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Crosstex Energy, L.P. Message Board

  • smorefi60 smorefi60 Jan 7, 2010 10:06 PM Flag

    Some thoughts on the preferred issue

    Well, this was a debt for equity swap, meaning that they reduced debt but increased equity, diluting your share in XTEX.

    They won't have the ability to incur debt until they do a complete refinance. The 10% interest rate on the preferred is about the same as their interest rate on their senior subordinated notes (10.5% as of 9/30/09), so the net effect is a wash.

    Their long-term debt includes a line of credit that expires in June, 2011, senior subordinated notes, and PIK notes (that is, notes that were issued in lieu of actual cash for the payment of interest on the notes).

    Debt after the issuance of the preferred will be about $680 million.

    I doubt that they will be able to improve on the debt interest rate with a refi (it averages over 8%), but they should be able to get the debt without all the restrictions they now face, which include, most importantly, the restriction on the ability to pay distributions.

    Operating income was still negative as of 9/30. They had a profit, but it was because of the gain on sale of assets. However, they do have positive cash flow, even excluding the sale of assets, and that's what's important as far as beiing able to service debt and interest.

    The restriction on paying distributions is based on the leverage ratio. I don't know what that formula is, and we don't have access to XTEX's unconsolidated financial statements, so I'll rely on the statement in the 9/30 10Q that currently they could not pay distributions.

    My guess is that they will be able to refi sometime in the 2nd quarter, which would mean that distributions could begin in the second quarter, those distributions being payable in August, 2010.

    Even if they don't refi, it may be that they'll be allowed to pay a $.25 quarterly distribution based on the improvement of the leverage ratio.

    Of course, if you remember if IDR formula, that would mean that XTXI shareholders would get zilch in incentives for that quarter.

    In the end, the value of this stock is based on what they are paying in dividends. A return to $.25 a quarter easily supports a $10 unit price.

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    • smore using your calculations of .25 per quarter for dividends, at a price per share of $10 that comes out to 10% per annually, at $15 per share 7.5% and at $20 the div would be 5% which is more than CDs or the money market now pays, so it would still be a good investment for people if they bought at $20 than if they put their money into the money market or CDs.

      • 1 Reply to ross.john51
      • Well, you can get a greater return if you're willing to take more risk. I'd rather invest in PFF (a preferred share ETF) at 8.5% than invest in XTEX at 5%.

        I think that given its recent history, XTEX either needs a premium return or the hope of a premium return (something like 10%) to be worth my money. I think the market's expectation is that it will pay $1.00 a year, and the stock will suffer if it comes out with a distribution smaller than that.

        But I've been wrong about as much as I've been right.

    • The distribution rate comparison you are making with CD rates is not valid because they bear almost no risk, very much unlike XTEX. Instead, compare with current rates being actually paid now by good G & P MLPs, which are in the 8% to 9% range, I believe. Good examples are RGNC or MWE.

      You must decide whether to wait and hope XTEX actually is able to begin distributions about one year from now, and whether they will distribute enough to support the unit price. They must clear some real hurdles before that happens. THe BX deal helps, but they are not out of the woods yet.

      For my money, XTEX is a trade, not an investment right now. I'll take the cash I got out of this very nice trade and put it in an investment for the present. If I want back in XTEX, there'll be opportunities.

    • XTEX is already over $10.- without the distribution...so you'd better go back to the drawing board and add a multiplier.

      • 1 Reply to cubicle_99
      • Are you saying that this stock would support a price of $10 indefinitely without a dividend? I doubt that you are. I don't think it would support a price of $1 without at least the expectation of a dividend. It has run up on the expectation that the dividend will return. No one knows what that dividend will be, but the significant runup in the past week or so indicates that the expectations are for a $.25 quarterly distribution, or at least a gradual return to that figure.

        This stock has sold off assets and the price of NG is about $6 per mmBTU, so I'm not sure what the normalized earning power of the stock is.

        I'm just happy the stock has run up, but it's getting a little bit frothy here.

 
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