Crosstex Energy LP Earnings Call Insights: New Facilities Outlook and Cajun-Sibon Pipeline

Crosstex Energy LP (NASDAQ:XTEX) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

New Facilities Outlook

Darren Horowitz – Raymond James: My first question regarding E2, you mentioned that that first plant is going to be expanded. I remember the initial budget for the three plants and condensate stabilization was about $75 million. So can you give us an update on where the expected cost is going to be? Is it still going to be operational in the back half of this year?

Michael J. Garberding – SVP and CFO: Yeah, Darren, this is Mike. So from an expected cost standpoint, you’re still within that range of just north of $75 million, so within the $80 million range. As we said from an operations standpoint, we expect the first two facilities to be operational in the fourth quarter, with the third facility operational in the first half of the first quarter.

Darren Horowitz – Raymond James: Then Mike, because it seems like this is a path that you’re going on, how do you think about beyond the investment – the initial investment in E2, further utilizing that general partner currency to fund more growth, whether or not it’s in the Utica or across that $1 billion of potential opportunities? But obviously, you’ve got a very attractive cost of equity capital. So, just some thoughts on the financing mix between the GP and LP would be appreciated.

Michael J. Garberding – SVP and CFO: Just to walk through, again, like we talked about in the past, we’ve put a finite amount of capital opportunity up at the corporation to finance distinctive projects, like the facilities we’re working on right now with Antero. Again, what we see really is dropping those assets down and really reloading that existing facility, which is just sub-100 million. Right now that is focused on the E2 opportunities in and around the Utica just because we think we have these great prospects there. We will consider looking at other opportunities in and around our other assets with that facility though…

Darren Horowitz – Raymond James: Then last question, Bill, as it relates to the other opportunities for ORV beyond condensate stabilization, how do you think about possibly a condensate splitter, where you could think about you exporting light naphtha or other refined products and getting further downstream, but effectively being more vertically integrated and kind of clipping coupons along every aspect of the value chain?

William W. Davis – EVP and COO: That’s a great question, Darren, and we have had some active conversations along those lines. That does provide us a great market outlet for the various products that can come out of the condensate. So, hopefully, we’ll see those continue to progress and have something there to talk about more concretely in the near future.

Barry E. Davis – President and CEO: Dan, this is Barry. Just to add a little bit. I mean, the numbers that we gave earlier in our talk, we’re expecting the condensate production to grow by three-fold or four-fold between here and the next six months. So as you can imagine, we are looking at every opportunity to create a marketable product. A condensate splitter is a way to enhance the value of the product, and so certainly we’re exploring those opportunities. Really with good counterparties that have additional value add, such as the refineries and market takeaways.

Cajun-Sibon Pipeline

Paul Jacob – Credit Suisse: So, obviously, you’ve got some delays going on, on the Cajun-Sibon pipeline. I’m just curious, do you see any carryover to Phase II related to that? And then, do you see – I guess, could you kind of outline what’s driving that as well?

William W. Davis – EVP and COO: Well, at this point in time, we don’t expect any delays in the Phase II project. None of the things that have impacted Cajun-Sibon have impacted the second phase of the project. And the items we’re experiencing are just normal things that you’d expect to see in a project of this size and scale and complexity, nothing really extraordinary about it. And as I said in the discussion earlier, I complement our team on their ability to work through these issues.

Paul Jacob – Credit Suisse: So it’s probably a number of issues, not just one major issue. Would that be fair?

William W. Davis – EVP and COO: Yes.

Paul Jacob – Credit Suisse: Then, in terms of the cost overrun, by my math, I mean that’s about $50 million over kind of the top end of that range. Do you think that that’s going to carry over to Phase II more significantly than Phase I? Like what’s the breakout on that? And then is there any one item that you could point to that you think kind of carries the bulk of that cost overrun?

William W. Davis – EVP and COO: We don’t see any impact on the – we think that $50 million covers both projects completely. And, of course, we’re further along on Phase I than we are on Phase II. But the team has completely analyzed the assumptions in Phase II and the contingencies that we’ve got in the budget there and compared it to our experiences in Phase I and feel like we’ve got it covered…

Barry E. Davis – President and CEO: Paul, this is Barry. I would add the single biggest contributor to the cost increase is the weather that we experienced in the first quarter of this year, which is something that we’ve talked about in previous calls. But we had, I believe, the greatest amount of rain in the last 50 years that we experienced during the primary part of our construction. So that’s one reason you wouldn’t see that carrying over into Phase II.

Paul Jacob – Credit Suisse: Then just kind of the last question, recognizing the fact that the NGL barrels come down a bit on the heavier end of the side, particularly the butanes, how do you think about your hedging policy going forward? Does it change, or are you guys kind of keeping things the same? And maybe give some insight to your outlook as well.

Michael J. Garberding – SVP and CFO: Yes. So Paul, when you think about what we’ve done there, our main focus was again all the growth projects that are focused on fee-based, right? So how do we shrink the commodity exposure? Like I mentioned, 86% of our business is fee-based. So that’s really the biggest thing we can control and what we’ve been focused on. If you look at our hedging, for this year on POL, we’re somewhere around, say, 70% hedged. And on processing margin, we’re somewhere south of 20% hedged. As you look forward, as you said, I think the biggest issue is more on the light end of the barrel, the ethane source trading more as a gas equivalent and makes you think differently about potentially hedging processing margin. So, again, we’ll continue to hedge like we have in the past, where you’re hedging really on a 12-month-forward basis, and we’ll continue to look at that. But again, our biggest factor is really the projects and decrease in the commodity exposure we have in the business.

Darren Horowitz – Raymond James: My first question regarding E2, you mentioned that that first plant is going to be expanded. I remember the initial budget for the three plants and condensate stabilization was about $75 million. So can you give us an update on where the expected cost is going to be? Is it still going to be operational in the back half of this year?

Michael J. Garberding – SVP and CFO: Yeah, Darren, this is Mike. So from an expected cost standpoint, you’re still within that range of just north of $75 million, so within the $80 million range. As we said from an operations standpoint, we expect the first two facilities to be operational in the fourth quarter, with the third facility operational in the first half of the first quarter.

Darren Horowitz – Raymond James: Then Mike, because it seems like this is a path that you’re going on, how do you think about beyond the investment – the initial investment in E2, further utilizing that general partner currency to fund more growth, whether or not it’s in the Utica or across that $1 billion of potential opportunities? But obviously, you’ve got a very attractive cost of equity capital. So, just some thoughts on the financing mix between the GP and LP would be appreciated.

Michael J. Garberding – SVP and CFO: Just to walk through, again, like we talked about in the past, we’ve put a finite amount of capital opportunity up at the corporation to finance distinctive projects, like the facilities we’re working on right now with Antero. Again, what we see really is dropping those assets down and really reloading that existing facility, which is just sub-100 million. Right now that is focused on the E2 opportunities in and around the Utica just because we think we have these great prospects there. We will consider looking at other opportunities in and around our other assets with that facility though.

Darren Horowitz – Raymond James: Then last question, Bill, as it relates to the other opportunities for ORV beyond condensate stabilization, how do you think about possibly a condensate splitter, where you could think about you exporting light naphtha or other refined products and getting further downstream, but effectively being more vertically integrated and kind of clipping coupons along every aspect of the value chain?

William W. Davis – EVP and COO: That’s a great question, Darren, and we have had some active conversations along those lines. That does provide us a great market outlet for the various products that can come out of the condensate. So, hopefully, we’ll see those continue to progress and have something there to talk about more concretely in the near future.

Barry E. Davis – President and CEO: Dan, this is Barry. Just to add a little bit. I mean, the numbers that we gave earlier in our talk, we’re expecting the condensate production to grow by three-fold or four-fold between here and the next six months. So as you can imagine, we are looking at every opportunity to create a marketable product. A condensate splitter is a way to enhance the value of the product, and so certainly we’re exploring those opportunities. Really with good counterparties that have additional value add, such as the refineries and market takeaways.

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