XTXI report: raising estimates, accelerating estimated resumption of dist. to Q4, '10 WF new report 1/8/10. Key summary bullets:
XTXI: Adj. Ests. & Raising Valuation On $125MM Infusion Likely To Accelerate Timing Of Distribution Resumption
• Key Takeaways. XTEX plans to issue $125MM of convertible preferred units to The Blackstone Group. The transaction could lower the partnership’s leverage ratio to 4.0-4.5x from 5.0-5.5x previously, which in turn could accelerate the timing of a potential distribution reinstatement. We are revising our model to assume XTXI resumes paying a dividend in Q4’10 versus Q4’11 previously. As a result, we are raising our valuation range by $1/share to $5-8/share. We are raising our 2010 DCF/share estimate to $0.04 from ($0.05) previously to reflect our accelerated distribution reinstatement assumption at XTEX. We are maintaining our Market Perform rating as risk/reward appears balanced. Assuming XTXI can reinstate a dividend of $0.33-0.47 per share, we calculate a valuation of $4-7/share based on the GP MLP median yield (plus a 100 bps discount) and a 12% discount rate.
• Distribution Reinstatement Possible This Year. XTEX’s current credit facility restricts the partnership from paying a distribution unless its leverage ratio is below 4.25x. Management is currently evaluating the possibility of refinancing its credit facility with more lenient covenants and completing a high yield debt offering to pay off its existing term loan facility. Additionally, we believe the partnership will target a coverage ratio of at least 1.3x when setting its new distribution. Based on this target and giving effect to the recent preferred unit offering, we forecast XTEX could reinstate an annualized distribution of $1.00/unit (or $0.33/share for XTXI) in Q4’10 based on our commodity price deck and $1.30/unit (or $0.47/share for XTXI) in Q2’10 based on current strip prices.