A Pipeline to Solid Returns

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to look at a stable master limited partnership that has trounced the overall market over the past decade: Markwest Energy Partners LP (NYSE: MWE).

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The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Markwest is a master limited partnership engaged in the gathering, processing, and transportation of natural gas and crude oil. Based on market capitalization, the company is valued at $7.87 billion. Because of the incredibly competitive nature of the industry, Markwest possesses a trailing twelve month profit margin of 7.98%.

Strengths:

  • Explosive Revenue Growth: In 2006, Markwest reported revenue of $576 million; in 2011, the company announced revenue of $1.50 billion, representing year over year annual growth of 21.35%, a solid trend that is expected to continue into the future, with projections placing 2014 revenue at $1.98 billion.  This growth has been a result of aggressive expansion plans
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  • Free Cash Flow Position: In 2011, the company generated over $300 million in distributable cash flow, a major upside for investors as the company has the financial security to reward investors
  • Institutional Vote of Confidence: 74.35% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future
  • Dividend: Currently, Markwest pays out quarterly dividends of $0.82, which when annualized puts the dividend yield at 5.73%, a major advantage for long-term investors
  • Established Distribution Network: The company possesses processing and transportation locations throughout the United States, and with this established distribution network comes a greater level of predictability and security for investors
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  • Accelerated Assets Growth: Total assets of the company have grown from nearly $3 billion in 2010 to currently $6.24 billion, and this trend of accelerated assets growth is extremely advantageous for investors
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Weaknesses:

  • Net Debt: Despite possessing $415.06 million of cash and cash equivalents on their balance sheets, the company’s debt load of $2.52 billion results in a rather substantial net debt, a major downside for investors
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  • High Valuation: At the moment, Markwest trades with a price to earnings ratio of 124.73, a price to book ratio of 4.59, and a price to sales ratio of 4.79, all of which indicate a company trading with a high valuation

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 2002, Markwest has consistently raised their dividend payouts and is expected to continue this trend well into the future
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  • Acquisitions: On Feb. 1, 2011 Markwest acquired the Langley processing plant, and further acquisitions could fuel growth and present opportunity to the company
  • Geographical Expansion: Substantial opportunity is presented in the Haynesville Shale, Eagle Ford Shale, and Barnett Shale, in addition to other major areas of possible opportunity throughout the United States, and any geographical expansion could fuel growth
  • Meet Growing Energy Demand: The US Energy Information Administration projects global energy demand rising from 352.4 quadrillion Btu in 2011 to 416.0 quadrillion Btu in 2020, and the opportunity presented to meet this rising demand could fuel growth
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Threats:

  • Government Regulation: Any government regulation that restricts the company’s ability to expand efficiently could pose a major threat to business; for instance, a major Keystone pipeline project was recently rejected

Competitors:

Major publicly traded competitors of Markwest include Oneok Partners LP (NYSE: OKS), Enbridge Incorporated (NYSE: ENB), Enterprise Products Partners LP (NYSE: EPD), and Kinder Morgan Energy Partners LP (NYSE: KMP). Oneok is valued at $13.12 billion, pays out a dividend yielding 4.76%, and carries a price earnings ratio of 16.39. Enbridge is valued at $35.31 billion, pays out a dividend yielding 2.85%, and carries a price earnings ratio of 40.17. Enterprise Products Partners is valued at $51.06 billion, pays out a dividend yielding 4.67%, and carries a price earnings ratio of 20.85. Kinder Morgan is valued at $31.96 billion, pays out a dividend yielding 5.89%, and carries a price earnings ratio of 53.20.     

The Foolish Bottom Line:

Financially, Markwest is solid. The company possesses accelerated revenue growth, a rapidly expanding dividend, and a strong free cash flow position. The only major weaknesses of the company are its net debt and high valuation. Looking forward, Markwest is primed for steady growth as the company reinvests into its own business. All in all, Markwest is growing at an accelerated pace and is paying out a massive dividend, which is also growing. Bottom line, Markwest is a more aggressive investment than more diversified MLPs, and should trounce the overall market.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P. and ONEOK Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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