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Crosstex Energy, AŞ Message Board

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  • mlpfollower mlpfollower Mar 27, 2006 11:20 AM Flag


    My wish list for the perfect GP is:

    1. High leverage to the underlying MLP. This can be accomplished a number of ways, but the result is the same: the higher the multiplier to the underlying MLP growth, the better. Paying GP level taxes is an obvious negative (XTXI, KMI and MWP), as is GP level debt (ETE). Stars here are NRGP (probably at least 4:1, with a huge NRGY shelf offering that would improve even that good number), MWP (pays taxes, has huge SG&A, and an absurdly poor marketing business, but boy is it cheap), MGG (a little less than 3:1 currently), and EPE (probably a little better than 2.5:1, and likely will continue to issue lots of new EPD units for the forseeable future).

    2. Stability of cash flows of the underlying MLP. This continues to be underrated by the market and is very tough to quantify. How much should we discount XTEX's growth projections because the pipe isn't in the ground yet and the contracts aren't signed yet? People bemoan the relatively low cash flow growth obtained from building a regulated pipeline (see the KMP Rockies news release), but this is virtually guaranteed money, so it ought to have lower upside. Compare that with projections for XTEX's N. LA line that may not even be built. No commodity exposure is best, but MLPs with commodity exposure can make up for it somewhat by running very high coverage ratios and keeping debt lower (APL's risk over the next couple years is far less than seemingly perceived by the market because of hedging and high coverage). Stars here are MGG and KMI (not a pure GP), each of which has virtually no commodity price exposure.

    3. Potential growth of distributions received from the captive MLP. Note this isn't just growth of the distribution, but includes MLP unit growth. MLPs with huge organic growth projects (or acquisitions) that are issuing boatloads of new units get extra credit. This is a speculative item because it involves projecting the future. Each of us can make our own judgments about which MLPs will grow their distributions best in the future.

    4. Honest and capable management. EPE and KMI undoubtedly top the list. MWP obviously is last. Difficult to rank the rest.

    5. Valuation, measured principally by price divided by a reasonable estimate of risk adjusted free cash flow two years forward.

    * * *

    Put it all together and I don't think any public GP is overvalued. A strong case can be made for each one, and all probably will outperform the market. You probably can make good money just buying a basket of them.

    If I was allowed to pick only one, the cheapest with the lowest risk is MGG. I'm not saying it will grow the most or fastest, but only that I am willing to pay a reasonable price for it because I am very, very confident it will not blow-up, and it also should grow nicely. That is a tough combination to beat.

    Since this is an XTXI board, I think XTXI is a good buy under $75. A lot of the risk and future tax payments now are built into the price and you aren't paying that much for a lot of organic growth in the pipeline. They have no debt and XTEX should be issuing more shares to pay for the growth. The Davis' seem honest. I like the way they don't sugar-coat shortfalls or potential problems. The problem is that someday they will start paying cash taxes and unless XTEX issues massive new units, XTXI will have modest leverage to XTEX within a couple years. XTXI also has a good bit of commodity exposure, although some is hedged in the short term. But the commodity exposure cannot be hedged in the long term, so you just have to live with it.