Crosstex Energy L.P.XTEX

Morningstar Rating

Stock Research and Analysis

by Jason Stevens

In early 2008, Crosstex looked as if it would deliver impressive growth. But last fall, twin storms--one meteorological, one economic--hit the company hard. Crosstex was forced to cut is distribution twice, and continued pressure from weak processing margins has now resulted in the suspension of its distribution indefinitely. Read more

Bulls Say

Crosstex has turned back from the brink and is focused on deleveraging its balance sheet and targeting high-return projects that could really hum if gas prices and drilling activity heat up.

The gathering system serves as a feeder for Crosstex's processing plants and its North Texas pipeline, which allows the company to offer Barnett producers wellhead-to-burnertip services and monetize a greater span of the midstream value chain.

Tighter pipeline gas-quality regulations will increase the volume of gas that requires processing and insulate processing margins when gas prices drop.

As the largest natural gas treating operation, Crosstex stands to benefit from deeper drilling as producers look for new sources of gas.

Oneok Partners' OKS Arbuckle liquids pipeline recently came on line, increasing takeaway capacity and potentially increasing processing volume or margins in North Texas. Read more

Bears Say

With the beating Crosstex's stock has taken, raising equity capital on economic terms may be challenging for several years.

Crosstex is not out of the woods yet and will have to work diligently to stay in compliance with its amended borrowing terms.

Gathering systems are less attractive than long-haul pipelines because they depend on a relatively small area from which production will eventually decline, and processing is sensitive to the spread in prices between natural gas and NGLs. A significant change in the spread could damp profitability.

The South Louisiana Processing assets are operating well under capacity and not generating the kind of revenue necessary to justify their purchase price. Unless the situation improves, these assets will continue to pressure returns on invested capital.

Owning units in a master limited partnership can greatly increase personal tax-filing complexity, especially if held in a tax-free or tax-deferred account. Read more

Strategy

We expect Crosstex to work toward lowering its overall debt levels while targeting small, high-return investments to generate cash flow and foster future growth. The company is likely to pursue sales of its noncore assets and will focus on its franchise assets in north Texas and Louisiana. Read more

Management

As a master limited partnership, Crosstex Energy LP is managed by its general partner, Crosstex Energy Inc. XTXI, which owns about 34% of the common units as well as the 2% general partner stake and incentive distribution rights. CEO Barry Davis has run the company since he led a management buyout in 1996, has more the 20 years of experience in the natural gas industry, and owns more than 5% of XTXI. Read more

Profile

Crosstex Energy LP is a midstream natural gas master limited partnership that gathers, transports, processes, treats, and markets natural gas and natural gas liquids, primarily in Texas and Louisiana. Read more

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