Southcross Energy Partners LP (SXE) made its public debut on Friday, November 2nd. Shares of the energy limited partnership ended their first day with gains of 11.7% to $22.35 per share.
The Public Offering
Southcross Energy Partners is a growth oriented limited partnership which focuses on the operation, development and acquisition of midstream energy assets. The partnership provides natural gas gathering, processing, treating and compression services in Texas, Mississippi and Alabama.
Southcross Energy Partners sold 9.0 million shares for $20 a piece. The partnership raised $180 million in gross proceeds in the offering process. Based on the offer price of $20.00, the partnership is valued at $500 million. The offering took place at the midpoint of the preliminary offer range. The firm and its bankers set a preliminary $19-$21 price range. All shares were sold by the partnership.
In total, 36% of the limited partnership's shares outstanding were offered. At Friday's closing price of $22.35 per share, the firm is valued at $558 million.
The major banks that brought the company public were Citigroup, Barclays, Wells Fargo, J.P. Morgan, RBC Capital Markets and Raymond James, among others.
Southcross Energy Partners was formed by its current management team and sponsor Charlesbank. The limited partnership provides a range of natural gas activities for producer customers, primarily under fixed-fee and fixed-spreads contracts.
The partnership reported total revenues of $548.1 million for 2011 on a pro-forma basis. The company reported a net profit of $7.5 million, compared to a profit of $9.7 million in the year before.
For the first six months of 2012, the partnership generated revenues of $226.3 million on a pro-forma basis, down 8.6% on the year before. Net income doubled to $8.2 million compared to the year before.
Southcross Energy Partners intends to use the $180 million of gross proceeds of the offering to repay $125 million of debt outstanding under its current credit facility. The company will make a $38.5 million cash distribution to Holdings.
The partnership operates with $53.8 million in cash and equivalents on a pro-forma basis. The company operates with $150 million in long term debt, for a net debt position of $96 million.
Based on a full year revenue estimate of $450 million, the market values the firm at 1.2 times annual revenues. The company is expected to report a full year profit of $16 million, valuing the firm at 35 times annual earnings. Full year operating cash flows could total $25 million for 2012.
The offering of Southcross Energy Partners is a great success. Shares rose 11.7% on their first trading day, after being offered at the midpoint of the initially guided price range.
Southcross intends to make a minimum quarterly distribution of $0.40 per share, for a current dividend yield of 7.1%.
In recent weeks, more energy limited partnerships have gone public. Last week, Lehigh Gas Partners LP (LGP) had a successful public offering. The offering of MPLX LP (MPLX) was even a greater success.
Limited Partnerships are special investment cases. Before investing, investors should consider the tax implications and specific risks to investing in limited partnerships. The current dividend yield of 7.1% of Southcross Energy Partners is very generous, even for limited partnerships.
With interest rates at historically low levels, investors are searching for current yield. The yield of Southcross is very high, even after Friday's jump.
I remain on the sidelines despite the high dividend yield of the partnerships. Lower transparency of limited partnerships, and the lack of diversification of activities, prevents me from investing in these smaller limited partnerships.