Shell Midstream: Good Not Great

Shell Midstream Partners LP SHLX shares have lost 17 percent year-to-date. Despite the significant sector underperformance, Morgan Stanley’s Tom Abrams initiated coverage of the company with an Equal-weight rating and a price target of $39.

Positives

Analyst Tom Abrams commented that there was much to like about Shell Midstream. It is a blue-chip MLP with “a solid asset footprint, significant potential dropdown inventory above it, and a strong sponsor in energy major Royal Dutch Shell (RDS).”

Related Link: Morgan Stanley Initiates Coverage On Shell Midstream Partners At Equal Weight

Shell Midstream’s dropdown backlog were now over $2.5bn of EBITDA, and the company has been growing at “a top-tier rate” for a number of year. “With stable FERC-regulated pipeline-centric assets, SHLX revenue is largely fee-based with protection from take-or-pay or life-of-lease provisions,” Abrams wrote.

Shell Midstream should be able to execute its strategy being mostly independent of commodity market conditions and would likely generate sustained and managed growth.

Remaining On The Sidelines

The market already seems to recognize many of Shell Midstream’s strengths. Despite the shares declining since mid-February, while more commodity-exposed equities rallied, the analyst recommended other dropdown names that are “slightly more attractive” - Dominion Midstream Partners LP DM, Valero Energy Partners LP VLP, Phillips 66 Partners LP PSXP and Columbia Pipeline Partners LP CPPL.