MarkWest Energy Partners LP finished FY 2010 with record distributable cash flow of $241 million, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $333 million and segment operating income of $472 million. These results were due to year-over-year gathering volumes increasing by nearly 15%, as well as strong natural gas liquids (NGL) prices and processing margins.

“Our focus remains on expanding our presence in liquids-rich resource plays that provide superior economics for MarkWest and our producer customers,” Frank Semple, president and CEO of MarkWest, said during a recent conference call to discuss Q4 2010 earnings.

“The result of this strategy is that we are seeing volume increases, even in a low natural gas pricing environment, and we are also benefitting financially from the uplift in processing margins. We’ve been executing this strategy for a number of years and our operational performance in 2010 demonstrates that this strategy continues to be very successful.”

The company saw increases in gathering volumes in western Oklahoma, which includes its systems in Foss Lake and the Granite Wash. On a year-over-year basis, these volumes rose 3% to 191 million cubic feet per day (MMcf/d). Semple noted that while volumes in Foss Lake have dropped recently due to lower prices, production out of the Granite Wash continues to increase.

This increase in liquids production out of the play resulted in the company recently announcing the expansion of its gathering system at its Arapahoe natural gas processing complex. This expansion will increase the company’s processing capacity in the Granite Wash to 220 MMcf/d when it comes online in Q3 2011.

“The Granite Wash continues to be one of the most profitable plays in the U.S. for Newfield, Linn Energy and other producers. MarkWest has been a premiere midstream service provider in western Oklahoma for nearly a decade and is ideally positioned to continue supporting the increasing production from the Granite Wash and surrounding areas,” he said.

Another growth area for the company has also been in Oklahoma with the Woodford Shale experiencing a 25% increase on a year-over-year basis in Q4 2010 with 521 MMcf/d compared with Q4 2009.

Semple noted that this growth has been very fast for the company since it only had gathering volumes of 100 MMcf/d just three years earlier. Despite this growth, the company anticipates a modest drop in production out of the play in 2011 since much of the gas in the shale is dry and prices are expected to remain low throughout the year.

“However, a portion of the Woodford produces liquids-rich gas, and we expect Newfield and other producers to continue to prioritize their drilling resources on the rich area of the Woodford. The liquids-rich acreage of the Woodford is also more profitable for MarkWest and our producers because of the processing upgrade,” he said.

In Appalachia, MarkWest’s Northeast segment’s five processing facilities and the Siloam fractionation and marketing complex in Kentucky and West Virginia experienced flat gas processing volumes in 2010 compared with 2009. The segment did experience a 5% increase in NGL volumes, including record volumes at the Siloam complex, due to higher volumes from EQT Corp.’s Huron/Berea Shale operations as well as increased NGL volumes from the Marcellus Shale.

The Siloam facility will continue to fractionate the heavier NGLs from MarkWest’s Marcellus operations until its 60,000 barrels per day Houston, Pa. fractionator comes online in Q3 2011.

“We have been the leading processor in the Northeast for more than 20 years and the acquisition of EQT’s Langley processing complex in southeastern Kentucky further strengthens our significant competitive position in West Virginia and Kentucky. It also provides a number of growth opportunities,” Semple said.

These growth opportunities include adding a 60 MMcf/d cryogenic processing plant at the Langley complex as well as the Ranger pipeline that will deliver NGLs from Langley to Siloam. Combined, these projects will cost about $100 million but are expected to significantly reduce transportation costs.

“Over time, we believe that the liquids-rich shale production in Appalachia will extend from the Huron/Berea Shale in southeastern Kentucky to the Marcellus Shale in southwest Pennsylvania and northern West Virginia,” Semple said. “MarkWest is uniquely positioned to capitalize on this growing area with our existing NGL capabilities, multiple processing facilities, strategic downstream access and two large fractionation marketing and storage complexes. Our vision is to ultimately connect our two systems serving the Huron/Berea and Marcellus shale into a fully integrated midstream solution that will significantly benefit producers in the Appalachian basin.”

By mid-2012, the company anticipates its processing capacity in the Marcellus to grow to 750 MMcf/d when it adds a new processing facility in Wetzel County, West Virginia.

The company continues to co-develop Project Mariner with Sunoco Logistics, which would transport ethane from Marcellus to the Gulf Coast via pipeline and marine vessels.

“Project Mariner has significant advantages relative to the other announced ethane projects [in the play], including the lowest project cost and the lowest required volume commitment by producers. The project will also utilize existing Sunoco pipelines and has the shortest construction timeline,” he said.

The company’s activities in the Marcellus will help them increase their fee-based revenue to 50% by 2012 due to new contracts signed with producers in the play. – Frank Nieto