For initial public offerings, energy’s still the driver
To draw investors, many in Houston area go for master limited partnerships, including Shell
HOUSTON companies taking their stock to Wall Street for the first time over the last 14 months included the first midstream master limited partnership by a global oil company — and that one required a sales job by Texas executives reporting to bosses in the Netherlands.
“It took a little bit for our European board to understand. It was more of an educational piece than meeting high-resistance barriers,” said Peggy Montana, CEO of Shell Midstream Partners, a Houston-based Royal Dutch Shell affiliate that raised $920 million in its October initial public offering.
“We are the first supermajor to come out with an MLP, and it caught people a little bit by surprise at first,” said Montana, who led a three-woman team that got Shell’s MLP up and running. “But it was all about long-term value and the capability for growth.”
Master limited partnerships are publicly traded entities that do not pay U.S. corporate income taxes and distribute most of their income to investors, called unit holders, in payments similar to stock dividends. The structure is most common in the midstream industry, where long-term transportation and storage contracts ensure regular income that can be passed along to investors.
Despite an oil price slump, energy companies continued to dominate Houston IPOs last year, and more than a third were MLPs, based on companies tracked by S&P Capital IQ that had initial public offering of shares — including spinoffs — from January 2014 through May 13, 2015.
S&P Capital IQ’s survey for the Chronicle 100 found that 11 of the 14 Houston-based companies making initial offerings since January 2014 were energy or petrochemical businesses, including five MLPs that alone accounted for $3.23 billion of the $4.74 billion total raised in the 14 IPOs.
The total was down from $5.82 billion in the last Chronicle 100 survey a year ago, but that tally included $2.8 billion raised in a single offering by Plains GP Holdings, an affiliate of pipeline and terminal company Plains All American Pipeline.
As for the recent IPOs, Shell Midstream’s in October raised $920 million, second only to another midstream master limited partnership, Columbia Pipeline Partners, which raised $1.08 billion in February. Columbia originated out of Indiana-based NiSource and its Houston-based spinoff, Columbia Pipeline Group.
Montana, who is retiring June 30 after leading the Shell Midstream launch, said Shell had considered the concept before but it never went far. She and Shell Midstream’s chief financial officer, Susan Ward, led the renewed effort with further evidence of other successful midstream MLPs, as well as the rapid growth of the North American energy infrastructure in general.
Shell can now move its midstream and offshore pipeline assets into the MLP and get more long-term value from them rather than put them up for sale, Montana said.
Houston-based USD Partners is taking a similar approach as a new MLP by growing primarily through the transfer of rail terminal assets from its USD Group, a pioneer in transporting oil by rail.
The MLP was a way of holding the assets rather than selling them, said USD’s chief executive, Dan Borgen.
Ted Gardner, senior portfolio manager for Salient Partners’ master limited partnership investments, said there’s a large backlog of proposed MLPs that seem to be waiting for oil and gas prices to rebound more before setting dates for initial public offerings. Hess Corp.’s announced Hess Midstream Partners is the largest brand name on
“We are the first supermajor to come out with an MLP, and it caught people a little bit by surprise at first. But it was all about long-term value...” Peggy Montana, CEO of Shell Midstream Partners
deck, he said.
Although energy giant Kinder Morgan consolidated and left the MLP space and Williams Cos. is doing the same, Gardner said those are special cases and not necessarily trends.
Kinder Morgan and Williams are both large, wide-reaching brands that wanted to reduce their costs of capital and simplify their structures. Few companies are large enough to pull off such moves, he said, and both Williams and Kinder Morgan had unique reasons for buying their affiliated partnerships.
The slump in commodities prices is slowing the launch of “nontraditional” MLPs — ones outside of the midstream sector. They are less common, Gardner said, and therefore less understood by investors looking for potentially safer, simpler bets.
Still, Houston-based Westlake Chemical Partners launched in July 2014 in the petrochemical space, and Black Stone Minerals opted to go forward with its initial public offering this spring as a minerals and royalties MLP.
“We evaluated postponing,” said Black Stone’s chief financial officer, Marc Carroll, but leaders decided to go forward and look for larger energy companies seeking to divest their non-core minerals assets.
“Let’s be in a position to take advantage of opportunities should they arise,” Carroll said. “We are financially sound.”