Markwest Energy Partners: A Solid Long-Term Dividend Play

| About: MarkWest Energy (MWE)

Basic overview

Markwest Energy Partners, L.P., (NYSE:MWE) together with its subsidiaries, engages in the gathering, processing, and transportation of natural gas. The company also transports, fractionates, stores, and markets natural gas liquids; and gathers and transports crude oil, as well as owns a crude oil transportation pipeline in Michigan. It conducts its operations in the Southwest, the Northeast, Liberty, and the Gulf Coast. MarkWest Energy GP, L.L.C. serves as the general partner of the company. MarkWest Energy Partners, L.P. was founded in 1988 and is based in Denver, Colorado.

Reasons to be bullish on MWE

It has a diverse high-quality portfolio of midstream assets, which are a great source of recurring stable income generated via long term fee based contracts. It is the largest gatherer of natural gas in the Carthage field in Texas. It is also one of the largest processors of natural gas in the North East.

It has a proven track record of supporting producers in the shale plays and is in an excellent position to benefit from the expansion of infrastructure that is going to be required for the Marcellus shale fields in western Pennsylvania and western Virginia.

It has teamed up with Sunoco logistics partners to build a distribution network to transport ethane produced in the Marcellus shale basin; this venture is known as the Mariner project and should provide an n additional boost to future earnings.

It has a great track record in terms of increasing its distributions. The current annual distribution ($2.92 per unit) is roughly 195% higher than its $1.00 annual distribution at the time of its debut in 2002.

Its recent purchase of the Energy and Minerals groups' 49% stake in the Marcellus shale joint venture project should immediately contribute positively to its earnings and cash flows.

Energy and Minerals group has agreed work with MWE in a new midstream joint venture in Ohio (Utica Shale) in 2012; this is another venture that should contribute nicely to the bottom line.

Additional factors

A very strong total return for the past three years of 581%

A strong quarterly revenue growth of 37%

Sales have been rising for the past three years

Cash flow from operating activities has been trending upwards for the past three years

It sports a good interest coverage ratio of 7.67

A decent current ratio of 1.14

A 5 year dividend average of 9%

A decent five year dividend growth rate of 6.27%

100K invested for 10 years would have grown to roughly 700K

As we are going to many key ratios in this article, investors would be best served if they got a handle on some of the following key ratios.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest, "5 Great Plays With Yields As High As 16.3%."

Debt to Equity Ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article, "Is Potash Corp. Of Saskatchewan A Good Long-Term Dividend play."

Markwest Energy Partners L.P.

Industry: Equipment & Services

It has a free cash flow rate of $-38.18M and a current ratio of 1.14 and an interest coverage ratio of 7.67

Performance

Qtrly Earnings Growth = N/A

Qtrly Revenue Growth = 37.1%

Total return for the past 3 years = 581.26%

Total return for the past 5 years = 128.23%

Total return for the past 12 months = 42.99%

Growth

Net income for the past three years

Net Income - 2011 = $-113 million

Net Income - 2010 = $31 million

Net Income - 2009 = $N/A million

EBITDA ($mil) 12/2011 = $N/A

EBITDA ($mil) 12/2010 = $313

EBITDA ($mil) 12/2009 = $79

Sales ($mil) 12/2011 = $N/A

Sales ($mil) 12/2010 = $1188

Sales ($mil) 12/2009 = $738

Dividend Sustainability

Total cash flow from operating activities

2008 = $227 million

2009 = $223.11 million

2010 = $312.33 million

Payout Ratio 12/2011 = 122%

Payout Ratio 5 Yr Avg 12/2011 = 774%

Change in Payout Ratio = -652%

Other Key Important Ratios

Price to Sales = 3.87

Price to Book = 2.49

Price to Tangible Book = 7.32

Price to Cash Flow = 19.34

Price to Free Cash Flow = -10.6

Quick Ratio = 0.81

Current Ratio = 1.14

LT Debt to Equity = 1.07

Total Debt to Equity = 0.77

Interest Coverage = 7.67

Inventory Turnover = 22.89

Asset Turnover = 0.37

Dividend yield 5 year average = 9.02

Dividend rate = $ 2.86

Dividend growth rate 3 year avg = 4.56%

Dividend growth rate 5 year avg = 6.27

Paying dividends since = 2002

Total return last 3 years = 581.26%

Total return last 5 years = 128.23%

Related companies (Peer Group analysis)

Williams Partners L.P. (NYSE:WPZ)

Industry : Equipment & Services

It has a free cash flow rate of $N/A and a current ratio of 0.73 and an interest coverage ratio of 4.35

Net income for the past three years

Net Income - 2011 = $1009 million

Net Income - 2010 = $1085 million

Net Income - 2009 = $1378 million

Total cash flow from operating activities

2008 = $247.39 million

2009 = $1.49 billion

2010 = $1.82 billion

Dividend yield 5 year average = 7.93

Dividend rate = $ 2.96

Dividend growth rate 3 year avg = 5.9%

Dividend growth rate 5 year avg = 8.3

Consecutive dividend increases = 6 years

Paying dividends since = 2005

Total return last 3 years = 540.75%

Total return last 5 years = 71.74%

Regency Energy Partners LP (NYSE:RGP)

Industry : Equipment & Services

It has a free cash flow rate of $-270.30M and a current ratio of 0.79 and an interest coverage ratio of 1.33

Net income for the past three years

Net Income - 2011 = $140 million

Net Income - 2010 = $-11 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2007 = $74.42 million

2008 = $181.3 million

2009 = $143.96 million

Dividend yield 5 year average = 8.23

Dividend rate = $ 1.81

Dividend growth rate 3 year avg = 1.04%

Dividend growth rate 5 year avg = 3.86

Consecutive dividend increases = 1 years

Paying dividends since = 2006

Total return last 3 years = 265%

Total return last 5 years = 29.29%

El Paso Pipeline Partners LP (NYSE:EPB)

Industry : Equipment & Services

It has a free cash flow rate of $195.76M and a current ratio of 1.03 and an interest coverage ratio of 2.79

Net income for the past three years

Net Income - 2011 = $318 million

Net Income - 2010 = $379 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $96 million

2009 = $638.5 million

2010 = $671.7 million

Dividend yield 5 year average = 5.32

Dividend rate = $ 1.93

Dividend growth rate 3 year avg = 17.11%

Dividend growth rate 5 year avg = 41.61

Consecutive dividend increases = 3 years

Paying dividends since = 2008

Total return last 3 years = 154.2%

Total return last 5 years = N/A

Buckeye Partners, L.P. (NYSE:BPL)

Industry : Equipment & Services

It has a free cash flow rate of $N/A and a current ratio of 1.15 and an interest coverage ratio of N/A

Net income for the past three years

Net Income - 2011 = $50 million

Net Income - 2010 = $43 million

Net Income - 2009 = $109 million

Total cash flow from operating activities

2008 = $215.26 million

2009 = $47.67 million

2010 = $292.48 million

Dividend yield 5 year average = 7

Dividend rate = $ 4.08

Dividend growth rate 3 year avg = 5.45%

Dividend growth rate 5 year avg = 5.69

Consecutive dividend increases = 16 years

Paying dividends since = 1990

Total return last 3 years = 101.88%

Total return last 5 years = 57.4%

Conclusion

The markets are extremely overbought, and it would be in long-term investor's best interests to wait for a strong pullback before opening up new positions.

EPS, EPS surprise and price consensus charts obtained from zacks.com. Earnings estimate and growth rate graphs sourced from dailyfinance.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.