Choosing the right long-term investment requires patience and timing. Patience to dig around the market to find interesting prospects, and timing to make the purchase at the right moment. To find both characteristics on a single stock can be harder than it may appear at first. For there are many stock with prospects for growth, but not all of them can deliver on promises made. Hence, research is one of the keys for finding the right stock, and where patience is required. After finding a good prospect, there remains to seen whether the time is ripe. And that, is out of the investor’s scope of control. So, after looking around MarkWest Energy (MWE) came up as a prospect investment. Now, it is the chance to see whether this is the right time. Two gurus and Peter Lynch would say it is.
Finishing and presenting
MarkWest Energy announced for 2014 the completion of seven major projects. The new facilities will increase cryogenic processing capacity by 1 billion of cubic feet per day and New C2+ fractioning by 98,000 billion barrels per day. Simultaneously, management announced that 17 major processing and fractionation projects are under construction throughout the Northeast. Undergoing projects are expected to raise processing capacity by 4.7 billions of cubic feet per day, and fractioning capacity by 400,000 barrels per day.
Another important long-term announcement made by MarkWest Energy is increment of revolving credit facility. Through an amendment, total borrowing capacity reached $1.3 billion, while at the same time extending maturity by 18 months to March 2019. Another sign of the good moment the experienced by the energy company is the order placed at Caterpillar (CAT). The yellow cat received an order for over seventy Cat G3600 engines, the company’s flagship series for gas compression applications.
Besides the long-term announcements made by MarkWest Energy, analysts animosity about the stock has not gone away. Since the beginning of March, no financial institution has upgraded the stock’s rating, or raised its target price. Most interestingly, all institutions that reported on the stock, downgraded its rating and lower its target price, planting a great sea of doubt over the company’s future. Recommendations however, follow the stock steep decline on stock performance in February.
Battling the analysts
MarkWest Energy has no international exposure, and its performance is heavily exposed to the US economy. Being one of the largest natural gas processors in the Appalachian region with a significant presence in the other prolific natural gas producing basins of the US, coupled to an improving economic environment, the company is expected to grow steadily in the coming years. Most importantly, assets included in its portfolio are high-quality and diverse, with a record for improving shale production and cash flow.
An additional upside to MarkWest Energy is the prospects held in the Marcellus Shale play in western Pennsylvania and West Virginia. The company has great chances of taking part in the expansion of infrastructure that will be required for the development of the shale. Also, the plan to build a distribution system to transport ethane produced in the Marcellus Shale Basin to markets along the Gulf Coast with Sunoco (SU) will have an important impact on revenues. Meanwhile, the downside is the greater sensitivity to commodity prices when compared to other MLP subgroups.
MarkWest Energy’s stock currently trades at 270.3 times its trailing earnings, carrying a huge premium to the industry average. Most importantly, debt levels have skyrocketed as revenue and net income levels see no improvements, while free cash continues to sink during the last three years. Operating margin is another indicator registering a big fall, just like stock face value. Although many gurus purchased the stock during the last quarter of 2013, overall performance has not improved and risk remain high. Hence, investors are not recommended to choose the stock for a long-term investment yet, even with the juicy quarterly dividends and annual yield offered.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.