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MarkWest Energy Partners LP (NYSE:MWE)

Q1 2010 Earnings Call

May 11, 2010 4:00 p.m. ET

Executives

Dan Campbell - VP, Finance and Treasurer

Frank Semple - Chairman, President and CEO

Operator

Good afternoon. Welcome to the MarkWest Energy Partners first quarter 2010 earnings conference call. Your lines have been placed on listen-only until the question-and-answer session of today's conference. This call is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Dan Campbell. Thank you, sir. You may begin.

Dan Campbell

Thank you, [Sarah], and welcome, everyone, to those who have joined us on the call today. Our comments will include forward-looking statements which involve risk 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.

And with that, I will 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 today. As indicated in our earnings release, we had another solid quarter and we continue to demonstrate strong financial and operational performance as we expand our footprint in several of the most economic resource plays in the US.

During the call today I will briefly review our financial performance, provide a commercial and operational update and conclude with a brief review of our increased guidance.

Now, beginning with our financial performance, distributable cash flow was $64 million, adjusted EBITDA was $89 and segment operating income was $129 million. In mid-April we announced a first quarter distribution of $0.64 per common unit, which results in a coverage ratio of 1.4 times.

So we're off to a great start in 2010 driven by a combination of strong margins and a continued ramp up of volumes from our organic growth projects.

Over the past 18 months we continued to pursue our growth strategy despite challenging economic conditions. During a period of time when the industry was cutting capital, we pursued the opportunity to create a first maneuver advantage in the Marcellus shale.

Maintaining this level of growth during a period of volatility required some very tough decisions such as completing capital market transactions, joint ventures and divestitures of non-core assets. However, our continued investment in these high-quality projects has positioned us to generate cash flow that will support our long-term growth objective which is to provide superior and sustainable distribution growth.

Over the past three years, approximately 70% of the $1.4 billion we have invested in growth capital has been focused on midstream infrastructure in the Marcellus, Woodford, Granite Wash and Haynesville resource plays where producer economics are very compelling.

Many of these plays have significant [EGO]- rich production in the areas in which we operate which further improves producer net backs. In addition, our investment during the past few years gives us a competitive advantage because of our established infrastructure, experience and existing customer relationships that we have developed in these growing basins.

In Southeastern Oklahoma, Woodford shale volumes continue to be very strong driven by the completion of new wells that were drilled in 2009. Volumes during the first quarter of 2010 increased to an average of 500 million cubic feet per day, an increase of nearly 20% year-over-year and nearly 10% from the fourth quarter of '09.

More importantly, our producers are reporting that completion costs continue to fall and well productivity continues to increase. [Whitfield] recently announced forecasted average production growth of 20% in 2010 compared to '09 which demonstrates their continued performance improvements in Woodford.

The ARkoma Connector Pipeline volumes during the first quarter increased to an average of 360 million cubic feet per day, an increase of more than 10% compared to the fourth quarter of '09. In our Western Oklahoma operating area we continue to see growth in our Granite Wash system in the Texas panhandle.

In the first quarter of 2010, gas volumes in the Granite Wash increased by nearly 40% compare to the fourth quarter to an average of 116 million cubic feet per day. We connected 19 new wells to our Granite Wash system in 2009 with average initial production rates in excess of 15 million cubic feet per day.

These horizontal wells are being completed in one of several highly productive stacked zones that are prolific throughout Newfield's acreage. Some of these zones are lean while other contain very hydrocarbon rich gas which provides incremental upgrade to economics.

The Granite Wash is providing extremely good results and Newfield has indicated that more than half of their planned wells in this play for the remainder of 2010 will be in the hydrocarbon-rich formations of the field.

In our Carthage system in East Texas, producer continue to carefully manage their capital programs in this challenging gas price environment. Gathering volumes during the first quarter were 430 million cubic feet per day which was a slight decrease from the prior quarter due to a reduction in pipe and drilling.

However, we have more than 200,000 perspective Haynesville acres that are dedicated to our system and held by the tight sand production. Our forecast for volumes in East Texas is to remain somewhat flat in 2010 with modest declines in the tight sand areas offset by new Haynesville production.

Our Javelina plant in Corpus Christi, Texas continues to perform well with volumes that are consistent quarter after quarter. Javelina is a key part of our operations and we continue to look at potential growth opportunities including the possibility of utilizing our significant existing fractionation capabilities to participate in the growth of the [inaudible] at the Eagle Ford shale.

Now let's move to the Appalachian region where we divide our operations into two financial reporting segments. The first segment, which we refer to as our northeast business unit, [impedes] the processing, fractionation, marketing and storage infrastructure that we have owned and operated in Kentucky and West Virginia for more than 20 years.

The second segment is our liberty joint venture that is focused on the Marcellus shale in Southwest Pennsylvania and Northwest Virginia. Beginning with the northeast segment, gas processing volumes and NGL sales in the first quarter of 2010 were relatively flat compared to the prior year quarter and to the fourth quarter of 2009.

While we expect conditional gas volumes in this area will generally remain flat in the short term, it's important to note that the Marcellus and Huron shales extend over essentially the entire area that is served by these assets.

In particular, EQT, who is one of our largest producer customers in West Virginia and Kentucky, has made tremendous strides in the development of Huron shale and the NGLs that we fractionate for EQT continue to grow at significant rate.

To accommodate this growth we expanded our Siloam fractionator in 2009 and it has been operating at record volumes. In addition, Siloam plays a critical role in the fractionation of the heavier NGLs produced in the Marcellus and will continue to do so until our Houston fractionator is completed in early 2011.

We have extensive experience marketing NGLs in the Northeast and the increasing NGL volumes that we are fractionating have given us the opportunity to significantly expand our marketing relationships.

Moving to our liberty segment where we are investing significant capital to expand our midstream operations in the Marcellus shale with our joint venture partners, the Energy and Minerals Group, which was formally known as Midstream and Resources, we recently issued several press releases discussing our ongoing growth plans in the Marcellus, including the Majorsville II processing plant.

This second plant increases our total announced processing capacity at the Majorsville complex to 270 million cubic feet per day and solidifies Majorsville as a key processing hub serving producers in both Southwestern Pennsylvania and Northwest Virginia.

When combined with the processing facilities currently operating or under construction at our Houston complex, by the end of 2011 we will have total processing capacity in the Marcellus' 625 million cubic feet per day. All of the facilities are essentially fully contracted with key producers including Range, Chesapeake, Statoil, [Chief] and [TNS].

We also announced the expansion of the design capacity of the Huston fractionation complex from 37,000 barrels per day to 60,000 barrels per day. This increase, when combined with our 24,000 barrel-per-day Siloam fractionator will create the largest NGL fractionation and logistics infrastructure in the Northeastern United States.

These facilities will provide fractionation capacity for up to 1.5 BCF per day of rich gas production and will support the development of the rich gas core the Marcellus for the foreseeable future.

In addition to these processing and fractionation expansions, we continue to build out high pressure and low pressure gathering systems to support the increasing production. Our liberty volumes increased to 100 million cubic feet per day in the first quarter of 2010 and, based on current projections from our producer customers in the Marcellus, our volumes will exceed 200 million cubic feet per day by the end of 2010.

Additionally, liberty recently completed the connection to deliver purity propane to the [Tempco] product's pipeline at the Houston complex. [Tempco] is the largest products pipeline in the Northeast United States and provides significant additional propane markets for liberty.

While the NGL market in the northeast is not as large as the Gulf Coast, it will continue to provide a premium year-around market for all the propane and heavier NGLs produced in the Marcellus.

One issue that is receiving a lot of attention is how to maximize the value of the ethane and the natural gas stream as being produced in the wet area of the Marcellus. The producers have done a great job of developing blending capabilities with the interstate pipelines in the northeast.

However, as the Marcellus production continues to ramp up the ethane will ultimately need to be extracted in order to meet the downstream pipeline specifications. The best NGL economics will be achieved by marketing the propane and the heavier NGLs regionally and then transporting the ethane to the premium petrochemical markets in the Gulf Coast or the Midwest.

We will have the ability to aggregate the majority of the ethane produced in the core of the rich gas area of the Marcellus and we're working very closely with our producer customers as well as the large ethane consumers to develop a purity ethane project that will generate improved pricing for the producers and deliver ethane to markets with strong long-term demand.

The Marcellus is obviously a major area of focus for us and we are very excited about the numerous opportunities we see for continued expansion and growth. By the end of 2010, MarkWest curative capital contribution for the liberty joint venture will be approximately $350 million and we expect the resulting cash flow will ramp up significantly in 2011.

So to summarize our commercial and operational activities, we're very well positioned to continue to grow our asset base and to provide excellent midstream services to our producer customers.

It's important to understand that for the past few years we've been focused in growing our presence in some of the best resource plays and the execution of that plan has resulted in more than 700,000 highly perspective acres dedicated to our midstream operations in the core areas of the Woodford, Haynesville, Granite Wash and the Marcellus.

These plays represent a significant portion of the future natural gas supply for the US because of the quality of the rock and the utilization of very efficient and productive drilling technologies.

Shifting now to a few financial metrics, our total debt at quarter end was $1.2 billion comprised primarily of senior notes in three tranches with the earlier tranche due in 2014. For the first quarter, our debt to total capital was 45%, our interest coverage ratio was 3.2 times and our leverage ratio was 3.9 times.

In mid-2009 our leverage ration was approximately 4.3 times, so we've considerably improved this important financial metric. We ended the first quarter with nearly $400 million of available liquidity, which positions us well to execute our growth capital plan and to pursue quality accretive acquisitions.

In addition, we recently completed a well-received equity offering that further improved our liquidity position. We're also very pleased that both Moody's and Standard & Poor's recently upgraded our credit rating to BB, and these upgrades were based on our improved financial performance and successful track record in executing our growth strategy. It will benefit us in the form of lower capital costs in the future.

One of our long-term objectives is to continue to increase our fee-based operating margin. With our contracts in the rapidly growing Marcellus and Woodford operations, we expect to increase our fee-based operating margin to approximately 50% by the end of 2012.

We also remain very committed to the disciplined execution of a rolling 36-month hedging program to manage the risk associated with commodity price exposure and to meet our distribution objectives.

We recently took advantage of improving commodity prices to increase our positions using food proxy hedges at prices ranging from $75 to $92 per barrel. As a result, for 2010 and 2011 we are hedged at approximately 70%, which for us is essentially fully hedged because of operation swing consideration.

For 2012 and 2013 we're hedged at approximately 35% and 10% and we will continue to opportunistically execute hedge transactions to lock in strong margin and to secure a large percentage of the commodity [sincere] portion of our future distributable cash flow.

Before concluding, I want to briefly discuss our 2010 guidance. We have increased our DCF forecast to a range of $200 million to $230 million, which reflects the impact of second and third quarter storage cycle for our propane business in the northeast.

The midpoint of our 2010 DCF guidance will provide a coverage ratio of approximately 1.2 times for the year at our current distribution and a number of units outstanding. The forecast assumes a reasonable range of crude oil prices, natural gas prices and NGL price correlations for the remainder of the year. The forecast also assumes our current hedge program and volume forecast.

As we have in the past, we included in the press release a sensitivity table that shows the impact on 2010 DCF of various crude and natural gas prices as well as the NGL correlations. Our 2010 growth capital forecast is unchanged at a range of $300 million to $350 million. The capital program is driven primarily by high-quality largely fee-based projects.

In summary, I want to conclude our call today with a message we've been communicating for the past several years. Our core operations are located in some of the best resource plays in the US and we're in great position to continue growing our volumes and cash flow.

We remain committed to our key priorities of providing quality midstream services, maintaining a strong balance sheet and achieving distribution objectives. We've been winding the investment spring for the past several years and will continue to do so throughout 2010.

As that spring begins to unwind in late 2010 we believe we are in a strong position to provide long-term distribution growth and returns for our unit holders.

So with that, [Sarah], let's open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Sir, I'm showing no questions at this time. I'd like to turn it back to Frank Semple for closing comments.

Frank Semple

Thanks, [Sarah]. I know a lot of the analysts and bankers are probably on their way up to New York for the MLP conference. Thanks, everybody, for joining us on the call today and, as always, we appreciate your interest and continued support for MarkWest. If you have any questions, feel free to give us a call. Thanks a lot.

Operator

This does conclude today's conference. You may disconnect at this time. Thank you for your participation.

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