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'We don't have our heads in the sand': Shell Midstream to watch sponsor payouts

Outgoing Shell Midstream Partners LP CEO John Hollowell reassured investors on Feb. 27 that management is keeping close tabs on required payouts from the energy pipeline master limited partnership to its general partner and those contributions' impact on capital costs.

Shell Midstream continues to pay a percentage of its incremental quarterly cash distributions to its general partner even as incentive distribution rights have fallen out of favor in the midstream sector because of the cost-of-capital burden that can handicap an MLP's ability to reinvest in the business.

"We do recognize the increase in cost of capital because [of] the [incentive distribution rights], there's no doubt about that," Hollowell said during Shell Midstream's Feb. 27 earnings conference call. "Just know that we don't have our heads in the sand here, we do recognize the impact ... and we're going to be working hard to be able to approach it in the right way and deal with it at the right time."

The CEO also emphasized that crude oil exports from the U.S. Gulf of Mexico's Louisiana Offshore Oil Port, which loaded its first very large crude carrier earlier in February, should boost volumes transported on the partnership's Zydeco pipeline system that connects directly to the port.

"To the extent that [Louisiana Offshore Oil Port] begins to export volumes more regularly, we certainly think Zydeco [is] well positioned to serve that," Hollowell said. "We are somewhat uniquely positioned to be able to serve that market."

During the call, Shell Midstream executives also pointed to the $1 billion to $1.4 billion of midstream assets the partnership expects to acquire from sponsor Royal Dutch Shell plc. In December 2017, Shell Midstream completed the acquisition of terminal and pipeline assets through an $825 million drop-down transaction with Royal Dutch Shell subsidiaries.

Hollowell will retire March 31 as president and CEO of Shell Midstream's general partner. Shell Pipeline Company Vice President Kevin Nichols was named as his successor.

Shell Midstream on Feb. 27 reported fourth-quarter 2017 adjusted EBITDA of $118.7 million, an increase from $84.3 million a year earlier. The partnership's distributable cash flow in the quarter was $97.0 million, up from $82.7 million in the prior-year period.