Having mentioned Crosstex Energy LP (XTEX) as a potential candidate for inclusion in the Protected Principal Retirement Strategy portfolio in the past few articles here on SA, I stepped up to the plate Wednesday and initiated a small position in this midstream master limited partnership asset.
Crosstex Energy LP is an independent midstream energy company. It is involved in the gathering, transmission, processing and marketing of natural gas and natural gas liquids [NGLs], and is thus a good fit as part of our re-allocation process (here). It meets virtually all of the criteria outlined in this article, and the additional information provided subsequently provides justification for its addition.
Based upon recent metrics, XTEX is currently paying a distribution of $1.32 annually, and while the distribution increases have lagged some of the other midstream players, information provided in their NGL business update and 2013 guidance conference call (December 11, 2012) was very encouraging.
It is the intention of XTEX to invest around $1 billion in their NGL business through 2014, which will, in their words "make us a different company" by end of 2014. Let's hope this is a positive supposition.
They estimate that distributable cash flow (DCF) will be around $144 million for 2013, and that the distribution will fall between $1.36 and $1.46 (a 1.1X coverage ratio).
Their forecast DCF/Distribution ratio for the coming two years is anticipated to increase significantly, and the compound annual growth rate (CAGR) is estimated at the five to six percent level.
My target price for position initiation was a current yield of approximately nine percent, which would have been an XTEX market price of $14.67 (Distribution of $1.32/Desired yield of 0.09).
On Wednesday, XTEX announced that it had priced a public offering of 7.5 million units at $15.15. As is the case with most MLP secondaries, XTEX's stock overreacted and traded at an intraday low of $14.78. I had placed a limit order for a few hundred shares at $14.67, but when I thought it would not reach this level, I bought at $14.80 (close enough!).
The goal is to eventually build a position between 500 and 800 shares, so a few more secondaries, or a drop in the market might get me closer to the goal.
Incidentally, XTEX will be holding its annual analysts' conference on January 23, so I will be listening (following) attentively to what it has to say.
Disclosure: I am long XTEX.
Additional disclosure: This article does not constitute a buy recommendation; rather it advances my strategy and rationale for stock purchase.