Shell midstream, special situation
Shell midstream, special situation
Chair of conflicts commmittee incentives are somewhat aligned
Shell owns 68.5% of Shell Midstream (SHLX) and wants to buy out the rest for $12.89. This is obviously too low as it would imply a 2022 FCF yield of 14.2%.
SHLX owns pipelines in places where no new pipelines will be built. A significant portion of their assets carry oil out of the Gulf of Mexico, which will see increased production this year. These are for the most part monopoly like assets on long term take or pay contracts that adjust for inflation. So pretty much the perfect inflation hedge. A coincidence that the offer came a day after worse than expected inflation figures were announced?
This VIC write up goes in great detail and estimated a base case fair value of about $17/unit in middle of 2020. This was while oil prices were at $40 and further development in the Gulf of Mexico were extremely uncertain.
Usually unitholders don’t have a lot of rights in situations like this. The only hope is that the conflicts committee that has to approve the merger, will demand a higher price. Luck will have it that the chair of this committee is James J Bender, and he purchased 10,000 units in 2020 for $16.90. Owning 35,000 units total. Rob Jones who will also be on the committee purchased 15,000 units for $16.57 in 2020 as well. For a total of 30,000 units.
Clearly SHLX is worth somewhere between $20-30. So an increase to $17 would still shaft unitholders here and give Shell a great deal. And mr. Bender probably has an incentive to get at least $17? So that he at least breaks even on his 2020 purchase. DCF forecasts are about $730m or $1.72/unit for 2022. With mid single digit growth through 2025 expected. Debt of $2.2-2.5 billion by the time this will close.
BP Midstream Partners (BPMP) owns very similar assets and will be bought out in an all stock deal. Offer was made in August for $13.01 and was upped to $14.75 in December. I don’t see any insider purchases though, so I think incentives for SHLX are better aligned to get a better price. Especially now that the consensus is that inflation might not be transitory. This should increase the value of these type of assets considerably. And should provide a strong incentive for Shell to get a deal done quickly.
I bought some $12 options to play this. I may sell at any time and do your own work obviously. Feedback welcome.
I would assign zero value to the incentive to get break-even. This guy Bender has had a good legal career in O&G and is probably worth $10m+ judging by his stock sales the past few years. I think there is no chance that getting break-even on a small stock purchase two years ago is going to affect his decision making. Career risk, lucrative directorships, future business opportunities and doing things right 'by the book' are all much, much more important.
That said, this could still be an interesting opportunity because the "lowball offer followed by a small bump" is an often used playbook because it is good for everybody. The directors can say they fought valiantly for a better price, Shell still strikes a bargain deal but can pretend there was a fair process and shareholders feel slightly less screwed.
Clever idea