M* says XTEX will need to spend $75M in growth cap-ex in 2010, mostly to keep up with their Haynesville competitors; that will likely draw down on funds available for 2010 distributions even though it should help in 2011. I think they may do a secondary this year to finance that cap-ex.
Natural gas prices also continue the downtrend, which may delay the completion of Barnett wells in 2010 and the profitable operation of their NGLS plants in Louisiana. These delays could also mean DCF comes in below estimates.
They need to improve the quality of their DCF, which came mostly from asset sales last Q; that cannot continue. XTEX will not resume distributions until they see solid operating DCF for probably two quarters, maybe three.
And unless you count BX, they have no big-brother GP sponsor they can count on to drop down accretive assets or finance their cap-ex, a la El Paso, Regency, etc.
Those uncertainties keep me out of XTEX for the present. If my thesis is correct, I'll have a couple opportunities to re-enter below today's price, with a clearer idea of their future DCF--unless someone shows up with a buyout offer!
Snipped from their Q4 report:
"The Partnership realized adjusted cash flow of $42.3 million in the fourth quarter of 2009 compared with $61.3 million in the fourth quarter of 2008... (snip)... Fourth-quarter 2008 adjusted cash flow included other income of $20.0 million associated with the assignment of certain contract rights to a nonaffiliated third party. Additionally, assets sold during 2009 contributed $18.3 million to fourth-quarter 2008 realized adjusted cash flow.
The Partnership reported net income of $55.9 million in the fourth quarter of 2009, compared with a net loss of $9.4 million in the fourth quarter of 2008. Fourth-quarter 2009 results included an $86.3 million gain on the sale of the Partnership's Treating assets, while fourth-quarter 2008 results included a $49.8 million gain on the sale of the Partnership's interest in the Seminole gas processing plant. Fourth-quarter 2009 results also included a $6.1 million loss from discontinued operations that was mainly related to the write-off of debt issuance costs and senior note make whole expense due to the repayment of notes with the proceeds from asset sales."
I read that as saying $18.3M, nearly half of Q4's cash flow, came from asset sales and Q4 results of $55.9M included net gains from asset sales of $80.2M ($86.3M -$6.1M). My point is that they need to demonstrate the continuing ability to produce DCF and accounting profits from operations, not asset sales. I think they can do it, but I can wait until they show me the cash.
ITM, I'm playing XTEX through an investment in BX, which pays an 8.67% dividend and is appreciating. And you know XTEX is the source of part of that dividend, and will participate in any buy-out upside.
If you reread the last sentence of your first paragraph, I think you will find that the situation is exactly the reverse of your description. $18.3 million of the 4Q 2008 results came from assets that XTEX no longer owned in 4Q 2009. 2009 net income benefited from asset sales but adjusted cash flow did not.
Good luck on your investment in BX. I know nothing about the company. If all of their investments are as astute as their investment in XTEX you should do very well.
I do not dispute your conclusion that you may have an opportunity to re-enter XTEX below today's price, especially if the general market weakens. I do not, however, find your reasoning persuasive. XTEX management has provided guidance that they expect to generate between $62 million and $96 million of DCF from operations in 2010. They have also stated that they expect to spend about $100 million of growth capex in 2010, although they have only included in their guidance the cash flow generated from the $25 million to $30 million in growth capex that the partnership has already approved. XTEX can fund between $45 million and $80 million of growth capex from their DCF and they have $215 million available on their revolver. I will be very surprised to see a secondary this year unless XTEX makes an acquisition. Finally, I don't know where you get the idea that XTEX's DCF came from asset sales. All of the proceeds from the asset sales went to debt reduction, not DCF.
BTW, you are correct that the proceeds of those asset sales went to pay down debt, but the other side of those transactions flowed through the P&L.
Without a secondary, they will very likely need to go to the revolver to fund the difference between the $25-30M they say they have approved and the $75-100M they actually need in purely growth cap-ex, just for 2010. If they go to the revolver, do you not think any distribution may be delayed a quarter or two?