MPLX, MarkWest Merger Gets Lukewarm Reception from Investors

Energy

Published: July 13, 2015 12:50 pm

Last Updated: April 28, 2020 2:14 am

Midstream and downstream petroleum company Marathon Petroleum Corp. (NYSE: MPC) announced Monday morning that MPLX L.P. (NYSE: MPLX), a master limited partnership (MLP) spun out of Marathon in 2012, will acquire MarkWest Energy Partners L.P. (NYSE: MWE). The transaction is valued at $15.8 billion and will be a tax-free “unit-for-unit” exchange and include a one-time cash payment to MarkWest unitholders. Including MPLX’s assumption of MarkWest’s debt, the deal is worth a total of about $20 billion.

MarkWest is the second-largest natural gas processor in the United States and the largest processor and fractionator in the Marcellus and Utica shale plays. Gary R. Heminger, CEO of both Marathon Petroleum and MPLX, said:

MPC’s strong balance sheet and liquidity will enable MarkWest to accelerate organic growth in some of the nation’s most economic and prolific liquids-rich natural gas resource plays. We expect the combination of these projects and MPC’s MLP-eligible midstream assets to support a strong distribution growth profile over an extended period of time for MPLX.

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That growth profile calls for forecast 29% distribution growth this year and 25% compound annual distribution growth rate for the combined entity through 2017. That sounds better than it is.

MarkWest currently pays a yield of 6.3% a year, or $3.64 per common unit. MPLX pays a distribution of $1.64 annually, or a yield of 2.4%. Given MPLX’s estimate, the distribution would rise by about $1.00 a unit by 2017, still well below the payout from MarkWest. The current MarkWest distribution would, of course, evaporate.

Common unit holders in MarkWest will get 1.09 MPLX common units and a one-time cash payment of $3.37 for each MarkWest unit, or the equivalent of $78.64 a unit, a 32% premium to Friday’s closing price. Marathon Petroleum will contribute $675 million to fund the cash payment.

MarkWest’s common units traded up about 12% during the noon hour Monday at $66.75 per share, indicating unitholders’ lukewarm acceptance of the deal.

MPLX units traded down nearly 17% to $57.40, in a 52-week range of $46.08 to $85.57.

The winner here is Marathon Petroleum, up about 8% at $58.80, after posting a new 52-week high of $60.38. The stock’s 52-week low is $37.32.

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