Shell Midstream Partners L.P. (NYSE:SHLX) may be relatively small, but it has proven its capability with the continuous growth in its operations while ensuring long-term sustainability and stability. Amidst the problems caused by the pandemic, it remained intact and almost unaffected during the first half. Moreover, its generosity is a bit surprising as the dividend payments have rapidly grown despite being a newcomer to the industry and trading. However, the stock price does not seem to go along with its good performance as it remains bearish and appears to stay there for the next few weeks.

Analyzing the Consistent Financial Growth

Operating Revenue and Operating Costs and Expenses

Small but terrible Shell Midstream Partners L.P. has been at its best since it started operating. Despite being a newbie in the industry, it continued to prove its worth and remained firm these past few years. The efficient production and the increasing demand for its products sped up its growth. With an average growth of 25% every year, the operating revenue of the company has increased substantially in less than a decade. The most impressive change happened in 2013-2014 when it increased by 79% from $182 million to $327 million. In 2015, the change remained high at 39% as it further rose to $452 million. Since then, growth has been slower but remained consistent if only it did not fall by 4.1% in 2019 from $524.7 million to $503 million. Nevertheless, it remained high and one can see that it already grew almost thrice as much as it was a few years ago.

Furthermore, the pandemic measured and proved the company’s ability to thwart its negative effect on its operations. During the first quarter, the revenue fell by 7.6% from $131 million to $121 million. During the second quarter, the company remained unfazed with $120 million of revenues. With an accumulated amount of $241 million, the company kept its balance as it made sure it had adequate revenues. Despite the challenges it faced, the company remained unharmed when many of its peers staggered. With this, the revenue is estimated to be slightly lower at $499 million at the end of the year. For the next few years, it’s expected that the company has already adjusted and could generate $576 million in 2024.

Likewise, the operating costs and expenses moved in an upward direction. As the company increased its operations, it had to spend more on the direct materials and strategies and hire more. As a result, the operating costs and expenses have increased as expected. But as time went by, the company has improved and increased its efficiency which widened their gap. Hence, the operating profit consistently increased these past few years. As estimated in 2024, the costs and expenses will remain increasing but the operating profit will change from $234 million to $264 million.

Taken from MarketWatch: Shell Midstream Partners, L.P.’s Annual Financials

Taken from MarketWatch: Shell Midstream Partners, L.P.’s Quarterly Financials

Net Income

The company’s non-core transactions remained in line with the core operations. The coordination between the two helped the company maintain its growing profitability over the years. Its non-operating income which was primarily composed of income from equity investments in affiliates consistently rose. Meanwhile, as the company expanded, it had to increase its financial leverage which also increased its borrowings. With this, interest expense increased as well. But with the offsetting effect of the earnings from equity investments, the net value of non-operating income consistently rose. It resulted in uninterrupted growth in net income. From only $13.4 million in 2014, it jumped high to $160 million until it reached $381 million in 2019.

On the other hand, the first two quarters of the year remained good for the company. Even if the earnings fell by 20% in the first quarter, it easily bounced back by 66%. With a total amount of $224 million, the company saw a 17% increase compared to the previous year. This proves the enhanced efficiency of the company. Despite the effect on sales, the company remained at its best and maintained its efficiency and stability to keep the costs and expenses lower. Now that everything’s becoming normal again, the company may do better. Hence, we may see an increase in sales which will raise net income for the remaining two quarters. As estimated, net income will reach $416 million at the end of the year and may even go higher to $615 million in the long-run.

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Taken from MarketWatch: Annual Financials

Taken from MarketWatch: Quarterly Financials

Current Ratio

As the company raised the efficiency and profitability of its operations, the company made sure it had more than enough to meet its short-term obligations. Its cash and receivables increased substantially since it opened. From less than a hundred million in 2013 and 2014, it closed 2019 with almost $340 million. And even during the pandemic, the value went higher. As the earnings remained high, the accumulated amount of cash and receivables as of June 30, increased to $383 million. For the next five years, as the company operates with fewer restrictions, sales and earnings may increase further which will raise its cash. Hence, current assets may increase and exceed $500 million in 2024.

Meanwhile, the company’s current liabilities kept rising, too. But the company kept it at a manageable level as it remained below $50 million. Initially, it was primarily composed of accounts payables and other liabilities. But as the company increased its financial leverage, its borrowings went up. Currently, its short-term borrowings are only $1 million. But its borrowing maturity may change its current liabilities. It may amount to $80 million.

Given this, one can see that the company has adequate current assets to meet all its current payables. It has high liquidity. From 4.1 in 2009, it kept increasing to 7.8 in 2019. Hence, the size of its current assets is almost eight times larger than current liabilities. The upward trend of the ratio suggests that the company’s profitability increases its liquidity. Its earnings are used properly for dividend payments, increasing operating capacity, and addition to cash on hand to increase its liquidity.

Taken from MarketWatch: Annual Financials

Return on Asset

Return on Asset (ROA) has also been following an upward trend for the last five to six years. When the company just opened, net income was still low. As a result, ROA was still low at 2.1%. But as the company grew, both its earnings and assets grew further. But the former did faster which raised the value of ROA. From less than the ideal value of 5%, the company easily exceeded it. Since 2015, its ROA never fell below 16%. This shows that for every $100 of assets purchased, the company earned at least $16. The company’s assets are mainly fixed assets and liquid assets such as cash and receivables. It further proves the company’s capacity to enhance its operations by increasing its assets to also increase its capacity. And since the profitability increased faster as more assets were added, the company’s sustainability increased as well. Given this, one can see that the earnings of the company can satisfy its shareholders and further increase its operations to also increase its earnings in return. Hence, the profitability of the company has been adequate and consistent with liquidity and long-term sustainability. For the next five years, the trend of ROA will be smooth at 17% before slowly increasing to 18% which suggests stability in the operations and enhancement in 2024.

Taken from MarketWatch: Annual Financials

Return on Equity

Meanwhile, the return on the shareholders can be measured by checking the company’s Return on Equity (ROE). At first, its value was low at 3.2%. But like ROA, as net income accelerated, ROE rose considerably. As the company had to expand its operations, it had to invest more particularly in fixed assets. With this, the company had to increase its financial leverage to be able to suffice it. As a result, its equity doubled from $417 million to $1.1 billion and grew further to $2.4 billion. Nevertheless, the rate of increase in net income grew faster. In 2019, it already reached 12%. Since the company is relatively new to the industry, it’s important to know its Sustainable Growth Ratio (SGR). One can derive it by multiplying the Retention Ratio with ROE. Given the Dividend Payout Ratio of 55% in 2019, the Retention Ratio was 45%. Given this, we can see that the company can still grow without increasing its borrowings and issuance of shares. Hence, the current earnings of the company can sustain its growth by 7% for the next few years.

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Taken from MarketWatch: Annual Financials

What’s in Store for the Investors?

Dividends Per Share

When the company decided to enlarge its operations, it had to finance its acquisition of assets. To suffice it, it increased its financial leverage by borrowing and issuing shares. In 2014 when it went public, the company had 46,000 shares. It distributed $0.1042 per share to the shareholders. It grew five times in 2015 to $0.674 per share. As the company became more viable, the shares increased so did the dividends. Since 2016, dividend growth became relatively slower but remained high and consistent. In 2019, the dividend payments amounted to $1.69 per share. The company may still be new to the industry and trading, but it proved its worth by further strengthening its operations and remaining committed to dividend growth. But since it’s still a Dividend Challenger, it will still have to continue as an assurance to many investors who value long-term growth and stability. Meanwhile, the Dividend Growth Model seems to have made an accurate estimation of $1.84 per share. It may continue to grow to $2.49 for the next few years.

Nasdaq: Dividend History

Dividend Payout Ratio

With the rapid growth in dividends, the company made sure it would have enough to suffice it for a long period. When the company had just gone public, the Dividend Payout Ratio was 35%. As the shares grew, its earnings changed faster. As a result, the ratio fell to 26%. But as the company further raised the dividends, it jumped to 40%-50%. Currently, the ratio is 55%. Despite the increasing ratio, the company managed to further increase its earnings to be able to sustain it and enhance its operations. As estimated, the ratio may go higher to 63-64% but will eventually decrease to 62%.

Taken from MarketWatch: Annual Financials and Nasdaq: Dividend History

Dividends, Net Income, and Free Cash Flow

With the Free Cash Flow (FCF) of the company, we can further check the consistency of the company’s earnings with the Balance Sheet. FCF focuses on cash inflows and outflows of the company’s operations for the period and the change in operating assets and liabilities, including Capital Expenditure (CAPEX). Given this, we can confirm its long-term sustainability. FCF showed a trend identical to net income. With this, the long-term sustainability of the company’s operations was confirmed. As the company grew, the inflows of cash increased faster which sustained the increasing operations and acquisition of assets. From $60 million in 2014, it already grew more than 10 times as it exceeded $600 million in 2019. Since CapEx is already deducted, FCF can be used to cover all its financial obligations and be saved for its plans. FCF is more than twice higher than the dividends which proved the high capacity of the company to sustain it. For the next five years, it may reach $888 million and its gap with the dividends may widen. The continuous growth in FCF amidst the increasing CapEx suggests that the efficiency and profitability increase as more assets are purchased. And the increasing profitability of the company becomes more adequate and sustainable to increase its capacity in the long-run.

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Taken from MarketWatch: Annual Financials and Nasdaq: Dividend History

Stock Price

After touching its low point at $6.97 last March 18, the stock price increased faster to $15.16 last June 9. However, the price has decreased continuously since then. Despite its impressive performance during the first half and a low P/E Ratio of 6.58, the price remains bearish. Even if it appears to be undervalued, the trend does not seem to follow. With this, one may wish to use the Dividend Discount Model to confirm this observation.

Current Price: $9.55

Average Dividend Growth: 1.303511832

Estimated Dividends Per Share: $1.84

Cost of Capital Equity 1.496181989

Derived Value: $21.99853799 or $21.99

Given this, the undervaluation of the price is confirmed. Nevertheless, the trend appears to continue for the next few days or weeks. One must refer to other sources such as the company news, economic and market trends, and current events that may put upward or downward pressure on the price.

Opportunity for Further Growth

Shell Midstream Partners L.P. Remaining Strong Amidst the Pandemic

The company remained unfazed despite the challenges the pandemic caused. Its sales and earnings slightly fell in 1Q, but it bounced back in 2Q. It shows the stability and growth in its operations despite being a newcomer. As everything gradually becomes normal, there will be fewer restrictions and consumers will have a higher capacity to purchase. It will be an opportunity for the company to be at its best. It may cause increased sales and earnings which may also increase its sustainability in the long-run. The company has to maintain its efficiency to ensure its viability.

Key Takeaways

As this analysis concludes, it may still be a question for many investors if investing here is a sagacious move. It is normal since the company is still new to industry and trading. It still has a long way to go to prove itself. But it’s also enticing to invest in a newer company with a lower price due to bigger potentials it has to reach and offer to the investors. Given this, is it good to invest in a newcomer like Shell Midstream Partners L.P.?

Short-term Investors: The undervaluation of the stock price as shown by the P/E Ratio and Dividend Growth Model may attract an investor here. Its impressive performance amidst the restrictions and the difference of $12 are some of the things one must consider. However, the trend seems to oppose the observations. The bearish price remains low and does not show a potential increase for the next few days or weeks. Perhaps, the release of the 3Q Report may be a game-changer. One must postpone his plans of buying stocks here to avoid losses. He may wait for the report before he decides or watch the trend closely to determine a potential shift of movement.

Long-term Investors: The company is a newcomer but seems to promise a rosy future for many long-term investors. Its impressive performance over the years and even in a situation like this proves its stable and efficient operations to remain profitable and sustainable. The consistent increase in the dividends shows the company’s commitment to the investors. Meanwhile, the increased earnings and FCF show its adequacy to suffice it and further enhance the operations. The consistency of the company’s profitability with liquidity and sustainability conveys growth and security.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.