Pipeline operator MarkWest Energy Partners L.P. (MWE) incurred a profit per unit (excluding marked-to-market derivative loss and compensation expense) of 9 cents in the first quarter of 2011. The results were nowhere near the Zacks Consensus Estimate of a profit of 37 cents and were down from 47 cents per unit earned on an adjusted basis in the year-earlier quarter.
Quarterly revenue came in at $263.2 million, down 14.7% from first quarter 2010 and way below our projection of $341.0 million.
The quarter’s performance was hurt by weak activities in East Texas and Gulf Coast regions along with higher operating expenses.
The partnership recorded adjusted earnings before income, tax, depreciation and amortization (EBITDA) of $96.2 million, against $88.5 million in the prior-year quarter.
Quarterly Cash Distribution
Recently, MarkWest raised its first quarter cash distribution to 67 cents per unit ($2.68 per unit annualized), representing an increase of approximately 3% sequentially and 5% year over year. The partnership’s new distribution will be paid on May 13 to unitholders of record on May 2, 2011.
Distributable Cash Flow
During the quarter, MarkWest generated distributable cash flow (“DCF”) of $76.1 million, up from $64.3 million in the prior-year quarter, providing 1.51x distribution coverage.
Business Units
With respect to business units, the Southwest segment’s operating income increased 13.0% from the year-ago level to $77.3 million, attributable to higher commodity prices, greater throughput in the Stiles Ranch gathering system, and higher product sales at Arapaho. These were partially offset by lower gathering systems volumes from Foss Lake and reduced throughput from the Arkoma Connector Pipeline.
The partnership continues to increase its gathering presence in southeast Oklahoma (in the Woodford Shale gathering system), where volumes remained somewhat static at 498,000 thousand cubic feet per day (Mcf/d).
The operating profit in the Northeast segment was $45.6 million, up from last year’s $40.5 million in the prior-year quarter, aided by a 57.9% jump in natural gas processed in the Appalachian region. However, natural gas liquids (“NGL”) product sales dropped 2.8% year over year.
The Liberty segment’s (the partnership’s Marcellus Shale joint venture) operating income leaped 133.5% year over year to $12.8 million on the back of increased natural gas processed (up 171.3%) and improved NGL product sales (up 140.4%).
However, the GulfCoast segment witnessed a 9.4% year over year decline in operating profit to $12.8 million, hurt by less refinery off-gas processed.
Capital Expenditure & Balance Sheet
During the quarter, MarkWest incurred total capital expenditure of approximately $309.2 million, of which $230 million was targeted at the acquisition of Kentucky-based EQT Corporation’s (EQT) Langley processing complex and the Ranger NGL pipeline.
As of March 31, 2011, the partnership had cash and cash equivalents of $63.3 million and total debt of approximately $1.47 billion, representing a debt-to-capitalization ratio of about 48.8%.
Guidance
Management raised its DCF guidance to the range of $280–$320 million for 2011, from the previous outlook of $260–$310 million.
MarkWest’s growth capital expenditures for the year comprise approximately $650–$700 million, while maintenance spending will be between $10 million and $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 and thereby maintain our long-term Neutral rating.
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