What: Shares of MarkWest Energy Partners (UNKNOWN:MWE.DL) did something that almost no other energy company was able to do in July: increase in share price. A look at this chart shows why:
So what: That one-time event that sent shares soaring was the day MPLX (NYSE:MPLX), the master limited partnership controlled by Marathon Petroleum (NYSE:MPC), announced that it will acquire MarkWest for a cool $21 billion, which includes $15.6 billion for the equity and the assumption of $5.4 billion in MarkWest debt. The goal of the merger was twofold. First, it will help MPLX realize its ambitious plans to maintain distribution growth. MPLX estimates that with dropdowns from the parent company and the inclusion of MarkWest's assets, it should be able to produce annual distribution growth through 2017
The second major goal of this merger benefits Marathon Petroleum itself. MarkWest's concentration of assets in the Marcellus and Utica share formations will give the company increased access to cheap feedstocks for its refineries in the Great Lakes region.
As much as the market appeared to like the move for shares of MarkWest, it wasn't as kind to shares of MPLX. Some fear that the company may be stretching itself a little thin with a purchase of this size.
Now what: Well, unless the deal falls through for some unforeseen reason, owning units of MarkWest will pretty much be an assumption that you will become a unitholder in the new combined company. So any investing decision you make regarding shares of MarkWest needs to assume MPLX as well.
The long-term question for this combined company is whether it will have the ability to grow its distribution as fast as management is saying without stretching itself too thin, financially speaking. On top of that 25% compounded annual distribution growth out to 2017, management of the new entity believes that it can achieve annual distribution growth rates of 20% in 2018 and 2019. The one comforting thing about this ambitious growth plan is that the publicly traded partnership will have the financial backing of Marathon Petroleum behind it. Distribution growth like that is really, really hard to turn down as an investor, but getting there won't be easy, and investors should be slightly wary of such an ambitious plan until we see some tangible results from the combined company.