One thing new on the conference call, they mentioned that the total number of units issued in 06/07 would be closer to 13 million. That counts the project expansions (NTPL, Barnett gathering system, N. LIG) etc. With current unit count being close to 27 million, that would put them at a 40 million unit count. That really ratchets up the leverage of the IDR's. As a back of the envelope calc, if XTEX has 40 million units outstanding, and they run with a 1.1x coverage ratio, counting the IDR's, then XTEX would need annualized DCF, and DCF/Unit of $293 million and $7.31/unit for them to be able to pay out a $4.00 distribution at XTEX. That would amount to a $8.00 dividend per share at XTXI after tax.
Yes, the 13mm new XTEX units coming online over the next few years is very bullish for the IDRs, even considering the prospect of some dilution to XTXI from the possible upcoming XTXI secondary to pay for XTXI's purchase of some new subordinated units. Consider:
XTEX issues 13mm new units.
Only about 7mm of those units will be subordinated for the initial purchase of Chief ($480mm deal financed 50/50 = $240mm new equity issued at a 10% discount = $34/unit). Maybe the discount is bigger than 10%, I don't know, just a placeholder guess to look at the numbers.
If XTXI buys 60% of the new subordinated units (per press release), then it will buy approximately 4mm subordinated XTEX units for about $136mm. At current prices, XTXI will need to issue about 1.6mm new XTXI shares to buy 4mm new XTEX units.
Based on these assumptions, looking out a few years, XTXI is diluted by 1.6mm shares, but XTEX has 13mm more units, meaning substantial additional GP leverage and IDRs, even with the small GP dilution. Still would be better if XTXI borrowed the money, but not too shabby the way they are doing it.
They have said repeatedly that they need a pristine GP balance sheet to backstop future XTEX share issuances. Even after Chief, they still need to issue lots of new XTEX equity. If XTXI borrows money to help XTEX buy Chief, then they may not have cash available to backstop XTEX fully going forward. I haven't run the numbers, but it certainly is true that they would have less backstop ability if they borrowed money now. If they issue 1.6 new shares, they will have full backstop capability going forward, thereby lowering XTEX's financing risk and implicitly lowering XTXI's derivative risk.
Note also that when XTXI's subordinated XTEX units convert to common units and begin receiving distributions, XTXI benefits not only from receiving distributions on its new 4mm units, but it also will begin receiving IDRs on 7mm units (its 4mm units, plus the 3mm new XTEX units to be bought by Yorktown).
Another small silver lining is that XTXI probably will owe less tax on the distributions it receives from XTEX units owned (versus cash that it receives from IDRs), because of the same tax deferral benefits received by common XTEX holders. This probably just means that XTXI's tax rate may hold closer to 25% or so when its NOLs expire, and will not jump up to 35% or so too quickly.