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Pipeline operator MarkWest Energy Partners L.P. (MWE - Analyst Report) generated profit per unit (excluding marked-to-market derivative loss and compensation expense) of 35 cents in the third quarter of 2011, lagging the Zacks Consensus Estimate of 42 cents. The results declined 25.5% from 47 cents per unit earned on an adjusted basis in the year-earlier quarter.

Quarterly revenue came in at $507.8 million, up 98.8% from third quarter 2010 and ahead of our $367.0 million projection. The quarter’s performance was buoyed by robust activities in Northeast regions along with lower operating expenses.

The partnership recorded adjusted earnings before income, tax, depreciation and amortization (EBITDA) of $107.0 million, as against $83.7 million in the prior-year quarter.

Quarterly Cash Distribution

Recently, MarkWest raised its third quarter cash distribution to 73 cents per unit ($2.92 per unit annualized), representing an increase of approximately 4.3% sequentially and 14.1% year over year. The partnership’s new distribution will be paid on November 14 to unitholders of record on November 7, 2011.

Distributable Cash Flow

During the quarter, MarkWest generated distributable cash flow (DCF) of $85.3 million, up from $54.7 million in the prior-year quarter, providing 1.38x distribution coverage.

Business Units

With respect to business units, operating income from Southwest increased 27.8% from the year-ago level to $78.7 million, attributable to higher commodity prices, greater throughput and product sales in the West Oklahoma gathering system, and higher natural gas processed at South Oklahoma. These were partially offset by lower gathering systems volumes from East Texas and reduced throughput from the Arkoma Connector Pipeline.

The operating profit in Northeast was $33.1 million, up from $22.3 million in the prior-year quarter, attributable to a 45.8% jump in natural gas processed. However, natural gas liquids (NGL) product sales dropped 10.4% year over year.

The Liberty unit’s (the partnership’s Marcellus Shale joint venture) operating income leaped 85.3% year over year to $19.0 million on the back of higher gathering system throughput (up 68.5%), increased natural gas processed (up 134.3%) and improved NGL product sales (up 88.6%).

The Gulf Coast unit witnessed a 36.8% year-over-year growth in operating profit to $17.1 million.

Capital Expenditure & Balance Sheet

During the quarter, MarkWest incurred total capital expenditure of approximately $111.3 million. As of September 30, 2011, the partnership had cash and cash equivalents of $86.4 million and total debt of approximately $1.48 billion, representing a debt-to-capitalization ratio of about 43.6%.

Guidance

For 2011, management raised its DCF guidance to the range of $325–$345 million from $300–$330 million projected previously.

MarkWest’s growth capital expenditure forecast for the year remain unaltered at $675 million to $700 million, including the $230 million acquisition of the Langley processing complex and the Ranger NGL pipeline from EQT Corporation (EQT - Analyst Report). The maintenance cost will be approximately $15 million.

For 2012, the partnership issued DCF forecast of in the range of $380–$440 million and expects to incur growth capital spending between $600 million and $700 million, while maintenance expenditure is forecast at approximately $20 million

Our Recommendation

We appreciate MarkWest’s high-quality and diverse portfolio of midstream assets that generate stable and recurring growth through long-term fee-based contracts. The partnership has generous prospects in the Marcellus Shale and is favorably positioned to expand infrastructure facilities.

However, due to the volatile nature of the natural gas processing business, we do not see any significant price upside for MarkWest units in the next few quarters. We expect the partnership to grow at a somewhat more conservative and sustainable pace.

MarkWest competes with other industry players such as Sunoco Logistics Partners L.P. (SXL - Analyst Report) and ONEOK Partners, L.P. (OKS - Analyst Report). We are maintaining a long-term Neutral rating on the stock.

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