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Safe Haven Units Now at Risk

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It has been a challenging 11 months for MLP investors and the benchmark index has fallen over 25% with the prospect of higher rates and weaker energy prices by the end of the year.  As organic growth projects have become more difficult to find anchor sponsors, mergers and acquisitions have been the answer for some MLP's to develop growth opportunities in the future.  On July 13th, Marathon's MPLX announced the acquisition of MarketWest Energy Partners, indicating a 32% premium from the prior close.  Investors had no chance to realize such a premium, as MPLX sank 15% after the announcement, and closed out the week 19.45% lower, leaving MarketWest unit holders with a paltry 9.5% equity premium and a one time cash payment of $3.37, for a total 13% premium.  

 

So how did 19% of the premium evaporate over the 5 days since the announcement?  For starters, MPLX unit holders had assumed they purchased a high growth (25% 3 year CAGR) LP which would financially engineer growth by dropping chunks of the $1.6B of MPC EBITDA assets down into the LP, using their balance sheet to finance the transactions.  After the announcement, MPLX  management projected a 29% growth rate for 2015, and >= 25% through 2017, and then "peer leading" thereafter. The previously financially engineered growth rate has now likely been reduced, and the lower rate is now subject to greater risk from the new asset base.  Further, the combined company will now be paying 50% of all incremental distributions as Incentive Distribution Rights payments to Marathon Petroleum, the owner of the General Partner and IDR's.  The 217MM new units of MPLX will also be incrementally paying IDR fees to MPC, which were not burdened previously by MWE's lack of IDR's.

 


 

 

If the deal is completed in Q4 as previously announced, MarkWest Energy unit holders will be receiving cash roughly equivalent to difference between the MWE and MPLX per unit distribution rate, after adjusting for expected growth,  for the next two years (currently MPLX pays out $1.64 and MWE $3.64 per unit).   By 2017, the MPLX distribution rate should be $3.06 per unit, a 15% reduction from the current MWE distribution rate.   One has to add back the lower risk, lower cost of capital and higher forward growth rate, which over the longer term (2017-2020), should lead to both higher income and total returns for MarkWest Unit holders.  The same cannot not be said for MPLX unit holders, who have been punished with a 19.5% discount to their closing value prior to the announcement.  Making the future less certain is the higher number of units, and their associated IDR burden of 50%.  Together, MPLX investors are facing a lower growth, higher risk MLP than they owned prior to the announced acquisition, which is a game changer for total return investors who have found relative safety by investing in the sponsored drop down units in the table below.

 

 

 

 

 

MLPData is in the final stages of developing a broader set of content and applications to help investors select, manage and monitor their yield and total return investment objectives.  In the next two weeks, MLPData will be offering a new set of premium subscription features and will continue to maintain free access to a subset of the content

 

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