MarkWest Fails to Top Zacks - Analyst Blog

MarkWest Energy Partners L.P. (MWE), a master limited partnership (MLP), reported disappointing second quarter 2010 results. Earnings per unit, excluding marked-to-market derivative loss and compensation expense, came in at 3 cents, which were way below the Zacks Consensus Estimate of 20 cents and year-ago quarter earnings of 36 cents. The negative comparison reflects an increased operating expense.

The partnership generated revenues of $276.9 million, up 49.7% from the second quarter 2009 level, driven by strong performance of the core assets. However, the company failed to meet the Zacks Consensus Estimate of $301 million.

MarkWest’s quarterly distribution of 64 cents per unit ($2.56 per unit annualized) remains unchanged from the year-earlier quarter and the previous quarter’s distribution.

During the quarter, the partnership generated record distributable cash flow (DCF) of $52.9 million, up from $39.9 million in the prior-year quarter, providing 1.16x distribution coverage.

Operating income for the reported quarter was $102.0 million, up 43.9% from $70.9 million in the second quarter 2009. Higher commodity prices, an increase in throughput volumes and natural gas liquids (NGL) sales, and a larger contribution from the Liberty segment boosted the quarter results.

With regard to business units, the Southwest segment’s operating income increased 37.8% from the year-ago level to $62.7 million, mainly reflecting higher volumes in the Stiles Ranch gathering system and contributions from the recently acquired Arkoma Connector Pipeline. These were partially offset by lower gathering systems throughput volumes from Foss Lake and Grimes facilities.

The partnership continues to increase its gathering presence in southeast Oklahoma (in the Woodford Shale gathering system), where volumes were up approximately 33.7% year over year to 539,400 thousand cubic feet per day (Mcf/d).

MarkWest’s Northeast segment generated an operating profit of $19.5 million, up from last year’s income of $11.7 million. The quarterly results were buoyed by a 4% sequential rise in gas processing volumes and a 7% sequential increase in total NGL fractionation volumes, attributed to growing NGL deliveries and a significant volume of butane and heavier NGLs from Marcellus operations.

Operating income from the Gulf Coast segment was up 7.8% year over year to $12.5 million. This was mainly on account of a solid performance and product volumes in the Javelina plant.

Finally, MarkWest’s newest segment, Liberty (the partnership’s Marcellus Shale joint venture), reported a profit of $7.4 million (up significantly 270.0% from the year-earlier period), fueled by the increased production and an impressive progress on processing and fractionation projects.

During the quarter, MarkWest had incurred a capital expenditure of $157.9 million, up from $151.8 million in the prior-year period.

As of June 30, 2010, the partnership had $54.9 million of cash and cash equivalents in wholly owned subsidiaries and $353.6 million available for borrowing under its $435.6 million revolving credit facility.

With a total debt of approximately $1.16 billion, the partnerships’ debt-to-capitalization ratio stood at approximately 41.3%.

Looking forward, management guided toward a DCF of approximately $210 million to $230 million for 2010. MarkWest’s capital plan for the year includes approximately $300 million – $350 million of capital expenditures for growth projects, plus $10 million to $15 million for maintenance capital.

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 will have generous prospects in the Marcellus Shale and is favorably positioned to expand infrastructure facilities. Considering the accelerating demand for natural gas liquids, an active hedging policy and steady improvement in the liquidity and cash flow position, we retain our Outperform recommendation on the stock for the long run.

However, under the current economic downturn and commodity-price weakness, MarkWest will likely perform in line with its peers and the broad U.S. equity market over the next one to three months. Hence, we maintain a Zacks #3 Rank (Hold) rating.