These days, many investors are rightfully looking to midstream energy partnerships for income. Because pipeline partnerships lock in long-term contracts, their cash flow visibility is also very good. Think of pipelines as the "veins and arteries" of North America's energy renaissance; they provide much-needed transportation infrastructure, much of which was completely absent in newly discovered oil and gas shale plays. Unfortunately, pipelines are not as cheap as they used to be. Investors have been steadily piling in and have thereby driven down yields.
However, one processor and gatherer of natural gas is off 11% from its February highs, and this partnership now yields a healthy 5.35%. That partnership is MarkWest Energy Partners (NYSE: MWE ) .
Although MarkWest's legacy positions are in Oklahoma and Texas, a majority of revenue now comes from the Marcellus and Utica, two of the country's premiere gas shales. In fact, the Marcellus is generally regarded as having the lowest cost base in the country for natural gas production. MarkWest moves the gas from the wellhead to the partnership's nearby processing and fractionation facilities. The partnership is also engaged in a joint venture pipeline and processing venture with Kinder Morgan (NYSE: KMP ) , by which gas will be transported from the Marcellus to the Gulf Coast.
Despite the advantages of being in such a prolific shale, shares of MarkWest have declined for a few legitimate reasons:
- Through 2013, MarkWest's distributable cash flow (DCF) was below 1x distributions.
- MarkWest's per share DCF, at least in 2013, did not grow thanks to equity issuances.
- One of the Utica's key producers, Gulf Port Energy (NASDAQ: GPOR ) , said that it experienced curtailments last quarter due partially to delays from MarkWest.
That equity issuance has thus far been dilutive is actually a typical dilemma for growing energy infrastructure businesses. MarkWest issued new shares to build gas processing plants and pipelines. That infrastructure, however, will not contribute to the bottom line for at least a few quarters; some of it won't contribute for a few years.
Make no mistake, though: MarkWest will experience outsized growth over the intermediate-term and long-term future. This is thanks to its position as an operator of much-needed infrastructure in a shale play that will soon be the world's biggest provider of natural gas. This growth will, in the long-run, more than compensate for MarkWest's equity offering.
The operational concerns are, perhaps, more legitimate. However, I think we should give MarkWest the benefit of the doubt in this instance, or at least give management a second chance. Gulf Port, in its first quarter earnings call, said that the infrastructure bottlenecks which caused the curtailments will be solved within the next few quarters.
I believe that MarkWest deserves another shot, especially because this processor and gatherer of natural gas is in such an advantaged geographical position. Consumption of natural gas is steadily increasing in the U.S., but there is plenty of new supply to go around. Therefore, the midstream names might have more upside than will the producers. If so, now would be a good time to pick up a beaten-down midstream growth name such as MarkWest.
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