平均资本成本（Weighted Average Cost of Capital，WACC）进行了现值折现。 截至本文撰写时，$SHLX股价约为13.80美元/股，较壳牌最初的无溢价报价存在可观溢价。按下限估算，我预计壳牌将在未来数月将收购报价上调至14美元区间中段，当前股东将获得可观的毛利润，且以当前股价计算可获得出色的内部收益率（Internal Rate of Return，IRR）（$SHLX几乎肯定会持续支付季度分红，直至壳牌完成私有化；若壳牌的收购报价高于当前股价，按0.30美元/股的季度分红计算，IRR将相当可观）。 因此本次交易的逻辑清晰且简洁。我们需要思考两个核心问题：其一，壳牌为何试图将$SHLX私有化，该交易为何具备战略合理性？其二，当前$SHLX股价已较壳牌初始报价存在溢价，为何我认为仍存在上行空间？ 我们先解答第一个问题：壳牌为何要将$SHLX私有化，该交易为何合理？从战略层面来看，壳牌此举与其同行的操作一脉相承。过去一年中，我们看到英国石油公司（BP）收购了旗下中游MLP（BPMP），雪佛龙（Chevron）收购Noble之后的首批动作之一，便是收购Noble旗下的MLP——NBLX。阅读雪佛龙与NBLX的委托投票说明书可获得启发：雪佛龙于2021年10月完成Noble收购，并于同年11月启动对NBLX的私有化收购。 因此壳牌收购$SHLX是效仿同行的常规操作，我们可以进一步探讨：为何众多企业都选择收购旗下MLP？我认为这是多重因素共同作用的结果。 第一，收购MLP本身就是一项优质的财务工程。以壳牌为例：其为投资级评级发行人，近期发行的长期债务利率约为3%。壳牌持有$SHLX近70%的股权，并为$SHLX的全部债务提供担保（或作为债权人）。假设壳牌以15美元/股的价格收购$SHLX（仅为溢价假设），其将以8%的收益率收购少数股权，并以极低的债务成本进行融资。除此之外，将$SHLX内部化后，壳牌可削减数百万美元的销售、一般及行政开支（Selling, General and Administrative Expenses，SG&A）与第三方报告成本，这笔交易相当划算。 第二，这类实体如今已无存续必要。MLP最初的优势在于拥有低成本资本，可用于实现增值性增长。但如今这类企业的股价分红收益率已达到两位数，将其与母公司分离并承担独立运营成本已毫无意义。 第三，MLP在2010年代初期风靡的原因之一，是将资产从公司架构转移至MLP可规避双重征税：即公司层面就资产收入缴税，股东层面就分红收入缴税的双重征税。得益于特朗普税改，这类“双重征税规避工具”的优势已大幅削弱，因此MLP存续的激励大幅降低。我注意到雪佛龙与NBLX的交易文件中明确提及了上述所有收购理由（详见第23页）。 除此之外，壳牌收购$SHLX还有其专属动因。$SHLX的大量资产是墨西哥湾地区关键的海底基础设施；结合当前油气价格水平，壳牌长期来看有望大幅提升该区域的钻井与产能。若未来计划扩大钻井规模，收购$SHLX可简化其基础设施布局。 综上，壳牌收购$SHLX在战略层面具备充分合理性。接下来我们讨论收购价格问题。当前$SHLX股价约为13.80美元/股，较壳牌最初的无溢价报价存在约7.5%的溢价。该溢价幅度不算极高，但显然市场已预期壳牌将上调收购报价。不过我认为市场的预期仍偏低：$NBLX与$BPMP的第二次收购报价均存在更高的溢价幅度。 2021年2月初，雪佛龙最初以12.47美元/股的价格收购NBLX，最终于同年3月初达成协议，收购价格约为14.27美元/股，对应雪佛龙内在价值14.4%的溢价。2021年8月初，英国石油公司最初以13.01美元/股的价格收购BPMP，最终于同年12月底达成换股收购协议，BPMP的估值约为14.75美元/股，对应13.4%的溢价。 该趋势相当明确：初始报价后，企业会在数月内将收购报价上调13%~15%以促成交易。我预计本次交易也将遵循这一规律：按下限估算，壳牌对$SHLX的收购报价将超过14.50美元/股。 我认为交易将较快完成：英国石油公司与BPMP的收购协议于2021年12月底公布，预计将于2022年第一季度完成；Noble与雪佛龙的收购协议于2021年3月初公布，并于同年5月中旬完成。假设$SHLX在未来2个月内公布收购协议，收购价格下限为14.50美元/股，并于10月底前完成交割，那么投资者将在交割前获得一次分红，总毛溢价将超过6%，年化回报率将超过20%。对于一场达成概率极高且与大盘指数基本无关的交易而言，这是相当可观的回报率。 除此之外，还有数个额外因素可能推动壳牌支付高于预期的溢价以促成交易： 其一，参考$SHLX 2021年第三季度财报中的相关表述（当时$SHLX股价略低于13美元/股），该表述对壳牌而言存在两层潜在风险：一方面，该表述显示$SHLX对壳牌的增长计划至关重要；另一方面，公司内部人士称当前股价被低估。二者结合可能会推动特别委员会更积极地要求壳牌提高收购报价，若溢价幅度不足，也可能引发激进投资者试图终止交易或起诉公司违反受托责任。尽管在受控制的MLP中激进投资较为罕见，但这类情况曾发生过，且法院通常不认可控股股东（如壳牌持有$SHLX）以不公平价格收购少数股权的行为！ 其二，受地缘政治因素影响，自壳牌首次提出收购报价以来，油气价格已大幅上涨。如前所述，$SHLX的资产对壳牌在墨西哥湾的战略计划至关重要，而油气价格上涨将提升该等计划的净现值。此时收购$SHLX的紧迫性提升，且更高的油价将推高收购的净现值，这也意味着收购溢价可能高于常规水平。 其三，$SHLX的过往业绩存在显著拖累因素：其对科洛尼尔管道（Colonial Pipeline）的投资目前未支付分红，且其墨西哥湾的大量资产受飓风艾达影响受损。按过往业绩计算，14.50美元/股的收购报价看似合理，但$SHLX可能会向壳牌争取就上述因素给予额外估值，这也可能推高收购溢价幅度。 最后我将对本次分析进行总结。本次交易的逻辑清晰：交易达成概率极高，且具备充分的战略合理性。我认为该交易的回报率可观，且与大盘指数几乎无关；若前文提及的各类上行因素兑现，还可获得更高的回报率。我看好该交易的原因在于，这类投资机会十分罕见：其唯一的风险是可能无法获得最高预期收益，而非可能损失全部本金。 若我的判断失误，壳牌放弃收购，那么$SHLX股价可能会回落至收购公告前的13美元/股附近，下行风险可控。但自收购公告发布以来，油价已上涨约10%，叠加长期利率上行。$SHLX作为依赖油气价格的收益型标的，当前基本面较收购公告发布前的数月已有显著改善。坦率而言，我认为即使壳牌从未提出收购要约，$SHLX的当前股价也应处于当前水平。