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Shell Midstream enters Permian Basin to leverage Shell's shale portfolio

Shell Midstream Partners LP's entrance into the Permian Basin through its acquisition of a 50% stake in the Nautilus gas gathering system reflects a strategy to maximize what executives called the "cornerstone" of Royal Dutch Shell plc's shale assets.

"This acquisition is the first of a number of growing opportunities for Shell Midstream Partners to provide the midstream solution to our sponsor's unconventional portfolio," partnership President and CEO John Hollowell said on an Aug. 3 earnings call. "The system will gather gas from a majority of Shell's operated production from future wells under a long-term, 20-year contract."

The system's initial build-out, which began service in June, has 60 miles of pipe with 20 receipt points, a 24-mile high-pressure header system and four compressor stations with more than 10,000 horsepower. It is expected to triple in size by 2030, expanding to about 250 MMcf/d of capacity.

Shell's unconventional portfolio allows for "flexibility as investment can be ramped up or down, which is valuable in the current environment," Hollowell said. It includes acreage in key basins in the U.S., Canada and Argentina, to which Shell contributes $2 billion to $3 billion in annual capital investment.

Within this portfolio, the Permian Basin is Shell's "most important asset," according to Hollowell. Shell Midstream's sponsor plans to funnel more than $1 billion per year in investments into its 270,000-acre position in the Delaware Basin to grow production to 150,000 barrels per day by the end of the decade.

The $47 million acquisition is an exercise of Shell's buy-in provision in its Delaware Basin gathering and processing agreements with Crestwood Equity Partners LP, signed in 2016. The deal is scheduled to close in the fourth quarter of 2017.

Shell Midstream reported limited partner interest in net income of $51.2 million, or 29 cents per unit, in the second quarter, down from $58.7 million, or 33 cents per unit, in the first quarter.