In the past, XTXI and XTEX have been valued very close in price with XTXI sometimes holding a higher value. I am having trouble understanding why XTXI would even be close to the same price as XTEX. I assume it has something to do with the way that the master partner/corporation (XTXI) is valued in comparison to the limited parter (XTEX.) Obviously, if they were both valued strictly on dividends (or distributions), XTEX should hold a significant price advantage. Does the corporation have some additional value in an MLP scenario? Thanks in advance.
For example, if XTEX made $4.00 for the year (which is a very high number), I still do not see XTXI coming close in terms of dividend distribution. For simplicity purposes, let's take 2% off the top for XTXI (.08). Next, XTXI gets 48% on everything above $1.50 (.375 per quarter) giving XTXI another 1.16. This leaves 2.76 for the year going to XTEX. XTXI would get 33% of the 2.76 distribution which is .91 total. Add .08 + 1.16 + .91 which would give a total dividend of 2.15 for XTXI shareholders for the year not considering any other corporate expenses and corporate taxes before paying this dividend.
So, if Crosstex has an awesome $4.00 in annual earnings which breaks down as follows:
2.76 to XTEX giving it about a $27.60 pps at 10% yield.
2.15 to XTXI giving it about a $21.50 pps at 10% yield.
As you can see, there is no realistic way for XTXI to come close to paying a higher dividend than the XTEX distribution under the current program. This has been the way it is for years. So, again, what gives XTXI its additional value to make up this difference at times? Does it have to do with valuation of company related to its true worth (such as in a takeover) or is there some other reason?
Although I agree with your general conclusion, I think your math is a little off because you are neglecting the first two tranches of IDR's among other things. XTXI gets 13% of all distributed cash between $.25 and $.3125 per quarter, 23% of all distributed cash between $.3125 and $.375 per quarter and 48% of all the distributed cash above $.50 per quarter from the IDR's. XTXI also gets their 2% GP share and the distribution from the 16.4 million LP units they own. Based on some rough calculations, if XTEX distributes $.77 per quarter to the LP's, XTXI will get enough cash to pay a $.51 per quarter dividend and XTEX will distribute $.9975 per unit per quarter, including the IDR's. I have tried to account for the different number of units/shares for each entity.
There are a number of reasons why XTXI and XTEX might be priced to have different yields. Above an XTEX distribution of $.375 per quarter, XTXI's dividend should increase faster than XTEX's distributions. Mutual funds that may not be able to own partnership units can own XTXI shares. Individual investors may prefer to receive dividends rather than distributions for various tax reasons. There are likely other reasons that don't occur to me at the moment.
Management owns 13% of XTXI, which in turn owns 33% of XTEX. See http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzYyMDM4fENoaWxkSUQ9MzU1OTEzfFR5cGU9MQ==&t=1
Their interests are aligned with XTXI as well as XTEX. As part of the refinancing deal, I think the banks and management will agree to re-write XTXI'x IDR agreement with XTEX. Lots of things have changed; so should the IDR agreement, or so it will be argued. Who knows, maybe they'll merge the two?
Yes, Jim, you are right about the extra percentage of cash going to XTXI. I left it out to keep it simple since it still did not allow XTXI to catch up from a dividend/distribution perspective.
I agree that some funds cannot hold XTEX and the issue of add'l tax implications of XTEX distributions.
Another item is that it appears that the management is only allowed to own XTXI stock and issued XTXI stock as a form of compensation. Of course, by owning XTXI, you technically own XTEX based on what we already know.
I am still trying to ascertain what makes the corporation (XTXI) more valuable. It may have to do with the fact that XTEX is completely run by XTXI as the management has total control of operations, deciding future distributions, acquiring/dispursing assets, and ultimately the sale of company and how stock sale price would be determined. Obviously, it is in the interest of management to have a high value for XTXI since those are the shares that they hold.
I take a simple approach to valuation-yield. Presently, it is reasonable to place an 8% yield on the G & P's. Actually, many of the really stable ones have lower yield. But, others, viewed as higher risk are heading to 8%. If you take an estimate of the coming yearly distribution, you can place an 8% yield on that and price accordingly. I think .80/yr; .20/qtr is possible.
So, you get $10/share. But, the company is not paying that, so uncertainty should reduce expected share price a bit. In other words, we are fully priced. Doesn't mean the share price won't keep going up as you are also buying potential and there appears to be good demand at this point, but you get the general idea.
Yield does not seem to be a strong factor in XTXI pricing. If you look back at period of two years including 2006 and 2007, XTXI only paid divi of close to $1 per year. The average stock price during this two year period has been about $30. That is an annual yield of only about 3.3%.
So, back to my question, what is it about XTXI that gives it this type of valuation? XTEX paid a little over $2 per year over the same period and averaged a little over $35 per share over the time period yielding around 6%.
Obviously, there is a different valuation applied to both stocks based on past pricing. Of course, owning XTEX pays a much better distribution regardless of the differing valuation.
A couple observations...
- XTXI has about a 5% lower share count than XTEX (46.5mm vs. 49.1mm). I haven't tried to verify your per-share math, but assuming your 2.15 figure is in the ballpark you'd have to gross that up by about 5% to account for the share differences.
- According to a post on the XTXI board (link below), XTXI dividends are eligible for qualified-dividend status (i.e. taxed at 15%). XTEX distributions (besides return of capital) are always taxed at the higher ordinary-income rates. So it's possible an investor might value $1 of cashflow from XTXI higher than $1 from XTEX, and assign a higher P/E to the shares as a result.