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Legacy Reserves LP (NASDAQ:LGCY)

Q2 2013 Earnings Conference Call

August 6, 2013 10:00 AM ET

Executives

James Daniel Westcott – Executive Vice President and Chief Financial Officer

Cary D. Brown – Chairman, President and Chief Executive Officer

Paul T. Horne – Executive Vice President and Chief Operating Officer

Kyle A. McGraw – Executive Vice President, Chief Development Officer, Secretary

Analysts

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Kevin Smith – Raymond James & Associates

John Ragozzino – RBC Capital Markets LLC

Michael D. Peterson – MLV & Co. LLC

Justin J. Agnew – Robert W. Baird & Co. Equity Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2013 Conference Call for Legacy Reserves LP. At this time, all participants are in a listen-only mode. Following the call, there will be a question-and-answer session. As a reminder, this call is being recorded today, August 6, 2013.

I will now turn the conference over to Dan Westcott, Legacy's Chief Financial Officer.

James Daniel Westcott

Good morning. I appreciate everyone in dialing into Legacy's Q2 earnings call. Before we begin, I’d like to remind everybody 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 statements 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 additional information contained in our 10-Q, which we hope to release tomorrow, and subsequent reports as filed with the SEC.

For those of you unfamiliar with Legacy, we're a master limited partnership headquartered in Midland, Texas, focused on the acquisition, development of oil and natural gas properties, primarily located in the Permian Basin, Mid-Continent and Rocky Mountain regions of the U.S.

This morning, Legacy's CEO, Cary Brown and I will provide commentary on the quarter. Then we'll open up the call for Q&A for the entire management team.

I'll now turn it over to Cary.

Cary D. Brown

Thanks, Dan. I appreciate our friends and unitholders joining us today. We're very pleased with our second quarter. Legacy produced outstanding results during the second quarter generating record adjusted EBITDA of $67.9 million and record distributable cash flow of $38.8 million. Despite third-party plant downtime in the Permian that curtailed production on a number of our oil-weighted properties, we produced over 19,500 barrel of oil equivalent per day.

Every quarter presents new challenges, and once again, our team at Legacy handled those challenges and produced strong results for our unitholders.

The integration of the Concho acquisition has gone well. I continue to be encouraged with the results from these assets, which produced approximately 5,000 barrels a day in the second quarter despite the downtime issues that I referred to. The downtime hit most of our oil properties; Lower Abo, the Deep Rock, the Fullerton and the Shafter Lake, so that plant curtailed some of our production, but in spite of that, the guys did a great job of hitting the numbers.

Year-to-date, we spent about $90 million on acquisitions primarily oil-weighted properties. The largest is the Resaca transaction for $68 million that we closed right at the end of the quarter. Resaca is an underperforming waterflood in the Permian. It’s got a tremendous amount of oil in place, believe that our guys overtime are going to be able to unlock that property and get some more of the oil that we know is already there out, and then create some long-term value. So encouraged by that transaction, we’ve also done several smaller deals, again, focusing on good economics. On the pipeline front, we’re continuing to look at deals of various sizes in all of our core areas. It looks like lots to look at these days, and so I’m encouraged that we’ll have some more acquisitions in the second half of the year and continue on our pace.

On the development front, we’ve done a good job on that front, primarily spending our capital on the Permian. The results of the Wolfberry drilling program remain solid and we continue to participate in several attractive non-operated drilling projects, including horizontal Bone Spring well, in which we owned a 50% interest in. You’ll see the pace of development pick up in the second half of the year as we’re going to drill another couple of operated Bone Spring wells that own large interest in. So we’re right on track and I’d say from the quarter, real pleased with what the team of Legacy has done with the good oil prices, and good production and good differentials, and at least, a good quarter for unitholders and we’re real proud of what the team has accomplished.

With that, I’ll turn it over to Dan and let him talk a little more specific about some of financial numbers.

James Daniel Westcott

Sure. Thanks, Cary. As Cary mentioned, we had another great quarter. Despite several infrastructure issues, we generated approximately 19,516 Boe a day, record adjusted EBITDA of $67.9 million, and distributable cash flow of $0.68 covering our $0.58 distribution by 1.17 times. The increase in our quarterly distribution of $0.58 marked our 11th consecutive increase, resulted in year-over-year distribution growth of 3.6%. The key driver of our growth and adjusted EBITDA from Q1 was a significant improvement in our realized commodity prices, specifically our realized oil price.

Our quarter-over-quarter WTI prices remained relatively flat, our companywide oil differential improved by approximately $9 per barrel during the second quarter as both the Permian and the Rocky regions improved to levels inside of their historical norms and above our expectations.

Most notably, with several refineries returning to production and the addition of new takeaway capacity, the Midland-to-Cushing/WTI differential decreased to approximately $0.16 per barrel in the second quarter from $7.70 per barrel in the first quarter. We expect our Permian Basin and Rocky’s differentials to be at or around normal levels for the remainder of 2013, with company-wide oil differentials of $5.25 to $6.25 per barrel.

On a nat gas side, our realized price improved from Q1 to Q2 due to improving index prices, but our realizations continue to be impacted by infrastructure issues and declining NGL prices in the Permian. We currently expect second half 2013, positive natural gas differentials of $0.90 to $1.00 per Mcf. Within our daily operations, LOE increased 6% in the quarter to $34.3 million or $19.29 per Boe from first quarter numbers of $32.4 million or $18.26 per Boe. This was due to higher workover and various other expenses including some continuing remedial workovers from our Concho properties. As you might recall, our Q1 LOE benefited from lower than normal remedial workover and related expenses.

G&A excluding LTIP expense for the quarter was $5.7 million compared to $5.3 million in the first quarter and this was mostly attributable to the hiring of additional personnel to help us more efficiently manage our larger asset base. On a capital markets front, we had a great quarter. We continue to build the company for long-term success. On May 28, we closed the $250 million private offering of [6.625%] senior notes due in 2021. With this opportunistic financing, we were able to access unsecured long-term capital at very attractive rates that will provide us with greater liquidity to pursue our acquisition and development plans.

Upon closing these notes, our credit agreements dictated that our borrowing base be reduced from $800 million to $737.5 million. So as of August 5, we had about $311 million of debt outstanding under our revolver, which gives us a record $426 million of availability. Given this availability, our recent performance and our expectations from our recent $90 million of acquisitions, I think, we’re in a great position and we are really looking forward to second half of the year and executing on our objectives.

At this time, Cary and I as well as the other members of management would like to take questions. So I’ll turn it back over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Dan Guffey of Stifel. Please go ahead.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Hi, guys. Congrats on the strong second quarter.

Cary D. Brown

Thanks, Dan.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Just to start, can you guys estimate how much production was offline from the third-party downtime and natural gas line issues, and then also do you see resolution cut on the horizon?

Paul T. Horne

Yeah, Dan, this is Paul Horne. It’s very difficult to nail that number down to say, it’s in the several hundred barrel a day range, I think would be about as tight as we would try to nail that. Second quarter every year is a difficult time, that’s generally when the plant turnarounds, it was a combination of ongoing issues that we’ve had in the Permian with increased pressures and restraints from the gas systems and some very significant plant turnarounds. So this quarter was impacted more than we have been. We’ve been telling you guys that we’re seeing those restraints over the last year, but this quarter was more significant than prior quarters, mainly due to that turnaround issue.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Okay, thanks, and then, just curious on the Bone Spring well, I guess, your next one that you have a 50% working interest in non-op well and then the next two operated locations, can you give the location of those wells, and where your operated wells be around, your first Lake unit 30H?

Cary D. Brown

You bet. Great question, the two wells that we are drilling operated, we are currently drilling the first and it is a direct offset to the Lake unit 30H that we drilled last year. The second operated well that we’re drilling is about three or four miles west of the Lake unit. So in the same are of Lake County.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Okay. Can you talk about the performance of the Lake 30H and then I guess your expectations for your next two operated wells and then kind of go through what you believe the cost may come in at for those next two wells?

Cary D. Brown

Yeah, Dan as you know, we typically don’t quote the individual well results. What I will say is the Lake unit 30H has done well. It has continued to produce. It was form of testing until early in this quarter, we ran to the well. Early in this quarter and it’s been flowing up to being so that makes over nine, 10 months that the well has being flowing. It’s exceeded our expectations. We are pleased with that, which is obviously why we decided to offset it, and drill on additional wells and the general area. I expect those wells to be in the $6 million and $6.5 million range on a gross basis. I believe off the top of my head, we own about 91% of the Lake unit and then I believe we have 50% working interest in the second operated well on Hammon that we’ll be drilling when we break down off of Lake Unit.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Okay. Great. Can you remind us again how many gross locations you have an interest in for the Bone Spring across all of your acreage?

Cary D. Brown

Yeah, I can tell you on an operated basis that we’re into 13 to 17 gross locations range depending on some of the acreage we’re still waiting for the industry to prove that area before we report this numbers, but that’s a good feel. We have numerous non-operated opportunities, but many of those are very small working interest and so, we haven’t even catalogued those, but there’s easily another eight to 12 locations with meaningful working interest in non-operated horizontal Bone Spring wells.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Okay. Thanks and one last one from me. Other operators have talked about success they’ve had drilling horizontal Wolfcamp in the Midland Basin and they’re starting to hear an excitement kind of still over into the Delaware Basin, just curious if you guys have identified any horizontal Wolfcamp locations across your acreage?

Cary D. Brown

We do not get that question. Yeah, obviously as excitement builds on the horizontal Wolfcamp play, we’re continually looking at our acreage position and opportunities that we see. Trying to quote number of acres is very difficult because that play is changing daily as to what’s perspective and as to what’s more proven, but we’ve looked in the main fair way of the play Midland, Martin, Upton, Glasscock, Howard and Reagan in that area, and are excited about the opportunities we see. I think we’ve probably got somewhere in those 12,000 to 15,000 net acres of leasehold in those counties. But you got to remember like all of our acreages, it’s scattered. Some of those are 40-acre tracts and you can’t drill horizontal well in 40-acre tracts. So I think you’ll see us trying to look around and see what we can do with outside operators.

Some of those are a couple of sections and obviously that would be some opportunities to drill some horizontal Wolfcamp wells. So as you guys are, we’re excited about the results that are being published and that we are reading about and we continue to watch those and we continue to look at our acreage and determine where we have really good perspective horizontal Wolfcamp. The exciting thing is we do and as the industry continues with that play, we’re getting more comfortable in our acreage and what it looks like.

James Daniel Westcott

Then I’ll just say it’s consistent with what we thought we came out as MLP, which is as you do work, more work comes available to do. With our footprint that we’ve got in the Permian, there’s several different plays that are going to places that I think you’ll see us putting capital in the coming years. So yes, we had two to three years of capital on the books that we’re trying to treat more as we execute on that plan and again, here we’ve told you guys that we’re starting to see seven, eight, nine years, where you can start running numbers on a horizontal coming in Permian and we’ve got a lot of years of drilling that we need to do and work on. So I’m very encouraged with the economics that I see on some of the horizontal plays, not all of them, but some of them, it’s appeared to be very lucrative and going to be up for a while.

Daniel D. Guffey – Stifel, Nicolaus & Co., Inc.

Sounds good. Thanks for the color, guys. Congrats again.

Operator

Our next question comes from Kevin Smith of Raymond James. Please go ahead.

Kevin Smith – Raymond James & Associates

Hi, good morning, gentlemen. Congrats on the quarter.

Cary D. Brown

Thanks, Kevin.

James Daniel Westcott

Thanks, Kevin.

Kevin Smith – Raymond James & Associates

I guess, this is for Cary or Paul, is there any reason to believe that infrastructure constraints are going to get worse as we go through the year or do you think it’s at pretty constant level on the Permian?

Cary D. Brown

I’ll let Paul talk. I would say there is going to be somewhere that there’s always they were going to have trouble. but overall, the industry has spending a lot of capital to get it fixed and it will get fixed just like the differentials and backing in, I think you’ll see the plant issues get fixed, but I don’t know if that’s next month or 10 years from now. Paul, what’s your thought?

Paul T. Horne

Yeah, we have started seeing in some areas where Wolfberry is pretty well drilled though and rig activity is slowed down in particular areas, we’ve seen some of those issues alleviate themselves. Obviously, Cary is right, our midstream MLP brethren are spending a lot of capital and working really hard to fix that issue. Kevin, I do think it’s magically going to disappear in the middle of Q4. I expect that it’s one of those that it fixes together in a particular area and we work on it and then it shifts over and comes down from place else. You can kind of watch the rig activity and have a pretty good feel for where your problems are going to be in the next quarter or the next year. So I am hopeful that they will continue to work on the issues and we’ll continue to see improvement. I’m not looking forward to resolve until anytime between now and the end of the year.

Kevin Smith – Raymond James & Associates

Fair enough. And then, where we are getting and the process you are getting all the Concho property wells connected. Are you good with that and happy with where that is?

Cary D. Brown

Yes. We are pleased with Concho. We continue as we do all of our acquisitions, we continue to track by acquisition and look at how those properties are performing as compared to our acquisition projections. As we told you guys, we are really pleased in the first quarter, it was slightly below our projections, but really pleased with where we are with that in the first quarter. Second quarter, half-way through the quarter, we would have been above our projections, our acquisition projections on the Concho.

Unfortunately, the significant plant turnaround issues that I mentioned, impacted our Concho assets actually more heavily than our based assets and so again, it is the slightly I’m talking in a 100 barrels a day turnaround and it’s Kevin not 1000 barrels a day range, but slightly below our acquisition projections, but all indications are that we’re doing really well that acquisition, with those assets. I do think that’s part of the LOE creep that you saw in Q2. We had a number of wells off, we spent a significant amount of money getting those wells back on and feel really good about that.

Kevin Smith – Raymond James & Associates

Got you. and then just one more question if I may? Clearly, the Wolfcamp has been making a lot of noise. Have you guys seen any non-operated usage that has surprised you anybody trying to drill anything on your acreage?

Cary D. Brown

No, I have not seen, no, not Wolfcamp, I guess I’m looking forward to it. That’s one of the ways, Kevin, that we told you in the past that we learned from our partners and I’m really hopeful that we’ll see a couple of those and get chance to learn from the guys who are already in that play before we move forward with implementing much higher working interest to operate capital on horizontal Wolfcamp.

Kevin Smith – Raymond James & Associates

Got you, all right. Thank you for taking the time and nice quarter.

Cary D. Brown

Thanks, Kevin.

James Daniel Westcott

Thanks, Kevin.

Operator

Our next question comes from John Ragozzino of RBC Capital Markets. Please go ahead.

John Ragozzino – RBC Capital Markets LLC

Hi, good morning, gentlemen.

Cary D. Brown

Hey, John.

John Ragozzino – RBC Capital Markets LLC

In the release, you noted, it was about 37% of your budget that was attributable to the non-op projects. Is that a typical level or is that a little bit higher than normal? And then when you look out to the back half of the year, can you kind of handicap what degree of uncertainty that we might come across in terms of capital spending levels?

James Daniel Westcott

Sure, John. Great question, this is Dan. I mean the Permian has been a great place for a lot of people. I think if you look back historically, our non-op capital has been about a quarter, maybe 25% to 30% of our capital. We mentioned in the release, as you mentioned that 37% number. We have great flexibility with our capital program. We have been going through that internally and have the ability with our leasehold position not to be forced into continuing to drill the old acreage. So we will remain flexible with that, I wouldn’t be surprised if it’s a little bit higher this year than normal, but I do think 37% is unusually high for fourth quarter.

Paul T. Horne

John, this is Paul, I would just mention that, in that 37% number, you had a 15% non-operated working interest in horizontal Bone Spring well $6 million, $7 million wells. So that in and out itself, skew that we have seen really good non-op activity from an AFB standpoint and continue to see that. But when you get 50% of $6 million, $7 million well, that can skew the percentages, not to say that we will see that again, in the coming quarters, but I think that’s what drills that in Q2.

John Ragozzino – RBC Capital Markets LLC

All right, thanks. that’s helpful. And then building up the line of question on the state of infrastructure in the basin, when you think about the activity plans for the second half of the year and where we are in terms of infrastructure constraints. Can you give us a little more color on where you see the organic production trends on a quarter-over-quarter basis, I mean we saw downtick slightly in the second quarter, which wasn’t to surprise anybody, but I just want to make sure we’re looking at the third and fourth in the appropriate way?

James Daniel Westcott

Sure. John, it’s Dan. As we mentioned back at the end of 2012 with our Concho acquisition, the Lower Abo was a pretty meaningful portion of that acquisition and an area of production that we weren’t going to change. So from a quarter-over-quarter perspective, we are aware we wanted to be, I think as is some infrastructure issues were probably better than where we thought we would be. But without getting too granular, I guess I’d point you back to our original financial guidance that we’ve provided in February. If you would look at that guidance, and then add in our Resaca acquisition, which closed June 28, I think we stand by that guidance, and I feel like it’s appropriate outlook for us.

John Ragozzino – RBC Capital Markets LLC

Okay. And then just kind of following up on Dan’s line of questioning in the Bone Spring, can you give us an idea of what the EURs are that you’re looking for there and perhaps with – if you look at stock prices with IRRs was identity?

James Daniel Westcott

Yeah, John, it’s Dan. We don’t provide that disclosure. So…

John Ragozzino – RBC Capital Markets LLC

Let me see if you don’t ask right.

James Daniel Westcott

Yeah.

John Ragozzino – RBC Capital Markets LLC

And then just to beat the bad horse on the horizontal Wolfcamp, you mentioned that approximately maybe 12,000 to 15,000 acres in those kind of primary counties, which people are thinking to be as perspective for the play, is there any limitations on debts in terms of where you may or may not have rise to some of the deeper horizons?

James Daniel Westcott

Absolutely, and that 12,000 to 15,000 acre number on lease is that, we believe we have the Deep Rock through the Wolfcamp, we have many more acres than that in those counties that we excluded, because we know we don’t have the Wolfcamp rights, but I think it’s going to be in that range for those counties. we’ve looked at numbers as high as possibly 20,000 acres, but I think it will end up in close to 16,000 acres. For those counties, I’m not saying that all of that will be economically productive in the Wolfcamp and I’m also not saying that the industry won’t add three more counties to that before this play is define. we are very early in it. Paul reminded me after I answered the question earlier about non-op AFBs, our land group is currently working with Pioneer on some acreage in Martin County on our horizontal Wolfcamp project that Pioneer will operate. We have seen AFBs here, but I think we will start getting some of that good information from our key players in that play in the Permian and we’re looking forward to that.

John Ragozzino – RBC Capital Markets LLC

Great, thanks very much, I really appreciate the color.

Cary D. Brown

Talking of other zones going horizontal besides Wolfcamp, and so our acreage position throughout the Permian is perspective in different zones what we are 12,000, 15,000 will be where we know we’ve got the Wolfcamp rights that, with the equivalent with Pioneer’s to adding in, if you believe Pioneer, each one of those acres is going to have three horizontals an A bench, B bench and C bench. we’re going to wait and see, we’re just really glad to be where we are in the play that’s close to all of our activities as we are. so I think that’s going to be a fun one to watch, if were to baseball game, we’re not the first getting we aim to start playing that game here, it’s just now getting warmed up, so don’t want to get too excited about it, but it is interesting to see what Pioneer is doing and it’s fun to have offsets to their acreage.

John Ragozzino – RBC Capital Markets LLC

Great, thanks for the color. and then just one more on the Cline, anything to update us there with respect to the joint venture?

Cary D. Brown

Yeah, the Cline, I think is what we know today is that you can make a lot out of the Cline. What we don’t know is, where all it’s going to be economic and we haven’t quite unlocked the key. It’s kind of we had some wells that are decent economic wells and then we had some wells that aren’t decent. Like just I saw last well was better than the one before that. So I’m hopeful that technically we’ll figure out the Cline. The Clines are pretty small part of our capital budget. I think less than 3% of our capital. So it won’t drive our strength, but I’m still reasonably hopeful that we’ll figure that out and I am real pleased with the partners we have over there and what they are doing.

Technically, but it is one that I would say the jury is still out because that they haven’t figured out how to just stand up better you stand up out here.

John Ragozzino – RBC Capital Markets LLC

All right, great. Thanks for all the color and congrats on a great quarter.

Cary D. Brown

Thank you.

James Daniel Westcott

Thanks, John.

Operator

Our next question comes from Michael Peterson of MLV & Co. Please go ahead.

Michael D. Peterson – MLV & Co. LLC

Yeah, good morning, everyone. A couple of questions here, if I could begin with Paul. Paul, in terms of kind of a long-term run rate for LOE costs, can you share with us what number would please you as you look at the portfolio and kind of what you are targeting?

Paul T. Horne

Yeah.

James Daniel Westcott

What number please Paul or Cary?

Paul T. Horne

Yeah.

Michael D. Peterson – MLV & Co. LLC

I’d be interested in hearing both of those numbers.

Paul T. Horne

Michael, let me talk about our current assets first and the reason I say that is as Cary mentioned, we’ve been very active in the – side and we’ve looked at deals from $12 listing costs to $36 listing cost in the last three to four months. And obviously, we’re being an acquisition company, our target changes daily depending on the current property. But for our current set of assets, I think you can calculate what we projected for guidance as of like we had a really good first quarter and was pleased with lifting costs for the first quarter. I wouldn’t expect this to re-drop and our lifting cost dramatically from that number down in the mid-singles.

I would expect $17, $18, $19 listing costs as we are much preferred on the bottom line of that range than the top, if you two, for on the top end of that range. What we have been able to do with some of the recent acquisitions, specifically the Concho acquisition that gave a scale in a number of areas is, take some of the advantages of having scale in areas as opposed to being completely scattered in the spend, have felt good about that and still likely we’ve still got opportunities to take advantage of their. But I think Michael with our current asset base, we are again in that range and I’m sure we are not going to start looking for numbers that would be significantly lower or higher than that.

Michael D. Peterson – MLV & Co. LLC

That’s helpful. I appreciate that. If I can switch gears a little bit you talked about the portfolio and the opportunities for consolidation. We are well aware of how quite hot certain areas of the Permian are quite now. Kyle, can you give us a perspective on as you look for the second half of this year, how much of the froth in the market is maybe limiting opportunities for accretion and how much is just a matter of finding a right fit for your portfolio?

Kyle A. McGraw

Okay, Michael. I’ll try to respond to that, I do know it has been the Permian, is extremely hot with activity and yet is that the overall acquisition market, we have evaluated our record number of deals to this point in time, by this point in the year, we try to come in. And so we’re seeing lots of deals all over to taking it through. So we’ve submitted a lot of it and actually in the Permian, there’s not at all that many acquisition opportunities around. So yes, I do think the white hot activity probably limits the ability to add our portfolio in the Permian, yet we’re going to work hard as it looks. But I’ll say right now, there’s not a lot of deals, marketed deals in the market. In the Permian, there is one or two that you can look out there and say and we are in those data rooms. Does it affect accretion, well, yet more competitors, something is that [round up] the more you have to pay and therefore we’ll reduce accretion, and yet we do and are proud of our disciplined approach.

And so therefore, we don’t win albeit, it’s a statistical deal and there’s many we don’t get, because we try to stick our numbers. We own in this MLP, and we also every deal we buy and we can’t own it, paying a distribution for a long time. So accretion is important to us. So that’s one of the reasons, we don’t get all the deals. But we work hard on them, we are looking at the basins of course, always, but we should know the Permian well and we’re looking in here for opportunities as well. Did that touch on some of the answers you asked?

Michael D. Peterson – MLV & Co. LLC

Yeah, that’s helpful. You mentioned other basins and I’m sure you’re not going to talk to the specifics, but given kind of just of your response a minute ago, is it something that you would consider our prices or assets attractive in other basins that you might consider, planting flag somewhere else?

Kyle A. McGraw

We already have a good flag planetary in the Rockies, we feel like with the team in Cody, Wyoming, we’ve evaluated assets recently in the North Dakota area with the non-Bakken primarily. So sure, Rockies are areas that we already have a foothold, we look Mid-Continent. We’ve got some Mid-Continent assets. We’d like to grow in that area. And so yes, those are considered necessarily new flags. We have in recent times with the places that might be where you put a new flag, have a new area and that always takes a big enough deal to be worked point of entry. So yes, we’re opened to those ideas and knowing that the Central part of the country is what we consider fair way for growth and we’re always looking at those kind of opportunities.

Michael D. Peterson – MLV & Co. LLC

Helpful, thank you. Again, if I can close that with the final question, you just initiated some which coined enhanced swaps and the window on those 2015 through 2018. Can you talk a little bit about why you chose that time horizon, if it was just opportunistic and what appealed to you about the structure of that instrument?

Cary D. Brown

Sure, yeah. So we’re coining those foot enhanced swaps, the primary reason behind that is because there’s a number of things. One, we’re looking at acquisitions on an ongoing basis. Secondly, we know that we need to hedge those underlying economics, the Rocky and our projected rate of return. And then thirdly, we’re focused on hedging our book in a processed manner. And so this particular instrument allowed us to really enhance the back-end of the curve.

If you look the curve right now today is probably is deep as it’s ever been, and recognizing that we need to be able to lock that in, but don’t want to be hedging in $80. We were looking throughout our portfolio and talking with our counter parties and trying to find an instrument that allowed us to get a little bit more juice on the out years. So our two officers will walk you through exactly what that instrument is that have been to produce analysis like at least in some fashion. But again, we are really trying to lock in those economics in a cost way but not over down to $80.

Michael D. Peterson – MLV & Co. LLC

That’s helpful. And certainly, I understand the three legs of the instrument just wanted to hear your thoughts on positioning I guess. Those are my questions. Thanks for your time gentlemen.

Cary D. Brown

Yeah, you bet.

Operator

(Operator Instructions) Our next question comes from Justin Agnew of Robert W. Baird. Please go ahead.

Justin J. Agnew – Robert W. Baird & Co. Equity Capital Markets

Hey, good morning. Can you walk me through that $17 million maintenance CapEx and was that simply an annualized number that we should expect to be pretty consistent on a quarter-over-quarter basis?

Dan G. LeRoy

Sure Justin, this is Dan. Yeah, when we provided a financial guidance back in February, we provided the $68 million of maintenance capital and that has been amortizing that on a quarterly basis. With our recent Resaca acquisition $90 million of acquisitions, I wouldn’t be surprised to see that number go up a little bit in Q3. You’ll see that in our Q3 release, in November timeframe. I don’t think they’ll go up a bunch, but that’s obviously has been a hard question in our industry. We give a lot of attention, and we are not prepared to provide a new number today given that needs to be reviewed with our Board along with our total capital plans. But I wouldn’t expect that to go too much.

Justin J. Agnew – Robert W. Baird & Co. Equity Capital Markets

Understood, that’s it for me.

Cary D. Brown

Thanks.

Operator

And with no further questions at this time, I would like to turn the conference back over to Dan Westcott for any closing remarks.

James Daniel Westcott

Thank you. Thank you all for dialing in today. We appreciate all your good questions and really appreciate the continued support and confidence in Legacy’s employees. As we mentioned earlier, we plan to file our Q tomorrow. So we’d point everybody to read that document for more detailed disclosures. And if you have any additional questions, please don’t hesitate to reach out to me, Dan Westcott. Thanks again, for your support.

Cary D. Brown

Thanks guys.

Operator

And ladies and gentlemen, this does conclude today’s conference. You may all disconnect. and have a wonderful day.

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Source: Legacy Reserves' CEO Discusses Q2 2013 Results - Earnings Call Transcript

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