Legacy Reserves LP (NASDAQ:LGCY)
Q1 2009 Earnings Call
May 7, 2009; 11:00 am ET
Cary Brown - Chairman & Chief Executive Officer
Steve Pruett - President & Chief Financial Officer
Michael Hall - Stifel Nicolaus
Ladies and gentlemen thank you for standing by. Welcome to the Legacy Reserves 2009 first quarter results conference call. Your speakers for today are Cary Brown, Chairman and Chief Executive Officer and Steve Pruett, President and Chief Financial Officer. At this time all participants are in a listen-only mode. Following the call, there will be a question-and-answer session.
I will now turn the conference over to Mr. Pruett. Please go ahead.
Welcome to Legacy Reserves LP’s 2009 first quarter earnings call. Before we begin, I would like to remind each of you that during the course of this call, Legacy Management will make certain statements concerning the future performance of Legacy and other statements that will be forward-looking as defined by securities laws.
These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in Legacy’s Form 10-K for the year ended December 31, 2008 our earnings release filed yesterday, our 10-Q which will be filed tomorrow and subsequent reports as filed with the Securities & Exchange Commission.
Legacy Reserves LP is an independent oil and natural gas limited partnership headquartered in Midland, Texas, focused on the acquisition and development of long-lived oil and natural gas properties, primarily located in the Permian Basin and Mid-Continent regions.
I will now turn the conference over to Cary Brown, Legacy’s Chairman and Chief Executive Officer.
Thanks Steve and thanks to our friends and unitholders joining us today. As you guys can imagine with the (Inaudible) out there we’ve been pretty busy, corresponding to data requests. I can’t say much, expect that the conflicts committee is working on it and we are providing all the information they request that they need.
All in all the first quarter came in reasonably close to our expectations. Production was down 3% from the fourth quarter. In the last half of last year we spent approximately $25 million on development capital expenditures. As we got to initial plus production, this caused our production peak. With the reduction in CapEx in 2009, we expect to see continued production decline.
Realized commodity prices were below our expectations, averaging around $31 down from the $44 in the fourth quarter, a 30% decrease. Part of the issue was the widening of our differentials. We believe we’ve seen the bottom on both prices and differentials as it appears that the differentials were starting to tie back up and oil prices are definitely ahead of the $36 we saw in the first quarter.
On the positive side our operations team has done the outstanding job of lower lifting costs. Even with lower production they were able to lower our lifting cost per barrel to 1407, compared to 1549 for the fourth quarter and 2113 in the third quarter of ’08. Paul Horne and his team have done excellent job and we may see additional decreases.
As we discussed in last quarter, some of our 2008 acquisition hedges didn’t kick in until January of this year. I’m pleased to report that they have kicked in and they are significantly impacting cash flow. Our EBITDA was $24.8 million and distributable cash flow was $14.9 million or $0.48 per unit.
In light of our current circumstances, we decided the best decision for this quarter was to leave our distribution at $0.52. We’ve reduced our CapEx budget to 10.7 for the year, 4.8 of which we spent in the first quarter. With lower CapEx and increased commodity prices, we expect to have positive coverage for the second quarter. With respect to future distributions, we continue to review our distribution policy to maintain liquidity and given the volatile commodity price environment and capital market environment.
With that, I’ll turn it over to Steve, our President and Chief Financial Officer to discuss further the first quarter results.
Thank you, Cary. We are pleased to report un-audited preliminary financial information extracted from Form 10-Q which will be filed tomorrow. I will make comparisons to the results the first quarter of 2009, to that of the fourth quarter of 2008 first. This information is contained in our earnings release and for a more detailed disclosure; we encourage you to access our Form 10-Q, which will be available in the EDGAR system and on our website tomorrow May 8.
Highlights from the first quarter of 2009 will now be compared to the fourth quarter of 2008. As Cary mentioned production decreased 3% to 8,322 barrels of oil equivalent per day from 8,553 barrels oil equivalent per day in the fourth quarter, as a result of the reduced development capital expenditure program to $4.8 million, down from $14.5 million in the prior quarter; along with downtime related to third-party gas plant maintenance in the Texas Panhandle.
Oil prices were $35.79 per barrel in Q1 compared to the $54.53 per barrel, while natural gas prices declined to $3.62 per Mcf from $4.77 per Mcf in the prior quarter. As Cary mentioned, oil price differentials to our oil price realizations compared to WTI widened to $7.42 per barrel in the first quarter, that’s the widest we’ve ever seen and that’s down from $4.22 per barrel in the fourth quarter and on average in 2008, we were approximately $3 per barrel.
So, we attributed this wider differential to high oil stores level at Cushing, Oklahoma and the low refinery utilization, which is related to the economic slowdown in this country. Oil and natural gas liquids and natural gas sales were $23.1 million in Q1, a 33% decline from $34.4 million in the prior quarter due to the decline in commodity prices and the decline in production rates.
Commodity derivative cash settlements were $19 million in the quarter, compared to $1.4 million due to the commodity price decline and due to our higher hedged percentage. Hedged oil prices averaged $87.69 per barrel in first quarter of 2009, compared to $74.62 in the fourth quarter. Natural gas hedge price is $8.20 per MMBtu in the first quarter, compared to $7.70 per MMBtu in the prior quarter.
In addition to higher average commodity derivative prices, just opposed against lower floating prices, we had also hedged the higher percentage of production in the first quarter with 71% of production hedge compared to 64% in the fourth quarter and we expect this higher hedged percentage to continue through this year. Production expenses as Cary noted, decreased $10.5 million down from $12.2 million in the prior quarter.
Adjusted EBITDA increased 40% to $24.8 million, up from $17.7 million, primarily due to the impact of our commodity derivatives portfolio compared to the fourth quarter, when we had $7.1 million of oil hedged settlement lag effect, which we discussed in our past earnings call. For this call we only have $1.4 million of hedge settlements in Q4 of 2008; all of which came from natural gas. We actually reported a loss on the cash settlement in oil in Q4.
Distributable cash flow increased to $14.9 million, up from $0.3 million as a result of our commodity derivatives settlements and our reduced development capital expenditure program. Net income for the first quarter of 2009 was $3.5 million, which was unfavorably impacted by approximately $1.2 million of impairment due to lower natural gas prices and compared to year end 2008. We had $0.5 million of unrealized gains on our commodity derivatives in the first quarter, which contributed to net income.
In the fourth quarter of 2008, we reported net income of $127.1 million, which included $230 billion of unrealized gains on commodity derivatives. Those are mark-to-market gains, offset by losses from an impairment of $76.5 million and $30.1 million of depletion, depreciation and amortization.
I’ll now make comparisons of the first quarter 2009 through the first quarter of 2008, for a year-over-year comparison. Production increased 22% to 8,322 barrels equivalent per day, up from 6,813 barrels equivalent per day as a result of our 2008 acquisition program and our $32.8 million development capital expenditures over 2008.
Combined realized prices were $30.79 per Boe, down 61% from $78.69 per Boe in the first quarter of 2008. Oil prices were $35.79 per barrel compared to $95.12 per barrel in Q1 of ‘08, while natural gas prices declined over $5 to $3.62 per Mcf from $8.73 per Mcf in Q1 2008.
The oil natural gas liquids and natural gas sales were $23.1 million, a 53% decline from $49 million in Q1 ’08, due to lower commodity prices partially offset by the higher production volumes.
Adjusted EBITDA year-over-year decreased 8% to $24.8 million from $27.1 million in the prior year, due primarily to the decline in oil and natural gas prices, partially offset by higher production volumes and higher commodity derivative settlements. If you recall, we actually reported a cash loss on our derivatives in Q1 of about $6.8 million, compared to $19 million cash gain in Q1 of ’09.
Distributable cash flow decreased 33% to $14.9 million, down from $22.3 million in the prior year, as a consequence of lower adjusted EBITDA, higher cash interest expense and higher development capital expenditures along with their effects of lower prices.
On March 27, 2009, Legacy announced the extension of our credit facility for another three years and the reduction in our borrowing base to $340 million from $410 million in the fall. The extension in maturity to April 1, 2012 from the original maturity of March 16, 2010, resulted in $4.3 million of upfront fees that were paid to our bank group in the first quarter, but will be expensed over the life of the facility.
The LIBOR interest rate margin ranges from 2.25% to 3%, which is a 75 basis point increase from the previous credit agreement. The commitment fee on unused capacity has been increased to 0.5% up from 0.38% previously. We have $300 million of debt drawn on our credit facility today, leaving $40 million of availability.
As Cary mentioned, the Take Private Offer is still under review by the Conflicts Committee of our Board of Directors. On April 3, we announced the receipt of a proposal from Apollo Management VII, LP to acquire all of the outstanding units of Legacy Reserves at a cash purchase price of $14 per unit, subject to adjustment or reduction for any distributions paid to the Partnership’s limited partners.
The Conflicts Committee of the Board of Directors has not made any decision with respect to the proposal and there can be no assurance that any definitive offer will be made, that an agreement will be executed or that any transaction will be approved or consummated.
Thank you for you supports, for your attention today and we appreciate your continuing patience with the process that’s being managed by our Conflicts Committee. We encourage you to review our earnings release in full and read our 10-Q, along with reviewing the risk factors and a more detailed disclosure that’s contained in our annual report filed on Form 10-K.
At this time we would like to take questions.
(Operator Instructions) Our first question today comes from Michael Hall, Stifel Nicolaus.
Good morning Michael.
Michael Hall - Stifel Nicolaus
Looking at the deal proposal, it’s looking like a pretty good price relative to some recent transactions. Just trying to kind of think about what are the values maybe asides from risk proved reserves and maybe starting with mark-to-market value of your hedges at the end of the first quarter. Could you provide any details as to where that was?
Michael I will start with the second part of the question. Our mark-to-market was approximately $135 million. That was really a $0.5 million gain from the prior period, which is just right at 135, so I think we’re about 135.5; pretty static just due to roll of and prices didn’t change dramatically over that period, at least in the forward curve. I’ll pass it to Cary for the first question, regarding process and the sources of value.
Mike I’d love to talk about it, but we pretty much have said all about that process we can say about.
Michael Hall - Stifel Nicolaus
Yes and I was more trying to get there in my own thinking; that hedge value is pretty significant as I think about proved reserve values, relative to kind of stock transaction in the basin right now, that aren’t necessarily hedged; they would buying the hedge on these reserves, correct?
That is correct. They would seem to be throughout of the hedge asset if you will and that’s a transparent value that clearly our banks give us credit for our hedge portfolio as we’ve said before. I would assume that Apollo and any other buyer would give credit to that asset where we sit today. I’ll just say its deferred duties in the eye of the holder, so.
Michael Hall - Stifel Nicolaus
Yes. Then where you guys are at kind of unproven reserves; any thoughts about probables and possibles on your assets; any comments there?
No, we’ve never evaluated probables and possibles. The SEC is encouraging companies that have been promoting their probables and possibles in investor presentations to now in a more organized fashion and put those in their Annual Report and hurts them to have third party engineering review of them, but we’ve never talked about probables and possibles.
The primary reason that we haven’t is our capital structure and our distribution model really hasn’t permitted a whole lot of booking, other than value associated with probables. Even though every year we drill probables and substitute probable opportunities and maybe possibles for some opportunities that are considered proved in our reserve reports, just because Paul Horne and his team did a good job of high grading our capital opportunities and substituting projects that they think offer a higher rate of return than some of our proved projects.
A lot of it, the SEC rules have some very strict definitions around how many locations around an existing producer can be considered parts and that doesn’t always dictate what is the best opportunity for deploying our capital.
Michael Hall - Stifel Nicolaus
Okay, great. That’s helpful, thanks.
Thank you, Michael.
(Operator Instructions) Currently, we have no questions in the queue. I will turn it over to Mr. Pruett.
I would want to clarify that I did represent our commodity derivatives position accurately, but I should also remind listeners that we have an LIBOR interest rate swap portfolio that ranges and expires from early 2013 to late 2013, on average about 3.05%.
Given the dramatic decrease in interest rates and LIBOR swap rates, that’s currently a liability of approximately $11.8 million and serves as an elevation of our reported interest expense over this quarter or the current quarter that we’re in, because the LIBOR swap rates are rates that are higher than current one month LIBOR rates, which were approximately 0.5%.
So, if you’re trying to do the math on comparing our stated LIBOR spread, compared to what we’re reporting as cash interest, you’ve got to take into account and I would encourage you to look at the Q, where we breakup the realized and unrealized portion on our LIBOR swaps as well.
Alright, thanks guys. We’ll report back next quarter and keep you informed as we know things.
Thank you very much for joining us today.
That does conclude our conference call. We thank you for your participation.
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