A bad day got worse for investors in MarkWest Energy Partners (MWE) Monday night, with shares adding to losses after hours on news of a unit offering. MarkWest plans to offer 8.5 million common units, with an underwriter's option for an additional 1.275 million units. MarkWest will use the funds raised for its cap ex program, and for other general purposes.
Units in MarkWest are now down over 10% in the last month, as investors weigh the risks of a higher tax rate on dividends and capital gains on the market and on MLPs, as well as the declining prices for oil and NGLs that can weigh on MWE's earnings through its commodity exposure. While these concerns are real, there are strong tail winds in 2013 for MarkWest that I think are being overlooked.
First, the company has a great first mover advantage in the Marcellus shale, which will still require billions and billions of dollars of midstream investment over the next decade. Companies, like Magnum Hunter Resources (MHR), EQT (EQT), Gulfport (GPOR), and Antero, have already contracted with MarkWest to use MarkWest's infrastructure as it is completed, with Magnum Hunter actually shutting in wells to wait for the processing plants to come online. The 830 million cubic feet of processing capacity being built for Gulfport and Antero will provide complexes that can be expanded to serve other customers, allowing for incremental add-on construction opportunities even after the initial big ground breakings. Based on forecasts, MWE will be operating 19 plants in the Marcellus Shale by the end of 2014, processing nearly 3 billion cubic feet of gas per day.
As one would expect, a big jump in volumes should lead to a big jump in distributable cash flow, and MarkWest's 2013 guidance does not disappoint. DCF in 2013 is forecast at $500 million - $575 million, the midpoint of which would show year over year growth of 28%, and would provide a coverage ratio of 1.41x based on the most recent quarterly distribution. That news failed to really stabilize the units for more than a few days, even though it points to the possibility of substantially higher distributions over the next year.
Based on the most recent distribution stabilized over the course of 2013, MarkWest would pay out $3.24 per unit over the year, translating into a yield, based on a unit price of $48, of 6.75%. However, based on both past history, and the company's guidance, it is safe to forecast that distributions should rise rather meaningfully, as new projects come online and add to DCF. The chart below shows a range of possible DCF for the company's guidance, using a units outstanding number based on the Q3 units outstanding plus the units from the new offering. It also shows possible distributions for the year, based on a targeted DCF coverage ratio of 1.2x, as well as the yield based on a price of $48.
|2013 DCF Projections (Low, Mid-point, High)||$ 500,000,000||$ 537,500,000||$ 575,000,000|
|2013 DCF/unit||$ 4.04||$ 4.34||$ 4.65|
|2013 Total Distribution based on 1.2x DCF Coverage||$ 3.37||$ 3.62||$ 3.87|
|Forward Yield, based on current price of $48||7.01%||7.54%||8.07%|
While these numbers are only an estimate, it shows the potential for yield growth opportunities going into the future. An investor buying units in MarkWest at 48% is locking in a yield of at least 7%, based on the low end of the forecast, and up to 8% on the high end. While volatility in the market may lead to ups and downs in the unit price, MarkWest is moving more of its businesses to a fee-based structure, forecasting that 70% of the margin will be fee-based by 2014, up from 53% now. This shift to a more fee based structure should allow for stable, long term distributions for decades.
While near term, units in MarkWest Energy Partners may continue to underperform, once the calendar changes, the fiscal cliff is dealt with, and the gas starts flowing into the new processing plants and infrastructure, MarkWest should return to investor favor.