Crosstex Energy LP (XTEX)

I really like Crosstex but my portfolio is excessively overweight in energy, so I’m not going to buy unless the valuation becomes compelling.

XTEX has a ticker symbol and a website that any native Texan will love. The shares have a current yield of 5.79% and a beta of .56. XTEX shares actually consist of units of a master limited partnership, not ownership of Crosstex, whose equity shares are traded separately under the symbol XTXI.

The generous income distributions might involve tax complications in the form of return of capital when the company is losing money, but income from the units is probably safe and there is capital appreciation potential. Crosstex Energy appears to be ideally positioned to gather, process and transport natural gas from new fields in the region, and there is plenty of gas in the ground waiting to be pumped.

According to the company’s website, “Crosstex Energy, L.P., a midstream natural gas corporation headquartered in Dallas, operates over 5,000 miles of pipeline, twelve processing plants, four fractionators, and approximately 168 natural gas amine-treating plants in service and 37 dew point control plants. Crosstex currently provides services for over 3.0 Bcf/day of natural gas, or approximately 6.0 percent of marketed U.S. daily production based on August 2005 Department of Energy data.” This is a small company with a market cap of about $1.5 billion. The website notes that XTEX was named one of the best places to work in 2006 by the Dallas Business Journal.

The “down home” gas business has a completely different set of fundamentals from the international oil business. It can get very cold in Texas and surrounding states in the winter; the people there are not used to being cold, they don’t like it, and they burn gas for heat. Most of this year’s natural gas price weakness can be attributed to last year’s abnormally warm winter, which left gas supplies in storage last spring at unusually high levels and curtailed demand for replacement gas. But one good cold cold snap can get the gas moving in those pipelines at a pretty good clip.

Turning to technical analysis, this security has only been trading for four years but it has done surprisingly well for a MLP, outperforming the S&P 500 by a factor of four. There was a 2-for-1 split in March 2003. The uptrend has flattened out in the last year.

Taking a closer look at the last two years of price data we see XTEX is trading about 18% below the all-time high reached in August 2005. For the last year Crosstex has been bouncing along sideways in a loosely formed ascending triangle with resistance above 38. If XTEX made a good thrust above 38 it would be very bullish. There has been good support and someone has been buying a lot of XTEX on dips all year.

But another mild winter combined with general price weakness in the energy pits could send XTEX tumbling to major support at 30. It would be hard to resist buying some at that price.

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