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SHEL Shell Plc

2,625.00
12.00 (0.46%)
28 Mar 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Shell Plc LSE:SHEL London Ordinary Share GB00BP6MXD84 ORD EUR0.07
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  12.00 0.46% 2,625.00 2,627.50 2,628.50 2,636.50 2,613.00 2,624.00 11,155,529 16:35:02
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Crude Petroleum & Natural Gs 316.62B 19.36B 2.9804 8.82 170.68B

Energy IPO Boom Leaves Some Wary

23/11/2014 8:51pm

Dow Jones News


Shell (LSE:SHEL)
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By Corrie Driebusch 

A gusher of U.S. initial public offerings of energy-focused master limited partnerships has some money managers urging caution.

Investors, drawn by the reputation of MLPs for stable, high payouts and a central role in the U.S. energy boom, have poured money into newly minted stocks from these companies, which mainly own and operate oil and natural-gas pipelines and storage facilities.

MLPs are publicly traded entities that pass on to shareholders the majority of their income in tax-favored distributions. Most MLPs earn money by charging oil-and-gas producers to transport or store their products.

This year, a record $6.8 billion has been raised through MLP IPOs, topping the previous all-time haul of $5.9 billion for all of last year, according to Dealogic. Nearly $11 billion has flowed into U.S. open-end energy-limited-partnership funds year to date, and an additional $3.8 billion has flowed into energy-limited-partnership exchange-traded funds, according to Morningstar.

Among the 18 MLPs making their debuts this year were the two largest IPOs ever in the group. Shell Midstream Partners LP raised $1.1 billion at its IPO in October, and Antero Midstream Partners LP sold $1.2 billion worth of shares in November.

But many MLP specialists warn that along with the boom have come more companies that have less-attractive features, namely businesses with high exposure to swings in energy prices, such as refineries, and unstable distributions.

"If you were an investor pre-2005 and you threw a dart at a board, you probably couldn't get in trouble" when it came to MLPs, said Brian Watson, portfolio manager and director of MLP research at Oppenheimer SteelPath MLP group of funds, which oversees $14 billion. "Now if I threw a dart at a board, I could end up with a very risky company."

The top holding in the Oppenheimer SteelPath MLP Alpha Fund as of Oct. 31 was Enterprise Products Partners LP, which at $76 billion in market capitalization is one of the largest publicly traded energy partnerships and is up 19% this year.

In a period of low interest rates, the high distributions offered by MLPs have been their main attraction. The Alerian MLP index, a widely followed benchmark, yielded 5.6% at the end of October. The MLP index has risen 12% this year, in line with the S&P 500. On a total return basis, it is up 18%, five percentage points ahead of the S&P.

Historically most MLPs grew by acquiring already-existing pipelines or storage facilities from exploration and production companies--often from parent companies that have carved out the MLP as a separate entity.

But in recent years the natural-gas and energy infrastructure boom has turned the pipeline and storage business into a growth industry, enabling some MLPs to expand their payouts without as much emphasis on acquisitions.

Through the end of the third quarter, the companies in the Alerian MLP index have increased their distributions by 5.7% from a year earlier, according to Alerian. And of the 50 names in the Alerian MLP index, 44 names were also in the index at the end of last year. Of these, 31 companies, or 70%, have raised their distributions in 2014.

But not all new MLP listings deserve to be blockbusters, money managers say.

One area that has drawn skepticism from some investors involves MLPs whose primary businesses aren't energy pipelines or storage.

USD Partners LP, which raised $155 million in an October IPO, is one MLP whose stock has struggled. The company's main businesses are rail terminals used to transport crude oil. The IPO was priced at $17, and the stock closed Friday at $16.50.

Some of these nontraditional MLPs also don't promise steady distributions. Among so-called variable-payout MLPs are CVR Partners LP and Rentech Nitrogen Partners LP, which focus on nitrogen fertilizer production. Shares of CVR are down 31% this year and Rentech is down 34%.

"The asset class has morphed somewhat to include some more fringe or tertiary type of infrastructure than the kind there were originally," said Todd Williams, who manages MLP strategies and separate accounts at Westwood Holdings Group, which manages $20 billion. Among the MLPs owned by Westwood funds as of Sept. 30 were Western Gas Partners LP, up 18% year to date, and Access Midstream Partners LP, up 12%.

Another group some fund managers say they are avoiding are so-called upstream MLPs, which are in the exploration and production business, and are therefore sensitive to falling oil prices. With crude-oil prices down by about 30% since June, that has become a front-burner issue.

Many managers are instead favoring traditional MLPs such as Enterprise Products, which are so-called midstream operators that collect revenue transporting oil and gas from one location to another.

A particularly attractive group, the fund managers say, are MLPs like Shell and Antero, which are spin-offs from established energy companies.

Strong demand for this kind of traditional MLP played out in the $1.1 billion IPO of Shell Midstream, which owns an interest in pipelines controlled by Royal Dutch Shell carrying crude oil and refined products. Shell priced its deal above expectations at $23 and sold more shares than it planned. It saw heavy demand despite having a yield at the time of the deal of 2.8%, at the time the lowest of any MLP IPO.

Shell Midstream opened 39% above its IPO price, and the stock is now up 53% since the offering.

"Investors are primarily attracted to visibility of growth from strong sponsors," said Chuck Park, head of Natural Resources Equity Capital Markets at Goldman Sachs.

While some of these MLPs offer lower-than-average yields, they provide greater predictability, fund managers say.

Leonard A. Weiss, senior vice president of investments for the Weiss Wealth Management Group of Raymond James in Farmington, Mich., says he keeps his clients, who are mostly retirees, out of the nontraditional entrants in the MLP arena, though they may be a good option for investors seeking higher risk and returns.

"For people over 50 who are looking to help secure their retirement income, the midstream market is really where it's at because it's so predictable," he said.

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