MLP Unit Merger, Higher Dividends From The Parts

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Shares of Crosstex Energy Inc. (NASDAQ: XTXI) are up more than 60% in the early afternoon on Monday and common units of Crosstex Energy LP (NASDAQ: XTEX) are up more than 35% following the announcement this morning that the two companies are teaming up with Devon Energy Inc. (NYSE: DVN) to form a new midstream master limited partnership and a publicly traded general partner firm. This is welcome news for shareholders in all three companies because the potential payout is likely to be well above what they’re used to.

The deal is essentially an acquisition by Devon although it is structured differently. The new companies have not been named yet but are expected to have an adjusted EBITDA of around $700 million in 2014.

The new companies will claim assets including 7,300 miles of gathering and transportation pipelines, 13 natural gas processing plants 6 liquids fractionators, barges, rail terminals, storage facilities, brine disposal wells, and a crude oil trucking fleet. These assets are scattered among many of the country’s high-production oil and gas regions, including the Barnett Shale, the Permian Basin, the Eagle Ford Shale, the Utica Shale, and the Marcellus Shale, among others.

To gain control of both both new companies Devon will contribute it equity interest in a newly formed company called Devon Holdings and $100 million in cash. The assets Devon is contributing to the new companies are valued at $4.8 billion.

Shareholders in XTXI will receive one share in the new general partner company and a cash payment of approximately $2 a share for each XTXI share, up to an aggregate total of $100 million. More details of the transactions are available in Devon’s press release.

Devon currently pays a dividend yield of 1.4%, while XTXI pays a yield of 2.5% and XTEX pays a distribution of 6.7%. According to Devon, both the new MLP and the new general partner company will pay higher cash distributions and dividends to holders: “[T]he cash distributions per unit of the [MLP] will exceed the highest incentive distribution tier. This maximizes the value of the incentive distribution rights held by the General Partner.”

Once the transactions are completed Devon will own approximately 70% of the general partner company while the other 30% will be held by current XTXI shareholders. Devon will also own 53% of the new MLP, XTEX shareholders will own 40%, and the new general partner will own 7%.

This deal follows three midstream transactions already this month. Regency Energy Partners LP (NYSE: RGP) will acquire PVR Partners LP (NYSE: PVR) for $5.6 billion, Crestwood Midstream LP (NASDAQ: CMLP) will acquire Arrow Midstream LLC for $750 million, and Buckeye Partners LP (NYSE: BPL) will pay $650 million to Hess Corp. (NYSE: HES) for 20 petroleum products terminals along the East Coast.

Shares of Devon are up 4.1% at $65.80 after posting a new 52-week high of %66.82 earlier.

Crosstex Energy’s (XTXI) shares are up 59.4% at $32.84 after posting a new 52-week high of $34.21. Crosstex Energy LP’s (XTEX) shares are up 38% at $28.08 after putting up a new high of $29.50 earlier.