Shell Pipeline investors expect higher price in takeover

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(Bloomberg) – Investors in a subsidiary of Shell Plc say the parent company undercuts them with a $1.6 billion offer for shares it doesn’t already own.

Shell said Feb. 11 that it plans to buy the remainder of Shell Midstream Partners LP for $12.89 per unit. The offer was not accompanied by any acquisition premium, because it corresponded to the closing price of the previous day. It was also a far cry from the $23 the stock started trading at in 2014.

The proposal is too cheap, according to at least three unitholders. Shell Midstream, or SHLX, is currently trading 8.6% above the bid, indicating that investors expect the company to raise it.

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Shell Midstream is a member of a select group of entities called master limited partnerships, a structure that was once widely adopted by US energy companies as a way to avoid corporate-level taxes while transferring more income to investors. . The popularity of MLPs has declined in recent years after changes to tax rules, and many companies have been taken over by parent companies, in deals similar to the one Shell is now offering.

“We would expect there to be a bump in the initial offer made to SHLX unitholders, primarily because that appears to be the way the precedent works,” said Gabriel Moreen, managing director of Mizuho Securities LLC. . “However, as the SHLX assets are worth significantly more today than they were six months ago or before the offer was made, I would say we are a bit skeptical.”

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Earlier this week, Höegh LNG Holdings Ltd. announced that it has reached an agreement to acquire the outstanding shares of Höegh LNG Partners LP after more than doubling the price of the initial offering.

Shell said its offer will be evaluated by a conflicts committee composed entirely of independent directors, who will negotiate on behalf of public shareholders.

“Shell’s offer is significantly below its intrinsic value,” according to professional investor Joshua Nahas, who owns the stock through his Wolf Capital Advisors fund. Shell’s “lowest” price values ​​the 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 lower by two oil price slumps in the past eight years, a change in the US tax system and investor pessimism about pipeline growth prospects under the transition to cleaner fuel sources. Other pipeline operators also fell. Energy Transfer LP, for example, has lost nearly 40% over the past seven years.

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One of the drawbacks of the MLP model is that it gives investors fewer rights than most listed companies. The general partner – in this case Shell – has no fiduciary duty to the common unitholders and board members are not required to be independent.

This makes legal alternatives very difficult, said Brian Gaines, whose Springhouse Capital LP owns shares of Shell Midstream Partners. Since Shell is apparently concerned about ESG, with governance being a key part of this, Gaines expects the company to offer fair value, something closer to $20 per unit.

The Disputes Committee, appointed by the Shell Midstream Board, is currently negotiating a final price with Shell. But Gaines and Nahas say the panel is indebted to its parent company, given that the board was appointed by Shell.

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The committee is also working on understated profitability numbers, said Caroline Lundberg, portfolio manager at Adakin Capital, which has held Shell Midstream shares since March 2020, in an interview. “We believe the offer price is very unfair given the quality of the underlying assets, some of which are not fully included in the EBITDA figure the company is working on.”

Shell’s bid level was based on profitability measures that were temporarily depressed by the impact of Hurricane Ida and the suspension of the dividend Shell Midstream typically receives from its stake in the Colonial Pipeline, Lundberg said. It also said that a price increase in 2022 that the planned pipeline and the expansion of one of its projects, together adding about 10% more profitability, is also not reflected in Shell’s offer.

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