MarkWest Energy Partners LP reported weaker-than-expected profits in the third quarter, partly on continuing operational constraints in the Marcellus Shale, as well as weak results from the Utica Shale segment, issues that management expects to remedy once most of the 22 growth projects are completed in 2014.
Pipeline and fractionation constraints, as well as project delays and the temporary shut down of a natural gas liquids (NGL) pipeline in West Virginia, impacted the Denver partnership's 3Q2013 results. Distributable cash flow (DCF) came in at $118 million in the period, about 30% lower than a year ago and 8% below 2Q2013, giving it a coverage ratio of 0.92. The decrease indicated that MarkWest is borrowing against future growth, which CEO Frank Semple acknowledged during a conference call Wednesday.
Across the Appalachian Basin, MarkWest and various partners have 22 projects being readied to expand natural gas liquids (NGL) gathering and fractionation services, with 17 expected to ramp up through 2014, Semple said.
"Our results reflect the continued success of our producers, as they rapidly develop their acreage positions in high quality, unconventional resource plays, as well as several short-term operational constraints that we have recently experienced in the Northeast," said the CEO. "Development of the Marcellus and Utica shales continues to provide us with significant future growth opportunities for the expansion of critical midstream infrastructure."
Producer customers' "highly successful drilling programs throughout the Marcellus and Utica have resulted in a dramatic increase in NGL production," which surpassed the capacity of the partnership's 60,000 b/d Houston fractionator in Washington County, PA, and its 24,000 b/d Siloam fractionator in South Shore, KY.
The big project lineup requires not only patience on the part of producers, but a lot of upfront cash. In the latest quarter, there also were impacts over which MarkWest had little control.
A landslide in August caused a line break on a portion of an NGL pipeline in a remote area of Wetzel County, WV, which led to the Mobley complex being offline for about two months. MarkWest's Sherwood complex in Doddridge County, WV, also experienced partially curtailed processing volumes, which required some NGLs produced at the complex to be trucked elsewhere for fractionation.
The Mobley and Sherwood complexes are back to full operations, but the higher transportation costs and lower realized fractionation income lowered profits.
MarkWest also is attempting to keep ahead of production growth, with almost $735 million spent during 3Q2013 on capital projects, up from $654.9 million a year ago. At the end of September MarkWest had about $327 million of cash and cash equivalents in subsidiaries, with total outstanding debt of $3.0 billion, representing a debt-to-capitalization ratio of about 42.1%.
Things are coming together, Semple told analysts. A Utica complex being built by MarkWest Utica EMG is set to start up in January. The Hopedale fractionation and marketing complex in Harrison County, OH, would be connected via a NGL pipeline to Marcellus infrastructure and "alleviate the current constraints associated with the production of purity products."
There is no lack of gathering volumes in Appalachia. Marcellus gathering system throughput in 3Q2013 increased to 563,200 Mcf/d from 444,700 Mcf/d, while processed volumes jumped to 1.137 MMcf/d from 479,400 Mcf. Fractionated NGLs more than doubled to 48,200 b/d from 22,300 b/d. In the Utica, gathering system throughput totaled 85,100 Mcf/d; none was recorded for the year-ago period. Gas processing volumes totaled 131,100 Mcf/d.
Because of the higher expansion costs, MarkWest reduced DCF for 2013 to $475-485 million from $500-540 million. Capital spending was increased to $2–2.3 billion from $1.5-1.8 billion. The expenditures all are Appalachian related and don't include a Granite Wash acquisition in Texas, which has helped lift the Southwest segment's earnings.
DCF in 2014 now is forecast to be $600-690 million, based on current predictions of operational volumes and prices. Capital expenditures are estimated at $1.8-2.3 billion, with maintenance capital of about $25 million.