Executives
Frank Semple - Chairman, President and Chief Executive Officer
Nancy Beuse - Chief Financial Officer
Randy Nickerson - Chief Commercial Officer
John Mollenkopf - Chief Operating Officer
Andrew Schroeder - Vice President, Finance and Treasurer
Dan Campbell - Assistant Treasurer
Analysts
Michael Blum - Wachovia Securities
John Edwards - Morgan Keegan & Company
Louis Shamie - Zimmer Lucas
Yves Siegel - Aroya Capital
Tod Wood - Wood & Company
David Fleischer - Chickasaw Capital Management
David Kim - Post Advisory
MarkWest Energy Partners LP (MWE) Q1 2009 Earnings Call May 12, 2009 4:00 PM ET
Operator
Welcome to the MarkWest Energy Partners first quarter earnings conference call. Your lines have been placed on listen-only until the question-and-session of today’s conference. (Operator Instructions)
I will now turn the call over to Dan Campbell. Thank you sir, you may begin.
Dan Campbell
Thank you, Sandra and good afternoon everyone. This is Dan Campbell, I’m Assistant Treasurer at MarkWest and we thank you for joining us today. Our comments will include forward-looking statements, which involve risks and uncertainties and are not guarantees of future performance.
Actual results could vary significantly from those expressed or implied in such statements and are subject to a number of risks and uncertainties. Although we believe that the expectations expressed today are reasonable, we can give no assurance that the expectations will prove to be correct and we caution you that projected performance or distributions may not be achieved.
Factors that could cause actual results to differ materially from their expectations are included in the periodic reports we file with the SEC. We encourage you to carefully review and consider the cautionary statements and other disclosures made in those filings, specifically those under the heading Risk Factors.
With that, I’ll turn the call over to Frank Semple, our Chairman, President and CEO.
Frank Semple
Good afternoon and thanks to everyone for joining us on the call. Following my overview of our financial performance and the continuing progress on our key business objectives, we will open the call up to all of your questions.
On the call with me today are Nancy Buese, our Chief Financial Officer; Randy Nickerson, our Chief Commercial Officer; John Mollenkopf, our Chief Operations Officer; and Andrew Schroeder, our Vice President of Finance and Treasurer.
Well it’s certainly been a busy quarter. During our last earnings call in early March, we focused at that time on the dismal economic conditions and our plans to address our balance sheet, liquidity and distribution objectives. During today’s call, we will be discussing our execution on those plans and our continued optimism about our business and future success.
Clearly there is still a lot of marketing certainty, but during these very challenging times, we successfully executed an $85 million expansion of our bank revolver, formed two joint ventures to fund strategic growth projects, increased our volumes and continue to deliver solid financial performance. These actions have allowed us to meet our key objectives of maintaining our distribution and supporting our customer’s requirements.
Distributable cash flow for the first quarter was $49 million and adjusted EBITDA was $81 million. Distribution growth was 7% compared to the first quarter of 2008 and our distribution coverage was a healthy 1.34 times.
Our high quality assets are situated in the heart of growing unconventional resource plays and our core operating areas continue to perform well. In fact, first quarter gathering and processing volumes for most of our operations were higher in the first quarter of 2009, than in the first quarter of 2008. However, when compared to the record first quarter of 2008, our segment operating income decrease $58 million, which is almost entirely attributable to commodity prices declining by 50% year-over-year.
Now it’s important to point out that segment operating income does not include realized gains or losses on derivative instruments. Realized gains in the first quarter were $45 million, including $15 from the early settlement of certain 2010 and 2011 hedge positions, compared to the realized loss of 19 million in the first quarter of 2008.
So, while segment operating income decreased by $58 million, realized gains on our hedge program increased $64 million, which demonstrates that our hedge program is effective and is working as intended. We remain very focused on our rolling 36 month hedging program to manage the risks associated with commodity price exposure and to meet our distribution objectives.
Consistent with this strategy, we re-hedged almost all of the 2010 and 2011 hedges we monetized in the fourth and first quarter, and have entered into to new hedge positions for our forecasted commodity positions in 2010 through 2012. So we are now approximately 80% hedged in 2009, 55% hedged in 2010, 50% hedged in 2011, and we have extended our hedge program into 2012 and are approximately 20% hedged for that year.
Now let me turn now to some of our key operational and commercial projects, starting first with Marcellus, because of its strategic significance and also it is the focus of most of our growth capital.
Our partnership with M&R is going well and our Liberty joint venture allows us to continue to develop the Marcellus gathering and processing infrastructure, to serve the long term needs of range, resources and other producer customers, at the same time maintaining the disciplined capital plan.
The entire M&R team has been instrumental in the ongoing planning and development of the Marcellus projects and the relationship also provides the ability to evaluate broader strategies and partnering opportunities. Last week we announced the launch of a new cryogenic plant that is operating at its capacity of 30 million cubit feet a day.
When combined with our refrigeration plant capacity, we will have 80 to 100 million cubic feet a day of capacity by the end of this year. In addition, we are installing a new 120 million cubic feet a day cryogenic processing plant at our Houston, Pennsylvania complex that will be completed in early 2010. We also plan to install by mid 2010, a second 120 million cubic feet a day cryogenic plant in our major field site, located approximately 30 miles South West of Houston.
In addition to our plant facilities, we currently operate six compressor stations and will install three additional compressor stations by the end of this year. This gives us a significant gathering backbone that can be efficiently scaled to meet the expected production growth.
We are also constructing significant NGL marketing infrastructure including product storage, real car and truck loading and pipeline capacity, in order to support the significant drilling programs of our producer customers. These assets, coupled with our strong customer relationships, puts us in a very competitive position and one of the best merchant shale plays in US.
We also recently announced that we formed a joint venture with ArcLight Capital Partners, to own and operate the Arkoma Connector pipeline. Similar to our joint venture with M&R and the Marcellus, our partnership with the ArcLight team will help us achieve our strategic objectives for this pipeline project that connects our Woodford gathering system with the Midcontinent Express and Gulf Crossing Pipelines.
Recently there has been a tremendous amount of discussion regarding the collapse in gas prices and the impact of the rapidly emerging shale plays. Because of these two significant events, the whole face of the industry is changing. I believe it’s worth taking a few minutes to talk about how MarkWest is positioned.
Before market indicates that the recovery of gas prices will take time and will be a function of rate reduction and the recovery of the economy; in other words, the supply and demand side of our business. In addition, many analysts agree that very few conventional production areas will be able to compete economically with resource plays such as the emerging new shale players.
Just as there are a handful of upstream companies that are well-positioned with a significant structural change in the industry, it is also clear that are a handful of midstream companies, that are well-positioned to provide long-term profitability in the new resource plays.
The majority of our gathering and processing assets are extremely well-positioned in unconventional gas reservoirs, including three of the five major shale plays in the US; and while even these new resource plays will experience a slowing of drilling activity in the near term, they will continue to be the focus of drilling activity for years to come.
Our two largest gathering systems by volume are East Texas system near Carthage Texas, and our Woodford system in Southeast Oklahoma. Our base production in East Texas comes from the Cotton Valley in Travis Peak, unconventional reservoirs on our Carthage and Appleby systems. While these plays continue to see a great deal of activity, the underlying Haynesville Shale has become the recent focus for our producer customers.
Based on early horizontal drilling results in East Texas, it appears that the Haynesville shale is very perspective over the majority of the area served by our gathering systems. Much of this in the underlying acreage is already committed to MarkWest under long term agreements, putting us in a great position to capture a significant market share of the Haynesville gas production in that area.
Our second largest gathering system is in the Woodford Shale in Southeast Oklahoma. Our Woodford system is highly efficient and we are by a significant margin, the largest gatherer in the Woodford. In addition, the Arkoma Connector gives our customer access the higher price gas market and further improves drilling economics.
The third significant shale play we operate is the Marcellus, which I discussed earlier. We currently are the largest gatherer and processor in the Marcellus shale and our objective is to retain a strong strategic position in this developing play.
As you can see MarkWest is the largest in gather and two of the five major shale plays and we are also very well positioned in the third. Even is Western Oklahoma, where we have historically gathered gas from vertical wells drilled in the Anadarko basin, we now gather over 50% of the gas from the Granite Wash play, a promising new resource play in the Texas panhandle.
In addition to the traditional gathering and processing operations, we also have our Javelina plant in Corpus Christi; the process is off gas from refineries and is not subject to decline risk. Although Javelina has certainly been impacted by lower commodity prices, it has a compelling long term business model that generates strong returns.
Now let me change gears briefly and talk about our balance sheet just for a second. At quarter end, we had cash on hand of $32 million and available capacity of $110 million on our revolving credit facility. Our total debt was $1.3 billion, which is comprised primarily of $1 billion of senior notes in three trenches, with the earlier trench due in 2014.
For the first quarter, our leverage ratio was four times, our interest coverage ratio was 4.2 times and our debt total capital was 52%. Regarding our liquidity, we continue to carefully manage our balance sheet and maintain a comfortable cushion around our bank covenants. We have executed a number of transactions this year to significantly strengthen our liquidity position in 2009 and beyond.
In January, we increased our revolving credit facility as I mentioned earlier by $85 million, and we recently announced the two strategic joint ventures that I mentioned. Both of which allow us to continue to support our producer customers by minimizing capital spending in near term.
The result of these efforts is that we have adequate liquidity for the partnership, through the end of 2009 and in 2010; let me give you some details. At March 31, we had available liquidity of $140 million. If you assumed that we generate DCF at the mid point of our guidance range, unless the growth capital guidance we provided and assume distributions remain at the current rate to the end of the year, with over $100 million of liquidity.
Although the capital markets have improved in every means and option, we do have the ability to fund our existing capital program without the capital market transaction in the near term. Also, we continue to refine our growth capital programs for 2009 and 2010 to achieve our liquidity objectives and customer requirements.
Before concluding, now let me just touch on guidance. Our 2009 DCF forecast is unchanged at $160 million to $200 million. Our earning release includes an updated DCF sensitivity analysis table, which reflects our first quarter actual results. Our overall capital plan for 2009 has moved up slightly to $225 million, of which $122 million was spent in the first quarter.
I want to point out that the capital forecast did not decrease as a result of the Arkoma Connector joint venture that I mentioned earlier, because construction of pipeline is nearly complete. The joint venture significantly improves our liquidity, but does not lower our 2009 capital plan.
To summarize, our people and asset continue to perform well. Our core operations are located in some of the best resource plays in the U.S., and as the economy starts to recover we are very well positioned to capture additional market share, volumes and incremental cash flow.
Looking forward, we will continue to focus on our key priority by providing quality midstream services for our customers, strengthening our balance sheet, and achieving our distribution objectives.
So with that Sandra, I will turn it over to you to help us with the Q-and-A.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Michael Blum - Wachovia Securities.
Michael Blum - Wachovia Securities
A couple of questions on the quarter if you don’t mind; can you just talk about volumetrically, what’s going on at Javelina, number one. Number two, in Liberty the volumes were down slightly sequentially and then I guess in spite of where natural gas prices are in the mid-continent, Oklahoma was generally up. So maybe if you can just go by region and talk about what’s going on in terms of volumes?
John Mollenkopf
Yes Michael, in the first quarter at Javelina, I think that was your first question, there was a refinery turnaround that caused our volumes to be lower than last year. We had budgeted for that and so it was expected; it was just in a normal course of business that the refineries had to do some repairs.
I think you’re asking also about the Oklahoma area, which obviously saw a large increase in volume in the Woodford system. We did have some decline in the Foss Lake area from the same period last quarter and that’s kind of a result of a somewhat reduced drilling effort that’s going on out there, but not significant. Liberty volumes…
Michael Blum - Wachovia Securities
The question; Liberty was slightly down sequentially from the fourth quarter, so I was just curious what’s going on there?
Frank Semple
Well we’re just kind of in a startup phase. There you’re going to see volumes fluctuate quarter-to-quarter over the next several quarters. Really the volumes are driven by the range drilling program.
As I mentioned in my formal comments, we just brought the new 30 million a day cryogenic facility on and that plant coupled with our existing refrigeration capacity now, gives a range, a clear path to ramping up their volumes to that max capacity of both those plants in that 50 to 60. They’ve been talking about, clearly on an equivalent basis being in that 80 to 100 by the end of the year. So, while startup quarter-to-quarter has been a little bit off, we’re going to be ramping up quickly.
Randy Nickerson
Mike, I’m actually showing 187 is what we processed through the quarter last year from the time we started that plant up and then we processed 33 million a day in the first quarter. So, maybe we can touch base with you afterwards and make sure we’ve got our information synced up.
Michael Blum - Wachovia Securities
Okay and I guess along the same lines, looking forward for the rest of year, would you expect I guess number one, Javelina volumes to recover to where they’ve been and in your sort of non-Woodford, Oklahoma areas, where would you expect volumes to be headed? Thank you.
Frank Semple
Yes Michael, we do expect Javelina volumes will come back to historical levels in the remaining quarters and in the Western part of Oklahoma we’re expecting pretty much flat volumes compared to the first quarter going forward. We’re seeing enough drilling activity there to keep the volumes flat.
Randy Nickerson
Again the Western Oklahoma operation includes both, that core Anadarko system, as well as the Panhandle, those are Stiles Ranch, Granite Wash lines.
Operator
(Operator Instructions) Your next question comes from John Edwards - Morgan Keegan & Company.
John Edwards - Morgan Keegan & Company
Frank, could you give us a little more color on the hedges that you put back on and I didn’t catch all the percentages; if you could repeat that and then just give a little color in terms of where pricing is with respect to your hedges?
Frank Semple
Yes, the starting point for that discussion John is that, as you recall, I’m sure for the fourth quarter and the first quarter of 2009, fourth quarter 2008, first quarter 2009, we monetized in the fourth quarter about $28 million of hedges that were mainly in the 2010, 2011 timeframe and then we also monetized in the first quarter about $15 million, kind of further from the hedges during the same period.
We’re pretty clear at the end of the year, at least in our March earnings call that monetization took place. Essentially it was a liquidity issue and really opportunistically looking at those hedges and the value of those hedges, and feeling like it was a great transaction for us to improve our liquidity and then to monetize a small portion of our overall portfolio with the expectations that crude was going to recover, which it has.
So, the point that I was making in the script was essentially that we had now come back and re-hedged significantly on a volumetric basis, significantly all of those; essentially all the volumes that we unwound in the fourth and first quarter at pretty good prices. I mean if you look in our Q, the Q provides all the details, but on a volumetric basis we’re back to those percentages that I mentioned earlier; essentially 55% to 50% in 2010, 2011, 90% in 2009 and then we’re starting to hedge 2012 basically at 20% on a volumetric basis today.
Prices that are very consistent with our long term business plan, somewhere on a swap basis, somewhere in our high 60s or 70s and for the callers somewhere usually in the 60 to 70, the exact numbers are in our Q. We feel like monetization that took place towards the end of the year and early in the first quarter and then our ability to comeback and re-hedge, taking advantage of the forward curve, turned out to be a very good business decision.
Operator
Your next question comes from Louis Shamie - Zimmer Lucas.
Louis Shamie - Zimmer Lucas
My question was regarding the CapEx estimate and I was just wondering, what the change was that brought the estimate up to 325?
Frank Semple
Well, it was really more of a timing issue, the closing of that JV, the partnership agreement with ArcLight. If you followed my comments, again the construction of that pipeline has continued and will be completed in the mid to late June timeframe, so essentially the capital is pretty much spent. So, the later we pushed the closing of that transaction, the more capital we needed to absorb into our capital program.
Liquidity impact will remain same. So, it’s a little confusing, but most of that $25 million up tick, was just simply due to closing in the last week versus closing a month earlier.
Louis Shamie - Zimmer Lucas
What was the final cost of the pipeline?
Frank Semple
We’re estimating right now, it’s somewhere in the 125 range, but we’re not done yet. John, can probably give you some more color, but it’s pretty tough going down there and Southeast Oklahoma, we’re in the final stages of completing the actual pipeline construction and all the remediation. So stay tuned on that, we don’t expect a significant overrun there, but it likely will go above the 125, but somewhere in that range.
Operator
Your next question comes from Yves Siegel - Aroya Capital.
Yves Siegel - Aroya Capital
Just several questions; number one, are you contemplating any additional JVs on the asset base?
Frank Semple
Well, we like to have options. So, I mentioned on our last call that we had continued the process of evaluating some strategic transactions like these JVs at that time, in lieu, because at that time for non-investment grade MLP, the capital markets were essentially closed. So, we were obviously very focused on where there might be some opportunities that were not dilutive for us to execute and obviously we put together two really good partnerships with ArcLight, M&R.
There are a couple of other opportunities that might be available to us that we continue to work pretty hard. We have some pretty clear objectives relative to those types of transactions and so we continue to look at those options as compared to now that the capital markets have improved a bit, we are looking at those options on a cost of capital basis versus trying to execute on some sort of a capital markets deal.
So it’s really just a function of having as many options out there as possible and then having the flexibility to really pick the ones that make more sense for us, particularly from an accretion standpoint.
Yves Siegel - Aroya Capital
Do you have a sense if you wanted to hit the debt markets, what the cost would be today?
Frank Semple
Yes, obviously we are getting a lot of input there and Nancy you want to kind of talk about it.
Nancy Beuse
Sure. We’ve been watching the markets pretty closely and watching new issue discount and all sorts of those things. So, I think it’s just where the market would be vis-à-vis our existing bonds, which are somewhere in the 11.5 to 11.75 ranges as we sit here today.
Yves Siegel - Aroya Capital
Then just a couple more if I could; could you also just comment, based on what Michael asked earlier on in the call. As you look out to the systems, would you expect volumes to hold fairly steady, when you think about Woodford shale? Is drilling activity holding up so that those volumes will continue to ramp up or could we see a little bit degradation as we go for the next couple of quarters?
Frank Semple
Well, I mean there’s a lot of stress on the producers drilling programs with the new gas prices where they are and even with the contango that exists in the marketplace and hedges in place. The producers are making their decision day-in and day-out based on the economics of those programs including the hedges.
What I would say, the best thing to do would be, to first of all refer to their earnings call scripts and the producers giving really good data as far as evaluating their programs in each of these areas. So that’s a great source of the detailed information, but generally from our perspective and John mentioned this earlier.
If you look at our 2009 forecast for volumes, what we do is, we work directly with all of our producers and we essentially help them evaluate their planned drilling program, because we have to be there to support that drilling program. So, we have pretty good insights into what their volumes should look like and then we bake that into our forecast with some conservatism.
So the bottom line is that, if you look at our DCF table for instance, the sensitivity table, we have baked into that, our best understanding about the producers drilling programs, the volumes that we expect to see and the impact on our income statements, EBITDA and DCF. So those are all factored into our guidance that will provide. Randy did you have some other thoughts?
Randy Nickerson
Well, I think it’s important that in the last two quarters in particular, there’s been a lot of question about volumes and what’s going to happen in pricing and one of the reasons I think that we’ve spent so much time with you talking about the basins, that when gas is $7, $8, $9, $10, every basin is a good basin, every play is a good play and the market really didn’t differentiate.
When gas prices are $3, $3.5, $4, $4.5, $5, suddenly there is a huge differentiation between the play. So, being in the right play is the big deal; at $4 of gas price, which we could be at for a while or $5 gas price. So as you said, in the near term every play will probably have somewhat slower drilling, but its become more critical now I think than ever, that in the years to come we’re kind of in places where there are strong economics and whether in the next month or two or three or four there might be slightly slower drilling.
What’s important I think is, over the next several, three, five years that’s a great place to be in. We’re very fortunate, which Frank pointed out at some detail on the call, which is why we did this. It’s good to be in the Marcellus, good to be in the Woodford, good to be near the Haynesville, good to have access to the resource play in the Granite Wash and that’s why that’s so critical we wanted to point that out, because that’s such an important question that you’re asking.
Yves Siegel - Aroya Capital
Just a last one, what’s your thought on how quickly you’d like to add the final hedges for 2010?
Frank Semple
Well, that’s a weekly decision for us. Our hedge committee process is a weekly process. We look at the economics and the impacts on our DCF forecast and obviously looking at the impact on our coverage and we decide each week when to layer on some additional hedges.
So, you’ll see certainly in the next quarter we’ll give you an update. We would expect us to continue to layer on and kind of in a disciplined approach continue layer on additional hedges throughout this second quarter. I’d be surprised if we’re not back talking in three months about clearly have completed our 2010 plan and well into the ’11 and ’12 plan.
Operator
Your next question comes from Tod Wood - Wood & Company.
Tod Wood - Wood & Company
A few questions, the first is an update on the current NGL correlations with crude?
Frank Semple
Tod, if you could speak up a little bit that would be great, but my understanding was your question was giving you our perspective on the current correlations, NGL versus crude.
Tod Wood - Wood & Company
That’s right.
Frank Semple
Well, it’s I think kind of somewhat volatile. The new acre, will dismal fourth quarter where correlations were off the chart relative to crude, basically more than two standard deviations below our historicals.
The first quarter started out pretty strong. Our correlations with the exception of ethane were fairly strong and fairly consistent with the main, using a three year regression and so that was great. Now starting in March we started to see some degradation again, down in a one standard deviation range on a C3 plus basis. Jump in here guys if I’m a little off base, but I think that’s kind of where we are looking at it.
Again, this is something we look at every week. It’s stays kind of in that one standard deviation range, even a little bit below here recently as crude has continued to accelerate its movement upward, which is what you kind of expect, but we’re just in a real volatile period.
Obviously we continue to feel strongly that the correlations overtime will return to the mean, ethane is going to be a little tough because of the global economy, but we still feel very good about our proxy hedge strategy and we expect those correlations to recover just as they did after the dismal fourth quarter in January and February.
Again, if you just kind of look at our tables you can see kind of the range. If we happen to have three full quarters, but one quarter actual at one standard deviation below, then you could see where we would end up on DCF basis, given certain gas well ratios, so that’s the whole purpose for that table.
In summary, pretty good January and February, we’re hoping for kind of a full year, but the correlations have separated a little bit in last month, but we would expect to see that recover throughout the year.
Tod Wood - Wood & Company
I think a related question to this, what from your perspective is the current state of the petrochemical industry that using the NGLs and any comments you might have for the outlook?
Frank Semple
Do you want to jump in, you probably closer, Randy there?
Randy Nickerson
Yes, I think the petrochemicals, I think when the things going to turn this out, one of the first indicators we saw was in the petchems and we’ve actually heard people start talking mostly about the petchems and not necessarily ethane, but some of the other products actually, hearing inventories maybe coming down, the petchems are actually perhaps seeing some recovery, but there is no question till their economy comes up and recovers and things are going a little bit better field wide, so the petchems really where about to go they were prior to this.
Frank Semple
It just going to be a very volatile market here for a while, I think we’re expecting that, but again it’s all driven by the economy and the good news is, we are four months into the year, seems like we are starting to see signs of recovery and we’re in a good position right now with our hedges to continue to support our business, our capital plan and our distributions. Those are the key for us even in pretty ugly market conditions. So, when we start to see that recovery, there’s no subsiding.
Tod Wood - Wood & Company
Outside of your hedging, are there any ongoing efforts to reduce the commodity sensitivity?
Frank Semple
Yes, I think we should probably spend some more time talking about it, but with these new projects all of our new expansion projects or strategic projects, the Marcellus is being a great example, the Woodford being another example. We feel very strongly that we need to continue to move towards a more fee based service.
So, if you just look at the contracts that are in place for the two big areas that I mentioned in my formal comments, East Texas and Southeast Oklahoma, those are largely fee based contracts, Marcellus is largely fee based contracts have some POL, but it’s not very sensitive, mainly sensitive to crude oil and NGL prices.
So, absolutely that’s a big focus for us, but it takes a lot of turn to move the needle as contracts roll over, we continue to negotiate for more fee based services, but where you get the most impact is when you are actually going out into the Marcellus for instances there is been several hundred million dollars and you have the opportunity to put in place more our contracts that are less sensitive commodity prices. So that’s our goal.
Tod Wood - Wood & Company
One obvious question to finish up with, the 2010 hedges that you are putting on, with current volume I’m assuming that current prices that you’re hedging out or considering hedging out are consistent with covering the current distribution?
Frank Semple
That’s just a key issue for us as we, I call it opportunistically layer on additional hedges and it’s worked very well for us for many years. Even before MarkWest energy partners with our hedging program, as you are looking at those transactions you have to consistently evaluate, what the impact of that settlement might be relative to your distributable cash flow and your coverage, so it’s a key part of the equation.
Again I think we hit the market right. When we unwound, we’ve been hitting the market right as we started to layer on in place those hedges create visible $60 that I prompt. So, we see some good opportunities to continue to layer on proxy hedges, real proxy hedges in the $70 plus range over the near term.
Tod Wood - Wood & Company
So, is it fair to say that in the current environment and with the capacity you have coming on you are able to sustain the distribution and there is even some growth potential.
Frank Semple
That’s certainly our goal and our objective, and a key priority is to maintain that distribution. Again, one of the reasons that we spend so much time reviewing and talking about this DCF sensitivity analysis, we can talk about our guidance range for DCF which allows you to back into the coverage ratio for the distribution, but it also allows you to kind of look at ranges depending on what you think about not only oil and gas ratios, but also correlations.
So, you can see if you just kind of take worse case scenario for the first quarter actual and the three quarter remaining in the year it allows us to still have a pretty good coverage ratio and certainly a lot of upside if we see these correlations come back to the mean, that would give us a huge upside.
Operator
Your next question comes from David Fleischer - Chickasaw Capital Management.
David Fleischer - Chickasaw Capital Management
Frank, given the interesting variables of weak current natural gas prices, but the competitive drilling costs in a lot of the Shale plays where you have good entrees and a lot of visibility or a ling term visibility upside.
I’m wondering as we look out beyond this year, what sort of visibility you have, what sort of discussions you have with those producers that you refer to before to the development time tables for production as you start to plan for your future capital projects, and therefore trying to get a better handle on what might be the capital requirements for 2010 and even 2011 on some major start ups there. What you’re thinking therefore on total capital expenditures as you look out ahead and start planning for that?
Frank Semple
Okay, well David just to repeat one thing I said earlier, the best source of information about the economics of these particular basins and the specific drilling programs are obviously the quarterly reports by the producers.
They just continue to get better and better over the last year or so, a lot of good economics because historically, that information just wasn’t provided, now I think that producers feel like it’s very important today as capital becomes more scarce to be able to layout, what their economics look like particularly in these resource play.
Randy, can talk a little bit about, there is probably two parts of your question. One is, kind of what are we seeing in our areas of operation relative to kind of the cost, the F&D and the drilling programs. We’re try not to drag this out too long, but Randy can you give you his perspective on those drilling economics and the second question is around, so what does all that mean relative to your IR MarkWest capital program in 2010 and beyond. So Randy.
Randy Nickerson
Yes, actually one of the highlights, the real gratifying part of the drop in gas price and the scarcity of capital has been, we’ve worked really hard in the last three or four years to serve well our customers and that’s paid off for us and one way that’s really paid off for us, is the openness and the willingness that producers have to really match kind of their programs with our programs, they communicate really deeply about, okay “where we can optimize capital”, “well if we drill here, it will only its will only cost half as much as of that work, as that you drill over here”.
So, particularly in the big play, Ranch and Newfield we couldn’t say enough good things about how open they have been to making sure that we’re an integral part of their planning process and that paid really, really I think really big dividends for us and even places like Carthage, we don’t have a single dominant producer as much and all the producers have been really, really open and willing in helpful in terms of making sure we understand exactly where they are going and working to their plans, kind of in conjunction with us.
The neat thing about that it allows us to a little bit; to a degree at least their programs are tailored to exactly how they approach and where kind of to meet our capital program, which is a really nice benefit for us to be able to match available capital with the opportunities for us. So, it’s been a big benefit of the relationship we’ve been able to build with most of the key producers.
Frank Semple
So, we pretty much joined to hit there and I think that without getting into specifics the economics are improving. Sitting side the gas price issue just for a second, the basic costs structure in these plays are in the technology has been ramping up very, very rapidly and their poised for some significant economic improvement or net back improvement when gas prices recovered.
The question is, when does that the recover and when will they recover and that issue is kind of directly to your last question which is so, what is the capital, how do we see the capital, how do we connect the dots with our capital to their drilling programs and its very much.
First point is that as we kind of alluded to earlier in our core operating areas whether that’s East Texas, Southeast Oklahoma, Western Oklahoma, certainly in the Marcellus we have built very strong backbones in place, in other words the incremental cost to ramp up our volumes, really are related to well connects in certain areas where we don’t have center delivery point of architecture like in Southeast Oklahoma, Western Oklahoma.
In compression, we’ve got a lot of ability with our backbone to go out and capture gas, yes it takes capital, but it’s not an enormous amount of capital as that producer’s ramp up. So, we can scale quickly efficiently and the bigger issue probably from the capital standpoint is timing, because we aren’t going to go out and build a hedge significantly of these producers, until we can see those volumes starting to come on.
John can go out and do the construction once we have visibility into those areas and the operational requirements, but because of our capital constraints we are going to closely time, kind of adjusting time basis, closely time our capital.
If volumes remain flat from where we are today, we would have very minimal incremental capital associated with our operations; with the exception of the Marcellus, where we are in fact committed for a lot good reasons, just to get ahead of the Tsunami of gas production out there in Marcellus.
David Fleischer - Chickasaw Capital Management
I guess, if I could just follow-up on that; I mean I guess I’ll go back to some of your earlier comments and it does seem as if there’s a possible scenario where gas price has come back modestly, but not roaring back and therefore the Shale plays got a lot of development and that you might need to spend a lot of money on capital. Yet you’re saying, you going to wait; you’re not playing in that far ahead; you’re going to wait until the demand is there and not be spending too far ahead of the demand.
Frank Semple
Well, the beauty of our relationship with the producers is that we will evaluate the capital requirements with the producers; kind of shoulder-to-shoulder with producers and just as we’ve been doing over the course of the last 12 months, is that we’ve really tried to get much more closely connected with our producer customers on the capital requirements.
We just need to be even more conscious and careful about that, because we are in the capital constrained environment, but we obviously will wait in with the producers and what their requirements are and making decisions on a continuous basis about where we need to be, with what kinds of infrastructure.
Randy Nickerson
In the backbone, I just want to reiterate what Frank said; having that backbone built, I mean being able to gather that first $300 million in the Woodford is multiples of times more expensive from a capital perspective, than collecting and then gathering the second $300 million day of production. Once you build the backbone, it’s just so much more cost effective for us to add-in compression, to do it; it just is a huge impact.
Even in the Marcellus, where we are building and building more plant, having the backbone that John’s team has just spent so much time and effort building that along side of a range of understanding it, they can drill a tremendous amount of gas in and near the backbone and so with very little capital, can you grow volumes out there tremendously; with really a nominal amount of capital, compared to what it took to gather the first 40 million a day of gas.
So we’re in a great position. From a timing perspective, we don’t have to be as far as front of it and just for a little bit of capital, we can have tremendous increases in gas volumes in almost all the areas. East Texas, the Haynesville’s right there; well we already had a whole system, where the producer delivers Haynesville gas to us everyday. We didn’t even spend any money on that and the Haynesville gas is coming to us. So, we’re in a great shape from that standpoint I’d say.
Frank Semple
So David, having said all that, that’s a long answer, but as Andy said we’re going to resist the temptation of talking about what 2010 looks like from a capital standpoint, because just right now we’re in the process of evaluating our producers requirements of the pricing and economics scenarios that they’ve laid out.
As we typically do late in the year, probably in the conference call we’ll start laying out some specifically 2010 program, but it’s just too early to start providing that kind of guidance. I can tell you that our models allow us to essentially dial-in what kind of volumes we’re going to be seeing and what types of volumes we would assume in these areas and then allow us to develop the capital requirements, but stay tuned, that will come later in the year.
Operator
Your last question comes from David Kim - Post Advisory
David Kim - Post Advisory
I apologize if I missed this earlier, but I was wondering if you guys could discuss what you’re thoughts are on issuing new equity maybe to bring your leverage down or just bring up your liquidity and also if there is any sort of appetite in the market for that?
Frank Semple
Yes David, it did come up earlier and we’re pleased that the capital markets, even for non-investment grade MLPs like us started to open up a little bit. Obviously equity is not trading where we think it should be trading, but it has improved; our bonds have narrowed quite a bit and we’re seeing a very good improvement with our bonds, so that’s all good news.
Nancy mentioned earlier that we are looking at a capital market transaction as just one option, debt equity versus perhaps some other type of a strategic transaction. So it’s nice to have options. We obviously filed our Q proxy and we are evaluating the impact on our balance sheet and really our ongoing distribution objectives around the various options for capital market transactions.
David Kim - Post Advisory
Is it safe to assume then that you at this point would probably prefer to issue debt versus equity, if you had to choose between the two?
Frank Semple
Well, you know the trade-offs and you can kind of imagine how we’re think about it. There’s just a lot of things to consider in terms of what the right sequencing and the right size, and the right timing might be for those capital market transactions and there are obviously trade-offs.
So again, I’m just glad. It looks like we’re starting to get a window here and hopefully that will hold up and stay tuned, we’re going to continue to evaluate those options and do the right thing for our unitholders.
David Kim - Post Advisory
Just one quick one, on the bank covenants the total leverage, 5.25 times. Where does that currently sit today, the calculation of it?
Frank Semple
At 4.0.
Operator
I will now turn the call over to Frank Semple for closing remarks.
Frank Semple
Thanks Sandra, I appreciate you helping us today and thanks to everyone for joining us on the call. We as always appreciate your interest and continued support. Give us a call if you’ve got any questions. Thanks and that concludes our call.
Operator
This now concludes our conference for the day. You may disconnect at this time.
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