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Pipeline operator MarkWest Energy Partners L.P. (MWE - Analyst Report) has priced a public offering of 6,000,000 common units at $50.72 a piece, with an over-allotment option for an additional 900,000 units.

The gathering and processing master limited partnership (MLP) plans to use the net proceeds from this offering – expected to be approximately $294.2 million after the underwriting discount and estimated offering expenses – to finance capital expenditures associated with pipeline construction projects and for general partnership purposes.

Denver, Colorado-based MarkWest Energy is engaged in the gathering, processing and transmission of natural gas, transportation, fractionation and storage of natural gas liquids (NGLs), and the gathering and transportation of crude oil.

MarkWest currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the unit.

MarkWest owns a high-quality and diverse portfolio of midstream assets that generate stable and recurring revenues based on long-term fee-based contracts. Over the last few years, the partnership has consolidated its position in the midstream business, achieved through a combination of organic efforts and accretive acquisitions.

With its proven track record of supporting producers in the development of shale plays, MarkWest is in a great position to participate in infrastructure upgrade that will be required for the development of the leasehold assets.

We believe MarkWest’s recent buy out of The Energy & Minerals Group’s 49% interest in the Marcellus shale joint venture project will be immediately accretive to earnings and cash flows. Both firms have also agreed to create a new midstream joint venture in eastern Ohio’s Utica shale in 2012, a play with considerable potential that is expected to see a ramp-up in oil and natural gas liquids production.

In 2010, MarkWest teamed up with another MLP, Sunoco Logistics Partners L.P. (SXL - Analyst Report), to build a distribution system to transport ethane produced in the Marcellus Shale Basin (in Northeastern U.S.) to markets along the Gulf Coast.

We believe that the initiative, known as the ‘Mariner Project,’ offers several benefits. The project has not only helped MarkWest to profit from the direct opportunity of capturing demand for ethane takeaway capacity at Marcellus, but it also supports higher gathering system volumes and ethane production.

Lastly, we appreciate MarkWest’s steady improvement in its liquidity/cash flow position and its impressive payout track record.  With 220% distribution growth since the IPO in May 2002, we are confident of the partnership’s total return potential.

However, we think the current valuation is fair and adequately reflects the partnership’s growth prospects.

First of all, gathering and processing MLPs, like MarkWest, are more sensitive to commodity prices compared to other MLP subgroups. As a result, collapsing energy prices adversely impact their cash flow stability.

MarkWest’s non-fee-based keep-whole and percentage-of-liquids basis contracts for its midstream assets – which make up more than 60% of its net operating margin – also expose the partnership to commodity price risk. This is expected to further limit its ability to generate positive earnings surprises.

As a result, our long-term total return expectation for MarkWest remains rather muted. We do not see any significant price upside for the units over the next few quarters and expect the partnership to grow at a somewhat more conservative and sustainable pace.

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