Natural gas processor and distributor, MarkWest Energy Partners LP (MWE) reported weaker-than-expected third-quarter 2013 earnings. Several operational constraints like lower realized fractionation income due to involvement of third-party facilities, delays in projects and temporary shut down of a NGL pipeline in West Virginia, along with weak results from the Utica segment hurt the quarter’s results.
MarkWest’s earnings – excluding mark-to-market derivative activity, compensation expense and asset sale adjustments – came in at approximately 22 cents per unit, missing the Zacks Consensus Estimate of 25 cents per unit. Earnings were also lower than the year-ago adjusted earnings per unit of 26 cents.
Revenues of $420.5 million were up approximately 50% from the third quarter of 2012 amid higher processing volumes primarily attributable to strong results from the Marcellus segment. However, it fell below the Zacks Consensus Estimate of $424.0 million.
Quarterly Cash Distribution
On Oct 23, 2013, MarkWest raised its third-quarter 2013 cash distribution by 1.2% sequentially and 4.9% year over year to 85 cents per unit ($3.40 per unit annualized).
Distributable Cash Flow
During the reported quarter, MarkWest generated distributable cash flow (DCF) – an indicator of cash paid out for distribution to unitholders – of $117.9 million, 13% higher than the prior-year quarter level of $104.3, providing 0.92x distribution coverage.
Business Units Performance
Southwest: With regard to business units, the Southwest segment’s operating income decreased 3.1% from the year-ago level to $75.9 million. The results mainly reflect a significant increase in operating expenses, partially offset by volume expansion.
Northeast: The segment’s operating profit of $26.1 million was up 15.3% from last year’s income of $22.7 million. The segment’s profit reflects effects of higher fractionated natural gas liquids (NGLs) and an improvement in NGL sales.
Marcellus: This segment (the partnership’s Marcellus Shale joint venture) reported a profit of $80.7 million, up 85.2% from $43.6 million in the year-earlier quarter. Improved natural gas volumes, higher gathering system throughput and NGL sales contributed to the impressive results.
Utica: Operating loss from MarkWest’s newest segment – Utica – was $886,000, wider than the year-ago loss of $536,000.
Capital Expenditure & Balance Sheet
During the third quarter, MarkWest spent approximately $734.9 million on growth capital projects, up from $654.9 million a year ago. As of Sep 30, 2013, the partnership had $326.6 million of cash and cash equivalents in wholly owned subsidiaries and total outstanding debt of approximately $3.0 billion, representing a debt-to-capitalization ratio of about 42.1%.
Guidance
2013
Management lowered the projected DCF to $475–$485 million from $500–$540 million. However, the growth capital expenditure was increased to $2–$2.3 billion from $1.5–$1.8 billion due to additional expansion projects the partnership plans to undertake. MarkWest projected maintenance capital of $20 million.
2014
Management projected DCF of $600–$690 million for 2014 keeping in mind the forecasted volume and commodity prices. MarkWest projected growth capital expenditure of $1.8–$2.3 billion and maintenance capital of about $25 million.
Stocks to Consider
MarkWest currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one-to-three months.
Meanwhile, one can consider other energy sector stocks like SM Energy Company (SM), Tesco Corp. (TESO) and Pacific Drilling S.A. (PACD) as attractive investments. All these stocks sport a Zacks Rank #1 (Strong Buy).
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