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MarkWest Results Show a Mixed Bag

MWE SXL

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Natural gas processor and distributor MarkWest Energy Partners L.P. (MWE - Analyst Report) reported lower-than-expected fourth quarter earnings, reflecting weak results from its Gulf Coast business unit.

The partnership’s profit per unit – excluding mark-to-market derivative loss and compensation expense – came in at 47 cents, against the Zacks Consensus Estimate of 53 cents.

However, Colorado-based MarkWest’s adjusted earnings per unit showed a significant improvement over the year-earlier period, when it incurred a loss of 5 cents per share. The outperformance was on account of the partnership’s impressive exposure to the Marcellus Shale play in western Pennsylvania and West Virginia.  

Revenue (excluding hedging impact) of $424.8 million was up 19.1% from the fourth quarter 2010 level and was also ahead of our projection of $388.0 million.

For its fiscal year ended December 31, 2011, MarkWest reported a profit of $1.39 per unit on revenues of $1.5 billion.

Quarterly Cash Distribution

Prior to the earnings release, MarkWest raised its fourth quarter 2011 cash distribution by 4.1% sequentially and 16.9% year over year to 76 cents per unit ($3.04 per unit annualized). The partnership’s new distribution was paid on February 14 to unitholders of record as on February 6, 2012.

Distributable Cash Flow

During the quarter, MarkWest generated distributable cash flow (“DCF”) – an indicator of cash paid out for distribution to unitholders – of $88.4 million, up from $69.1 million in the prior-year quarter, providing 1.21x distribution coverage.

Business Units Performance

Southwest: With regard to business units, the Southwest segment’s operating income increased 31.9% from the year-ago level to $100.1 million, mainly reflecting higher volumes.

Northeast: MarkWest’s Northeast segment’s operating profit of $40.4 million rose 34.3% from last year’s income of $30.1 million, buoyed by an 86.1% jump in natural gas processed. The quarterly results were also positively impacted by a 3.1% increase in total natural gas liquids (“NGL”) product sales.

GulfCoast: Operating income from the Gulf Coast segment was down 7.2% year over year to $11.8 million. This was mainly on account of lower volumes of gas processed and liquids fractionated. NGL sales volume also dipped 4.3% from the fourth quarter of 2010.  

Liberty: MarkWest’s newest segment, Liberty (the partnership’s Marcellus Shale joint venture), reported a profit of $18.7 million (up from $15.9 million achieved in the year-earlier period). Improved natural gas volumes, gathering system throughputs and NGL sales – all added up to deliver an impressive quarter.

Capital Expenditure & Balance Sheet

During the quarter, MarkWest spent approximately $183.9 million on growth capital projects (including equity investments), an increase of $102.3 million compared to the year-ago period. As of December 31, 2011, the partnership had a total debt of approximately $1.8 billion, representing a debt-to-capitalization ratio of about 55.1%.

Guidance

Looking forward, management guided towards a DCF of approximately $440–$500 million for 2012, contingent upon the buy out of The Energy & Minerals Group’s 49% interest in the Marcellus shale joint venture project, Liberty.

MarkWest’s capital plan for the year includes approximately $900 million to $1.3 billion of capital expenditures for growth projects plus $20 million for maintenance capital.

Rating & Recommendation

MarkWest – which has teamed up with another partnership, Sunoco Logistics Partners L.P. (SXL - Analyst Report), to build a distribution system to transport ethane produced in the Marcellus Shale Basin to markets along the Gulf Coast – currently retains a Zacks #2 Rank (short-term Buy rating). We are also maintaining our long-term Outperform recommendation on the stock.

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