The comparatively new industry of separate midstream MLP firms has recorded a number of firsts in recent years. Another occurred in late 2014 when Shell Midstream Partners LP became the first midstream MLP sponsored by a worldwide supermajor. Its $7 billion equity market cap would be signifi- cant in comparison to most midstream businesses but appears small in comparison to the $188 billion market cap of its sponsor, Royal Dutch Shell Plc. Shell’s extensive U.S. pipeline network represents the bulk of its existing assets.
But like most startups, Shell Midstream has had its growth and change—not the least of which was the retirement of its CEO, Margaret “Peggy” Montana, at the end of June. John Hollowell, executive vice president for deepwater, Shell Upstream Americas, has assumed the midstream unit’s CEO post. Susan Ward, the new MLP’s CFO, took time to visit with Midstream Business to discuss Shell Midstream’s begin- ning and its promising future.

MIDSTREAM What do you find different about the CFO role in a new and comparatively midsize partnership?

WARD Actually, I started my career as a chemical engineer in refining. After an MBA and training in finance at another large oil company, I worked in investment banking in energy in New York and Houston for 10 years before joining Shell. I also was vice president of commercial finance for Shell’s global upstream in The Hague for two years, from 2008 to 2010.
Because most of my work in banking was in M&A, equity capital markets or debt issuance, I had a lot of variety in my day-to-day work. And while there is still much transaction work especially with the growing MLP—and I have retained my role as part of M&A and commercial financial for all of Shell’s business in the Americas—what has been the most dif- ferent for me has been the routine, re- porting-related activities each quarter for a publicly traded company.
MIDSTREAM Shell midstream was one of the larger [MLP] IPOs done in 2014. What was the hardest part of going public for you?
WARD Zydeco is the pipeline system formerly known as Ho-Ho. It is the largest of the four pipeline systems we chose for our initial MLP asset mix but it did not have stand-alone audited historical financials. That had to be carved out of Shell Pipeline Co., which is a much larger entity, prior to the (U.S.) Securities and Exchange Commission registration process. That was time consuming. And since the business going into the MLP was small from a Shell point of view, getting everyone on board with a much more precise level of mat riality was critical. We spent many hours working on that.
The actual one-and-a-half week marketing process on the roadshow just prior to the IPO was fun. We had meetings and calls with nearly 100 potential institutional investors in more than 10 cities. Many said they were surprised to see an all-woman management team at an energy company. We had a female CEO, Peggy Montana; myself and the vice president of regulatory and major projects, Michele Joy—all representing Shell Midstream Partners on the road- show. It just worked out that way.
The executive officers were selected for their expertise and qualifications but people were really surprised. Sometimes there were challenges finding a women’s restroom—the institutions were used to having all-male management teams come in!
MIDSTREAM How would you rate Shell Midstream’s reception by The Street? Analysts for the most part seem to be giving a buy rating so they must like your story
WARD As you said, Shell Midstream Partners is the first MLP sponsored by a supermajor and that’s attracted quite a bit of attention by the equity research analysts and the institutions. We’ve had a great reception by the market. Shell Midstream, at the time we came public last November, was the largest and lowest- yielding MLP ever. And even now we are currently rated “buy” by four of the five equity research analysts who cover us. All of the four initial pipeline interests included in the MLP have stable cash flow, good safety and reliability records, strong customers and—for the most part—opportunity for long-term growth.
Those were terrific assets to be able to put into the MLP. Shell operates the majority of the MLP’s assets, including the onshore and offshore crude pipelines, and we also operate the refined products pipeline associated with the Bengal system. The attraction of an MLP owned by a supermajor as viewed by investors is that Shell has a very large inventory of qualified income assets and several of those are already visible. In addition, Shell annually spends capital on new assets to support its core upstream and downstream businesses, so we have the potential to create an even larger inventory of assets going forward. I believe we see that in our valuation.

MIDSTREAM The midstream MLPs recently formed by some of the majors, including Phillips 66 Partners and MPLX as well as Shell Midstream, seem to be tracking well in the stock market compared to free-standing midstream MLPs. Does a relationship with a well-known sponsor help the unit price?
WARD Yes, we see those MLPs as our peer group. I think having the Shell brand and Shell behind us as a sponsor is a unique advantage. It makes anenormous difference to the market. At Shell, safety and reliability are top priorities; our pipeline group is seen as a world-class operator. Our reputation for best-in-class asset integrity and reliability attracts high-quality customers and investors. And being able to offer investors predictable cash flows depends on our operations.
You know, Shell Pipeline Co. (SPLC), Shell’s primary vehicle for midstream in the U.S., has been in operation for nearly 100 years. And it has always been run as a commercial business for the parent and for third- party customers.
Shell has a diverse group of pipeline assets: offshore and onshore, crude and refined products. It has one of the largest pipeline systems in the deepwater Gulf of Mexico, including 16 offshore pipelines. We operate the majority of the pipeline corridors moving production to shore from Eugene Island, Mars and Odyssey and others. We then connect with an extensive onshore network that includes LOOP and LOCAP.
So as we see it, our metrics are focused on Shell’s ability to drop its existing strong portfolio of assets down into Shell Midstream Partners because acquisitions from third parties can be expensive. In addition to these existing assets, our organic projects generally provide cash returns at considerably lower multiples than it would cost us to do third-party acquisitions at this time.
MIDSTREAM You focus primarily on fee-based, ship-or-pay services. But what impact do you see that lower commodity prices might be having on your future cash cows?
WARD We have some slight impact from the low commodity prices related to a portion of our crude pipeline contract revenues, called allowance oil. This accounted for up to 15% of the revenues of those pipelines when we first went public—but oil prices were $100 per barrel then. Of course, that portion of revenue has been impacted in the $50 per barrel current environment. But so far, the Zydeco and Mars pipelines have made that up through higher transportation volumes than we originally expected.
MIDSTREAM Shell Midstream’s Bengal and Colonial pipelines move a signifcant portion of the nation’s petroleum products to market. What special challenges do you face right now on the products side of the business?
WARD The volumes on Bengal and Colonial are directly related to the demand for Gulf Coast refined barrels on the East Coast. Changing that demand, either from imports or local refinery production, can affect Bengal and Colonial volumes. And in addition, the Gulf Coast refineries are looking for their greatest market opportunities, which may be exports.
Currently, the demand for transportation services on Bengal, and especially on Colonial, remains high. But that demand can change. It’s important for Bengal and Colonial to be competitive and to provide high reliability.
Competition for refined-product transportation in any particular area, such as the East Coast region served by Colonial and Bengal, are impacted by the market demand for the volume of products produced by the refineries in that area, the cost of transportation for that target market and the availability of products in those market areas.

MIDSTREAM Do you see any change in your refined-product mix?

WARD The general market trend has been for a growth in distillate demand and longer-term tapering of gasoline demand, although that trend has stalled a bit with lower gasoline pricing driving some demand increases.

MIDSTREAM Midstream operators have a growing presence in the Gulf of Mexico, including Shell’s Mars system. Do you see offshore moving toward an upstream-midstream service model more like what has emerged onshore in recent years?
WARD Over the last decade, we’ve seen great investment in these offshore pipelines by the midstream pipeline companies. These companies are providing solutions that generally tie back to existing infrastructure, and the producers are seeking competitive options for their production to shore and assurance that their production reaches competitive markets. We’ve seen that particularly on Mars Pipeline. While we expect these midstream companies to provide strong competition, Shell and other producer-affiliated midstream companies are going to remain active in providing these solutions in the Gulf of Mexico.
From my perspective, the good news is the production from new fields is often more economic tieback to existing pipelines, and Shell has a strong position in many of those corridors. Sometimes we benefit by producers who occasionally bear the cost of tiebacks into our system that could have been sized to take advantage of these future opportunities.

MIDSTREAM Shell built the Zydeco, or Ho-Ho, header system to ease crude bottlenecks around the Gulf Coast. How has the crude transportation situation changed with the emergence of signi?cant light crude production from the Eagle Ford and other shale plays?
WARD Zydeco, which was formerly known as the Shell Ho-Ho system, was built to deliver crude to refineries across the Gulf Coast. Until 2013, it primarily delivered imports in Louisiana and Gulf of Mexico production west along that chain as far as Houston. But now, there is a need to move crude from Texas shale plays back east toward the Gulf of Mexico refineries. So the reversal of Zydeco was made at the request of our customers. And demand on that reversed pipeline was for 87% of capacity for periods between five and 15 years. In addition, Zydeco capacity is now pro-rated due to the high demand we’re experiencing, and we’ve demand grow despite the current crude price environment
MIDSTREAM Where do you see Shell Midstream Partners’ growth opportunities? Do you expect further dropdowns soon?
WARD Well, we’ve been working on getting our dropdown machine up and running, readying asset packages for dropdowns since the IPO. We’ve made substantial progress in the last six months and we announced our first dropdown acquisition for $448 million. On our first-quarter earnings call, Peggy Montana indicated that two more dropdowns may occur this year. Those will be intended to diversify the types of assets we have—specific assets going into the MLP that will be different from the original set of four pipelines.
In the near term, the plan is to work through the identified inventory of qualifying assets that would make good dropdowns. They should have attractive, fee-based predictable and growing cash flows; attractive tariffs; long-term transportation agreements with a guaranteed return. We’re seeing that these can help provide significant cash flow growth rates for the MLP.
After that, we expect the growth to come from other Shell assets—whether existing or in development. And in addition we’re always looking for quality third party acquisition opportunities.

MIDSTREAM Do you see any change in strategy or planning going forward with the change in senior management?
WARD I don’t think we will see any change in strategy related to the retirement of Peggy Montana, which was a personal decision by Peggy. She’s worked in the business for 38 years and will stay on our board of directors. John (Hollowell) brings a wealth of experience to the position. In fact, he ran the U.S. pipeline organization previously, and he led Shell’s distribution business where he took responsibility for the global network of Shell terminals, pipelines and transport. So he’s a terrific addition to the MLP’s executive leadership.
He interacted routinely with Peggy and Shell Pipeline Co. as it relates to the operated pipelines in the deepwater Gulf of Mexico. As with Peggy, John will report to the executive committee of RDS (Royal Dutch Shell). RDS has been very supportive of the MLP and committed to it. I think this is not going to change going into the future.
Shell sponsored the MLP to generate long-term value for both Shell and its investors—the MLP’s investors. Shell likes the MLP format because we can maintain control of the assets while selling minority interest to investors, who appreciate the long-term, stable business, growth potential of the assets and cash flow generation.
We recognize that in order for the MLP to benefit Shell, it needs to be large and we are working actively to do that. In addition to serving as a monetization vehicle for RDS, the MLP also spotlights the value of RDS’s extensive midstream business, which isn’t always obvious as one looks at the broader company.

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