MarkWest Energy Partners LP, which teamed up with private equity fund The Energy & Minerals Group (EMG) three years ago to create one of the largest natural gas processing companies in the Marcellus Shale, now sees a “critical” need to create similar midstream infrastructure in the emerging Utica Shale, CEO Frank Semple said last week.

MarkWest and EMG plan to develop gas processing and natural gas liquids (NGL) fractionation, transportation and marketing infrastructure in eastern Ohio beginning next year. EMG would fund most of the initial capital expenditures required to develop the midstream infrastructure.

Denver-based MarkWest also is negotiating to acquire EMG’s 49% stake in MarkWest Liberty Midstream & Resources LLC, the partners’ Marcellus Shale midstream joint venture (JV), for an estimated $1.8 billion. The new JV would be similar to the Liberty project, Semple explained to energy analysts during a conference call.

Most of the details about planned Utica Shale infrastructure are to be disclosed in January once the dual transactions are completed.

“We will provide in January details, including capital expenditures, of the specific projects and assets involved in the Utica,” Semple said. But he signaled that the plans are similar in scope to what MarkWest and EMG have accomplished together in the Marcellus Shale.

“The original Liberty JV was developed in early 2009…in order to provide flexible capital to execute on significant opportunities in the Marcellus,” he said. “That was the foundation of forming the relationship with EMG…”

Acquiring EMG’s ownership in Liberty has “obviously strategic benefits because it provides [MarkWest] with 100% ownership of Liberty interest at a time when we have a stronger balance sheet to fund not only this transaction but to capture 100% future upside in the Marcellus, which today is much more mature than in 2008 and 2009. The timing is really good for MarkWest unitholders and the timing also is good for EMG.”

The Utica Shale today is similar to where the Marcellus was three years ago, he said. “It’s in the early stages of development and we can partner with EMG to provide flexible capital to support enormous opportunities..”

Semple said the Liberty JV “has made significant capital investments to develop world-class midstream infrastructure that has been critical to the development of the liquids-rich area of the Marcellus. The creative acquisition structure includes up-front cash and deferred issuance of [MarkWest] common units. This structure provides immediate and future accretion and reflects the strength of our relationship with EMG as well as their confidence in the future value of [MarkWest’s] common units.”

To buy out EMG’s minority ownership, MarkWest is offering to pay $1 billion in cash and 19.95 million of its unregistered Class B units. Semple said MarkWest estimates the current value of its units as between $750 million and $800 million.

MarkWest Liberty ended 2010 with 209 MMcf/d of cryogenic capacity at its West Virginia processing complexes in Houston, PA, and Majorsville, WV. It expected capacity to increase to 625 MMcf/d by the middle of this year and to reach nearly 750 MMcf/d by mid-2012 with the addition of a new processing complex in Wetzel County, WV.

“If you factor in the projects we have announced, by mid-2013 Liberty will have more than 1.3 Bcf/d of capacity with fractionation increased to 135,000 b/d, and 625 MMcf/d of processing capacity with extensive NGL gathering, critical storage and marketing services,” said Semple. “Given the current discussions with producer customers and the quality and producer economics of the Marcellus Shale, we anticipate significant growth in midstream volumes and assets for years to come.”

EMG CEO John Raymond said the Liberty JV had “adapted to the success and needs of the producer community — as demonstrated by record drilling activity levels in the basin — via multiple iterations of geographic and functional expansions that has manifested the development of a large scale, world-class integrated midstream system that allows the producers to fully develop and maximize the value of their underlying reserves. This is the direct result of the strong relationship between the teams at EMG and MarkWest.”

To raise money for the transaction MarkWest has launched a public offering of eight million class B units and gave underwriters an option to buy up to 1.2 million additional units. EMG could convert the units by July 2017.

Because of the acquisition, MarkWest increased its 2012 earnings guidance to a range of $480 million to $540 million. It also raised its 2012 capital expenditure guidance to a range of $900 million to $1.3 billion. The acquisition also is expected to increase the partnership’s fee-based net operating margin by up to 6% annually beginning in 2012.

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