MarkWest Energy Partners (NYSE: MWE ) is a midstream 'pipeline' partnership engaged in the transportation, storage and processing of mostly natural gas and natural gas liquids within the United States. About 60% of the partnership's operating income originates in the Marcellus and Utica shales, and that proportion is growing.
The Marcellus Shale is a massive shale gas play spanning from Pennsylvania to upstate New York. Nobody is exactly sure how much gas is in the Marcellus' shale rock, but all estimates are in the hundreds of trillions of square feet. Drilling activity in this shale play could, theoretically, go on between 80 and 100 years or more. In addition, drilling and operational costs in the Marcellus are among the lowest of all domestic, shale gas plays. The dry gas of the Marcellus and natural gas liquids of the neighboring Utica shales are a huge economic asset, and MarkWest is one of the first midstream operators in this region.
Starting in 2011 MarkWest began its plan to build out infrastructure in the Marcellus, believing the Marcellus to be the partnership's engine for long-term growth. Let's look at the results so far:
As we can see, gas volumes have nearly tripled since 2011, with the Marcellus and Utica accounting for nearly all of that expansion. As a master limited partnership, MarkWest is primarily a target for income investors. With that in mind, look at the company's growth in distributable cash flow.
On the surface, this looks pretty good. Distributable cash flow, or DCF, in 2013 increased by 16%. Unfortunately, unit count has grown right along with distributable cash flow.
This chart illustrates the effect that MarkWest's buildout program has had on the partnership's unit count. MarkWest's favored method of financing its expansion in the Marcellus and Utica has been to issue equity.
So, while DCF in 2013 grew substantially, the unit count seemed to grow even more. This has resulted in a major drag on per share distributable cash flow. In fact, 2013 was a disappointing year for MarkWest. Management lowered guidance and DCF fell just short of distributions: MarkWest's distribution coverage ratio for the year was 0.99 times.
In 2014, MarkWest expects DCF to be between $600-$690 million; a wide range indeed. Furthermore, management didn't indicate how much equity it is looking to raise in 2014. Therefore, it is difficult to know how much, or even if, distributions will grow on a per-share basis. Management did say, however, that investors can expect MarkWest to return to high single-digit to mid double-digit distribution growth starting in 2015. Basically, we have to wait another year to see growth flow through to income investors.
There are some clear strengths and weaknesses to an investment in MarkWest. Management's history of over-promising and under-delivering, which it has certainly done in 2013, is disappointing. Furthermore, MarkWest is by no means trading at a discount. In fact, based on 2013 numbers, MarkWest now sits at 18.65 times DCF. The distribution yield of 5.44% is not bad, but there are better yielders out there, for example Kinder Morgan Partners (NYSE: KMP ) , which yields nearly 7% and trades at a significantly lower multiple.
My philosophy is this: If we have to wait until 2015 to get good distribution growth, why not wait until we can get a better entry point on MarkWest Energy Partners? I believe the partnership deserves another look when the yield reaches 6%.
But here is one silver lining in the clouds: Midstream infrastructure buildout is something which is done over multiple quarters. In other words, the spending being done in 2013 will not flow through to distributable cash flow in 2014. It will take a couple years to realize the cash flow on current capital expenditure. But when these projects are all operational, MarkWest will be growing for many years to come.
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