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  • rrb1981 rrb1981 Aug 11, 2005 11:52 PM Flag

    Dividend Machine Part 1

    So now, couple the North Texas Barnett Shale Pipeline with the recent acquisition from El Paso. Crosstex paid $500 million for the assets and paid a multiple of 8.9x which means that the cash flow it generates is around 55 million. The multiple is very steep, however they said they believe they will be able to drive the multiple down with expansions and tying into existing assets that they own in Louisiana. So, again, taking the same aproach, they will most likely pay for the acquisition 50/50 debt and equity. Now the analysis gets a bit tricky because we don't know what price XTEX will be but we can make a very conservative guesstimate and assume tha they once again tap the private equity guys (Kayne, Tortoise, Fiduciary) and sell at a discount. So, the need to raise $250 million in equity capital. Lets assume again that they issue the units at $40/unit. So that is a total of 6.25 million units. Now lets also assume that those units will be receiving the increased distribution of $2.10 and a $.75 GP take. So, each unit consumes around $2.85/unit. So that is a total of $18 million that the equity portion consumes. We also assume that they finance the debt at 7.5%, so that eats a total of $18.75 million, so collectively, it consumes a total of around $37 million. That leaves 18 million to be split between the GP and the LP's. First, we will assume, again, that they hold back 10% for coverage. So they have $16.5 million to split. So, that leaves $8.25 million to be divided over 25.5 million units (the 19.25 million plus the newly issued 6.25 million). That comes out to around .32/unit, which is close to the .30/unit that they have projected. Again, we can see that management has been cautious and built a bit of surplus into the equation. So, from the XTXI perspective, they receive and additional (.30*25.5 + 10*2.4= $31 million. So collectively, they are receiving a total of $1.05 per unit for the GP take and $2.4/unit for each XTEX unit that they own. That is a total of (25.5*1.05 + 10*2.4) = $50.75 million divided over the 12.5 million XTXI shares gives $4.00 pre-tax. Now we will look at the Louisiana project that they have announced that will kick in during 2006. It is a capital project of around 225 million and the cash flow projection is around $40 million, giving it a multiple of around 5.6x. So, again, assuming they issue equity to pay for half of it, and again using a very conservative issuance price of $40/unit, they would need to issue 2.75 million units. Those units would consume (2.75*(1.05+2.4)= $9.5 million. The debt service would require $8.5 million, consuming a total of $18 million dollars. That leaves $22 million to be split between the GP and the LP. Again assuming a 10% coverage ratio, that would leave $20 million to be split. That would mean $10 million to be divided over (25.5+2.75=28.25 million units) or a total of .35/unit increase. So, they should be able to push the distribution to $2.75/unit. That would mean that XTXI is raking in (28.25*1.4 + 10*2.75) or a total of 67 million. Divided over the 12.5 million XTXI shares, that is a total of $5.36/share. If one assume a 35% tax rate, that is $3.50/share in after-tax cashflow to be paid out, and again, that baked a lot of conservative numbers into all of the calcs. They should be able to issue the units at better than $40/unit, they should be able to get debt at better than 7.5%, they should be able to drive the multiple down to something much lower than 8.9x on the recent El Paso acquisition. If the Barnett Shale pipeline goes to 100% capacity over the next few years as drilling increases, it is easy to see an XTEX distribution that is maybe $.50/unit higher than the $2.75/unit projection, and a XTXI dividend that is in excess of $4.00/share.

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