Am somewhat surprised to hear no news on the secondary offering. Would love to here how many units were sold, what they priced at, and what the total proceeds raised were...assuming the secondary has been completed. Quite a bit of time has elapsed since they priced, so I would assume that the offering has finished.
Good points. One thing I think that we are bound to see, in fact, I would say that it is inevitable, is that we will see a wave of consolidation in the MLP sector. I am actually shocked that we have not already seen it. I suspect we will see at least 2 or 3 deals in the next few years. The market is getting saturated with new upstart MLP's that are willing, and capable of overpaying for assets in order to grow. Remember, an MLP with a 100 million dollar market cap, a 15 million dollar deal is significant for them. The big MLP's will be able to better compete by combining to leverage asset interconnection and to cut overhead. Candidates: ??? My original guesses were MMP and BPL, because Carlye Riverstone owns the GP of both. I also think TPP and EPD will merge eventually. Would not be surprised to see TRP part with TCLP(they have already sold off most of the LP units that they owned and retain just the GP and a few LP units). Also might see something happen with PPX (has a financially motivated group that owns the GP). Actually will probably continue to see GP's enter the market (Atlas and Penn Virginia, Buckeye). Will it happen...no telling, but it looks like things are heading in that direction.
As for Crosstex, they have a lot of great projects either in the works, or on the back burner. They are still a relatively small MLP and I expect many good things from them to come.
you are welcome. Thank you rrb for all of your excellent analysis. those of us who listen to you have learned a lot.
and on your comment "It might actually make sense to own the MLP when it is young" - I think that can be (somewhat) proven also if you move out that view to the 5 year horizon. I assume that 3-5 years ago KMI was not yet in the 50/50 splits and it is reflected in the graph as KMP performed better for some time and then KMI caught up and surpassed.
With all the IPOs coming it seems like the smart thing is to focus on GP's and strong IPO MLP's - like DPM and WPZ - both of which have huge stables of assets to be spun down from their respective parents/GP's.
I read that WMB has in the neighborhood of 12 Billion in qualifying MLP type assets they could, over time, spin down to WPZ. WPZ already is going to the secondary market this Q which has its price likely stagnating a bit until that overhang is digested. A good time to buy that one... IMO.
sorry, got a bit off topic there...
Like they say, a picture is worth a thousand words.
One comment about the MLP GP debate. It might actually make sense to own the MLP when it is young (small capital base, which makes any acquisition material, and also they are in the low splits). When the GP enters the high splits, that is when you want to own it. However, by that time, it will already be expensive, so you almost have to buy it when it is in the low splits and then wait...
Thought I might walk through some of the numbers rather than just post them without giving any detailed back up. Lets look at the recently announced Hannover compressor acquisition. This acquisition is massive in terms of solidiying XTEX as the leader in the rapidly growing gas treatment business. They have cobbled together what now amounts to the largest treating division in the country. They have bought out Graco, Cardinal Gas and now Hannover. Now lets look at the financial side of the transaction. They paid 52 million for the assets. Lets assume that they bought them at a modest 7x multiple. That would mean the cash flow from those assests was around 7.4 million. Lets assume that they finance the transaction 50/50 debt and equity. So, they borrow 26 million at around 6.5%, and they issue 740,000 units to pay for the equity portion. The debt will incur interest expenses of around 1.7 million annually, while the units will have to have distributions of around 1.9 million (the $1.96 LP distribution plus the .60 GP IDR payment). That means that financing the deal costs 3.6 million. That leaves around 3.4 million to be split between the GP and the LP. Lets assume that they hold back 10% off the top for distribution coverage. That now leaves around 3 million to be split. The GP, since it is in the 50/50 splits, gets half of the accretive cash flow (meaning they get 1.5 million, not half of the total cashflow). The LP units get the other half. Currently there are around 26 million LP units, so they must split the other 1.5 million. That amounts to .057 cents per unit of accretion. Also keep in mind that XTXI owns 10 million of the 26 million XTEX units, so 39% of the cash that went to the LP goes back to the GP. That 39% of the LP cash is 19.5% of the total accretive cash (because it was split 50/50 earlier). The GP therefore gets a little over 2 million bucks which it must pay taxes on, and then spread over 13 million shares. That comes out to about .10 or .11 cents per share after tax. That might not seem like much, but remember, XTXI only had to fund half a million dollars of the 52 million dollar purchase (they have to fund 2% of the equity costs, and the equity portion was 26 million. So, they walk away with a continuous cashflow stream of 2 million a year, for a all in cost of about .5 million. Furthermore, the number of XTEX units has risen by .74 million, meaning that since the current GP take is around .60 unit, that is an additional 400K that XTXI will recieve, so the sum total comes to around 2.4 million, for a cost of about .5 million. Ahh, and now we know what Rich Kinder saw in 1997 when he and Bill Morgan paid 17 million for the GP of what was then Enron Liquids Partners, a sleepy MLP with a few terminals, and some CO2 assets....... the GP is a cash flow beast. Its arbitrage at its finest. Buy assets at 7x to 10x cash flow and finance them at 6% or 7% and laugh all the way to the bank.
Do you know what the cash flow to XTXI will be once the XTEX distribution is increased to $2.48ish area? The GP take from the IDR's pretty much doubles, not to mention the incremental cash from the LP units they own. XTXI receives, directly, or indirectly, 69% of all of the accretive cash flow yet they only fund 2% of the equity financing, which, if they fund everything 50/50 equity and debt, means they get 69% of the accretive cash flow for 1% of the acquisition cost (or build cost in the case of organic expansion projects like the Barnett Shale line).
Its all about cash flow, don't get too hung up in PE's, PEGs and all of that other silly stuff. Look at the cash generating ability, the net after tax cash flow. I have found that one of the best valuation metrics is the enterprise value divided by the free cash flow figure.