Ok, I have been crunching numbers on Crosstex for well over a year but I thought I might fine tune it after all of this activity.
We know that they projected that the Barnett Shale pipeline, which I believe they refer to as the North Texas Pipeline, is in the works and moving along nicely. The projects from management are that it will cost $98 million and with 75% of capacity full that it will bring in around 17.5 million. That works out to a 5.6x multiple, which is very attractive. For the sake of simplicity and to add a little conservatism to the mix, I will assume that the project costs $100 million and brings in just $15 million. We know that they like to finance 50% equity and 50% debt. So, lets say that they sale units of XTEX in a private placement (ie, a large number but at a discount to market price). Lets say that they sale 1.25 million XTEX units at $40/unit to raise the equity portion and they borrow the remaining 50 million at a rate of 7.5%. The current GP take per unit is approximately .53/unit and the current distribution is $1.88, so collectively, the newly issued units eat up around $2.41/unit or a total of $3.0 million dollars. The debt service eats up around $3.75 million dollars, leaving a total of $8.25 million in surplus cash. Now I assume that they hold back 10% for the coverage (coverage ratio of 1.10x) so they will then have $7.5 million in accretive cash flow. That amount is split 50/50 between the LP's and the GP. So, $3.75 million is divied up over the 19.25 million outstanding units (originally 18.0 million plus the newly issued 1.25 million units). That comes out to .19/unit. On the conference calls, management has mentioned that this project will add .22/unit, so my numbers jive along close considering that I upped the construction cost, lowered the estimated cash flow(which was already using 75% capacity), I used a high borrowing rate and also a rather large discount on the units issued. if you run the numbers with less extremely conservative numbers, you can see that the cash available to be distributed could easily be closer to $.28/unit. So it looks like management has baked in a little surplus in case they encounter difficulties. So, that should, in essence, put the XTEX distribution up to $2.10/unit(using the .22/unit estimate by management).
I will also walk through the new acquisition and the Louisiana to Carthage pipeline project that they are working on with Kinder Morgan.
So what does all of this mean for XTXI?
Well, right now, the dividend is $1.72/share.
XTXI owns 10 million units of XTEX. The GP take right now, as was mentioned, on a per unit basis, is roughly .53/unit. After the .22/unit increase at XTEX, the GP take accelerates to .75/unit. So, XTXI is gaining more GP IDR's(incentive distribution rights) per unit, and their are more units outstanding(from 18 million to 19.25 million). That means between the GP take and the LP units XTXI's cash flow increase from 18*.53 + 12*1.88 or a total of $32 million to a total of 19.25*.75 + 12*2.1 or a total of 39.6 million. If you will remember, they mentioned that a .01/Q increase at XTEX equated to an increase of 300K/Q at XTXI. If you crunch the numbers above, you will see that .01/Q increase equates to 1.2 million a year. The above increase was 7.6 million which, if you divide by 1.2 million gives 6.33 and multiplied by .04 gives an increase of .25/unit, so that jives close with the .22/unit increase that they projected, and of course, ours is off because of the increased unit count. So, that 7.6 million increase, if taxed at 35% would be 5.0 million after-tax. That comes out to $.40/share in after-tax cash, which is what they had projected on the calls and in the presentations. So a dividend of $1.72 + $.40 = $2.12/share.
So now, couple the North Texas Barnett Shale Pipeline with the recent acquisition from El Paso. Crosstex paid $500 million for the assets and paid a multiple of 8.9x which means that the cash flow it generates is around 55 million. The multiple is very steep, however they said they believe they will be able to drive the multiple down with expansions and tying into existing assets that they own in Louisiana. So, again, taking the same aproach, they will most likely pay for the acquisition 50/50 debt and equity. Now the analysis gets a bit tricky because we don't know what price XTEX will be but we can make a very conservative guesstimate and assume tha they once again tap the private equity guys (Kayne, Tortoise, Fiduciary) and sell at a discount. So, the need to raise $250 million in equity capital. Lets assume again that they issue the units at $40/unit. So that is a total of 6.25 million units. Now lets also assume that those units will be receiving the increased distribution of $2.10 and a $.75 GP take. So, each unit consumes around $2.85/unit. So that is a total of $18 million that the equity portion consumes. We also assume that they finance the debt at 7.5%, so that eats a total of $18.75 million, so collectively, it consumes a total of around $37 million. That leaves 18 million to be split between the GP and the LP's. First, we will assume, again, that they hold back 10% for coverage. So they have $16.5 million to split. So, that leaves $8.25 million to be divided over 25.5 million units (the 19.25 million plus the newly issued 6.25 million). That comes out to around .32/unit, which is close to the .30/unit that they have projected. Again, we can see that management has been cautious and built a bit of surplus into the equation. So, from the XTXI perspective, they receive and additional (.30*25.5 + 10*2.4= $31 million. So collectively, they are receiving a total of $1.05 per unit for the GP take and $2.4/unit for each XTEX unit that they own. That is a total of (25.5*1.05 + 10*2.4) = $50.75 million divided over the 12.5 million XTXI shares gives $4.00 pre-tax. Now we will look at the Louisiana project that they have announced that will kick in during 2006. It is a capital project of around 225 million and the cash flow projection is around $40 million, giving it a multiple of around 5.6x. So, again, assuming they issue equity to pay for half of it, and again using a very conservative issuance price of $40/unit, they would need to issue 2.75 million units. Those units would consume (2.75*(1.05+2.4)= $9.5 million. The debt service would require $8.5 million, consuming a total of $18 million dollars. That leaves $22 million to be split between the GP and the LP. Again assuming a 10% coverage ratio, that would leave $20 million to be split. That would mean $10 million to be divided over (25.5+2.75=28.25 million units) or a total of .35/unit increase. So, they should be able to push the distribution to $2.75/unit. That would mean that XTXI is raking in (28.25*1.4 + 10*2.75) or a total of 67 million. Divided over the 12.5 million XTXI shares, that is a total of $5.36/share. If one assume a 35% tax rate, that is $3.50/share in after-tax cashflow to be paid out, and again, that baked a lot of conservative numbers into all of the calcs. They should be able to issue the units at better than $40/unit, they should be able to get debt at better than 7.5%, they should be able to drive the multiple down to something much lower than 8.9x on the recent El Paso acquisition. If the Barnett Shale pipeline goes to 100% capacity over the next few years as drilling increases, it is easy to see an XTEX distribution that is maybe $.50/unit higher than the $2.75/unit projection, and a XTXI dividend that is in excess of $4.00/share.
They already said that they intend to issue more units later this year or early next. The only issue is when and how many units? They need to get their debt to EBITDA ratio down under 4:1, hopefully closer to 3:1 to keep a good bond rating. Timing is important also because you don't want to issue the units before you need them because to do so increases required distributions. Also, there are big transaction costs with each issuance, so you want to minimize them. They will go ex-dividend for Q3 in late-October, so I don't think they will do anything before then. Maybe in Nov. or Dec.? Do we know when they actually need the cash to pay for El Paso and the ongoing pipeline construction?
The great thing about it is, is that XTEX has super low cost equity capital. I hope we see either a seondary offering or a private placement that allows them to raise about $300 million in equity capital. I figure they could raise $300 million between a secondary offering of around 3 million units and a private placement of around 5 million units, assuming a price of say $40/unit. This would allow them to fund the Barnett Shale project as well as the El Paso project and leave only the Louisiana expansion project unfunded as far as equity capital is concerned. They have a lot of work to fund these projects, but clearly, they know what they are doing. What may end up happening is a series of secondary and private placement offerings that they string out over a year or 18 months. Kind of hard to float that many units on the public of private capital markets. Even with generous placement prices and average lock up restrictions, I doubt that the private guys like Kayne, Fiduciary, Tortoise and Claymore could swallow 5 or 6 million units.
beerman - since you seem to be familiar with the previous yorktown distributions, do you have any idea how long this selloff might last? Do we typically see downward pressure for just a day or two, or for a couple of weeks or more?
I've been slowly moving my MWP money into XTXI since early June, and I am trying to determine if I should add more XTXI right now, or whether I should wait a couple of more weeks. I know you don't have a crystal ball or anything, but any input you might have would be appreciated.
I have not studied it historically, but I have been around for a few Yorktown distros. It seems there is an immediate drop when the market opens following the announcement. That seems to be the time to buy. Sometimes it dips below the morning after drop, but more often not from my recollection. It did not break into the 50s today on a bad day for energy and the market in general. I would think it will not go into the 50s, but it could. As for MWP, not long ago MWP was trading around half the price of XTXI, I suspect before long it will be trading at 1/3rd as one team is focused on creating shareholder value and one is intent on enriching themselves. One team is telling you will get $3 dividend soon and the other one literally is pretending the GP does not exist.
stlbeerman you are correct.
XTXI has told the shareholders that the year end 2006 dividend will be $3.00. Remember, I did a pretty detailed analysis of the numbers and these guys baked in plenty of cushion. They are from the Rich Kinder school of underpromising and over-delivering. As to whether or not it will see $50.00 again, well, I don't have a crystal ball. What I do know is that, and on the conference call, one of the analysts asked them for a 2007 projection, obviously trying to get a feel for the accretion that the project that they are building with Kinder Morgan will add. My swag was to examine the Louisiana project (not the recent Louisiana acquisition) in the same context as the North Texas (Barnett Shale) project. The two projects are being built at essentially the same multiple (5.6x), the Barnett Shale line is 98 million and will add .40 to XTXI. For a ballpark guesstimate, one could state that since they are being built at the same multiple, and since the Louisiana project is 2.25x larger, then the Louisiana project will add, again, approximately .90 to XTXI. That would push the dividend to $3.90. On the call, they also mentioned that they believe they can drive the purchase multiple down to 7x, meaning an addition 15 million in cash flow on top of the 56 million they forecasted. That would be split between the GP and the LP. Because the GP owns such a large number of LP units, the GP would end up getting 7.5 million, plus since they own 10 million LP units, that would be an additional 2.5 million (.25*10 million). So net, that is an additional 10 million pre-tax to XTXI which is around .82/share. After tax, that is around $4.40/share. A dividend of $4.40 yielding 3.5% would put the price at $125.
You're right about a $125 price target. The lowest it could be barring a major move in long term interest rates is mid $80 range which ain't bad. If at the end of 2006or 2007 there are still growth opportunities it will trade a lot higher than $80, though.
I would suggest going to the XTXI website. looking at the releases of all of the Yorktown disbursements, then going back and looking at the chart on yahoo. My swag says that while the shares are not all out (only 180K traded today vs normal avg of 60K and they released 700K, although some of those are held by principals of Yorktown and are not selling) more shares to come out, but the $3.00 dividend in 06(and by my calcs, with the Louisiana expansion project, probably closer to $4.00 or higher), the downside wouldn't seem to be too great before value investors step in....but that is just my opinion.
The El Paso deal could close as early as Oct. 1 but the expectation is Nov 1. Their North Texas pipeline project is due to come on in the first quarter.
My guess (and it is a WAG) is an offering in early December.