OK. I am a little conflicted here. While the 3-for-1 split should ultimately lead to a better return, I am a little concerned about the 150 million share authorization. It looks as though the company wants to be able to issue another 60 million shares. What concerns me is future dilution.
Also, it seems a big piece of the company's success is dependent on the recent Chief acquisition. Now while the price of gas itself should not directly affect the company since they have little price risk, so they say, they do have volume risk. Lower prices (the current environment) can lead to less rigs and less volume and they need more volume to generate increased earnings. If they issue more shares with the same or only modestly higher earnings, the coverage ratio will get thinner and riskier.
Am I overblowing my concern here? Does anyone have a counterpoint for me other than the oft-quoted 10% split appreciation argument. Remember, if we split at $87, that will leave us at $29 and with a $3.00 appreciation for the split, at an equivalent pre-split price of $96. That's old news. We've already seen $100+. Not much "appreciation". I am downgrading from "strong buy" to "hold" until I see how this runs its course in the market.
I disagree. If you take the time to read the prelim proxy filed at sec.gov, they clearly state that they have no intention of issuing additional shares. My theory is this, they are simply raising the ceiling for the future, if they ever elect to do another 3 for 1 split. The proxy states that this split requires a meeting because the maximum share count listed in the letter of incorporation is 20 million. If they boost it to 150 million, it gives them the ability to do a 3 for 1 split, bringing the issued to 45 million, and in theory allow them to do an additional 3 for 1 in the future bringing the total to 135 million shares.
Just my take on it, but I think Crosstex did an outstanding job outlining all of the facts, positive and negative in the proxy and I suggest all read it.
As for the Chief deal, yes, they have a lot riding on it and low prices don't help, but also remember, Devon has a lot riding on it, and even at $5.00mcf, they will make money hand over fist.
One other thing, the coverage ratio applies to XTEX, not XTXI. XTXI is a c-corp, XTEX is the MLP, the MLP's report distributable cash flow, the c-corp usually does not report dcf, and gaap earnings is a useless number, a better indication for XTXI is after tax cash flow. This can be arrived at by taking the total distributions from XTEX (from both LP units and incentive distribution rights "the GP take") and then using a conservative 35% tax rate. Next divide that over 15.1 million XTXI shares outstanding.
Thanks for the tutorial rrb. I was going to wait until the final proxy was submitted but the prelim was good enough. As for the coverage ratio issue, I just went brain dead. I now feel comfortable going up to a buy rating since I think the fundamentals are still strong. The only thing holding me back from a "Strong Buy" recommendation is I'd like to see the 3Q earnings first. I was a little disappointed that we didn't get to a $0.65 dividend in 2Q and we seem to be a little behind in trying to reach a $3.00 annual div by the end of the year (that's 4Q reported in Feb 07). It's still an excellent long term performer given some alternative investments and technicals do indicate a rise in the price.