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MarkWest Energy Partners, L.P. (NYSE:MWE)

Q1 2012 Earnings Call

May 08, 2012 12:00 pm ET

Executives

Joshua Hallenback -

Frank M. 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

Randy S. Nickerson - Chief Commercial Officer of Markwest Energy Gp L.L.C. and Senior Vice President of Markwest Energy Gp L L C

Analysts

John Edwards

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

TJ Schultz - RBC Capital Markets, LLC, Research Division

Heejung Ryoo - Barclays Capital, Research Division

Unknown Analyst

Operator

Welcome to the MarkWest Energy Partners First Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Josh Hallenback. Thank you, sir, you may begin.

Joshua Hallenback

Thank you, Sharon, and welcome to those that have joined us on the conference call. Our comments today 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 distributions may not be achieved.

Factors that could cause actual results to differ materially from our 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, particularly those under the heading Risk Factors.

As indicated in our earnings call notification, we will be discussing the Keystone Midstream acquisition. Yesterday, we posted our presentation on our website under Investor Relations Presentations and Webcasts to set forth information regarding the Keystone acquisition.

With that, I will turn the call over to Frank Semple, Chairman, President and Chief Executive Officer.

Frank M. Semple

Good afternoon, and thanks to everyone for joining us on the call today. As indicated in our earnings release, we began the year with another quarter of record distributable cash flow. We also announced a number of significant expansions and the acquisition of Keystone Midstream.

The Keystone acquisition, an extension of our NGL gathering system, are very strategic because there are significant additions to our fully integrated Midstream operations in the Marcellus Shale, and they expand our presence into the perspective rich gas quarter in Northwest Pennsylvania. I'll discuss the acquisition and expansions in more detail later in the call.

I'll also discuss our financial performance and provide a commercial and operational update, including more details on our continuing growth in the Marcellus and Utica shales, as well as our Southwest business unit. And finally, I'll review our balance sheet and discuss our 2012 DCF and capital guidance.

As always, we'll leave time at the end to respond to your questions.

Now beginning with a high-level overview of our financial performance, distributable cash flow was a record $109 million during the first quarter, an increase of more than 40% compared to the first quarter of 2011. Adjusted EBITDA was a record $133 million, and segment operating income was $194 million.

In April, we announced a first quarter distribution of $0.79 per common unit, an increase of nearly 18% compared to the first quarter of 2011, while maintaining a strong distribution coverage ratio of 1.35x. We're pleased with our financial performance and our continued ability to deliver sustainable, top quartile returns for our unitholders.

Moving to the operational update. We continue to focus our expansion projects in the rich gas resource plays and throughout our discussion, you'll hear how our processed volumes continue to grow in our core areas.

Let me begin with our Southwest business unit, which includes Texas and Oklahoma and contributed 44% of our total segment operating income in the first quarter. Our Western Oklahoma operating area, which includes both our Foss Lake and Granite Wash systems, compared to last year, gathered volumes increased 26% and processed volumes increased 30%, primarily driven by strong performance of our producer customers in the Granite Wash.

When compared to the fourth quarter of 2011, volumes decreased slightly due to unscheduled downtime at third party fractionation facility. For the remainder of 2012, we expect processed volumes to continue to increase as rich gas wells are brought online from the Granite Wash, Cleveland and Tonkawa formations, offsetting the decline of dry gas production.

In Southeast Oklahoma, volumes remain strong at more than 500 million cubic feet per day, and our processed volumes year-to-date are greater than 100 million cubic feet per day, a 9% increase compared to last year, which continues to provide an uplift in operating margin. As in Western Oklahoma, we expect processed volumes in Southeast Oklahoma to continue to increase as rich gas wells are brought online offsetting the decline of dry gas production.

In our Carthage system in East Texas, processed volumes increased by 11% compared to the prior year and 3% when compared to last quarter. We announced in the first quarter that we signed new long-term agreements with several producer customers, including the Anadarko, Chevron, PetroQuest and Samson.

To support the producers' development plans, we're currently constructing the 120 million cubic feet per day Carthage East plant. With the addition of this plant, our total processing capacity in East Texas will increase to 400 million cubic feet per day. Carthage East is expected to come online in the first quarter of 2013 and is anchored by new rich gas volumes in both the Haynesville Shale and horizontal Cotton Valley wells, which are currently being drilled under these new contracts. As a result, we expect our processed volumes in East Texas to grow by as much as 20% in 2012, with continued growth in 2013 and beyond.

There are tremendous reserves yet to be drilled in the unconventional plays in our core operating areas in the Southwest, and we continue to be ideally positioned to further expand our presence. As a result, we have been able to grow our volumes in the low natural gas price environment, even though some producers have been reducing their drilling programs, primarily dry gas areas.

Our Javelina plant in Corpus Christi, which accounts for almost 10% of our segment operating income had a great quarter, both operationally and financially. Processed volumes increased by 17% compared to the prior year and 6% compared to the prior quarter. But also in the final stages of installing our fourth in-lake compressor, which will provide redundancy and enhanced run time for our refinery customers. This project adds fee-based revenue and allowed us to extend the terms of our processing and fractionation agreements.

Our Northeast segment, which serves the Huron and Southern Appalachian Basin, includes 6 processing facilities with over 500 million cubic feet per day of capacity and a 24,000-barrel per day fractionator. Our processed volumes in the Northeast segment were up 6% compared to the prior year and flat compared to the prior quarter. Fractionated volumes decreased 25% compared to last year because the Marcellus NGLs are now being fractionated at our Houston complex, which began operation in September last year.

Our Langley processing expansion in Southeast Kentucky continues to go well and will come online later this year. Given the announced changes in producers' drilling plants and maintenance on third-party pipelines delivering gas to our processing facilities, our current guidance assumes relatively flat processing volumes in the Northeast segment in 2012.

There are vast natural gas reserves supporting our assets in Kentucky and West Virginia. And given our franchise position in the area, we can provide strong support for our producers' midstream requirements over the long term.

Moving now to our Liberty segment, which includes our Marcellus operations. We continue to see dramatic growth in 2012 with total volumes increasing by 57% compared to the first quarter of 2011 and 6% compared to the prior quarter.

With a continuing connection of new wells for range resources in Southwest Pennsylvania and the startup of the initial Mobley and Sherwood plants, we expect total volumes to more than double to nearly 1 billion cubic feet per day by the end of this year. The Marcellus continues to be one of the most economic shale plays in the U.S., and we recently announced 2 major projects in our Liberty segment, which will significantly expand our gathering and processing capabilities and increase our presence in this prolific resource play.

The first of these projects is a long term fee-based arrangement with Chesapeake Energy to expand our Marcellus gas processing capacity to support their rapidly growing rich gas production in a 185-square-mile dedication area in Marshall, Brook and Ohio counties in the northern panhandle of West Virginia and in Washington County in Southwest Pennsylvania.

In support of this agreement, we're expanding the processing capacity at our Majorsville complex by 400 million cubic feet per day to 1.1 billion cubic feet per day with the addition of the Majorsville V and the Majorsville VI plants. These plants are scheduled to be completed in late 2013 and mid-2014.

The second project is a long-term fee-based arrangement with Antero Resources to install compression and high-pressure gathering facilities in support of Antero's rapidly growing rich gas production in Doddridge and Harrison County in Northern West Virginia.

This new gathering system will have the capacity to initially deliver more than 300 million cubic feet per day of Antero's rich gas to our Sherwood gas processing complex. The first phase of the gathering system will be completed in the third quarter of 2012 in conjunction with the completion of the 200 million cubic feet per day Sherwood I processing facility.

We have previously announced the expansion of the Sherwood processing complex to include the construction of Sherwood II, a 200 million cubic feet per day processing facility, which is expected to come online in the second quarter of 2013. This will increase the total capacity of the Sherwood gas processing complex to 400 million cubic feet per day.

Today, we are in various phases of installing 8 new cryogenic processing plants in the rich gas area at the Marcellus. In 2014, when all of our announced processing facilities are completed, our total processing capacity in the Marcellus will be more than 2.1 billion cubic feet per day.

All of these new processing plants are supported by long-term contracts with very attractive and very active producer customers, including Range, Antero, Chesapeake, CONSOL, EQT, Magnum Hunter and Noble.

Other significant projects under construction include 3 de-ethanization facilities at Majorsville and Houston with combined capacity to produce 115,000 barrels per day of purity ethane, approximately 325 miles of gas, NGL and purity ethane pipelines and a 200 car rail facility at our Houston complex.

Now let's move to the Utica, where we are partnering with the energies and minerals group to develop large integrated full-service midstream solutions for our producers. In March, we announced that we executed a letter of intent with Gulfport Energy to provide gathering, processing, fractionation and marketing services in the liquids-rich corridor of the Utica.

Over the past 2 months, our teams have worked together to design and begin to install a large gas gathering system in Harrison, Belmont and Guernsey counties. Our engineering land and construction teams are working diligently to complete the construction on the first phase of the system to bring Gulfport's initial wells online. Gulfport has a very impressive team, and we couldn't be more excited about the opportunity to partner with them. We're also in active discussions with a number of producers that are developing acreage in the area of this large new gathering system.

The gathering system will deliver the rich Utica gas to the Harrison processing complex that we're currently constructing in Harrison County. The processing complex will include an interim 40 million cubic feet per day refrigeration plant that is expected to be operational in mid-2012. That will be followed by a 125 million cubic feet per day cryogenic processing facility with a planned in-service date in early 2013.

The Harrison County complex is being designed for an additional 200 million cubic feet per day plant, which could be installed as early as 2013 to support future producer contracts.

Additionally, we are constructing 100,000 barrels per day of ethane and heavier fractionation capacity at our Harrison County, Ohio, which is expected to be the online in late 2013. This new facility will be connected through an expansion of our Marcellus NGL gathering system, to our Houston fractionation complex and allows us to cost effectively expand our Marcellus fractionation capacity under long-term contracts and create world-class midstream facilities in the heart of the Utica.

The Houston and Harrison County facilities will be the largest fractionation complexes in the Northeast and will provide tremendous operating flexibility and reliability, as well as market access.

The Harrison fractionator will be owned jointly by MarkWest Liberty and the Utica joint venture, and the capital required to build the complex will be shared accordingly.

In addition to the Harrison, Belmont and Guernsey county assets, we are developing a second processing complex in Noble County that includes the installation of a refrigeration plant in the fourth quarter of 2012, followed by a 200 million cubic feet per day cryogenic plant in mid-2013.

All of the Noble County NGLs will be transported through an NGL pipeline to the Harrison fractionation complex. As we've discussed previously, the first $500 million of capital expenditures for the Utica JV will be funded by our partner, EMG, after which, MarkWest will fund the 100% of capital requirements until we achieve 70% ownership.

It's also important to note that MarkWest will receive 60% of the distributions for the first 5 years or until our ownership exceeds 60%. Although we're in the very early stages of the Utica development, we're very excited about the play, which we believe will drive significant long-term high-quality investment opportunities.

Now let me touch briefly on the ethane projects. With our existing NGL infrastructure and the completion of our planned purity ethane pipeline and fractionation facilities, our Houston and Harrison County complexes will be key supply sources for Northeast ethane pipeline projects. The Mariner West project, which is being developed in partnership with Sunoco Logistics, continues to move forward, and we still expect to begin delivering ethane to Mariner West as planned in mid-2013.

With Mariner West and the Enterprise ATEX Express pipeline, the ethane takeaway issue has been addressed for the near term. However, Northeast NGL volumes will continue to grow as a result of the development of the rich gas resources. This expected growth in NGL volumes is one of the drivers behind the potential conversion of the Mariner East project from a purity ethane pipeline to a mixed ethane and propane pipeline. Changing Mariner East to a combined EP project provides an outlet for producers and improves operational flexibility. It also provides us with the ability to export propane and access critical international markets.

We've still got a long way to go before Mariner East project is finalized, but we continue to explore opportunities to enhance market access and product netback prices for our customers.

Yesterday, we announced the acquisition of Keystone Midstream Services for consideration of $512 million. Keystone is currently owned by Stonehenge Energy Resources, an affiliate of Rex Energy and Sumitomo Corporation. We expect the transaction to close in the second quarter of this year. This is a very strategic transaction that expands our Marcellus footprint into Northwest Pennsylvania, which has significant rich gas Marcellus, Utica and Upper Devonian resources.

The existing Keystone assets are located in Butler County, Pennsylvania, and include 2 cryogenic gas processing plants totaling 90 million cubic feet per day of capacity, a gas gathering system and associated fuel compression.

Under the terms of the agreement, Rex Energy and Sumitomo will dedicate 895 square miles to MarkWest. Rex Energy and Sumitomo currently have leased 68,400 acres in this dedication area, and they continue to expand their acreage position.

Volumes are currently at 40 million cubic feet per day, ramping up quickly as the 50 million cubic feet per day Bluestone Plant comes online this month. We expect volumes to reach approximately 80 million cubic feet per day at the end of 2012, 170 million cubic feet per day at the end of 2013 and 350 million cubic feet per day by 2016.

These estimates are based on Rex Energy's drilling program and the quality of the shale in this region. Currently, Rex Energy has 18 wells waiting for completion and has plans to drill and complete 22 new wells in 2012. We will gather and process the rich gas and fractionate the NGLs under long-term fee-based agreements.

We anticipate EBITDA from Keystone to be $18 million over the next 4 quarters, $28 million for the full year 2013 and growing to approximately $130 million by 2016.

To support Rex Energy's drilling program, we estimate additional capital expenditures of up to $500 million over the next 5 years to expand the Keystone gathering and processing facilities. A portion of that capital is related to the extension of our NGL gathering system, north from our Houston complex towards Beaver, Lawrence and Butler counties to the Keystone assets and other planned processing plants.

This is an important expansion because being able to recover ethane from the Keystone and other plants in the Northwest corridor and transporting the mixed NGL stream to our Houston fractionator will greatly enhance the Keystone operations and support the continued growth in gas and NGL production in the Marcellus.

In addition, indications are that the Utica Shale could be both very rich and highly prospective in Northwest Pennsylvania and Northeast Ohio. And the NGL pipeline expansion will provide an attractive outlet for Utica producers in these areas.

As part of the Keystone transaction, we also executed a letter of agreement with Rex Energy to explore similar gathering processing and NGL fractionation services proportions of Rex Energy's Utica acreage in Ohio. Rex Energy is drilling their first well in Carroll County and is expected to complete 2 additional wells in 2012.

So in summary, the Keystone acquisition is usually strategic and further expands our footprint in the Northwest Pennsylvania. We're excited about our new partnership with Rex and Sumitomo, and we're very focused on supporting their growth plans in Pennsylvania and Ohio.

Capturing premium NGL markets in the Northeast is critical for producers as they develop their rich gas acreage in the Marcellus. And our extensive NGL infrastructure is key at maximizing the value of the production.

With the Keystone acquisition, we will be operating 5 large processing complexes, all of which are or will be connected to our highly integrated NGL gathering, fractionation and marketing facilities.

The northeast is where MarkWest began our midstream operations almost 25 years ago, and we're proud to continue to play a leading role in the region. By the end of 2012, we will have approximately 1.5 billion cubic feet per day of processing capacity. And when all the announced projects are completed in mid-2014, we will have processing capacity of approximately 3.4 billion cubic feet per day and fractionation capacity of more than 330,000 barrels per day.

So turning now to our balance sheet, we had a productive first quarter. We raised $388 million of equity capital in March, and ended the first quarter with available liquidity of over $1.2 billion to fund our ongoing capital program. As of March 31, 2012, our debt-to-total capital was 49%, our leverage ratio was 2.9x and our interest coverage ratio was a healthy 5.5x.

Given our distribution objectives and the variability of the forward markets, we continue to consistently hedge our future commodity positions. For 2012, we're hedged at approximately 65%. And for 2013 and '14, we are hedged at approximately 55% and 27%, respectively.

Our hedged transactions have been executed through a combination of crude oil swaps and collars and direct product swaps. Our crude oil swaps for the next 3 years range from approximately $85 to $100 per barrel, and our crude oil collars have an average floor of $85 and average ceiling of $105 over the next 3 years.

Our guidance for distributable cash flow remains unchanged in 2012 and will be in the range of $440 million to $500 million. The midpoint of our guidance results and year-over-year growth in DCF of more than 40% and greater than 14% growth in DCF per unit at current units outstanding.

The coverage ratio would be approximately 1.4x for the year at the midpoint of our guidance. The substantial increase in U.S. natural gas liquids production, combined with the historically warm winter, has created our short term dislocation in ethane and propane prices relative to crude prices. The midpoint of our guidance assumes that ethane and propane prices return to more normal levels over the last half of 2012. Now ethane -- if ethane and propane prices remain soft through the remainder of the year, then we would expect to be closer to the low end of our range.

Our capital investments over the last 5 years are driving significant growth in distributable cash flow and when combined with a strong coverage ratio, we have room to continue to grow and deliver top quartile total returns for our unitholders.

Our 2012 capital forecast has increased as a result of the Keystone acquisition, and as forecasted in the range of $1.1 billion to $1.5 billion. This range excludes the Keystone purchase price of $512 million. Our maintenance capital expenditure forecast for 2012 is approximately $20 million. This range is net of the capital requirements for the Utica JV that will be funded by EMG.

So in summary, 2012 is shaping up to be another great year with strategic expansions and continued growth. In spite of the NGL pricing headwinds, our guidance for 2012 provides strong year-over-year growth in both DCF and DCF per unit. With our diverse set of assets and growing rich gas resource plays, we continue to be very well positioned to develop 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, Sharon, let's open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Edwards of Crédit Suisse.

John Edwards

Just a couple of questions, Frank, on the comments you were making. The ramp-up of Keystone, from $18 million, I think you said to $130 million by 2015, was it or 2016?

Frank M. Semple

2016, yes.

John Edwards

Okay. Now does that include the additional $500 million that you're expecting to spend? Or does that exclude that?

Frank M. Semple

Okay. We're -- yes, it includes the ability to ramp-up to those levels for both volumes and EBITDA, includes the assumption that we will continue to contribute capital for the Keystone growth. This includes additional gathering facilities and additional plants that are included in the Keystone forecast. It also includes the, as I mentioned in my formal remarks, it also includes the incremental capital that Keystone would support for the NGL pipeline expansion.

John Edwards

Okay. All right, okay, that's a good clarification there. And then I missed your comment. As far as where you ended up on your balance sheet, your debt-to-total-capital -- I'm sorry, your debt to EBITDA for the quarter? Your debt to trailing EBITDA, your 12 months trailing...

Frank M. Semple

Yes, at the end of the first quarter, debt-to-total-capital was 49% and that resulted in leverage ratio of 2.9x and interest coverage ratio was 5.5x.

John Edwards

Okay, great. All right. And then last question was on the total CapEx budget now, so the $1.1 billion to $1.5 billion, that does take into account then the contributions that the energy and minerals group will make. So that's -- I mean, this is, obviously, this is net MarkWest share, correct?

Frank M. Semple

Yes. When we gave CapEx guidance, John, it is net -- the $1.1 billion to $1.5 billion CapEx for 2012 is net of the EMG contribution for Utica, and that'll be consistent as we move forward, similar to what we did at Liberty.

Operator

The next question comes from Michael Blum of Wells Fargo.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

One question, just to confirm on the Keystone acquisition. Do you have -- you said there are fee-based cash flows. Are those going to be take-or-pay contracts similar with what you have with Range? Or are those would be acreage dedications with effectively where you'll have fee-based, but it will be volumetrically sensitive?

Frank M. Semple

First of all, in terms of the contract structure, they are both. They include their fee-based fees that have acreage -- that are supported by the acreage commitment and the volume commitments.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. So you do -- so you have volume commitments as well?

Frank M. Semple

That's correct.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And then can you just confirm the guidance -- your current DCF guidance for this year? Does that include or exclude any contribution from Keystone?

Frank M. Semple

It does include contributions for the remainder of 2012 for EBITDA and DCF. But those were minor given the ramp-up. So it's -- basically, we kept our guidance the same.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And do you have a maintenance CapEx number for Keystone?

Frank M. Semple

It's about $1 million or so of maintenance capital. These are brand-new facilities.

Operator

The next question comes from Selman Akyol of Stifel, Nicolaus.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

A couple of quick questions, if I may. First of all, in the Harrison processing complex, it sounds you're doing a lot of building out there. Are you seeing any the cost pressures at all from the contracting side?

Frank M. Semple

I'm just going to repeat the question to make sure I have it right because you're coming in a little bit weak. But the question I believe was for the Harrison processing complex in the Utica, are we having any -- and you're talking about construction price?

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Construction, yes, are you doing that on the turnkey or how is that being done?

Frank M. Semple

Well, my comments on Harrison processing complex is typical of all of our processing -- of all our facilities that we build up there. We are typically contracting out to multiple construction contractors -- the contracts, and those are typically under turnkey kind of fixed bid type of projects. And for that particular processing facility, the processing plant itself -- the skid-mounted processing plant itself is also a turnkey and on a fixed basis. So overall, in the Northeast, it's not Texas, so it's tough to build up there. Pipelines are particularly challenging. But for our processing complexes, we're typically able to come in on budget on those projects because of the fixed fee turnkey type of structure.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Fair enough. And then if I understand correctly, this will end up be funded by EMG under the first $500 million?

Frank M. Semple

Yes. The first $500 million of our Utica development plan is being funded by EMG.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

All right. And how long do you think it's going to take to go to that $500 million?

Frank M. Semple

Well, it's going to be -- we'll obviously give you updates on where we are relative to the $500 million on a quarterly basis. But we're -- right now, our projections are that, that $500 million will take us well into 2013.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then last question, if you can just -- and this is going over the Keystone. Can you guys talk about your volumes doubling from 170 million cubic feet per day in 2013 up to 350 million in 2016, but your projected EBITDA goes from, call it, $30 million up to $130 million, so roughly a factor of 4. In terms of thinking about that, is there anything going on there? It would have been a little higher than I would have thought.

Frank M. Semple

Well, the EBITDA that's being generated by the volumes that are being -- that are growing over that period of time includes multiple portions of the contract. In other words, they're fixed. They are fee-based gathering, processing, compression, fractionation, NGL transportation. So there's a multiplier effect for -- from a revenue standpoint as the volumes ramp up. And I would say that the volume forecast, which is driving the revenue and EBITDA, is based on a fairly conservative projection for the drilling programs that the Rex and Sumitomo have developed for their Butler County, Beaver County acreage. So, yes, it's a ramp-up, doubling over that period of time. But if you look what's happened in the Marcellus, behind our Houston and Majorsville plants, and also it's becoming the case with Mobley and Sherwood, that -- once you get these plants and facilities in place, once you solve the downstream NGL issue, then the ramp-up becomes pretty clear. And Rex has a proven track record of being able to drill, complete and ultimately bring those wells online. So we think we've got a pretty conservative estimate for the volumes. And as you mentioned, the revenues are then driven by the multiple services that we provide for the natural gas and the Natural Gas Liquids.

Operator

Our next question comes from TJ Schultz of RBC Capital Markets.

TJ Schultz - RBC Capital Markets, LLC, Research Division

I guess, sorry, just one more time to go back to Keystone, just a clarification from me. The $500 million in CapEx, understanding this supports kind of Keystone EBITDA growth to $130 million by 2016. But I guess, with that capital spend, are there cash flow opportunities outside of the Keystone assets that we should be contemplating here?

Frank M. Semple

Oh, absolutely. And I should have been more clear probably in my formal comments because that is clearly the strategic objective in the acquisition of the Keystone assets. It puts us squarely in the next major development area for the Marcellus and the Utica and the Upper Devonian. And so it gives us an opportunity to essentially build that capacity to be able to leverage those assets into additional producer contracts. It's a very prospective area, the Marcellus, and also gives us great access into the Utica. So yes, it's -- the assets themselves are being built and constructed to support Rex and Sumitomo and their development projects but we're very excited about being in the heart of the Northwest corridor. And that's really again the next big developmental area in the Marcellus and allows us to reach over very easily with our NGL that are into Columbiana County and the eastern portions of Ohio for the Utica.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay, good, that's helpful. I guess, just kind of moving on there kind of more bigger picture. As you move further north and kind of focusing on the Utica opportunity, now the assets first proposed in Noble County up to Harrison and maybe to Carroll County. I'm just trying to get your comfort level that you see a core part of the play forming this part of the Utica, or just how much further north is producer activity kind of indicating that there's room to grow kind of into Northeast Ohio so that maybe your current footprint offers additional growth opportunities here?

Frank M. Semple

Yes, TJ, as you know, as I stated, we're focused on the Harrison County, Noble County development area, mainly because of the Gulfport contracts, as well as the additional producer discussions that we've had. But the rich area, the core certainly reaches up to the Northeast. I'll let Randy kind of add to the color around how we view the Utica.

Randy S. Nickerson

Yes, and just building on what you've said, we think there's not a tremendous amount of results yet even up into northwestern PA. But certainly, geologically and from the [indiscernible] wellbores that are sort of up there, certainly, producers are feeling like, and geologically, our analysis and the analyses of the folks we've talked to certainly seems to support the fact that Northwestern PA could be a big area for rich gas Utica development. And then just jumping over, even North of Columbiana County, Mahoning are crumbled up in that area. It could be a really, really great core area for the Utica. So one of the need things obviously about Keystone is now that we're up to the Beaver County, we're up to Lawrence County, we're over to Butler County. But now we have great access to all of those Northern PA, Northwestern PA counties that could have Marcellus, but they really could have Devonian and particularly rich Utica. So it was a key part of the acquisition, and we see that area heating up and being developed pretty actively. So we're excited about it.

Frank M. Semple

Yes, if you think about it, TJ, if you think about Marcellus, Utica and the required midstream infrastructure being somewhat of a triangle. The Keystone acquisition allows us to kind of extend our system to connect the dots over that Northern Pennsylvania and Northeast Ohio area. So it's obviously critical for the continued development of the Marcellus and the Utica to be able to access the NGL system and then ultimately provide outlets for the NGLs. So that's our goal, is to continue to build out the infrastructure, not only for the natural gas gathering and processing, but also for the NGL fractionation and transportation components so that our producers can have ready access to all those facilities.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. I guess, just lastly, kind of shifting gears over to the Granite Wash. Some producers are now targeting some of the oil formations. I guess, it is impacting you all? And then also have NGL price weakness, has any of that impacted any producer activity in the region from your view?

Frank M. Semple

TJ, this is Frank. Could you repeat that question?

TJ Schultz - RBC Capital Markets, LLC, Research Division

Yes, just on the Granite Wash, some producers now are targeting some of the oil formations there. I'm just curious kind of what impact that may be having on you all. And then also just kind of curious with some of the recent NGL price weakness if there's any change in producer activity in that region from your perspective?

Frank M. Semple

You're correct. The Granite Wash continues to be delineated from a crude standpoint and that's a great opportunity for us. I mean, we're -- we've got significant assets in the panhandle and good relationships with our producer customers and continue to be in the middle of those discussions. So as the crude delineation continues, then we're in a great position to be able to participate in some of those required projects. So then moving to the issue around the weakness in the NGL pricing in the Mid-Continent, they're weak. Obviously, Conway has been a tough market here, really, over the last 4 or 5 months. And so that impacts, obviously, our margins as [indiscernible] margins primarily out of Western Oklahoma. And that's going to ease over time as more infrastructure is built between Belvieu and Conway. But currently, C-2 and C-3 are very -- the prices are very weak right now and [indiscernible] we have factored in those -- the pricing that I mentioned earlier for the NGLs into our guidance and our tables contains sensitivities around what happens if those NGL correlations continue to stay disconnected again for ethane and propane. But over the long term, we see the NGLs being produced in the contract structure that we have in Western Oklahoma being advantageous for the MarkWest unitholders over the long term. As the bottlenecks that exist between Conway and frankly, the Panhandle of Texas down to Belvieu are continuing to be worked by a number of different companies and over time, we see those differentials closings. But we expect to have -- we expect to see continued weakness in ethane, propane prices over -- certainly, the middle part of this year, we did see a strengthening over the -- near the end of the year as the winter -- we expect a more normal winter for propane. And when the petrochem complex, the crackers that are down in the Gulf Coast come back online. But yes, it's weak right now.

Operator

Our next question comes from Helen Ryoo of Barclays.

Heejung Ryoo - Barclays Capital, Research Division

Frank, you mentioned in your remarks that by 2014, you'll have 3.4 Bcf per day of processing capacity up in the Marcellus and Utica and also 330,000 barrels per day of fractionation capacity. I was just wondering, is your fractionation capacity enough? Do you need more? And also, of that 330,000, where -- I guess, you would have about 175,000 in Houston. Where are the other capacities going to be installed?

Frank M. Semple

Helen, just to be clear, the more than 3 Bcf a day of processing capacity that I mentioned in my formal remarks and the 330,000 barrels a day of fractionation capacity, that includes our current Northeast business units. So these are the Southern Appalachian Basin processing facilities and also the fractionation facility at Siloam. So by that 2014 timeframe, my point was that we will have 3 fractionators operating, those being the Siloam fractionator, which is 20,000 plus barrels a day; the Houston fractionation complex, which is up and operational today, including ethane rejection -- ethane recovery, excuse me, that comes from our Majorsville and our Houston de-ethanization plants. And then the third fractionation complex will be, as I've discussed, over in the Utica at our Harrison County fractionation facility, which includes C2 plus fractionation. And so that's how you get to those numbers, Helen.

Heejung Ryoo - Barclays Capital, Research Division

Okay. So the 330,000 would be total NGL fractionation capacity, right? So what's the -- how much of de-ethanizer capacity would you have?

Frank M. Semple

Okay. So the Harrison County -- we'll just kind of go through. We're installing -- for the Marcellus ethane projects, we're installing 3 de-ethanizers, 2 at our Majorsville plant and 1 at our Houston facility. And that's approximately...

Randy S. Nickerson

That's about 115, and when you add 40-ish over in Ohio, you get to about -- you get about 150,000, 155,000 barrels of C2 capacity currently.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And then there would be some more from the Utica side?

Frank M. Semple

That includes the Utica.

Heejung Ryoo - Barclays Capital, Research Division

That includes Utica, okay. Okay, that's very helpful. And then...

Frank M. Semple

115,000 in the Marcellus of de-ethanization capacity and 40,000 at our Harrison County Utica fractionation facility. And the de-ethanization as it is over in the Marcellus occurs at the processing facilities.

Heejung Ryoo - Barclays Capital, Research Division

Right, okay. And is this enough for you guys on that type of processing capacity? Or do you need more fractionation capacity?

Frank M. Semple

We will continue to add fractionation, including de-ethanization capacity as the producer volumes continue to ramp up. Now the good news here is that with those 3 large fractionation facilities, we have a lot of ability -- significant ability to continue to scale in line with the producers' wet gas development. And it's connectivity with the liquids line is really key to that. As I said, you have sort of a triangle here that allows us to essentially provide that NGL header into the processing areas of the Marcellus and the Utica, so the producers have an easy access to the processing plants that we're installing, as well as the NGL header that will take the mixed NGL stream though one of those large world-class fractionation facilities.

Heejung Ryoo - Barclays Capital, Research Division

Okay, got it. And then could you just provide an update on your project Mariner East project? You did mention that you're changing that to a more EP mix project. And at this point, what needs to be done? Also, given this change in plan, how does that affect, I guess, your overall project needs?

Frank M. Semple

Well, I'll tee this up for Randy to talk a bit more about that transition from a purity ethane pipeline to an EP mix pipeline. But the points that I was making in my formal comments about the continued growth in the liquids production in the Northeast, a big part of that growth is from propane. And we have mentioned in previous calls about our interest, our continued work with the producer customers that allows us to forecast where, particularly ethane and propane from a volume standpoint is going over the next 3 to 5 years, and propane is a big part of that mix. So just like ethane, just like in the ethane solution that we began talking about 3 years ago, needing to have additional outlets, for ethane, for the producer customers, propane has a similar story. Near term, propane has a home in the Northeast. But long term, you need to have more outlets for propane So that's one of the drivers, Randy, that really is causing us to look and reevaluate with Sunoco Logistics, the idea of transitioning to an EP mix pipeline.

Randy S. Nickerson

Yes, I agree with you, Frank, completely. The pipeline that, in the pipeline complex, that was sort of always part of Mariner East and having to build a short pipeline to connect to the existing Sunoco line. That really doesn't change when you go from ethane to EP. Essentially, the same pipeline assets. And Frank touched on the volumes, which are really sort of the first leg of the stool, is to keep using that sort of analogy. It's the first part of the triangle. The existing assets that Sunoco has, sort of in that area, and certainly we want to talk with them, but they have tremendous assets in that area. And in the Philadelphia area, at the end of the pipeline and going to an EP mix allows us, them and our producer customers sort of to access those and gain value from those. And then extension from that is accessing international markets. We have volumes, we have assets, and they're building in, extending those to having Marcellus and Utica customers, producers being able to access, overseas at sometimes very high-value international markets for their product makes the Marcellus, Utica just that much more perspective, and so the big part of the push. And so it was the natural extension when ethane, certainly, in the short term, has been solved to sort of push that over to EP was, as I said, sort of the natural extension of the project.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And in terms of time line, I guess, is that something you could affirm up by next year? Or is that too early?

Frank M. Semple

Well, these projects, the purity ethane projects and the propane tourmaline projects that -- and storage projects that Randy mentioned, these take years to develop. And so -- but every quarter, we make more progress in terms of the strategic approach, the commercial terms, the work with our producer customers. So every quarter, we'll continue to provide update, Helen. But I do believe that by the end of this year, we'll have a lot more clarity around the development of those joint projects: the pipeline projects, the storage projects, the terminaling projects off of the Mariner East pipeline project. And it's interesting because again, I use the comparison about the ethane pipeline project, Mariner West and now the Enterprise ATEX Express pipeline. Those just take a long time to develop and the producers have some big decisions in terms of really what they're willing to support from an investment standpoint to be able to facilitate those new markets. So just stay tuned. We'll continue to update every quarter of the progress and I'm hoping that by the end of this year, we'll have a lot more clarity and really, commitments from the producers in terms of what facilities are going to be ultimately built over in the Philadelphia market.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And then last question is, your East Texas expansion, how rich is that gas stream? And also, what type of contracts do you have in place? Is it more fee based? Is it commodity exposed? And then when do you expect your -- the additional capacity to fill up?

Frank M. Semple

That plan -- we're real excited about that new facility because, as I mentioned in my comments, we've signed recently some new contracts with some great producers in East Texas that are developing the rich area of the Haynesville Shale and the Cotton Valley, and that's supporting that 120 million a day processing plant that will be completed early, very early in 2013. And it's very rich, it's C2-plus. It's about 3 GPM, 3.2 or so GPM. So good economics for the continued drilling of that gas by the producers. And again, those are fee-based type services for us. So the continued expansion of our East Texas assets is really exciting for us and we expect that -- as I mentioned in my comments, we expect that growth to continue because it's very economic for the producers to continue to develop those particular areas.

Operator

Our last question comes from Carl Basca [ph] of Basca Family Office [ph].

Unknown Analyst

The purchase by MarkWest of Keystone and Williams Partner's recent purchases came in, in Susquehanna have led me to question whether there's anything in the way of other significant gathering processing facilities that are potentially available for sale or have MarkWest and Williams pretty much cleaned the table?

Frank M. Semple

Carl, yes, those were the 2 large gathering processing assets in the rich area of the Marcellus. And to your point, those were very competitive projects, processes. And we're very pleased with our ability, as I mentioned in my formal comments, in the Q&A, that we were able to acquire those assets of Keystone and ultimately, integrate them into our broader midstream infrastructure in the Marcellus. So for us, it's a great acquisition.

Unknown Analyst

This may be a bit of a stretch but if a producer in the next 3 or 4 years wants to find someone to gather and process his gas coming out of the Marcellus, will he have only you and Williams Partners to deal with? I mean, are you going to be in an almost monopolistic position?

Frank M. Semple

Well, the fact of the matter is that the Marcellus and the Utica is a very competitive area from a midstream standpoint. There are a lot of large independent producers and majors that are in that area that are very capable and are, in fact, executing on their own midstream capabilities. So that's the good news for -- from a midstream infrastructure standpoint is that the industry, which includes companies like Williams Partners and MarkWest, is ramping up very rapidly to support all of this rich gas development. But you got to keep in mind that the producers have the ability to continue to build out their own infrastructure. And there's a lot of private equity capital that continues to come into that market to build infrastructure. For us, it's just really critical and has been, for us, to continue to provide a total solution for the producer customers. And that's why we talk so much about not only the gathering and processing, but also the NGL infrastructure that's required. So the answer to your question, the producers have choices, we know that. That's why we're really focused on customer service and integrated midstream solutions for all of the producer customers.

Unknown Analyst

One last question. If a cash-rich company, such as an Exxon, were looking to acquire major gathering and processing facilities in serving the Marcellus and the Utica, would MarkWest be a logical place for them to come talk?

Frank M. Semple

Well, MarkWest is in a great position to continue to grow our assets independently in all our areas of operation. We provide the best services for our producer customers and provide the best value for our unitholders by staying independent and to be able to focus on the customers. So that's our long-term goal. It's just to continue to do what we're doing and staying independent and building value for our unitholders and our customers.

Operator

At this time, I would now like to turn the call back over to Mr. Frank Semple for closing remarks.

Frank M. Semple

Thanks, Sharon, and thanks, everyone, for joining us on the conference call. We appreciate your interest, and continue the support. And please, as always, don't hesitate to call us if you got any additional questions. Thanks a lot. That concludes our call for today.

Operator

This concludes today's conference. We thank you for your participation. You may now disconnect.

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