Pipeline operator MarkWest Energy Partners L.P. (MWE) has priced a public offering of 10,000,000 common units at $54.25 apiece, with an over-allotment option for an additional 1,500,000 units.
The gathering and processing master limited partnership ( MLP ) plans to use the net proceeds from this offering - expected to be approximately $521.1 million after the underwriting discount and estimated offering expenses - to finance the proposed buy out of 'The Energy & Minerals Group's' (EMG) 49% interest in the Marcellus shale joint venture project.
(Read our full coverage on the planned acquisition: MarkWest to Buy Stake in JV )
However, in case the transaction fails to materialize, MarkWest intends to utilize the offering proceeds to provide capital expenditures and working capital for general partnership purposes.
Denver, Colorado-based MarkWest Energy is engaged in the gathering, processing and transmission of natural gas, transportation, fractionation and storage of natural gas liquids (NGLs), and the gathering and transportation of crude oil.
Even though MarkWest has a Zacks #2 Rank (Buy rating) in the short run, we are Neutral on the units in the longer term.
MarkWest owns a high-quality and diverse portfolio of midstream assets that generate stable and recurring revenues based on long-term fee-based contracts. Over the last few years, the partnership has consolidated its position in the midstream business, achieved through a combination of organic efforts and accretive acquisitions.
With its proven track record of supporting producers in the development of shale plays, MarkWest is in a great position to participate in infrastructure upgrade that will be required for the development of the leasehold assets.
Last year, MarkWest teamed up with another MLP, Sunoco Logistics Partners L.P. (SXL) , to build a distribution system to transport ethane produced in the Marcellus Shale Basin (in north eastern U.S.) to markets along the Gulf Coast. We believe that the initiative, known as the 'Mariner Project,' offers several benefits.
Not only will the project help MarkWest to profit from the direct opportunity of capturing demand for ethane takeaway capacity at Marcellus, but it will also support higher gathering system volumes and higher ethane production.
We also appreciate MarkWest's steady improvement in its liquidity/cash flow position and its track record of consistent distribution growth.
However, we think the current valuation is fair and adequately reflects the partnership's growth prospects.
First of all, gathering and processing MLPs, like MarkWest, are more sensitive to commodity prices compared to other MLP subgroups. As a result, collapsing energy prices adversely affect their cash flow stability.
MarkWest's non-fee-based keep-whole and percentage-of-liquids basis contracts for its midstream assets - which make up more than 60% of its net operating margin - also expose the partnership to commodity price risk. This is expected to further limit its ability to generate positive earnings surprises.
As a result, our long-term total return expectation for MarkWest remains rather muted. We do not see any significant price upside for the units over the next few quarters and expect the partnership to grow at a somewhat more conservative and sustainable pace.