Shell Midstream Partners Earnings: 3 Reasons Stupendous Growth Likely to Continue in 2016

Source: Shell Midstream Partners

Not surprisingly the worst oil crash in 50 years has decimated energy company earnings, with very few exceptions. However, Shell Midstream Partners (SHLX) has proven itself extremely capable of bucking this painful trend, which has resulted in Wall Street rewarding it with some of the best relative performance in the MLP industry.

SHLX data by YCharts

While this means that Shell Midstream is nowhere near as cheap as many of its peers, its latest earnings result reveals three reasons why its premium valuation is well earned. More importantly, these factors are likely to continue into 2016 and beyond, potentially making this fast growing midstream MLP one of the best long-term dividend growth opportunities you can find today, even if energy prices stay low for several years.

Growth engine firing on all cylinders

Sources: earnings releases, earnings presentation, Morningstar

Note that Shell Midstream Partners is too new to have full year 2014 data.

Shell Midstream's sensational growth this quarter was due to the closing of two drop downs from its sponsor and general partner, Royal Dutch Shell (RDS.A). What's more impressive is that Shell Midstream, despite growing its distribution at one of the fastest rates in its industry, has been consistent in not just keeping its DCR -- the most important metric for judging the long-term security and growth potential of a payout -- not just stable, but actually growing over time as well.

Source: Shell Midstream Q4 earnings presentation, note that excluding non-recurring DCF items, DCR for Q4 2015 was 1.6.

However, past performance isn't a guarantee that future growth will be as impressive, not unless three key factors exist. Luckily for Shell Midstream investors, these factors are present in spades, and likely to keep this midstream MLP's growth red hot for at least the next five to ten years.

Payout profile among the best in its industry

• Forward Yield: 2.5%
• 2015 Coverage Ratio: 1.44
• Five Year Analyst Annual Payout Growth Projections: 24.4%

The first thing every income investor should look at is the payout profile of any potential investment which consists of; yield, payout security, and long-term realistic payout growth expectations.

As you can see, not only did Shell Midstream Partners generate substantial excess cash flow in 2015 ($51.5 million worth) but analysts expect its impressive distribution growth to continue for the next half decade. This explains why Shell Midstream Partners has been relatively unscathed by the oil crash and why Wall Street continues to reward t with such a premium valuation compared to its slower growing rivals.

However, keep in mind that analyst long-term projects are educated guestimates that always need to be taken with a grain of salt. Investors always need to ask the question "what is the growth catalyst that makes those projections reasonable?" In the case of Shell Midstream Partners its the enormous growth runway provided by Royal Dutch Shell's enormous drop down pipeline.

Growth potential is massive but most importantly...

Source: Q4 investor presentation.

As you can see Royal Dutch Shell, due to its enormous scale, has a mountain of midstream assets it plans to eventually drop down to Shell Midstream Partners. In fact, the potentially $3.5 billion in annual EBITDA growth represented by Shell's North American pipeline, storage terminals, and processing facilities alone would represent a potential increase of over 19 fold compared to the MLP's trailing 12 month EBITDA. 

When you factor in Shell's global midstream assets, which likely represent potential future EBITDA growth several times larger than this, you can see why Wall Street loves Shell Midstream and continues to allow it to command such a premium valuation.

However, just because a midstream MLP has a potentially massive growth runway doesn't mean it can necessarily execute on it. Which is why the final step dividend investors need to undertake is to check whether or not a company or MLP has access to enough cheap growth capital to actually live up to its long-term growth potential

...Shell Midstream has strong access to cheap capital to grow for many years
While Shell Midstream's high and growing DCR represents an exponentially g
rowing stream of excess cash flow that it can use to fund its future growth the fact is that, even on an annualized basis, Q4's record high coverage ratio represents only $82.5 million in excess DCF.

Until Shell Midstream Partners grows substantially larger its excess cash flow simply won't be large enough to fund a significant portion of its capital spending. Luckily, the MLP's low leverage ratio (Debt/EBITDA) of 2.37,one of the lowest in its industry, gives it a strong liquidity position of $703 million, 87% of which is in the form of revolving credit facilities.

Add in Shell Midstream's easy access to equity growth capital courtesy of its richly priced units, and you can see that Shell Midstream is well positioned to potentially grow quickly for decades.

Bottom line
Shell Midstream Partners' current yield may be one of the lowest in the midstream MLP industry however due to its enormous long-term growth potential it has earned its premium valuation.

With a massive drop down pipeline from the world's third largest publically traded integrated oil giant likely to supply ongoing strong payout growth for as far as the eye can see, one of the strongest coverage ratios in the energy industry, and large, easy access to cheap growth capital, I highly recommend that all income investors consider this MLP for a spot in their diversified dividend growth portfolios.