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I agree that equity issuance by xtxi isn't ideal, but it seems to be about the only choice here due to the nature of the deal.
Because it is a high growth play where cash flows are coming on-line primarily in 2008/2009, the deal almost had to be financed with non-cash paying subordinated units at the xtex level. As I believe you've mentioned, there has been a lot of issuance lately dragging down valuations, especially on xtex. With it being non-paying for 18 months, it is even harder sell to institutions at a decent price.
So, given the xtex valuation i don't mind xtxi buying the equity to finance the deal (plus the fact that it may have been required to facilitate the deal). The non-cash fact means they don't have a related cash flow for 18 months to pay off interest on any debt incurred. Cash hungry deals require equity up front. It's frustrating, but a fact of life.
Another reason they probably avoid funding it with debt is the fact that it would be dilutive to the dividend at this point. Debt would probably cost 7% in current cash while the yield is below 4%. The equity is surely more expensive on a total return basis, especially now, but accretion/dilution to the dividend is one of the primary metrics in the industry.
I'm not excited that the board/mgmt is buying the equity of xtxi. it's good for interest alignment, but i wonder about the independence of board committees that are transient while relationships are clearly going to last longer than the committee. As long as they price the equity at or above $75, I'll be happy since this deal fits perfectly with xtxi.
On the dividend, i'm at 3.60 in q3 '07, but by june '09, i'm closer to $5.90 assuming some other accretion from the pre-chief assets. This also doesn't include any issuance of xtex related to the capex of $150m discussed on the cc. That could add 2m xtex units or more. Add a few bolt-on acquisitions for xtex and you could see $7.00 (16% more units) dividend in '09. At a 4% yield (because the growth of chief assets is so strong after '09, i give it a pretty low yield) and 10% discount rate you could say xtxi is worth around $130, excluding dividends along the way.
> I agree that equity issuance by xtxi isn't ideal, but it seems to be about the only choice here due to the nature of the deal.
How about the borrow the principal + 18 months interest from BoFA. After that, the subords become common and their distributions will be covering the interest payments, while we would enjoy the increased dividends.
Of course they could do that (borrow to fund the purchase of xtex units), but it might create some cash flow issues for those 18 months (yes they could borrow for that as well).
I'd be very happy if they decided to fund it with debt rather than equity, but they've been pretty clear that they don't want debt at the gp level. I agree it's frustrating that they're going ahead with issuing very cheap equity (but would most of us be here if it wasn't cheap?). I'm not defending it, just saying I can understand where they're coming from.
I agree somewhat. I think they could have issued the XTEX equity to institutions. They might have had to knock $6.00 to $7.00/unit off, but I think they could have got it done.
Yes, the dividend is going to grow tremendously. Lets not forget some of those pre-Chief projects that were on the back burner, like the downsized North LIG project and the potential South LIG project.
They also mentioned they wanted to establish a presence in the Arkansas Shale play as well as the Rockies. I think its very possible that they make a few more modest acquisitions over the next 4 or 5 years that add to the dividend. So, 5 years out, a $7.00 dividend doesn't seem unreasonable, but its pretty silly for us to project 5 years out, I have a tough time projecting 2 years out. Still, with the most likely approach to $3.60 by 3 Q 2007 being measured increases(an increase of .05/Q) over the next 6 quarters, and assuming we can squeeze out a few more Q's of growth until June 2008 when the $2.00 increase will begin(per the conference call) which will happen over 1 year (till June 2009), after that, hopefully the next phase of growth will kick in, allowing continued increases.
if they had knocked off $6-7/unit of xtex to get the deal done (around $29?), i think it might have been a serious drag on xtxi. depending on what you use for xtex fair value (raymond james now has $48), there would be a point where it makes sense for xtxi to buy the sub units rather than issues the xtex units to institutions.
So, if you say xtxi is worth $110, for example, and they issue xtxi shares at $72, then the discount to fair value is 35%. If xtex fair value is $44 and the equity was sold at $29, then the discount is almost 35%. So, you are selling something at a 35% discount to buy something at a 35% discount and at the same time making xtxi worth more bc of the idr's
Although more xtex units would have increased idr's, there is also the consideration of acquisition currency and the signal it sends to the market. By not over-diluting xtex and showing that mgmt believes in the deal (via gp), it might enable more deals or better pricing for future deals, but if that's the only reason for the deal it would clearly be a bad one.
You're probably right about projecting dividends being a risky proposition, but it seems to be worth thinking about how things interact to get to an estimate of what the market would value it at in the future and comparing it to estimates of value today.
A year or so ago, ETP issued some units that were bought by insiders. They had a committee determine essentially, that is was the same deal (I believe a 15 percent discount) that the institution would have given them regarding the issuance of units.
Bottom line ETP has had tremendous performance since the "insider issuance". The lesson I learned there and will apply here is that when insiders are eager to support a deal with their own money, do not be afraid to get in there with them and buy.
This is going to be an exciting place to be for the next five years, at least.