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Crosstex Energy, AŞ Message Board

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  • rrb1981 rrb1981 Dec 21, 2005 2:15 PM Flag

    Equity Cost of Capital

    Thought I would go ahead and explain the equity cost of capital for XTEX and why it is not 14% like geoequities implied. XTEX/XTXI are indeed in the 50/50 splits, however, this does not mean that all cash is split 50/50, it means the accretive cash is split 50/50. For example, right now, XTEX is selling for roughly $34/unit. The distribution is $1.96, for a yield of roughly 5.75%. However, the true cost is higher as the GP take must be factored in. The current GP take, on a per unit basis, is roughly .60/unit. This means that the true yield (cost) is closer to 7.5%, far from 14%. Also keep in mind that while XTEX is in the 50/50 splits, it has one of the lowest yields of all of the MLP's, a feature that helps compensate for the fact that they are in the 50/50 splits.

    • Use a spreadsheet:
      (1) current GP take per LP unit = $.152. Add it to the $.49 and you get $.64, not $.60.

      Note: GP "tax" is 31%.

      (2) assume XTEX distribution grows to $.75/Q = $3 annual. At 7% yield, XTEX = $45/share. GP tax = 55%. Cost of equity = 10.33%.

      If you doubt it, do the math.

      Current low yield factors the next 2 year growth. I agreed that this is a given. But in 2-3 years with a cost of equity in the 10+% how will they be able to finance growth at the same rate? Hence the multiples will drop, hence higher cost of capital.