Ok, here is a cleaned up version of my XTXI dividend model.
We start with current model. Currently XTXI owns 10 million XTEX units as well as the incentive distribution rights and the GP(2% economic interest). I have built a table that calculates the GP take(the 2% stake plus the ever increasing incentive distribution rights). Right now the GP take, per XTEX unit is .53. That is a total GP take of 10.29 million (total of about 19.5 million XTEX units outstanding). The LP income that XTXI gets from its 10 million LP units is around 18.8 million (1.88/unit x 10 million units). Thats a total take of around 29 million. That comes out to around If you tax that at 23%, which I believe is there tax rate, it comes out to $1.72 when you assume that they have 13 million shares outstanding (fully dilluted). Several things to keep in mind, 1) as XTXI has no operations aside from the shuttered processing plant in E Texas, they have very low SG&A. I think it comes out to around 200K per Q. The real sharecount is a little less than 13 million. So my numbers are pretty close, as they have been setting the dividend policy as if they had to pay taxes because they are currently burning the last of their NOL's off.
So, now to the nitty gritty.
I will try to be less conservative on this iteration unlike last time when I baked a lot of safety margins into everything. This is a kind of best case scenario situation.
They have said the North Texas Pipeline (aka the Barnett Shale straw) is forcasted to cost 98 million and will bring in 17.5 million with 80% capacity. I do not know what the fixed costs and variable costs are to know what 100% capacity would bring in as far as cash flow, but I think it is safe to assume it would probably be close to 20 million. Keep in mind that they have also mentioned that if demand is strong enough and management has already "predicted" that that will happen mid 06 to mid 07. That expansion is billed as a 15 million dollar expansion (just adding compression) and will add an additional 17.5 million in cash flow (as Yves put it, its a high class problem to have to add compression).
So anyway. I assume the expansion does not come online right away. We know they have a penchant for keeping everything financed 50/50 to keep the debt to cap down. So we know that they issued around 1.5 million units (at $33.50) in a private offering at the end of the 2Q. These units don't get distributions until 1Q 06 and partially explains the discount to market price. We know that they will finance the 2nd half with debt. Their borrowing costs are super low, probably at 5%, I'll use 5.5% because that is more realistic going forward. Between the units and the interest the total financing cost is 6.9 million (about 3 million in debt cost and about 3.9 million in equity cost[i.e. the 1.88 distribution plus the .54/unit GP take multiplied by the 1.5 million units issued]). So, accretive cash left to be distributed comes out around 10.6 million. I we consider they keep a 1.1x coverage ratio, then they hold back around 1.6 million and now have 9.6 million to distribute. The GP and the LP's split that 50/50. So that means 4.8 million is spread evenly over 19.5 million XTEX units. That comes out to .24/unit, which is close the .22/unit that they forcasted. The GP gets the 4.8 million(the half of the accretive cash left after financing costs), it gets the .22 or .24 per unit increase on each of the 10 million XTEX units that it owns(a total of 2.2 or 2.4 million), plus it gets the GP take on the newly issued units (.52*1.5 or a total of .78 million) so all together XTXI gets around 5.5 million. When you assume a tax rate of 23%, and 13 million share of XTXI outstanding, you get a dividend increase of .43/share. That is close to the .40/share that they have projected and remember, I haven't been netting out any SG&A costs, so it looks like they are running a pretty lean operation(lite on the SG&A-no complaints).
El Paso Asset Acquisition
Ok, this is the tricky part because this deal may actually close prior to the completion of the Barnett Shale pipeline. It is tricky because, they will need to raise a lot of equity for this and I have no crystal ball to see what the unit price will be when they do the follow up offering. I have no way of knowing if they do this offering in say late 1st Q or early 2nd Q after the Barnett Shale line has kicked in(and the distribution has been raised-which one would assume would drive the price up). I settled on a less than optimal case in which I assume the distribution has been increased(and the GP take also going up) but the price of XTXE not going up. This is a bit conservative, something I was trying to avoid in this model, but I am more or less forcd to make a guesstimate and that is my swag. So, lets start doing the number crunching on that piece. The XTEX distribution is now $2.10 and the GP take is .74/unit. Note the .22 increase for both, due to the 50/50 splits. Also remember that they bought this at around a 8.93x multiple or 56 million a year in cash flow.
They will again, probably finance it 50/50 debt and equity. So, that means they need to raise around 250 million. So, assuming a price of $40.00 which seems reasonable because, while the distribution may have gone up, XTEX was already "un-cheap" to start with and they will be hitting the market with a lot of units and they will have a tough time to demand much higher than say $42 or $44. If we assume $40 issue price, that means a total of 6.25 million units issued. That is an equity cost of around 20 million or(6.25 million x (2.1+.74) x 1.1(for coverage). The debt portion would run (I assume 6.5% borrowing ,not the 5.5% I mentioned in the previous post), so it costs around 16.25 million in interest. That leaves about 20 million in accretive surplus cash. Assuming they hold back about 10%(for coverage) that gives about 18 million to distribute. 9 milion goes to XTXI(the GP) and the rest is split between the now 25.75 million XTEX units. That comes out to around .35/unit in accretion. That is a little higher than the .30 that I believe I remember hearing them mention on the conference call. On the flip side, XTXI will net around 9 million from the 50% of the accretive cash, about 3.5 million from the .35/unit increase on the 10 million units that they own and an additional .74/unit x 6.25 million newly issued units or an additional 4.6 million in cash. That is a net total of 17 million. After tax that comes out to around 13 million. That comes out to around $1.00/share at XTXI. Note that this is a little higher than the .80/share that they have projected. I don't know where my analysis has strayed other than maybe they have built in a little cushion to the acquisition. Note, the XTEX distribution would be at $2.45/unit and XTXI dividend would be at $3.18/share.
You raise a very good question about why to own the GP over the MLP. I will give it a stab.
First, I came up with my own metric to compare the MLP's to GP's in a very simplistic manner that does not take into account taxes.
I call it the D/D Multiple or the Dividend to Distribution Multiple.
First, what I do is get a weighted comparison. In other words, if I invested $243,460, I could buy 6580 units(at $37.00) of XTEX and recieve $12896.60 in distributions annually (based on the current $1.96/yr distribution).
Likewise, I could buy 3700 shares of XTXI (at $65.80) and receive $6808.00 a year based on the current $1.84/yr dividend at XTXI. So, the question becomes, why pay more for XTXI to get less per year. The answer is quite simple. The D/D multiple is extremely attractive. Crosstex recently raised its dividend by .12/yr in comparison to a .08/yr increase at XTEX. Remember, XTXI owns the IDR's, so they are in essence a leveraged play on XTEX. So, if you look at my posts on this board, and I have tweaked and refined my own personal model since then, but on a whole, the dividend with pass the distribution on a per share basis, within the next 12 months. On a dollar for dollar basis, it will take probably 2 years before the dividend passes the distribution, but the growth, along with the fact that XTEX is debt free, makes it much more attractive. Also, keep in mind that the GP receives a higher multiple in terms of valuation than the MLP due to its leverage.
RRB is obviously a lot smarter than me, but I think he meant to say XTXI is debt free, not XTEX. I would note that the income from XTEX or XTXI does not come in a vacuum, but instead is subject to you own personal income tax rates. On this score, the MLPs are more favoarable than the GPs, but the prospective price increases of the GP based on the dividend increase will more than offset it, in my view.