Neutral on MarkWest

Denver, Colorado-based partnership MarkWest Energy Partners LP (MWE - Analyst Report) has come back strongly from a rocky second half of 2008, when there were doubts regarding its ability to sustain distribution levels in the face of weak commodity prices and reduced access to credit. These concerns have largely been laid to rest following the partnership's improved liquidity position and growing signs of vitality in the credit and equity markets. 

We believe that MarkWest's recent successful completion of a notes offering and formation of joint ventures have buttressed the partnership’s financial profile and provided it with sufficient liquidity to meet its near- to medium-term needs. 

These favorable developments, in conjunction with the partnership's hedge program, have improved our confidence in MarkWest's ability to maintain current distribution levels (64 cents per unit, or $2.56 per unit annualized) over the next few quarters. 

However, we believe that these positives are already reflected in its current valuation and do not foresee much upside from current levels. As such, we rate MarkWest units as Neutral. 

In particular, gathering and processing partnerships such as MarkWest are more sensitive to commodity prices compared to other partnership subgroups. As a result, collapsing energy prices over the last few quarters have adversely affected MarkWest’s cash flow stability. 

Considering the current uncertain economic environment, we believe the partnership’s revenue and profitability to be under pressure in the near-to-medium term. 

Our $26 target price reflects an unchanged distribution run rate of $2.56 per unit and a target yield of 10%. Our target yield assumes a 625 bps spread over our 10-year Treasury bond yield expectation of 3.75% over the next 12 months.