DENVER Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of MarkWest Energy Partners LP earnings conference call or presentation Wednesday, November 4, 2015 at 5:00:00pm GMT
TEXT version of Transcript
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Corporate Participants
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* Frank Semple
MarkWest Energy Partners LP - Chairman, President & CEO
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Conference Call Participants
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* Kristina Kazarian
Deutsche Bank - Analyst
* Michael Blum
Wells Fargo Securities, LLC - Analyst
* T.J. Schultz
RBC Capital Markets - Analyst
* James Carreker
US Capital Advisors - Analyst
* Christian Richardson
- Analyst
* Unidentified Participant
- Analyst
* Heejung Ryoo
Barclays Capital - Analyst
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Presentation
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Operator [1]
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Welcome to the MarkWest Energy Partners' third quarter 2015 earnings conference call.
(Operator Instructions)
This call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Mr. Frank Semple, Chairman, President, and Chief Executive Officer. Thank you. You may now begin.
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Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [2]
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Good morning and thanks to everyone for joining us today. The slides referenced during today's call can be found on our website, and we invite you to read the disclosures on slide 2. Our discussion today will include forward-looking statements, and actual results may differ materially from our expectations. Factors that could cause actual result to differ are included here as well as in our filings with the SEC.
On slide 3 we've also included disclosures on the announced business combination between MarkWest and MPLX. We encourage you to carefully read the registration and joint proxy statements as they contain important information about the proposed merger. This merger, which I'll discuss in a minute, will be the next major milestone for MarkWest. We've spent the last 13 years creating significant value for our customers and our unitholders. The strategic opportunities and commercial synergies created by this merger will be tremendous.
So, beginning with our operational and financial highlights on slide 4, our strong record of customer service continues to distinguish us as an industry-leading midstream company. For 2015, producers across the nation voted MarkWest number one for total satisfaction in the annual EnergyPoint research midstream survey. We've achieved this top ranking in every survey they've conducted since 2006. And our customers-focused culture, coupled with our operational excellence, are the main reasons for our successful organic growth strategy in high performance shale plays.
Total system volumes reached a new record of 5.8 billion cubic feet per day, an increase of 5% over last quarter and 28% from the same period of last year. Since June, we have increased our total processing capacity by over 18%, to 7 billion cubic feet per day. And we maintained average utilization of 75% during the third quarter.
Distributable cash flow was $176 million, and adjusted EBITDA was $230 million. We increased our quarterly distribution to $0.93 per common unit with a coverage ratio of 0.96 times, which was impacted by $5.3 million year to date of merger-related expenses. Without this nonrecurring cost our coverage ratio would have been just under 1 times.
From a commercial standpoint, we continue to complete new projects and execute major agreements in existing and new areas where we have synergies and our producers' economics are compelling. We're excited about the completion of an expansion at the Carthage complex in East Texas because our existing facilities at this location were operating at capacity. In addition, we announced new agreements to support the build-out of gathering in infrastructure for Ascent Resources' dry gas development in the Utica shale and Newfield Exploration's crude oil production from their prolific stack play in the Cana-Woodford.
Slide 5 highlights the key value drivers and the status of our merger with MPLX, the master limited partnership sponsored by Marathon Petroleum Corporation. This transaction will create a high-growth, diversified, investment grade MLP. Once the merger is completed MarkWest will become a wholly-owned subsidiary of MPLX. And our industry leading organic growth program will be combined with their expanding downstream logistics business and Marathon's $1.6 billion of currently identified drop-down EBITDA.
As the largest refiner in the midwest and fourth largest in the nation, Marathon's financial strength and operational capabilities and strong support as the general partner will drive tremendous opportunities. We expect the combined entity to generate a mid-20% compound annual distribution growth rate through 2019.
We have cleared important hurdles including HSR and SEC review. And last Friday we filed a definitive proxy statement. A special unitholder meeting has been set for December 1. And we are excited to complete the transaction and begin the important work of integrating our businesses, developing critical midstream projects for our customers, and delivering significant unitholder value.
Now, on slide 6 we illustrate the power of the strategic combination between MarkWest and MPLX, including the substantial growth opportunities for the Combined Company. MarkWest is the second largest processor in the US, operating in some of the most economic shale plays. The Combined Company, with the support of MPC, has the ability to expand our organic growth model and develop significant commercial opportunities. We anticipate the potential to deploy $6 billion to $9 billion of incremental capital investments beyond our estimated $1.5 billion in annual organic CapEx through 2020.
The opportunities for our two companies are especially strong in the northeast where the Marcellus and Utica are currently supplying almost a quarter of all total US natural gas production. And approximately $30 billion cubic feet per day of new pipeline projects are being developed to support future growth from the region. In addition to gas, the Northeast is forecasted to produce over 20% of total US NGL production by 2020, positioning the region as an important global energy and petrochemical hub.
We have built the premier midstream footprint in the Marcellus and Utica. And our facilities provide the critical link to connecting gas and liquids to downstream end markets, supporting the remarkable production growth the Basin has experienced over the past five years. We currently process and fractionate about three-quarters of total rich gas production in the Northeast, and our processed volumes have grown to over $3.7 billion cubic feet per day.
Now, the next phase of the infrastructure required in the region will extend from gathering, processing and fractionation and into projects that increase regional demand, and create access to both domestic and international markets. While we're focused in the Northeast and Midwest, the Gulf Coast also provides extensive opportunities to develop midstream infrastructure to support Marathon's significant refining and marketing operations.
Transitioning to our segment review, slide 7 summarizes the Marcellus, where we currently process and fractionate 90% of the rich gas production. And we continue to grow our position as the leading midstream service provider. We currently operate 3.8 billion cubic feet per day of capacity.
And while the rate of growth of Marcellus rich gas production has moderated due to the current commodity price environment, our total volumes in 2015 are expected to increase 40% over 2014, and we still expect volumes to increase by another 20% in 2016. As indicated, utilization was 77% during the third quarter even though we completed three additional gas plants at the very end of the second quarter. We will continue to complete facilities on a just-in-time basis to match capacity with the ongoing requirements of our customers.
Utilization of these new facilities will increase over our typical 12- to 18-month time frame as producer gas volumes continue to grow. As the largest processor and fractionator in America's most productive shale resource, our CapEx continues to be focused on the rich gas areas. However, we're also well-positioned to continue working with our producers' development efforts in the core, dry gas areas of southwest Pennsylvania, and northern West Virginia.
Moving to slide 8, growth in our Utica segment remains very strong. Utica processed volumes increased by 22% over the last quarter, and we forecast an approximate 45% increase in volumes in 2016. We currently operate 1.3 billion cubic feet per day of processing in the rich gas core of the Utica, and by the end of this year we expect total processing capacity to be operating at approximately 85% utilization.
In addition to processing we continue expanding our infrastructure to support the efficient production and marketing of liquids. Our condensate stabilization facility in Cadiz, Ohio has become a key hub in the rich Utica and Marcellus. We support multiple parties at this facility, including Marathon, Gulfport and Twin Eagle. And our 23,000 barrel per day of capacity is nearly fully utilized with stabilized condensate being delivered to end users, both regionally and internationally. Ultimately, this high-value feedstock will be transported via the MPLX Cornerstone pipeline, a project that will be completed in late 2016.
On slide 9 you can see the dramatic growth of our Utica gas gathering partnerships with EMG and Summit. To date we've constructed 300 miles of pipeline and operate over 100,000-horsepower of field compression in six counties. Our gathered volumes have grown to over $750 million cubic feet per day for the third quarter. And we expect total gathered volumes to double from 2015 to 2016.
As shown on slide 10, we are well-positioned with two strategically located dry gas gathering hubs which we believe are in the best areas of the play. In May we began gathering Gulfport's dry gas from southern Belmont and northern Monroe counties. And in August we announced an expansion of our Utica dry gas gathering infrastructure to support Ascent Resources.
Together with EMG we'll construct a large-scale gathering system, primarily in Jefferson county. The ultimate design capacity of this new system is over $2 billion cubic feet per day with more than 250 miles of pipeline and 200,000 horsepower of compression. We have already begun our initial construction and expect to begin flowing gas by the end of this year.
We're working with Ascent to optimize the capital required to support their drilling program, which will allow us to complete facilities on a just-in-time basis. Beyond gathering and processing we also remain focused on meeting our producer customers' fractionation requirements.
On slide 11, we have included a combined overview of our Marcellus and Utica fractionation operations. During th he third quarter, total fractionation volumes exceeded 240,000 barrels per day. The vast majority of liquids the that we fractionate are propane and heavier volumes. And we operate 192,000 barrels per day of C3-plus capacity. Our facilities at Houston, Hopedale and Keystone are highly utilized, averaging 88% during the third quarter.
Ethane recovery continues to be critical for allowing our producers to meet residue gas quality pipeline specifications and fulfill existing downstream commitments. And we operate currently 134,000 barrels per day of de-ethanization capacity. Purity ethane produced in the Marcellus and Utica is already moving to petrochemical markets in Canada on Mariner West and to the Gulf Coast through the ATEX pipeline.
When Mariner East is completed, it will mark the first deliveries of purity ethane from the Northeast to the expanding petrochemical market in Europe. Northeast ethane will become an important supply source as world-scale cracker projects are developed in the Northeast and around the globe.
Moving to slide 12, we provide an overview of our Southwest business unit. As shown in the table, utilization of our facilities remains strong at 84% during the third quarter of 2015. In the Haynesville shale, producers remain very active. Our facilities in East Texas are highly utilized and gas volumes continue to grow. In order to support producers' continued rich gas development we completed am expansion of the Carthage complex in October, increasing our total capacity in East Texas to 600 million cubic feet per day.
In Western Oklahoma, utilization of our processing facilities are benefiting from the rapid growth occurring in the highly economic Cana-Woodford shale. Producer activity in this area has increased significantly, as the multiple geological horizons of this play are generating strong results for oil and associated gas production.
We currently support Newfield's development of their stack area. And in June we connected our Cana gathering assets to the Arapaho processing complex with a 60-mile high-pressure pipeline. We've continued to expand our gathering system and have connected over 50 wells. In addition, we recently executed a new agreement with Newfield to begin crude oil gathering in the same area.
In the Permian, we have started construction of our new Hidalgo plant to support Cimarex and Chevron in the Delaware Basin and we expect to being operations in the second quarter of next year. The Permian is the most prolific oil basin in the US, and production from the Delaware is rapidly increasing.
MarkWest's focus on supporting producers in emerging shale plays began in Texas and Oklahoma, and we're excited about the opportunity for continued growth throughout the Southwest. In 2016 we forecast average processed volumes will increase by approximately 20%, driven by growth in existing areas such as the Haynesville, as well as growth in new areas including the Cana-Woodford and the Permian.
Concluding our operational review, we're very pleased on the continued optimization of our assets in today's commodity price environment. Our full-service suite of assets in many of our nation's best resource plays, together with the largest and most diverse producer customer base, continues to drive strong performance and the ability to generate stable growth over the long term.
Moving to our financial summary on slide 13, maintaining financial flexibility continues to be important given the current markets conditions. Today we have over $700 million of liquidity and during the third quarter we raised approximately $200 million of equity. We continue to utilize our at-the-market program to access the equity markets and in October we raised an additional $125 million.
Our CapEx deployment has slowed significantly and we're well positioned to support our capital program through the middle of next year. In addition to our ongoing focus on capital optimization we have a number of options available to fund our growth capital program. These options include raising equity capital through the public and private markets, and utilizing the capital flexibility provided by our joint venture partners. As always, we will continue to focus our efforts maintaining a strong balance sheet, supporting our ongoing organic growth program, and achieving our long-term distribution growth objectives.
Turning now to our financial forecast on slide 14, our DCF and adjusted EBITDA forecast for 2015 remains unchanged. We expect DCF in a range of $700 million to $750 million. And our adjusted EBITDA forecast remains in a range of $925 million, to $975 million. We expect our 2015 capital expenditures to be approximately $1.6 billion, which is at the low end of our previous range of $1.5 billion to $1.9 billion.
We are also providing our 2016 forecast, which is based on our expectations for producer volumes, forecasted commodity prices and our strategy of deploying capital on a just-in-time basis. We forecast 2016 DCF in a range of $800 million to $875 million, and adjusted EBITDA in a range of $1.05 billion to $1.15 billion. We forecast 2016 CapEx will be in a range of $900 million to $1.5 billion. Included in our earnings release is our sensitivity tables showing the projected ranges of 2016 DCF based on our volume and NGL price forecast.
Fee-based economic has continued to increase, and is expected to be approximately 92% in 2016. For our commodity exposed margin, we maintain an active hedging program and are currently 25% hedged for 2016.
Transitioning to slide 15, you will see our successful history of growing the distribution. And we've been able to achieve a 10% compound annual growth rate since our IPO in 2002. We currently forecast a distribution growth rate of 4.3% in 2016, and expect to achieve an annual distribution growth rate of 8% to 10% from 2017 to 2020. Our distribution expectations are based on the projected producer drilling programs, as well as our forecasted commodity prices, which are in line with third-party sources such as Bentek, CAMI and PIRA.
In closing, the MarkWest team continues to focus on operational excellence and best-of-class customer service. And the merger with MPLX will create significant commercial synergies, financial flexibility and strategic growth opportunities. As a Combined Company, supported by the strong balance sheet, extensive drop-down inventory, and diverse asset base of Marathon Petroleum, we are exceptionally well-positioned to continue executing on behalf of our customers and deliver long-term value for our unitholders.
With that, Paul, I'll open it up to questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Kristina Kazarian.
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Kristina Kazarian, Deutsche Bank - Analyst [2]
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Congratulations on the Newfield add. But first a question on the longer term. You lowered guidance for 2016, in the bottom end of the range for 2017-plus. What are the drivers in messaging here?
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Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [3]
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You are correct, Kristina. We have lowered our guidance for 2016 and reconfirmed our ability to reach that 8% to 10% in 2017 through 2020. And, really, Kristina, that's just a function of the current market conditions, primarily the significant reduction in commodity prices that has, as you know, impacted our producers' CapEx in many of our areas, but specifically where it impacts us the most is up in the Marcellus and the Utica,
As you would expect, as our producer customers modify their CapEx, as a result of lower commodity prices, that has an impact on our operating income, our DCF and adjusted EBITDA in 2016. But clearly we expect the commodity price environment to improve moving into 2017. And that's the reason why we still are messaging and confident in our ability to return to that 8% to 10% distribution growth rate.
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Kristina Kazarian, Deutsche Bank - Analyst [4]
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Yes. And then it sounds like the Utica dry system -- I know you talked about it earlier -- is going well, especially with the August add of the Ascent contract. How should I be thinking about CapEx required to build the 2 BCF system? What's the time frame to getting to full capacity and the potential for other commitments?
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Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [5]
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You have picked up on the key term. Ultimately we are planning a system, designing a system that can accommodate 2 BCF, which is driven by the outstanding acreage position and the quality of the acreage by Ascent. So, pretty clear line of sight on the construction and development of the projects that are going to be required to support that. But that will be over a multi-year period of time.
For 2016, that's going to be a very modest amount of money. Probably less than $100 million would be required to support the initial phase of construction. We'll give you more information, Kristina, as we are moving into the year based on the performance of the wells, and also a sense, updates, on their drilling program.
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Kristina Kazarian, Deutsche Bank - Analyst [6]
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And then can you talk about the NFX announcement? I know it's near an existing rich gas system but it's a bit of a step-out for you guys. With MPX as a potential parent should I be thinking about more crude gathering now that you have a dedicated downstream customer? Or am I thinking about that wrong?
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Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [7]