MarkWest Energy Partners (MWE) is a leading provider of midstream services in the natural gas industry. MarkWest is engaged in the gathering, processing, and transportation of natural gas. I would rate MarkWest a long-term buy.
Warren Buffett aims to buy great businesses at "fair" prices, often holding stocks for long periods. He summed up his investing philosophy in a 1996 letter to Berkshire shareholders: "Your goal as an investor should be simple, be to purchase, at a rational price, part interest in an easily understandable business where earnings are virtually certain to be materially higher five, 10, and 20 years from now."
MWE is making it difficult for customers to leave. Companies that lock in customers through the cost or inconvenience of leaving have a moat of value. With its expansion facilities, it is holding competitors at bay. One way to build a moat is to put roadblocks up that make it difficult or expensive for competitors to enter your market. A market truth is that capital always seeks earnings and any company that is creating substantial and ongoing wealth.
To raise capital does not deter a company's growth prospects, nor does it deter it from paying its unit holders. MarkWest CEO Frank Semple has stated that growth is based on a kind of moat. The contracts it has are far beyond the minimum volume commitment with the facilities that it has in place. MarkWest Energy management continues to execute existing projects and development projects. Even though MWE reduced guidance below analysts' expectations, its core growth is still intact. Roughly, its guidance projections were a more reasonable ramp-up volume by its producer customers, forcing MWE management to build ahead and build above producers' projections. Any pressure for DCF units comes with the critical understanding that management needs to invest capital to support its producer customers in this high-performance shell environment. A producer needs to know whether MWE management has the capability to build facilities, gather facilities, and process fractionation capabilities. A company that develops a certain moat cannot play catchup -- it has to establish enormous opportunity and participate along with the producers, and not speculate with underutilized assets.
This is not the case for MWE once it gets facilities online. Producers quickly exceed volume commitment contracts. Mind you, producers are doing their jobs; they're outperforming MWE expectations and developing acreage that is exceeding their forecasts. If management decides to do nothing, its capital will be reduced significantly by 2015 and beyond. A company or management that believes in their growth story needs to pursue new opportunity and new customers. Establishing an early footprint does not guarantee a competitive advantage. What guarantees a competitive advantage is increased volume capacity and infrastructure that maintains and gains its position in the future.
In continuing its growth story, the Marcellus and Utica development has long-term agreements with over 20 producers. Currently, it has 2.2 billion cubic feet capacity with space for an additional 2.3 billion cubic feet in capacity. It has a joint venture with Utica, ENGlobal Corp (ENG), and Kinder Morgan Energy Partners (KMP) to build a large-scale processing complex in Ohio. The Arapaho processing complex is full at 235 million cubic feet per day. The first quarter will begin operations of 200 million cubic feet per day at Buffalo Creek.
Chesapeake Energy Corporation (CHK) will ramp-up volume with an additional 100 million feet per day. The cartage plant is running at near-capacity, enabling them to design a fourth processing plant in Mont Belvieu, Texas. These long-term contracts offer the ability to MWE to maintain a competitive advantage over its competitors.
For the past three months, insiders sold only 14,500 shares. It has a small window of opportunity to sell these shares. This signals the confidence it has to grow their business. There is a balancing act between raising capital to fund new projects and to meet expectations of customers. A 3% dilution on its shares means that the capital markets are confident on its outlook and growth. Most analysts who cover MWE have a price target of $76 to $79. The 50% retracement from the 52-week high is 62.56. Will a retracement from the $75 to $79 price target permit MWE management to raise more capital? The answer is yes.
Every entry point in a stock has an exit. Management does care that investors do well. It does have a strong history of distribution growth, which is very much dependent on the volumes and success from their producers. On Dec. 19, MWE announced a joint venture with EMG and Gulfport Energy Corporation (GPOR) to form an Ohio condensate company to support growth of condensate production in the liquid-rich area of the Utica Shale. This shows how fast MWE management moves to support investors confidence and specifically enlighten investors why capital is raised and deployed. MWE management takes its role seriously and knows it has to secure confidence with unit-holders and producers equally to exploit opportunities and protect long-term advantage.
When MarkWest announced a secondary offering of 4.75 million units, it did not announce it when the share price stood at $73 or $75; it could have diluted the shares 5%-10%. MarkWest units were on a downtrend below the 200-day moving average, shedding roughly 3% of existing unit holders became a non-issue. The 200-day simple moving average is often looked at by big financial institutions as a good entry point. MarkWest will spend upward of $2 billion on expansionary projects, which will increase producing assets excess of 10%. These expansions will furnish continued EBITDA and distribution growth; this will be beneficial for units. As of the last quarter, the company had a debt/equity ratio of 0.98 while most in the industry carried notably more debt than equity. That is why MWE has maintained its ability to compete over its competitors and protect its long-term advantage. It has established a unique moat that the other companies simply do not have.
Some companies look at the places they have achieved. MarkWest has established a pipeline for future growth. They have established growth in earnings with the rich exposure to the Marcellus shale. MWE is a conviction buy that would grow the distribution per unit for decades to come.