Legacy Reserves LP (NASDAQ:LGCY)
IPAA's Oil & Gas Investment Symposium
October 1, 2013 11:55 AM ET
Cary Brown - Chairman, President and CEO
Dan Westcott - EVP and CFO
All right. Good morning, everyone. Today we’ve got Cary Brown and Dan Westcott. Cary is the Chairman, CEO and President of Legacy Reserves and Dan is the Executive VP and CFO. Please welcome Cary Brown.
I am glad to see everybody here this morning. I was afraid with the government shutdown we wouldn’t have anybody show up, but I guess that there is -- some of us still go to work and are trying to make it work. So I am actually really glad to be here in California. When I look at our Investor Group there is the East Coast and West Coast seem to be underrepresented in our unit. So if I tell a boring story for those you guys who have heard me before, the story hasn’t changed a lot. So you probably can snooze off a little bit, but for those of you from California who don’t know a lot about us, I will try to give you a little bit about who Legacy is.
I will start with forward-looking statements and you guys know what those are and I don’t know, not to believe what I say I guess. Let me start with who we are, we are a publicly-traded master limited partnership. Basically as I described to people who don’t know much about Legacy but they do know about real estate REITs, I say we’re a REIT but the underlying cash flow comes from long lived oil and gas assets, primarily oil. That’s where we go. I want to -- that’s the kind of assets we own.
Right here if you see the star, that’s Midland, Texas, that’s the hometown I grew up in, it’s the heart of the Permian Basin and that’s where our roots really are. We are a family organization. My dad [inaudible] started buying properties in 1981. We aren’t the wild [inaudible] part of the oil and gas business, we’re mostly the, I’ll call us the manufacturer, we manufacture oil, we buy.
Once people find oil, we buy those properties and produce them out and it’s been a great business. We always have had the bank as our partner. We didn’t go public until 2006 -- actually we did a 144A in ’06. In ‘07 we actually did the IPO, but from 1981 to 2006 we didn’t have anybody but our own, I think I was the collateral on the first loan and the bank is our partner as we grew the assets. In 2005 we could see that the game we’re playing was going to change and we could either jump in or get out and we chose to jump in and start the MLP. It was early then; today we’ve grown it to about a $2.4 billion enterprise value. There again doing the same thing we’ve always done, I will talk about that.
Our goal today, we’ve got about 8.6% yield; our goal is to pay 8% or so out and grow the distribution anywhere 3% to 6% a year. And I’ll show you how we do that, we have been very successful at doing that since we started. We paid, I think it is about 14% annualized return year in and year out. We paid that distribution and have grown it for the last 11 quarters. So I think we know a lot about what we’re doing. We are an oil company, and so I will talk some about reserves. We’ve got about 88 million barrels of reserves, I’ll go through some of that.
What we really do well is we operate oil and gas properties in the basins where we are. I think we are exceptionally good at buying properties. We have been doing it. You won’t find us make a whole lot of mistakes in the kind of properties we buy and I will tell you why that is, and then of course having the people to execute on that plan.
This is my favorite slide and you guys at the back room can go what it this, this is just a bunch of colors on a map, but see that same star, that’s Midland, that’s my hometown right there. You are looking about 150 miles this way, 150 miles this way, it’s about a 150 miles circle around Midland and that’s the Permian basin. If you’ve heard about the Permian basin, it is pretty hot right now. When we first started talking about this, the Permian basin was the ugly girl at the dance and today we’re the hot girls at the dance, so that’s kind of fun.
But why is the Permian so hot? When we look at this basin, it’s produced 30 billion barrels of oil. And so if you stood at the back of the room, threw a dart and hit a color on that map, you could make a producing oil well. It produced at peak out in the 70s and then it was coming down and it was making about a 1 million barrels a day or 800,000 barrels a day, today it’s back up to 1.2 million, very tight rock, lot of oil in place.
When we drill an old vertical well, generally you are going to get about 20% of the oil in place. If you water flood it, you might get to 30%, which says there is anywhere from 60% to 70% of oil that we know is there is still in those rocks. And all of a sudden now with horizontal drilling new frac techniques and we are drilling really, really good horizontal wells now. So that's why the Permian Basin has gotten so hot.
If you look at our assets, if you shot a shotgun right there, we've got assets everywhere in the Permian, about 20,000 barrels a day is what we produce. I tell people in the Permian there is always a deal, I call it the deal of the day. Since I have been doing this, there is never a day that we're not looking at a deal. There is always stuff coming up for sale, always stuff to buy.
So when we look at the MLP, we try to reinvest enough back in the ground where there is good places to reinvest in the Permian to hold production flat and then we acquire properties as lots of people, always something for sale in the Permian. That's one of my favorite things about it. And then because it's tight rock it's got a pretty shallow decline. So we're not having to invest a lot of money to hold our production flat.
So the drivers of our growth, if we do our - we reinvest enough back in the ground and that's generally in the 20% to 30% of our cash flow to hold production flat. The way we grow our distribution is through acquisitions and we are an acquisition machine, we look at lots and lots of deals, you can see from ’06 to 2013, it's 1.6 billion of properties that we purchased. We'll give you the metric; it’s 5.6x cash flow that we purchased those properties at. Since I’ve been buying it's generally between a 4 and 6 x, depending on what the forward strip looks like. Sometimes that can get out to 7 times cash flow, but you buy those multiple as a declining cash flow stream. If you don’t reinvest back into it, it will decline. So we try to buy those declining cash flow streams, reinvest enough to hold them flat and then pay out the balance in distribution. There isn’t very many deals in the Permian - well, there is no deals in the Permian that we haven’t looked at and gone. We know about this asset. If it comes up for sale, we generally are operating next door to it. So we don’t make very many mistakes. The MLP gives us a pretty low cost of capital.
So where we see low risk, we will go in and buy and then we will pay that cash flow out to our investors, but I’m really proud of the team in the way they have done things. What I'll tell you about the acquisition game is, our goal is generally 200 or so of acquisitions a year. We’ve averaged that but last year we did 600. The year before that, 2011, we did 137. Why is that? We're value buyers. We're going to look at it. And I would say most of the time, we get outbid, it's not because that we're not willing to pay what the next guy is, he sees more reserves than we see. We are pretty conservative. If you took all the acquisitions and roll them together and what we do in our shop is we do a forecast day one.
So I still go back and look at the properties we bought in 2006, I say how’re we doing today relative to production compared to what we thought we would do. If you added all those up, we’re within about 0.5% of what we thought we're going to do. That's how we're able to continue to grow the distribution and make good acquisition as we make the numbers we say we are going to make. The Concho acquisition through the first, the data I have today we are on plan with that within 1% or 2%, so very, very good in the basins we play.
So Permian is about 75% of our asset base, it’s mostly oil. We also, we generally grow through relationship, we had a relationship with a friend of mine up in Wyoming. And he want to get out of the business, we bought some assets from him and opened the Cody office with those people, been a great area for us to grow and acquire. We were not buying in the Permian, we can buy up in the Rockies we also got assets in the Panhandle in Oklahoma. We would love to see the whole map and through the middle part of the country turn blue.
We generally don’t look out in California, we are not really going east, but we think in the middle part of the country there is a lot of assets that fit the MLP model. And we try to buy every one of those we can buy.
If you look 88% of our reserves are PDP. What that means is the reserves that I have on the books today I don’t have to go spin money to go get those. If you look in 2006 about 88% of our reserves would be PDP. I don’t worry too much, if we've got a two to three year inventory of PUDs on the books because as we spin that money, we’ll get two to three years more.
The kind of assets we buy don’t lend themselves to spin a 100% of cash flow back on those assets. But you can spin 20% or 30% on those assets year in and year out and continue to grow an increased production, because remember I told you, about 60%, 70% of the oil is still there, what we are doing is trying to get 1% or 2% or 3% more out and new techniques help that.
So the Permian right now is real hot. Some of you guys have heard the horizontal, Wolfcamp, Bone Springs, we've got all of that, we've got enough of that to continue drilling for years, but we are only going to drill about 30% or so of our cash flow is where we try to target and we try to stay about 1x covered.
So back to who we are. We got good oil properties, oil’s a good place to be right now, I think it will, when I look at my own portfolio and I should say my family and McGraw’s and management own about 18% of the company. You will see we are one of the few MLPs that do not have IDRs that’s not because I don’t want to get rich, it’s because I don’t know a deal that I can buy to keep 25% of cash that would be a good deal for the investors. So when we started we said we’ll just make it straightforward; the kind of stuff I own is the kind of stuff you are going to own. So we still own about 18% of it.
We’ve never sold, but we have issued new units and so we’re getting diluted a little bit along the way. So we are pretty disciplined in that approach. We’re going to continue to do acquisitions; we’ve got plenty that we do work wise. And I think if things go like I see it, we’ll continue to make that 8% or so distribution in growth by 3% to 5%, 6% a year. And that makes my family happy. I’d Sunday lunch with a lot of these guys and they don’t care what the distribution is tomorrow, they want to make sure we are doing the right things so 10 years from now we still live off this asset, it is our largest family asset.
I’m going to let Dan talk more about the individual financials.
Thanks, Cary. Good morning, guys. I am Dan Westcott. I want to flip through some of the finance section. So page 9, our cap table, I think we’ve made a lot of progress over the past year really building out the company from a balance sheet perspective. We’ve issued two different tranches of high yield. In November we issued a $300 million senior notes offering at 8%. And then in May of this year, we added another $250 million 6.625% due in ‘21, so as you will see down at the bottom of the page here, let me get that, we’ve added quite a bit of liquidity. We have over $400 million of liquidity today that’s by far a company record. Cary mentioned our acquisitions and how that underpins our story. We think how the significant liquidity enables us to quickly pursue that strategy. As we know the acquisition market can be very competitive and having that liquidity is a key advantage for us.
So at about $880 million of debt and $1.6 billion of enterprise, market cap or 2.4 TEV [Total Enterprise Value], we are obviously continuing to grow the story, we will talk through that here in a slide or two, but couple of stats on the page, through last quarter annualized we have $272 million of EBITDA, I think if look at the consensus for this year, we’re somewhere around 277 or so. And we have got 80 million barrels of proved developed reserves. So Cary talked a little bit about that, we think that that is probably if you are looking at our stats is probably more illustrative of the quality of our asset base. Again, we’re not aggressively booking PUDs, it’s not within our business model. And we don’t orient that business model around proved reserves reporting. At $2.32 of annualized distribution we’re an 8.6% yield, so for those of you new to the MLP space or us in particular think that’s a very attractive entry point.
Slide 10 gives a little bit more history, so we talked about on slide 9 where we are today; slide 10 really shows where we have come from. So if you look at the top of the page, both on production and EBITDA basis we have grown the company at over 20% annualized return. We are very proud of that accomplishment. The bottom half of the page is showing leverage. I will point out, it's the most recent statistics on those leverage that's a little bit misleading. We purchased the Resaca acquisition at $68 million on June 28th. So we have that debt, but we don't have that cash flow in those numbers.
So our goal is to, with high yield, is to run the company at around 3x or 2.9x today on a true pro forma basis and feel like that really positions us well to leverage our cheap capital through the bank debt, but give ourselves enough liquidity again to pursue those acquisitions quickly.
Slide 11 is my favorite slide. If you go back and look from our IPO till today, I think this slide illustrates several key points and it's really the smooth growing nature of our distributions. That's really juxtaposed with the volatility in oil price. So how does an upstream MLP deliver very consistent and growing distributions? I think the answer to that is three things. One, it's how we manage our balance sheet. Two, it's how we evaluate and pursue our operations. And then three, it's hedging. So we're a very disciplined company in that manner. Cary mentioned 18% ownership, again this is not a quarter-to-quarter game for us, this is a very long-term model. And I think what slide 11 shows is that we've been able to prove that through a 6 plus year history.
I mentioned hedging. I want to mention a couple of things on hedging. One, we're right now on the oil side. We're 92% hedged on the oil side through ‘14. If you are like Ethan you’ve sat through a lot of these presentations you’ll know that we've never exceeded 85% before. When the Middle East crisis was going on a couple of weeks ago, we asked our banks for a one-time waiver and we're able to add about 1,000 barrels a day of incremental hedging for ‘14. So we're really happy about that. Feel like we capitalized at a good point in time.
But we believe, so stepping back and really thinking about what we're doing here, we believe in hedging the next two years very aggressively and then trailing that off. We think our investors are invested in legacy because they want long-term oil price exposure. So we're not trying to eliminate that, but we're trying to mitigate that volatility. And so think of us as a long-term oil play, but hopefully insulated against short-term ups and downs.
Another couple of key points I'll make when we evaluate our acquisitions. We have talked several times now about our acquisitions. We're going to lock in those economics as best we can. We feel like, as Cary mentioned, we are within 0.5% of hitting our production. The other key aspect of that simple equation is price, and so we're going to try to do our best to lock in that revenue stream.
Thirdly, our hedges today and our hedges all along have always been cost. So we think that’s a key fundamental aspects for us, that’s how we view the world. We view hedges as when we’re looking at an acquisition, we are saying what can we pay versus what is the market today, the market should tell us what that is worth based on our engineering and we’re going to do our best to do that, but we’re not going to pay up for it because we think that you’re kind of mixing balance sheet and ongoing cash flow.
So we mentioned briefly our strategy, let me just, this slide 13 really shows how that has played out. So you have unhedged revenue, impact of hedges, hedged revenue and then EBITDA. And what you will see is that on the top right hand side, when oil prices have been fantastic, we’ve lost money on our hedges, when oil prices have been terrible, we've gained money on our hedges, but by and large, the story has worked, we’ve shown a pretty smooth growth profile in our revenue stream.
Slide 14 talks a little bit more about those hedges specifically. We use Costless collars, three way collars, swaps and then put enhanced swaps. I think we have pretty good disclosure on that in our filings that point to that; they are all fairly basic structures. A few of those are trying to capture a little bit more of the upside, while again protecting the downside, but that’s hopefully very easy to go through.
So that's us. We appreciate your time this morning. I think we head out to Pacific Heights. Thank you all.
[No Q&A session for this event]
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