Monday, December 10, 2012

A Great Way to play Oil & Gas Cash Flows

 This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small cap names. The valuation, unlike my other articles, is not mine.

  • Crosstex (ticker: XTXI)  - Currently trades at $13.06 
  •  Potential Upside by Industry Estimates: Approx. $5 to $10 per share 
  • Market Capitalization: $620m; Dividend Yield: 3.8% 
  • Cash: $6.00M; Total debt: $1B 
  • Shares Outstanding: Approximately 47.4M 
  • Revenue: $1.61B; EV/EBITDA: 7.8x 
  • Sector: Basic Materials ; Industry: Oil & Gas 
  • Main Catalyst: Distribution rights, new projects online in 2013, M&A,  Fundamentals,

 What does XTXI?
Founded in 2000, Crosstex Energy LP (XTEX), a master limited partnership that gathers, processes, and markets natural gas and natural-gas liquids, and transports crude oil. Crosstex (XTXI) owns a 2% general partner interest; 22% of the LP's units, and all of the incentive distribution rights. The LP operates approximately 3,300 miles of pipeline, 10 processing plants, and 4 fractionators, and makes money by charging fees for its services. It also buys natural gas and crude oil, and resells it at a profit.

Weak natural-gas prices have slowed growth in the past year for much of the oil and gas industry. Crosstex Energy is no exception. The partnership's distribution has been unchanged for the past three quarters, as Crosstex (XTEX) has been investing in fee-based projects that expand its natural-gas liquids and oil business, where prices have remained relatively steady compared to gas. Some of those projects are expected to come online in 2013, leading to higher cash flows.
The company's general partner, Crosstex Energy Inc. (XTXI), offers a good way for investors to benefit from the growth. As a general partner, it owns lucrative incentive distribution rights, which motivate it to manage the LP's assets effectively and grow the distribution. As the distribution increases, Crosstex receives a stepped-up percentage, up to 50%, making it levered to the LP's rising cash flows. In 2011, the company received 27% of all cash distributed.

Potential Catalysts:

Increased distribution:
XTXI generates all of its cash flow from the distributions, and doesn't own hard assets. As growth projects come online, distributions and dividends could grow significantly. Industry analyst from RBC expects XTXI distribution growing 3.4% in 2013 and 11.7% in 2014, while the dividend could increase by 8.3% in FY13 and 33.7% the FY14. XTXI shares closed last week at $12.51. In the FY13, they could rise 25% or more, and yield 3.8%. CEO of the XTXI stated that he anticipates XTXI will continue to see annual distribution-growth rates of 8% to 10% per year, and dividend growth rates of 20% to 25% per year.

Promising Fundamentals:
While Crosstex could lose $12.8m, or 27 cents a share, this year on revenue of $1.6bn, it could pocket 26.6% of the LP's estimated $217 million in EBITDA. FY13, the LP's EBITDA could rise 14%, to $248m, due to new projects and acquisitions. One project, the Cajun-Sibon, is a 130-mile NGL pipeline extension of a 440-mile pipeline in central Louisiana. It could come online in mid-2013, and generate $170 million in annual operating income by the end of that year.  Last May, XTXI bought Clearfield Energy, an oil-services company, giving it a strong foothold in oil transportation.
Potential M&A:
XTXI could be attractive to an acquirer, given its leverage to the LP's cash flows and the scarcity of publicly traded general partners. Last year, several deals involving GP buyouts occurred at significant premiums. Shares can rise to $18, but as cash flows ramp up in coming years, that value could rise to $24.

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