MarkWest Energy Partners' Explosive Growth Vs. Boardwalk Pipeline Partners' Demise

Includes: BWP, KMP, MWE
by: Michael Ambrozewicz

There are certain companies that have a propensity and capacity to exist by developing strong principles by surviving by growth. Companies need to differentiate themselves from other companies with varying conditions that however slightly have a manner of profitability to itself and to investors that believe in them. MLPs are rather unique in their behavior where there is a need to reconcile differences and achieve co-operation to generate growth by building infrastructure that requires capital to do so. That alone will ensure a collective survival in the long term. Both MarkWest Energy Partners, LP (NYSE:MWE) and Boardwalk Pipeline Partners, LP (NYSE:BWP) are midstream limited partnerships that provide transportation, storage, gathering, and transportation of natural gas.

After listening to Boardwalk Pipeline Partners' earnings call, their president and CEO Stanley Horton provided some insight to the demise of the business and future growth potential. What stood out was Stanley Horton's lack of confidence, he sounded quite nervous and concerned. He indicated that the market fundamentals of natural gas transportation on their pipeline system continued to put pressure on contract renewals. What analysts look for most in a company is the ability to grow and illuminate some degree of confidence in their organization. If it is a question of contract renewal, then the question is why? No reason was given. Stanley Horton only eluded that there was a reduced storage production decline. My question is, was it because of competition? Are they being locked out by others like MWE, Kinder Morgan Energy Partners LP (NYSE:KMP), and EMG? Are these companies competing on the grander scale than BWP and are producers seeing better results in their capital expenditure and growth? When the CEO of BWP stated that they are continuing to evaluate all aspects of their growth projects and are engaging in ongoing discussions with certain parties regarding interest and commitments for fractionation and LPG export terminal capacity, then should the interest and commitment have been settled long ago?

The growth we are seeing in production of oil, natural gas liquids, and natural gas is in its early infancy. No doubt if energy companies maintain their current level of drilling activity we will still have growth for the next twenty or more years. However, it seems that natural gas producers are rewarding companies like MarkWest Energy for their explosive growth. MWE has established product, function, and location. It has a large footprint in the Marcellus and Utica shales that fuels their growth opportunities. Geography has become the key to MLP growth prospects. Natural gas liquids like ethane and propane has resulted in a massive build-out of new energy infrastructure including new pipelines, processing plants and storage facilities which is driving growth at a rapid pace.

If Charles Darwin was alive today and took a deeper look at what happened to BWP, he may have found his survival of the fittest theory at work. It is oversimplified by the blanket endorsation of the "dog eat dog" world of big business. If companies wish to survive and become victors, especially MLPs, then they must align themselves with the strong to vanquish the weak. Kinder Morgan and MarkWest have joined forces to build a mixed NGL pipeline to the Gulf Coast which is a direct competition to the proposed Bluegrass pipeline which may be built by Boardwalk Partners. KMP, MWE, and EMG joint-venture aimed at the Marcellus/ Utica shale region. The project is a 400 MMCFd cryogenic processing plant in Tuscarawas County in Ohio to separate raw materials into methane and natural gas liquids. The second project is a new NGL pipeline that will, like the Bluegrass, run from Ohio all the way to the Gulf Coast. The producers are ecstatic in the Marcellus/Utica area because it takes away capacity for the NGLs they are currently producing.

The CEO of BWP clearly stated that the reduction of distributable cash flow from the 2013 level is primarily because of new supply sources of natural gas developed in the Marcellus and Utica shale plays. In fact, this is where MWE's strength and moat come into play. When Stanley Horton mentioned that the production in this area has grown from six billion cubic feet per day to thirteen billion cubic feet per day and could exceed 25 billion by 2020, he admitted that the new supply source caused significant reduction of its cash on their pipeline systems. This makes BWP unable to compete and renew transportation contracts. Even though Stanley Horton remains bullish in the Bluegrass project connecting natural gas liquids transportation capacity to the Marcellus and Utica Shale play to the U.S. Gulf Coast, they are still trying to get producers to commit to the pipeline.

When analyst Stephen Maresca simply asked if the Bluegrass project has potential moving forward. Stanley Horton's response to the unitholders was devastating:

"Look, as I said, we've got discussions going on with potential customers and it's dependent upon those discussions. We clearly said since the project was first announced, we'll only go forward to the extent that we were able to have market commitments to support the project and receive regulatory approvals."

Even with the $300 million support from Loews (NYSE:L), Boardwalk must still work out details in order to reach the point where producers are supporting their projects.

On January 30th MarkWest Energy Partners commenced operations of seven major infrastructure projects in the Northeast including five new cryogenic processing plants adding one billion cubic feet per day to their capacity. During the fourth quarter of 2013, MWE announced three new processing plants in the liquid-rich corridor of the Marcellus that will process in excess of 2.2 Bcfd. In December, MarkWest doubled its purity ethane fractionation capacity to 76,000 barrels per day with the start-up of its second de-ethanization facility. MarkWest is the first midstream operator in the Northeast to offer its producer customers to recover and produce purity ethane and provide transportation infrastructure. Potentially, it can become a key driver for the future expansion of the global petrochemical industry. The Seneca Complex, comprised of hundreds of miles of low and high pressure gathering pipeline, nearly 600 MMcfd of gas processing services, NGL transportation infrastructure is a new world-class NGL fractionation facility that would drive future growth for MarkWest.

BWP has followed the same footsteps as NRGY. In January 2012, Inergy cut back half its distribution. Its unit price plunged and has never recovered since. With over 100 MLPs today, MLPs are transforming themselves and forming predatory co-operative alliances to rid the landscape of weaker players that have become a nuisance for energy producers that can't support their ambition. MarkWest is a strong buy versus BWP which is a strong sell. If I can use survival's mantra as a reference, MarkWest has outwit, outlasted and outplayed the competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.