MLPs break ECM silence

IFR 2126 26 March to 1 April 2016
3 min read
Robert Sherwood

Shell Midstream Partners broke the equity funding drought for cash-starved master limited partnerships last week. The Royal Dutch Shell-affiliate’s US$383.5m block trade with Barclays on Tuesday night was the first regular equity raise from an MLP in four months.

Shell Midstream is considered to be a high-quality MLP with US$5bn market capitalisation and a relatively low 2.8% dividend yield.

Demand was evident as Barclays reoffered 11m units at US$31.75, a 6.7% discount to Tuesday’s last sale. That represented a 29% increase from the base offering of 8.5m units and the high end of US$30.75–$31.75 guidance.

The wider-than-normal discount reflected a negotiated situation between bank and client, with a minimum price and then profit share above that level.

Shell Midstream opened well above the reoffer price at US$33.65, suggesting a successful outcome for all parties.

Proceeds will be used to pay down US$458.2m of outstanding borrowings under a credit facility, thus clearing the way for future drop-down asset purchases from its parent.

“The Ebitda of assets owned or underdeveloped by Shell in North America is currently estimated to be US$3bn–$3.5bn,” said CEO John Hollowell on Shell Midstream’s earnings call last month. “This is a good indication of the opportunity available to Shell Midstream at this time.”

Shell Midstream completed US$1.2bn of drop down acquisitions last year. These deals have proved accretive to Shell Midstream’s quarterly dividend. A declaration of 22 cents a share for the fourth quarter, or 88 cents per annum, marks a 34% increase from the fourth quarter of 2014.

The Alerian MLP Index was up 34% last week from its February all-time lows. The sector’s collapse forced other MLPs that were unable to sell equity to seek alternative funding sources.

Summit Midstream Partners needed to extend the capacity of its credit facility last month in order to finance a US$1.2bn acquisition. Plains All America raised US$1.5bn in January through a private mandatory convertible issue to support its dividend.

Less clear is whether investors are really ready for MLPs to return to equity capital markets en masse.

Other people’s money

Natural gas explorer Antero Resources seized a unique opportunity to buffer its own finances without diluting its common shareholders. The Marcellus/Utica Shale-focused E&P raised US$179.2m in a block trade comprising shares of its midstream MLP affiliate Antero Midstream Partners.

Citigroup offered 8m units on behalf of the selling shareholder at US$22.40, versus the US$24.97 last sale. The wide 10.3% discount again reflects a negotiated process.

Antero Resources received 10.9m common units of Antero Midstream in September as partial funding of a drop-down of its water business, extending common unit holdings to 40.9m, a 41% stake. Last night’s sale reduces its common holdings in its subsidiary MLP to 33% of the outstanding.

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