MarkWest Energy Partners LP's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: MarkWest Energy (MWE)

MarkWest Energy Partners LP (NYSE:MWE)

Q2 2011 Earnings Call

August 09, 2011 4:00 pm ET


Frank Semple - Chairman of the Board of MarkWest Energy GP LLC, Chief Executive Officer of MarkWest Energy GP LLC, President of MarkWest Energy GP LLC, Chief Executive Officer of MarkWest Hydrocarbon and President of MarkWest Hydrocarbon

Dan Campbell - Vice President of Finance - Markwest Energy Gp Llc and Treasurer of Markwest Energy Gp, L.L.C


John Edwards - Morgan Keegan & Company, Inc.

TJ Schultz - RBC Capital Markets, LLC


Welcome to the MarkWest Energy Partners Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Dan Campbell. Thank you, sir. You may begin.

Dan Campbell

Thank you, Ashley and we welcome everyone that has joined us today on the call. 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. 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 distribution may not be achieved. Factors that could cause actual results to differ materially from their expectations are included in the periodic reports that 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'll turn the call over to Frank Semple, our Chairman, President and CEO.

Frank Semple

Good afternoon, and thanks for joining us today. Well, given the recent volatility in the markets, we know it's difficult to take time out and focus on MarkWest. But we're excited about our results and look forward to today's discussions.

As indicated in our earnings release, we have another outstanding quarter. And we continue to experience growth and strong financial performance from our diverse set of high-quality midstream assets. This performance primarily results from our producer customers' continued success in developing their liquids-rich acreage in some of the best resource plays in the U.S.

Before merging with MarkWest Hydrocarbon in 2008, which eliminated all incentive distribution rights, we have invested approximately $2 billion in organic growth projects and acquisitions focused on shale development. And it's exciting to see the significant ramp up in cash flow and distribution growth, as these projects come online. We have also significantly strengthened our balance sheet and liquidity position over the past several years, supporting our ability to pursue ongoing growth opportunities while continuing to provide superior and sustainable total returns for our unitholders.

During the call today, I'll discuss our financial performance, provide a commercial and operational update and a brief overview of our balance sheet and financing plan. I will discuss our increased DCF guidance and updated capital forecast for 2011. We'll then respond to your questions.

So beginning with the high-level overview of our financial performance, we achieved record distributable cash flow of $83 million during the second quarter, adjusted EBITDA was also a record at $120 million and segment operating income was $148 million.

In July, we announced a second quarter distribution of $0.70 per common unit which is a 9.4% increase over the second quarter of last year. And I'm going to provide more financial results in a second, but as you can see, we had a pretty spectacular quarter. With a strong balance sheet and a continued strong distribution coverage ratio of 1.4x, we are very well-positioned to continue executing our growth strategy.

Moving to the operational update, you can refer to our press release and the 10-Q for the year-over-year operational statistics. While that information is important to our discussions, my comments today will be focused primarily on sequential comparisons between the first quarter and the second quarter of this year, which we believe is more relevant given our significant growth.

Let me start with the Southwest segment, which is comprised of our operations in Oklahoma and Texas. The Southwest is our largest business segment and currently accounts for nearly 60% of our total segment operating income.

We had a strong second quarter in the Southwest, driven by higher gathering volumes, increasing NGL sales and favorable processing margins. Most notably, our gathering volumes in the Granite Wash increased to more than 140 million cubic feet per day in the second quarter, an increase of nearly 10% compared to the first quarter, which was driven by continued strong results from Newfield Exploration.

To support this growth in liquids-rich volumes from the Granite Wash, we are nearing completion of a 75 million cubic feet per day expansion of our Arapaho processing plant in Western Oklahoma, which will come online in the third quarter of this year. Also of note in the Southwest segment is the consistent growth in gas volumes that we processed in Southwest Oklahoma, which provides a healthy uplift in margin for both MarkWest and our producer customers. This increase is a result of the ongoing drilling activity of our producer customers in the liquids-rich zones of the Woodford.

Our processed volumes in Southeast Oklahoma grew by 17% in the first quarter and by 44% compared to the prior year quarter. Overall, we continue to be ideally positioned to further expand our presence in the Southwest segment given our solid history of providing exceptional midstream customer service.

Our Javelina plant in Corpus Christi continues to perform well, both operationally and financially. Javelina, which accounts for more than 10% of our segment operating income, continues to see strong demand from Gulf Coast petrochemical companies for ethane, ethylene, hydrogen and other products that we produce.

Now let's move to our operations in the Northeast where we are experiencing the most dramatic growth. Our Southern Appalachia operating area includes the Siloam fractionation and marketing complex and 5 processing facilities in Kentucky and West Virginia, which collectively account for more than 20% of our segment operating income. Gas processing volumes in this segment increased significantly compared to the first quarter, primarily due to a full quarter benefit from the Langley acquisition. In addition, we continue to fractionate record volumes at Siloam driven by increased NGL volumes from Langley and continued growth in NGLs being trucked from our Marcellus operations.

As indicated in our press release, keep-whole sales were lower in the second quarter of this year compared to last year as a result of variations in our summer propane storage volumes. The net result was that we stored more propane in the second quarter of 2011 than in the second quarter of 2010.

In our Liberty segment, which is our Marcellus joint venture with The Energy & Minerals Group, 2011 continues to be a terrific year. Our efforts in the Marcellus are focused on building world-class midstream infrastructure for arguably one of the best gas plays in the U.S. This infrastructure is critical to the full development of a liquids-rich area of the Marcellus in Southwest Pennsylvania and Northern West Virginia. And we're very pleased that almost every major independent producer in this area has dedicated a majority of their gas production to Liberty. As has been the case in the past several years, we continue to execute on a large number of projects to expand our Liberty midstream system.

During the second quarter, we commenced operations of our 200 million cubic feet per day Houston III processing plant and our 135 million cubic feet per day Majorsville II processing plant, which together increased our total cryogenic processing capacity in the Marcellus to 625 million cubic feet per day.

We are on schedule and on budget to complete the construction of 2 additional processing complexes. And by this time next year, MarkWest Liberty's full operational processing capacity will go to nearly 1 BCF per day, essentially all of which is supported by long-term contracts. These 2 additional complexes further extend the reach of our processing and NGL gathering infrastructure into the heart of the liquids-rich Marcellus in West Virginia.

The first of the 2 complexes, which we have talked about previously, is Mobley. The first phase of the Mobley complex includes a 120 million cubic feet per day plant that will primarily serve liquids-rich gas transported in EQT's Equitrans gas pipeline. The Mobley plant is scheduled to be completed in the second quarter of 2012, and we continue to work with a number of additional West Virginia producers to meet their needs for increased capacity.

For several months, we have discussed a second processing complex in West Virginia but have not provided many details. This new complex, which we call Sherwood, includes a 200 million cubic feet per day processing plant located South of Mobley in the heart of Doddridge County, where producers are reporting strong drilling results. Sherwood is scheduled to come online in the third quarter of 2012. Both the Mobley and Sherwood processing complexes will be connected to our Houston fractionator through expansions of our extensive NGL gathering system. And both plants are supported by long-term agreements with high-quality producer customers.

Now shifting to our Houston, Pennsylvania fractionator. We continue to produce purity propane and to truck the butanes and gasolines to Siloam for final fractionation. Within the next few weeks, we will complete the next phase of the Houston fractionator, which will allow us to produce a full purity stream of all NGL products including propane, isobutane, normal butane and natural gasoline.

Now this is a major milestone for Liberty. It will provide significant scale and operational efficiencies, eliminate trucking cost to Siloam and substantially enhance the profitability for our producer customers while improving margins for Liberty. The Houston fractionator, which will come online ahead of schedule, has a design capacity of 60,000 barrels per day and will be the largest fractionator in the Northeast United States. Our plan is to expand the fractionator over the next 2 years by adding up to 80,000 barrels per day of purity ethane capacity, which will increase the total design capacity to up to 140,000 barrels per day.

Our ability to produce and market purity NGLs is enhanced by the 50,000-barrel per day rail loading facility, the first phase of which will be completed in the fourth quarter. This critical addition to our Houston complex, coupled with our existing truck loading facility and considerable NGL storage capacity significantly enhances our ability to take advantage of the premium Northeast NGL markets and solidifies our position as the premier provider of NGL solutions in the Northeast.

The final piece of the NGL value chain is ethane. MarkWest has been a leader in developing solutions to support our producers in the liquids-rich area of the Marcellus. Our ethane recovery will be critical for the full development of the play with our existing NGL infrastructure and the future installation of our ethane fractionation facilities, our Houston complex will be a primary supply source for ethane in the Marcellus. The timing of an ethane solution is critical since many producers will need to recover at least a portion of their ethane by the end of 2013.

The Mariner East and Mariner West projects, which are being jointly developed by Sunoco Logistics and MarkWest, provide attractive alternatives that can be completed within the 2013 timeframe and provide significant optionality to our producers. Mariner West is anticipated to have an initial capacity to transport up to 50,000 barrels per day of Marcellus ethane to Siloam markets by mid-2013. In late July, Sunoco announced a 30-day binding open season, with priority service available to shippers making long-term volume commitments.

The Mariner West project looks promising and would provide a critical solution for our Marcellus producers. The Mariner East project is designed to transport 50,000 barrels per day of Marcellus ethane to Marine terminals in the Philadelphia area by mid-2013. In addition to interest by Gulf Coast petrochemical companies, the Mariner East project has garnered significant interest from international petchems. We're also pleased by the continued announcement of potential new ethane crackers in the Northeast, which could provide an additional competitive market for ethane, enhancing the value for Marcellus producers in creating much needed high-paying jobs in Appalachia.

Our long-term vision for our Northeast operations continues to be the creation of a large integrated gas processing and NGL gathering and fractionation system that extends from the Huron/Berea shale in Southeastern Kentucky to the Marcellus shale in Northern West Virginia and Southwest Pennsylvania. We already operate 10 processing plants throughout Appalachia, and we will soon complete the second major fractionation and storage complex. By connecting our Huron/Berea and Marcellus NGL infrastructure, we will create enormous reliability and flexibility for Appalachian producers.

In addition, to the Marcellus and Huron/Berea shales, recent significant discoveries of rich gas in the Utica shale also present new midstream opportunities. We're excited about our strong competitive position as the producers begin to develop the Utica resources, given our extensive NGL infrastructure in the Northeast and our demonstrated capability to provide best-of-class midstream services.

Now turning to our financials. The balance sheet continues to be a key area of focus for us given our significant growth opportunities. In early July, we completed a successful and upsized equity offering of 4 million units at a net price to MarkWest of $46. The proceeds, about [ph] $185 million, were used to repay borrowings on our credit facility and to fund our ongoing capital program.

We also increased the borrowing capacity of our revolver to $745 million. And today, we have available liquidity of nearly $720 million. We ended the quarter with total debt of $1.6 billion and it's important to note that the next maturity of our senior notes is not until 2018.

Pro forma, following the July equity offering, our debt-to-total capital is 44%. Our leverage ratio is 3.2x and our interest coverage ratio was a healthy 4.4x. We have worked hard to strengthen our balance sheet and these strong credit metrics were reflected in the upgrade to the BB rating that we received from S&P in the second quarter.

Given our distribution objectives and the variability of the forward markets, we have consistently hedged our future commodity positions. We are fully hedged for 2011 and 2012. And for 2013 and '14, we are hedged at approximately 50% and 20%, respectively. The majority of our hedge transactions had been executed utilizing crude oil swaps that range from approximately $85 to more than $100. This hedging philosophy has served us well and continues to be a key priority for MarkWest given our long-term distribution objectives.

Before concluding, I want to briefly discuss our updated DCF guidance for 2011 and then provide some color on our second quarter distribution increase. Since 2008, we have been winding the spring nearly $2 billion of high quality capital investments that significantly expand our presence in liquids-rich resource plays. We are now realizing the financial benefits from these investments and we still have a large inventory of high quality projects scheduled for the next several years. The growth in DCF from these recently completed projects, coupled with strong NGL prices and processing margins supports an increase in our 2011 DCF forecast to a range of $300 million to $330 million.

The midpoint of our revised guidance results in a 30% year-over-year growth in DCF and 18% growth in DCF per unit, while providing a coverage ratio of 1.4x for the full year at our current distribution and units outstanding. This growth in DCF per unit allowed us to increase our distribution by 9.4% compared to the second quarter of 2010 and to maintain a strong 1.5 coverage ratio for the quarter. This significant growth in DCF from our strategic investments, coupled with elimination of IDRs back in 2008 clearly supports our long-term distribution objectives.

Shifting to capital expenditures. We narrowed our 2011 growth capital forecast to a range of $675 million to $700 million, which includes the $230 million Langley acquisition. Our growth capital program continues to fund high-quality largely fee-based projects in our key operating areas.

So in summary, 2011 is on track to be another record year. With our diverse set of assets and growing resource plays, we're very well-positioned to continue developing efficient and effective midstream solutions for our producer customers. These growth opportunities, coupled with the strength of our balance sheet, continue to support our objectives to provide superior and sustainable total returns for our unitholders.

So with that, Ashley, let's now turn to the questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from TJ Schultz.

TJ Schultz - RBC Capital Markets, LLC

Just first on Mariner East, can you guys just discuss kind of where you are in the discussion process you mentioned with international petchems and kind of how that's developing?

Frank Semple

Yes, TJ. Like I said just in the call, we were excited about the Sunoco open season and that's progressing pretty well. As indicated, that's a pretty tight open season, 30 days and it is binding. So I think that we're pretty optimistic that they'll complete that effect [ph]. And again you asked the Mariner East, I was just correcting you. So the Mariner West again will complete the open season and we're pretty optimistic about the responses that Sunoco has been getting. The Mariner East, let me just shift gears here and talk about Mariner East. The fact is since -- as that project has progressed, we have seen a lot of activity start to develop around the international markets and potential petrochems in the east. And with that route essentially bisecting the state of Pennsylvania over to Philadelphia, gives us a lot of opportunities for growth in that area both domestically and internationally. And obviously, we are continuing to pursue and develop opportunities in the Gulf Coast with those petrochems in the Gulf Coast. So all systems are go. We are seeing good responses. It clearly, from kind of a binding open season standpoint, is behind Mariner West but we're again very encouraged by what we've seen so far.

TJ Schultz - RBC Capital Markets, LLC

Okay, great. Just on the Utica on the opportunity there. I know it's still kind of early days, but can you just provide a little bit more color on how you are positioned or how you are positioning yourselves to capitalize on the opportunity if the play does develop?

Frank Semple

Yes, TJ. I mean we're excited about the discussions that the producers have been having publicly about their results in the Utica. We think it's the real deal. Clearly with our infrastructure located so close to the Utica, the rich area of the Utica, we're obviously having a lot of discussions about, with the producers, on opportunities out of that area. It's still early, but again we're very encouraged by what the producers have been saying publicly and feel that we can leverage our existing position in West Virginia and Pennsylvania to be able to compete for those services.

TJ Schultz - RBC Capital Markets, LLC

Just lastly, again shifting gears to Granite Wash with Arapaho expansion coming online. Can you just talk about your position to further expand your presence in the Granite Wash?

Frank Semple

Well, yes. That 75 million a day plant, TJ, that's discussed in my comments will be very, very full by the time it comes online here in a couple of weeks. And so we're already in the process of evaluating the next stage of processing capacity upgrades to support the continued success of the Granite Wash producers, particularly Newfield. So it's an exciting time for those producers. They have continued to focus -- because of the economics, continued to focus on the rich horizons of the Granite Wash and that's obviously good for our processing business in Western Oklahoma.


[Operator Instructions] Your next question comes from John Edwards.

John Edwards - Morgan Keegan & Company, Inc.

Just following up TJ's question on the Utica. In terms of potential investment opportunity, I mean what kind of range would you expect it to develop into or is it really too early to even be thinking about that?

Frank Semple

Well, it's not too early to be thinking about that. Our ability to be effective in our discussions with the producers, given the rapid ramp up of their drilling program on the Utica depends on our ability to provide some pretty detailed estimates for the providing, the gathering and the processing and fractionation NGL marketing services for the Utica. Like I said earlier, in response to TJ's question, having the significant capabilities in the Northeast today, gives us the ability to deliver to those assets and be effective. Now, it is too early for us to talk publicly about what those investments are going to look like. But I mean, you can just think about the last 3 years of development around the Marcellus and the Utica is shaping up to be a very similar type of explosive play. So it's going to require significant infrastructure. There will be a number of midstream providers that are interested in that area. And it's going to take hundreds of millions of dollars potentially to be able to provide just the midstream infrastructure. It's located in a great position, relative to the market and actually, it's in a great position to be able to take advantage of our existing -- our particularly existing NGL infrastructure capabilities in the Northeast. It's a big play.

John Edwards - Morgan Keegan & Company, Inc.

Okay. So just remind us to date how much have you invested in the Marcellus play to date?

Frank Semple

In total, it's about $1 billion and the majority of that Marcellus infrastructure has been invested as a part of our joint venture with The Energy & Minerals Group. So that roughly $1 billion investment is on a day-to-day [ph] basis.

John Edwards - Morgan Keegan & Company, Inc.

So the Utica, do you think it could be as big as the Marcellus?

Frank Semple

Well, again it's very early. But then again, we're taking our lead from the information that has been developed by the producers. But I think you certainly have understood from listening to Chesapeake and others that this has the potential of being at least as big as the Marcellus. And has huge implications on the overall supply and demand balance for natural gas in the U.S. So we're watching it closely. We are certainly excited about what we're seeing and very aggressively pursuing the opportunities in the Utica.

John Edwards - Morgan Keegan & Company, Inc.

Okay. And then you know I always have to ask you this question, Frank. Just in terms of your capital investment, inventory of opportunities. What are you thinking about here over the next 3 to 5 years?

Frank Semple

Yes, John, you've been real consistent.

John Edwards - Morgan Keegan & Company, Inc.

I have to ask that.

Frank Semple

We have one more quarter to report before we give you our 2012 guidance. So I'm not going to get ahead of myself on guidance. You know what I've said in previous quarters, the last several quarters is that based on the projects that we've already announced are that we're pretty comfortable that those projects will drive something in that $300 million a year type of capital. That's net to MarkWest. And I think that number has increased slightly, kind of that rough estimate of what the capital might look like over the next several years. We'll obviously give you more complete guidance in November. But it's just looking probably closer to that $400 million than $300 million. But again that's very rough, and it will be refined when we talk to you in November.

John Edwards - Morgan Keegan & Company, Inc.

Okay. And then I don't know if I was late dialing in so I don't know if you have already commented on this. As far as where do you stand on liquidity and then as far as hedges for '11, '12 and '13, where do you stand on that right now?

Frank Semple

Yes. Liquidity, following our equity offering a couple of months ago, we currently have $720 million of liquidity from our revolver. And so again, we're in good shape to support our ongoing capital program. And from a hedge standpoint, the information that we've been providing over the last several quarters is really through 2014. We have extended our hedge program into 2014. We're essentially fully hedged for the next 2 years, for 2011 and 2012. And for us, when we say fully hedged, that's roughly 70%, 75% hedged to provide us some operational flexibility in those near-term years. And in 2013 and 2014, those numbers were about 50% hedged, 50% of total commodity positions in 2013 and approximately 20% of the total production in 2014.


[Operator Instructions] I will now turn the call over to Frank Semple for closing remarks.

Frank Semple

Thanks, Ashley, and thanks to everyone for joining us on the call today. Again, we appreciate your interest and continued support. And as always, give us a call if you've got any additional questions. That concludes our call for today. Thanks.


Thank you for participating in today's conference call. You may disconnect at this time.

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