MarkWest Energy Partners L.P. (MWE), a master limited partnership (“MLP”), reported strong third quarter results, reflecting a robust performance of its core assets and the growing contribution from the Marcellus expansion projects.
Earnings per unit, excluding marked-to-market derivative loss and compensation expense, came in at 47 cents, way ahead of the Zacks Consensus Estimate of 19 cents and the year-ago adjusted profit of 8 cents.
Revenue of $292.4 million was up 40.6% from the third quarter 2009 level and was also ahead of our projection of $269 million.
Quarterly Cash Distribution
MarkWest’s quarterly distribution of 64 cents per unit ($2.56 per unit annualized), remains unchanged from the year-earlier quarter as well as the previous quarter’s distribution.
Distributable Cash Flow
During the quarter, the partnership generated distributable cash flow (“DCF”) of $54.7 million, up from $40.3 million in the prior-year quarter, providing 1.20x distribution coverage.
Business Units
With regard to business units, the Southwest segment’s operating income increased 19.7% from the year-ago level to $61.6 million, mainly reflecting higher commodity prices, higher volumes in the Stiles Ranch gathering system, and higher contributions from the Arkoma Connector Pipeline. These were partially offset by lower gathering systems throughput volumes from Foss Lake and Appleby facilities.
The partnership continues to increase its gathering presence in southeast Oklahoma (in the Woodford Shale gathering system), where volumes were up approximately 37.7% to 535,800 thousand cubic feet per day (Mcf/d).
MarkWest’s Northeast segment’s operating profit of $22.3 million improved significantly from last year’s income of $16.2 million, driven by higher commodity prices. The quarterly results were also buoyed by a 17.8% increase in total natural gas liquids (“NGL”) product sales on the back of processing capacity expansions and upgrades, partially offset by a 3.5% drop in natural gas processed in the Appalachian area.
Operating income from the GulfCoast segment was up 5.1% year over year to $12.5 million, mainly due to $5.0 million related to the steam methane reformer (“SMR”) hydrogen facility and higher commodity prices, partially offset by lower volumes due to power outages in July caused by Hurricane Alex.
Finally, MarkWest’s newest segment, Liberty (the partnership’s Marcellus Shale joint venture), reported a profit of $10.2 million (up from $3.7 million achieved in the year-earlier period). This was mainly on account of the ongoing expansion of the Liberty facilities and improved NGL pricing.
Capital Expenditure & Balance Sheet
During the quarter, MarkWest spent approximately $116.9 million on growth capital projects (including equity investments), an increase of $50.1 million compared to the year-ago period. As of September 30, 2010, the partnership had a total debt of approximately $1.2 billion, representing a debt-to-capitalization ratio of about 43.0%.
Guidance
Looking forward, management guided towards a DCF of approximately $225 – $235 million for 2010, up from the previous guidance of $210 – $230 million. MarkWest’s capital plan for the year includes approximately $300 of capital expenditures for growth projects, plus $10 million for maintenance capital.
Our Recommendation
We have a long-term Outperform recommendation on MarkWest Energy units, reflecting its promising prospects. With a proven track record of supporting producers in the growth of shale plays, the partnership is in a great position to participate in the expansion of infrastructure that will be required for the development of leaseholds. Additionally, the successful completion of a notes offering, formation of joint ventures and the Starfish stake sale support MarkWest’s financial profile and provide sufficient liquidity to meet its near- to medium-term needs. As such, we believe MarkWest is well positioned going forward, and view it as an attractive investment.
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