Crosstex Energy Inc.XTXI

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.

XTXI acts as an option on XTEX's full recovery. At a minimum, XTXI should be worth a third of XTEX, just based on its ownership of 34% of XTEX's units. The rest of its value lies in expectations for resumed distribution growth at XTEX.

The LIG system is well positioned to provide takeaway capacity for Haynesville shale production, and we expect Crosstex to have more than 500 mmcf/d of takeaway capacity online in the second half of 2010.

Crosstex' North Texas gathering system serves as a feeder for its 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.

Investments in NGL fractionation and transportation may lead to an attractive liquids business along the Louisiana Gulf Coast. Read more 

XTXI's only asset is its ownership interest in XTEX, and only source of cash flow is distributions from XTEX. Until XTEX resumes distribution payments, XTXI will operate in the red, and it only has cash for a handful of years before running out.

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. Read more