MarkWest Energy Partners (MWE) continues to grow, announcing a major deal Monday night to acquire the remaining 49% of Liberty JV from the Energy & Minerals Group. The deal will give MarkWest control of some of the best infrastructure assets serving the Marcellus Shale, cementing the partnerships future as a dominate player in the US energy picture for years to come. To help fund the deal, the partnership is also announcing a common unit offering of 8 million units, with an underwriters option to purchase another 1.2 million common units.
Under the deal, which is not definite yet, MarkWest will pay EMG $1 billion up front, in addition to the issuance of 19.95 million MWE Class B Units. These new Class B Units are non-transferable, and will begin to convert to MWE common units on a 1 for 1 basis over five years. Starting July 1, 2013, a fifth of the Class B Units will become MWE common units, the next fifth convert on July 1, 2014 and so on, with a fifth converting each year for 5 years. EMG has agreed to limit its right to vote to 5% of MarkWest common units, so there is no threat of a loss of control for other common unit holders.
MarkWest sees the deal as being immediately accretive on a DCF per unit basis in 2012, and "up to 6% accretive in 2013 and beyond." In addition, the partnership now sees 2012 DCF in the $480-$540 million range, up from the guidance of $380-$440 million given last month. In addition, capital expenditures will be in a $900 million to $1.3 billion range, up from the previous $600 to $700 million range.
Both companies are also announcing the formation of a new Joint Venture to serve the Utica Shale, which would develop natural gas processing and NGL fractionation, transportation, and marketing infrastructure in Ohio. The two firms plan to put out a press release early in January to provide additional details, but EMG stands to initially fund a majority of the JV.
So what does all this mean for MarkWest unit holders? Frankly, I think this is a great move for MarkWest, although a bit of an expensive one. The $1 billion in up front payment to EMG is not a concern, but the Class B Units are a little strange. My take is that each side gets something out of the deal, while each gives up a little as well. MarkWest gets the benefit of not needing to issue distributions to the Class B Units until they convert to common units, and EMG gets the benefit of getting MarkWest units at a potential discount to where they will be in 2013-2017, as the Class B Units convert. MarkWest also gets full ownership over fantastic assets serving the Marcellus Shale, and a commitment that EMG will help fund the new Utica JV. Similar deal structures have been used in other MLP deals, such as when Enterprise Products Partners (EPD) bought out their GP and certain GP holders agreed to forgo distributions for a period of time, so this sort of creative unit issuance is not new, although it's always a little strange, given that the deal is structured differently from most. Either way, the structure allows MarkWest, an MLP with a $4.7 billion market cap, to do a deal with a value close to $2 billion, depending on the value attributed to the 19.95 million B Units, which the partnership gives as between $750 million and $800 million. The ability to fund a deal of this size shows management is committed to taking MarkWest to the next level, and should bode well for growth going forward.
Complexities aside, MarkWest is a winner in this deal. The partnership is tightening its hold on critical infrastructure for the Marcellus Shale, as well as creating a new venture to further expand into the Utica Shale in eastern Ohio. At the same time, new projects from both MarkWest and other MLPs are being planned that should be beneficial to MarkWest. The Project Mariner Joint Venture with Sunoco Logistics (SXL) will connect the Marcellus Shale to export markets on the East Coast and to Sarnia to the west. In addition to that, a proposed Enterprise Products Partners pipeline down to the Gulf would tie MarkWest's assets further into the national infrastructure. The unit offering was announced with units trading a few percent below not just 52-week, but all time highs, showing how management is taking advantage of the units as a strong currency. The firm has had high distribution coverage, at 1.46x for the first nine months of 2011, and the addition of the remaining 49% of Liberty, as well as the completion of new facilities at the Mobley Processing Complex in 2012, should allow MarkWest to continue to grow the distribution in the years to come.
I'll admit that I've been late to the game for MarkWest, and that there are higher yielding MLP's out there. But the footprint of assets MarkWest has, and its size and growth potential, make it look like an attractive investment. The firm has an incredible head start in serving the Marcellus Shale, and will continue to benefit as production there increases.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MWE over the next 72 hours.