Wednesday, November 19, 2014

MarkWest Energy Ready to Deliver Double-Digit Distribution Growth

This article was originally published by TheStreet on October 21, 2014.
By Sarfaraz A. Khan. Research Asst. Daniel L. 
NEW YORK (TheStreet) -- MarkWest Energy Partners (MWE) , a master limited partnership engaged in gathering, processing and transportation of natural gas and natural-gas liquids, has reduced its exposure to commodity prices to the lowest levels ever.
Oil prices have fallen by more than 10% in the past four weeks, hitting the stock market, particularly the energy sector.
"MarkWest has been similarly impacted," Joshua Hallenbeck, the company's vice president of finance and treasurer, wrote in an email.

In a report emailed to TheStreet, Citi's analyst Faisel Khan wrote that the company has "above-average commodity sensitivity."
Consequently, MarkWest's units (the MLP equivalent of shares) have fallen by 9.8% over the past four weeks, though they are up 7% for the year to date, trading at above $72 on Tuesday.
That said, "MarkWest has dramatically increased its fee-based income and is now less exposed to changes in commodity prices than any time in our history" Hallenbeck wrote.
For the current year, the company's business is more than 70% fee-based, while the remaining portion with commodity exposure is about 60% hedged, minimizing risks related to drops in hydrocarbon prices.
The part of MarkWest's income that is exposed to commodity prices is affected by changes in natural-gas liquids, rather than oil prices, Hallenbeck wrote.
Citi's Khan agrees, writing MarkWest has low exposure to oil but high exposure to the pricing environment in the natural-gas and natural-gas-liquids markets.
MarkWest mainly operates in Marcellus Shale in Pennsylvania and West Virginia and Utica Shale in Ohio, the leading natural-gas and natural-gas-liquids-producing regions.
Utica is one of the fastest growing, while Marcellus is the biggest shale gas producing region of the U.S. responsible for about 40% of the U.S. production, according to the U.S. Energy Information Administration.
And this is where MarkWest dominates.
MarkWest is the biggest player at Marcellus, "a low-cost gas play", in terms of processing and fractionation capacity with a well-established footprint, Goldman Sachs Jerren Holder analyst wrote in a research report.
Several gas and natural-gas-liquids producers, such as Chesapeake Energy (CHK) , Chevron(CVX) , EQT Corp  (EQT) Noble Energy  (NBL)  and Range Resources (RRC) have significant operations at Marcellus and are some of MarkWest's main customers.
Production from Marcellus is expected to climb to nearly 16 billion cubic feet a day next month from just 2 billion cubic feet a day in 2010, according to EIA estimates.
Holder has said that Marcellus could continue reporting between 3.5 billion to 4 billion cubic feet of annual production growth.
To capitalize on this booming production from Marcellus, as well as Utica, Hallenbeck wrote that the company has planned to increase its combined processing and fractionation capacity in the two regions by 76.5% and 67.7%, respectively, by 2016.
"This growth will come entirely from the 21 major infrastructure projects under construction," he wrote.
And that is not it.
"As producers continue to develop their acreage we expect to continue to grow capacity beyond 2016," Hallenbeck wrote.
The investments in capacity will allow MarkWest Energy to post "multi-year double-digit distribution growth" Holder says. 
During the second-quarter conference call, MarkWest Energy's management also forecast thatannualized distribution growth will increase to 10% in 2016 from 5% this year.
Additionally, MarkWest, unlike a majority of other MLPs, doesn't have a general partner, making it a strong acquisition target, which can translate in an upside for investors, Holder says.
Other analysts from Global Hunter and US Capital Advisors have also said that MarkWest, thanks to a strong asset base and a lack of a general partner that can make an acquisition much simpler and quicker, is an ideal takeout candidate.
MarkWest will report its third-quarter results after markets close on Nov. 5.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.