Shell said on Feb. 11 that it planned to buy the rest of Shell Midstream Partners LP for $12.89 per unit. The offer came with no takeover premium, as it matched the previous day’s closing price. It was also a far cry from the $23 at which the stock first started trading in 2014.
The proposal is too cheap, according to at least three unitholders. Shell Midstream, or SHLX, is currently trading 8.6% above the offer, indicating investors expect the company to raise it.
Shell Midstream is a member of shrinking group of entities called master limited partnerships, a structure that was once widely adopted by US energy firms as a way to avoid taxes at the corporate level while passing more income to investors. MLPs’ popularity has waned in recent years after changes to tax rules, and many of the companies have been bought out by the parent companies, in transactions similar to the one Shell is now proposing.
“We would expect there to be a bump in the initial offer made to SHLX unitholders, mostly because that seems to be how the precedent works,” said Gabriel Moreen, a managing director at Mizuho Securities LLC. “However, as far as SHLX assets being worth significantly more today than they were six months ago or prior to the offer being made, I would say we’re a little bit skeptical.”
Earlier this week, Höegh LNG Holdings Ltd. announced it reached an agreement to acquire the outstanding units of Höegh LNG Partners LP after more than doubling the original offer price.
Shell said that its offer will be evaluated by a conflicts committee consisting solely of independent directors, who will negotiate on behalf of the public holders.
“Shell’s offer is substantially below its intrinsic value,” according to professional investor Joshua Nahas, who holds the stock through his fund Wolf Capital Advisors. Shell’s “rock-bottom” price values units at nearly half of what they were worth in January 2020 despite oil prices doubling since then, he added.
The stock is trading around $14, pushed down by two oil-price crashes in the last eight years, a change to US tax system and investor pessimism about the growth prospects for pipelines amid the transition to cleaner fuel sources. Other pipeline operators also fell. Energy Transfer LP, for example, lost almost 40% over the last seven years.
One disadvantage of the MLP model is that it gives investors fewer rights than most listed companies. The general partner — in this case Shell — doesn’t have a fiduciary obligation to common unitholders and board members aren’t required to be independent.
That makes legal alternatives very difficult, said Brian Gaines, whose Springhouse Capital LP holds units of Shell Midstream Partners. Given that Shell is seemingly concerned with ESG, with governance a key part of that, Gaines expects the company would offer fair value, something closer to $20 per unit.
The conflicts committee, appointed by Shell Midstream’s board, is currently negotiating a final price with Shell. But Gaines and Nahas say the panel is beholden to its parent company, given the board was nominated by Shell.
The committee is also working off of undervalued profitability numbers, Caroline Lundberg, a portfolio manager at Adakin Capital which has owned Shell Midstream stock since March 2020, said in an interview. “We think that the offer price is very unfair based on the quality of the underlying assets, some of which aren’t fully included in the EBITDA number company is working of.”
Shell’s offer level was based on profitability metrics that were temporarily depressed by the impact from Hurricane Ida and suspension of the dividend Shell Midstream typically receives from its stake in the Colonial pipeline, Lundberg said. She also said a 2022 price increase that the pipeline planned and expansion of one of its projects, together adding about 10% in extra profitability, aren’t reflected in the Shell offer either.