Legacy Reserves' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Legacy Reserves (LGCY)

Legacy Reserves LP (NASDAQ:LGCY)

Q3 2013 Earnings Conference Call

November 5, 2013 10:00 AM ET

Executives

James Daniel Westcott - EVP and CFO

Cary Brown - Chairman, President and CEO

Paul Horne - EVP and COO

Kyle McGraw - EVP and Chief Development Officer

Analysts

Michael Peterson - MLV & Co.

Kevin Smith - Raymond James & Associates

John Ragozzino - RBC Capital Markets

Ethan Bellamy - Robert W. Baird & Company

Michael Schmitz - Ladenburg Thalmann & Co.

Daniel Guffey - Stifel Nicolaus

Abhishek Sinha - Wunderlich Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third 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, November 5, 2013.

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

James Daniel Westcott

Good morning. Appreciate everybody dialing in to Legacy's Q3 earnings call. Before we begin, I’d like to remind 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 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, November 6; as well as subsequent reports that’s filed with the Securities and Exchange Commission.

In a moment, I will turn the line over to Cary Brown, our Chairman, President and CEO. He and I will provide commentary on the quarter, and then we will open up the call for Q&A, for the entire management team.

Cary?

Cary Brown

Thanks Dan and thanks to our friends and unitholders joining us today. I don’t know, I was looking forward to these calls, but today is really fun. I always enjoy, get to brag on the great work that the Legacy team is doing and they had a great quarter, accomplished a lot this quarter. Once again, we had record production, we had record revenue, we had record EBITDA, I am just really proud of the job the employees are doing. We also had record prices – some of our past decisions and putting in three way collars, we told you guys, allowed us to participate some of the upside and you saw that in the third quarter, as the three way collar, it was costless, but they also allow us to participate some, and that helped us with the outstanding results.

We continue to face some infrastructure issues here in the Permian, but our employees did a great job to meet production numbers, and in spite of those challenges, I think you will still see some of those in the fourth quarter, but expect those to lessen, as the midstream guys are really working hard to alleviate some of that, but it was an outstanding quarter and I am really proud of what the team accomplished.

The other thing we did this quarter with Dan and his group, in the third quarter we had exceptionally high prices relative to historical and Dan took the opportunity to go ahead and lay in some fourth quarter 2013 hedges, and some 2014 and 2015 hedges. So not only do we have great short term results, we also laid the foundation into our long term results, and really proud of the work Dan and his team did on that front.

On the drilling side, that continues to go well. Our Wolfberry program is doing well, we drilled our first Bone Spring well, which came online in September. Looks like that one is going to be ahead of our expectations, got another Bone Spring well that will come on this month, and we are really hopeful for that. So the capital front looks like that’s working well and doing well. We increased our capital budget to $100 million. I think you will see us come in pretty close to that for the year.

The fun part of that, what we are seeing you guys here, about the Permian and the horizontal boom and all the different things. The capital projects continue to replenish themselves, and we see good opportunity on our current asset base, to put good capital to work. So I feel real good about that program.

On the acquisition front, we continue to be active. We did 11 acquisitions so far this year, for about $100 million. Didn’t do much in the third quarter on the acquisition front, and we are seeing some deals that we like, I really am encouraged by the deal flow, seeing some Permian assets out there we’d like to have. Don’t know whether it would be successful in buying those assets or not, but it’s sure nice to be looking at them. As we’ve told you guys in the past, we continue to look at getting better, not just bigger.

We always have our value glasses on, when we are looking at acquisitions. So if we don’t get one in the fourth quarter, I am not overly discouraged. Wouldn’t be surprised if we get one, wouldn’t be surprised if we don’t get one, but really like the deal flow and what’s out there. Good news is, with all the activity, as assets trade hands, they generally will come back around to us, if we miss them this time around.

So that action is pretty good. Given our operational and financial results, and our positive outlook, we increased for the 12th consecutive quarter, the $0.585 a unit. We generated distributable cash flow of $44.1 million or $0.77 a unit, covering our distribution by 1.3 times. So as I said earlier, really proud of the team and what they accomplished this quarter. Feel good about next quarter, probably wouldn’t be quite as good as this quarter, because prices are coming down, but the team has done some great work.

With that, I will turn over to Dan, and talk a little bit more in detail.

James Daniel Westcott

Thanks Cary. As Cary mentioned, Legacy recently made several significant accomplishments. We generated record production of just over 20,000 BOEs a day, a 3% quarterly increase. As production from our acquisitions, most notably our $66 million Permian acquisition, and development projects were partially offset by third party plant down time and natural gas line pressure issues in our Permian, where those impacted us in the third quarter.

I will also note that we had downtime of several wells from our Permian Basin acquisition, but after remedial work was completed, that production now meeting plan.

We generated record revenue of $136.2 million and record adjusted EBITDA of $76.2 million, which represent increases of approximately 15% and 12% respectively over prior period results.

Along with increased production, other key drivers include an improvement in oil price realization of approximately $12.16 per barrel, and a positive one month hedge lag effect of $1.9 million, that were partially offset by higher cash settlement paid on our commodity hedges of $4.6 million. WTI increased $11.78 per barrel during the quarter.

Our Permian Rockies oil differentials remain favorable during the third quarter, like they were in the second quarter, but are deteriorating somewhat so far in the fourth quarter, as we detailed in our earnings release. Our natural gas differential at Henry Hub improved by approximately $0.10 this quarter to $0.76 per MCF, and this differential really reflects continued curtailment of our NGL-based natural gas production, as well as low NGL prices in the Permian. We expect the differential to remain at or around this level during the fourth quarter.

Within our daily operations, LOE increased 7% to $36.7 million or $19.88 per BOE from $34.3 million or $19.29 per BOE in the second quarter. This increase was due to additional expenses associated with acquisitions, as well as higher workover and other well failure expenses of approximately $1 million, the bulk of which was related to our recent Permian acquisition.

G&A excluding LTIP expense for the quarter was $6.6 million compared to $5.7 million in the second quarter, mostly attributable to the hiring of additional personnel.

In addition to our quarterly results, we saw great strides in improving our outlook. During the quarter, we capitalized on some of the market volatility in oil prices and hedged significant volumes for Q3 2013 through 2015. These incremental hedges, as well as a summary of our total hedge position are outlined in our press release.

On a weighted average basis, we hedged approximately the following percentages of PDP at the following prices; for Q4 2013, 88% at $92.45; for 2014, 98% at $91.93; for 2015, 75% at $90.87. And I will remind everybody that these hedges are costless. We have obviously seen some pullback in price since these, but these hedges appear to have healthy inflation in lower oil prices, and through the hedge structures that are outlined in our press release, offer some upside participation.

On the capital markets front, our 20 member bank recently increased our borrowing base back up to $800 million, which provides us with approximately $490 million of availability.

As the setback in the quarter reflects on our performance, as well as our outlook, I see that we have plenty of availability under our credit facility. We have got very comfortable leverage at 2.8 times debt-to-EBITDA and with favorable conditions in the solid debt and equity markets, we look forward to finding attractive MLP opportunities to invest our capital and continue to grow the business. I’d also like to echo Cary and say that we are really thankful for the hardwork for our employees, and the record results that they helped produce this quarter.

So at this time, Cary and I, as well as the other members of the management team are here to answer any questions. Operator?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Our first question will come from the line of Michael Peterson from MLV and Company. Your line is open and you may proceed.

Michael Peterson - MLV & Co.

Good morning everyone. I have two questions for the team today. First, how much of the increase in development CapEx would you attribute to positive drilling results, and how much to fewer acquisitions, given the frothy prices in the Permian?

Paul Horne

Michael this is Paul Horne, I will make a stab at that. We actually made that recommendation to the board back in August. It was not a recommendation that we made, due to the acquisition front, it was strictly focused on results and opportunities set, and very pleased with the results we have seen so far, as we continue to see over the last several quarters, and historically Michael, we have increased our capital budget throughout the year for a couple of reasons; one, as we make acquisitions, (inaudible) that gives us additional cash flow to put back into the ground; and two, if we are having good results and good process and our cash flow and EBITDA are up and for the like, we can take advantage of a few more opportunities.

So that’s why we increased it, feel really good about that, and feel real good about the results that we are seeing to-date.

Michael Peterson - MLV & Co.

Appreciate that Paul. If I could do a brief follow-up, based on your latest results, how do those results shake out in terms of allocating capital, relative to other opportunities that you have? Is it higher in the top quartile or decile, how do you think about latest results?

Paul Horne

Sure Michael. Our results continue to be strong. Obviously, we were very thrilled, as we told you guys, starting with our fourth quarter call, of the horizontal Bone Spring work that we had done. Told you guys at that time, we were going to drill several horizontal Bone Springs well this year, because those wells have higher rates of return on a lot of our projects, and we are continuing to see that and are pleased with it. So I think that answers your question, obviously we think those are on the top end of our program and opportunities that we have additional locations to drill, and I think you will see that in 2014 as well.

Wolfberry program, nobody is talking about Wolfberry in particular wells, but we are still seeing really good solid rates of return and good opportunities and are very thankful for that program over the last three or four years, and look forward to continuing that program over the next year.

Michael Peterson - MLV & Co.

Thank you for the details Paul. Next, Cary, given the attention on the Permian of late, and because you are having such a good day, would you mind sharing with us your thoughts on prices and prospectivity within the basin?

Cary Brown

Ask that question in a different way Michael?

Michael Peterson - MLV & Co.

Well first of all, because you are having such a great day, maybe you’d be a little magnanimous and give us kind of the long term view as to what’s going on in the Permian? Certainly, there is a lot of attention, and we have seen a terrific increase in price, both of acreage as well as operators there. How do you feel these prices are going up? How much of it can you substantiate due to economics, how much do you think is may be pricing in expected results that may be good in the future? How would you characterize all of this attention? Certainly we know that you are very favorably inclined towards the basin, but prices are a lot different now than they were six months or a year ago?

Cary Brown

That’s helpful. I think I understand. What I would say is, I am surprised at how good the horizontal results have been in several plays. Middle of the basin play is looking for real, and the right spots. I think you are going to see that acreage be very-very valuable. You are seeing different benches being drilled. Whether, I don’t think it’s going to be as good as publicly announced. I think there may be some froth in the ultimate recoveries of the wells that are out there.

Truth is we don’t know. What we have are 30-day IP rates, and a little bit of production. We don’t know what these wells will ultimately queue. What I can tell you is, sure looks like there is going to be some places where the economics are going to be stellar, and I am really glad we got a footprint – if we watch our results into Mexico and stuff that I did not think would be productive vertically, and now we are making really good wells horizontally. It’s pretty fun to be part of the basin.

I think you are going to see that it doesn’t happen as fast as the market it’s going to happen, both because it takes people, it takes land, you are talking about a basin that is mostly owned right now with current production. To drill a few mile lateral, there is a few companies that can do that. Most companies are going to have to partner together, to get those things done. Is the right answer to drill one mile laterals, 1.5 mile laterals, two mile laterals, we will see that, but you got to work out on lots of land details, to be able to sand the rig up and keep it drilling.

So I don’t think it’s going to happen as fast as people think it is, I think it will be very-very good. So I would say, our overall takeaway is, I’d be surprised if production grows as fast as the numbers that I have heard, out of the Permian, but I will not be surprised if the rates of return are really-really good on the horizontal plays.

Michael Peterson - MLV & Co.

(Inaudible) that was helpful, I appreciate that Cary. Those are all my questions this morning. Thanks again guys.

Cary Brown

Bye Michael.

Operator

Thank you. Our next question comes from the line of Kevin Smith from Raymond James.

Cary Brown

Good morning Kevin.

Kevin Smith - Raymond James & Associates

Good morning gentlemen. Nice results this quarter. Looks like you added $2 million in acquisitions this quarter. Anything to talk about, and maybe how much they contribute to 3Q?

James Daniel Westcott

Sure Kevin, this is Dan. Yeah, you’re assuming that was $10 million for the quarter or actually in this press release, the vast majority of that actually closed on $10.1 million, so there was a negligible amount of production from acquisitions in the quarter.

Kevin Smith - Raymond James & Associates

Okay, great. Then last quarter, you kind of mentioned at the end of your conference call about the potential for a Pioneer-operated horizontal Wolfcamp well, any updates on that?

Kyle McGraw

This is Kyle McGraw, and yes we did enter into an agreement with Pioneer on one particular track. We probably had about 19,000 net acres of exposure in the Wolfcamp scattered across the basin. On this one particular track, we had entered into agreement with Pioneer. I think they have it on their schedule for some time during mid-2014 probably, may be the back half of 2014 we are hoping.

Kevin Smith - Raymond James & Associates

Okay. And then Kyle, if you don’t step up your Wolfcamp acreage, just to be clear, you said 19,000. I think before you were talking about last quarter, 12,000 to 16,000, if my memory serves me correctly? Or is that vertical versus horizontal?

Kyle McGraw

From our last call, we were beginning to inventorying it and the 19,000 number I now work from, is as last checked, we are also having land brokers help us to assist to look at offset operators, and in doing so, checking our own acreage, so you find that sometimes it gets fine tuned. So yes, current thinking right now is right in this Wolfcamp section, at about 19,000 acre number, what we are working from that, being net acres.

Kevin Smith - Raymond James & Associates

Got you. And so far, is Pioneer is the only horizontal Wolfcamp well? Do you guys have any thoughts of participating in, in the next, call it six to nine months?

Kyle McGraw

Actually the way our project lays out, is there is lots of little tracks that would be 320 acre, 160 acre, or in a few cases, may be a section. So we are talking to many different operators, the one with Pioneer was the one that was just – it was readymade and Pioneer was approaching us. So we are talking to other companies as well, that’s really going to be the name of the game for a lot of people in the Permian, is to join forces with offset producers. I think right now, the current thing is 7,500 foot laterals. There are more people that think that’s optimum, then there are less than that, it still remains to be seen.

So to do 7,500 footers, it’s going to take cooperation among other producers, and so we are talking with other players as well.

Kevin Smith - Raymond James & Associates

Then lastly on that thought process, is that going to impact your capital budget and the fact that lot greater percentage is going to be non-op, or is the number small, and really shouldn’t be that meaningful?

Kyle McGraw

That’s a good question. In some of these cases, we would like to think we are going to be operating, and yet if your partner is a Pioneer and they own a substantial portion, [logicals], they would operate. We had operations with Diamond back in one area, where they own the majority interest. So I think you’re probably right. It’s probably a bit about half and half. You know of the acres that I was mentioning, those are acres that are basically that we have acquired over some period of time. They came with production as part of our PDP production. We haven’t gone out and bought straight acres, in any scenario yet. This is just part of our HPP production, where we are assessing the rights to the deep rise or not.

I don’t think you will see a material change in our operated versus non-operated capital next year Kevin, but I am not sure – we haven’t finalized next year’s capital budget, but I would expect that that 25% to 30% non-op capital would cover most of what we are talking about. Paul, you got any feel on that?

Paul Horne

I was going to step up and say the same thing Kyle has said half and half, but he is talking about, of the Wolfcamp acreage, one of it might be operated and one of it might be non-operated. We have always had the luxury of seeing a lot of good opportunities of non-op projects, and it has been in the (inaudible). So it hasn’t just been in the horizontal Bone Springs, it has been in the Wolfberry and now it looks like it’s going to be in the Wolfcamp. It could increase, but I don’t think it’s going to increase dramatically the percentage of non-op capital we spend year in and year out.

In fact, we have some acreage in the Wolfcamp that is very close to being drillable operated and at 100% level, so if you have one of those, that can offset four or five lower working interest, non-op opportunity. So we are working on it Kevin.

Kevin Smith - Raymond James & Associates

Okay. Great inflow. And then just switching gears in the last question, any updates on the properties you brought from Resaca, as far as – I think you were going to change maybe, the waterflood process, or potentially to upgrade it?

Paul Horne

Yeah. Resaca.

Kevin Smith - Raymond James & Associates

Resaca, sorry about that.

Paul Horne

That’s okay. When we took those assets over, they were significantly underperforming, compared to what we had on the PDP side, that’s one of the reasons you saw expenses increase this quarter. Obviously, it was the first full quarter that we had LOE on those leases, those add increase, but we spent a significant amount of money, that Dan mentioned, getting those wells back online. Our primary focus in Q3 was that, getting production back online and getting those assets back on our production plan. We are looking at, and I believe, we will build in some of our 2014 capital for waterflood improvement on those assets. We have not started waterflood improvement work, having just had those in-house for three months.

Kyle McGraw

Kevin, the nature of waterfloods are – you actually lose current production when you do that kind of work, because you are generally converting a producer into an injector, and it may take six months to a year, before you see the benefit of that. So I don’t think you are going to see substantial improvement to the waterflood in a quarter [look]. You got to look at over a 10-year lifecycle, that’s the nature of waterflood work, and it’s great long term work, but doesn’t produce much short term results. Short term results are usually negative.

Kevin Smith - Raymond James & Associates

Got you. Makes sense. Thanks.

Cary Brown

Thanks Kevin.

Operator

Thank you. Our next question comes from the line of John Ragozzino from RBC Capital. Your line is open and you may proceed.

John Ragozzino - RBC Capital Markets

Hey good morning guys.

Cary Brown

Good morning John.

John Ragozzino - RBC Capital Markets

Just [started] to do the budgeting process for 2014, what kind of base case assumptions are you using for plant infrastructure constraints for Permian?

James Daniel Westcott

John, its Dan. I think it’s a great question. It’s one that we wrestle with regularly. I think it would characterize the issues as being akin to (inaudible). It is quite a challenge to figure out where the next problem will arise. But as we look at it, we see a lot of money going into the basin, and have had several meetings with midstream providers, who are eager to put money to work.

Obviously, with our – the nature of our asset base and the kind of broad gathering across the entire basin, they are not flocking to us to solve all of our issues, but we are happy that a rising tide does all – I think if we look at the infrastructures in totality, I would like to think that by the end of Q1, we will have addressed a bunch of the issues we are currently dealing with.

But I will say that, on a quarter-over-quarter basis, John, like I said, we are dealing with lots of problems. So I don’t think you have seen our production without infrastructure issues for several quarters.

Cary Brown

I am not aware of a place where we have changed, where we are going to spend capital because of infrastructure issues, or oh are you? Are we seeing any place where we have actually not drilled a well or done work that we felt we are going to do? No. So generally short term, they are just everywhere.

John Ragozzino - RBC Capital Markets

That’s helpful. Thanks a lot. Then going forward, you guys mentioned Continental assets saw reasonable declines compared to expectations. Do you expect to see a continued elevated level of workover expense in the LOE going forward, and then do you expect to be able to continue to mitigate most of the declines from the Lower Abo?

Paul Horne

John, this is Paul, I will take a shot at that. We have been very pleased with the results of the work that we have done in the Lower Abo. We told you guys early on in that acquisition, that we weren’t going to chase those peak rates, and we felt like those assets were declining at a pretty good clip. We have significantly arrested that decline. It has not been as high as we anticipated throughout the year, and so we are very pleased with that. I hope we find additional opportunities for workovers on not just the Lower Abo, with our other opportunities because those are our highest rates of return projects, because we spend every one of those dollars, we find opportunity to spend. Not seeing anything that is jumping out at me, at this point, that I would say that those costs are going to be elevated.

The significant increase in costs this quarter was not due to workovers on the Concho, it was due to well work that was required on our $66 million Permian (inaudible), because of its underperformance when we took over operations of it, basically 1st of July.

John Ragozzino - RBC Capital Markets

All right. Then just one more quick follow-up to Kevin’s question earlier about the Pioneer well for next year. Do you have a working interest that you’d like to share with us?

Paul Horne

I believe we are going to be in the 40% range, that’s just from memory.

John Ragozzino - RBC Capital Markets

Perfect. Thanks very much. Congrats, and keep it up.

Paul Horne

Thank you.

Operator

Thank you. Our next question comes from the line of Ethan Bellamy from Baird Company. Your line is open and you may proceed.

Ethan Bellamy - Robert W. Baird & Company

Hey good morning guys. Congrats on a good quarter. Back to M&A, where are the acquisition opportunities you are seeing, and has anybody approached you with the idea of may be swapping PDP for some of your acreage that’s prospective for unconventional development?

Cary Brown

Ethan, what we are seeing is a lot of Permian assets that are trading hands, say maybe weighted towards middle of the basin a little bit. So, that’s color on where we are seeing acquisitions, but I think some guys are taking advantage of the high prices in kind of a frothy market, if they would plan on exiting, now is a good time to exit. And then there are some guys that just don’t have the capital to do what needs to be done on these assets, and yes, we have been approached to partner and look at some of those things where we could take some and MLP at some, into a different kind of structure. But don’t really have anything, I’d say, is imminent on that front to give you much color. That’s where we are seeing deals that I kind of like, if you could buy it, and get some PDP and get this development potential. It’s kind of fun.

Ethan Bellamy - Robert W. Baird & Company

Got it. So if we see do a deal by you and more than likely, it’s going to be in your backyard?

Cary Brown

Be more than likely in our backyard.

Ethan Bellamy - Robert W. Baird & Company

You deducted $18 million in maintenance CapEx in the quarter, versus roughly the same amount last quarter. What’s in that number? How do you guys calculate it and what comfort can you give us that that is a sufficient deduction?

James Daniel Westcott

Ethan, this is Dan. So for the quarter, we had $17.8 million that’s up from Q2 at $17 million, principally driven by Resaca, and together with small acquisitions. And so, as a reminder, we will set our maintenance capital number on an annual basis, and then update that periodically, as needed principally around acquisitions. It’s probably helpful to give you – this has obviously been a much written about topic here in this space, I think, if I can, I will try to provide a bit more context.

For maintenance capital, we went to this construct in 2013, really driven around comparability to our peers. It’s not a like a lot of both, including you guys were asking us to do so. I think if you look at the way we are running our business today, I still think we are running it in a very similar fashion, really around one times on a total development capital basis, and that really kind of underpins, maximizing PV while not creating a situation where we are increasing our total production of client rate at an unsustainable level.

So that’s really how we are looking at it. When we calculate maintenance capital, we are looking at the long term decline of our assets, and comparing that against the projected productivity of our capital. So I think it’s a fairly straightforward mathematical exercise. We added some language in the quarter to our footnote in the DCF reconciliation table, at the back of that release. But we are looking at a compound annual decline over a five to 10-year period, and looking at projected productivity of our capital and solving for that delta.

Ethan Bellamy - Robert W. Baird & Company

So just to be clear, that’s an accounting allocation rather than this project goes in this bucket, and this project goes in another bucket?

James Daniel Westcott

Great question. It is a financial, I don’t want to use the word accounting, I am going to try to stay away from that word, because this is a non-GAAP measure, it’s a financial calculation, it’s an allocation of dollars based on, effectively the weighted average productivity; because you have got more total capital than you do maintenance capital, so if you hive off some of that towards maintenance, then you are just taking a pro rata slice.

Ethan Bellamy - Robert W. Baird & Company

And can you give us either side of that equation, what’s your average decline rate over the next five years is, and what the dollar gets you?

James Daniel Westcott

No. We haven’t provided that yet.

Ethan Bellamy - Robert W. Baird & Company

All right. Well I am going to keep asking.

James Daniel Westcott

We know your persistence.

Ethan Bellamy - Robert W. Baird & Company

All right. Thanks guys. Appreciate it.

Operator

Thank you. Our next question comes from the line of Michael Schmitz from Ladenburg Thalmann. Your line is open and you may proceed.

Michael Schmitz - Ladenburg Thalmann & Co.

Yeah hi, great quarter. Just a follow-up on the horizontal, the 19,000 net acres prospective for the Wolfcamp. How much of that is contiguous, where you could drill your own long horizontal laterals, and how much is dependent upon working out deals with adjacent operators?

Cary Brown

That’s a good question, and one I don’t have document. Kyle, do you have – I would say, I don’t have – Ask the question in other way, so how much is contiguous and is currently –

Kyle McGraw

No, my response would be very little is currently drillable, if you are drilling 7,000, 7,500 foot laterals. If you are drilling 5,000 foot laterals, we absolutely have some drillable locations on 5,000, but when you look at our asset base, it doesn’t matter whether you are talking about in the Wolfcamp, in the Wolfberry, in any play except our very small working interest in the acreage and the client. It’s scattered acreage, 40 acres here, 160 acres there, 320, maybe a 640 here or there.

So there are very few places that we currently have 7,000 plus foot laterals that are drillable, and that’s why Cary mentioned earlier, this is going to be – I think for the industry as a whole, this is going to be a pretty significant land issue, on a go forward basis, because there are a lot of operators that have asset base similar to ours, that can’t drill a horizontal Wolfcamp well at 7,000 to 10,000 feet on their own, and going to have to form partnerships and pull that acreage, and make those wells drill.

Michael Schmitz - Ladenburg Thalmann & Co.

And just one follow-up, on the acquisitions, certainly I know you are encouraged by what you are seeing the Permian. Do you currently have much appetite, or are looking at things outside the Permian?

Kyle McGraw

Yes we are, this is Kyle. Overall this year, we have streamed about 147 different fields, and of that, it’s a typical mix (inaudible) so we have got one that’s – we have looked at several this summer that were mid-continent, the Oklahoma gas basin, in some of those (inaudible), we were not successful. But as (inaudible) in the Rockies as well.

Michael Schmitz - Ladenburg Thalmann & Co.

Thanks so much. Great quarter.

Operator

Thank you. Our next question comes from the line of Dan Guffey from Stifel. Your line is open and you may proceed.

Daniel Guffey - Stifel Nicolaus

Hi guys. Congrats on a good quarter. Just a follow-up to Ethan’s question I guess, asked may be a little bit different. Do you guys have an organic production growth target that you guys are seeking with the development dollars spent above maintenance CapEx?

Paul Horne

I will answer, I will make a stab at that. No, we don’t have a target that we say we are trying to drill organically, 3% or 5% or 7%. You have seen organic growth in the single digit growth year-in and year out, but we don’t have a specific target that we are shooting for. We set our capital budget more based on opportunities set, and what we feel that is appropriate levels, based on the results of the year.

Kyle McGraw

But we do have, Daniel, a growth in distributions, we’d like to be in the 3% to 6% growth in distribution, that we think we can pay 8% out and grow 3% to 6%, that that’s a reasonable return for our unitholders, the ones that we have designed legacy. We look at what we are trying to accomplish, we are trying to get cash flow to the unitholders that want long term sustainable cash flow, that’s going to be adjusted for inflation by commodity prices.

So when we look at maintenance CapEx, it all goes into the equation to try to reach that sustainable distribution over time. And I think you can’t look at one piece or another piece, you have to look at the whole piece, and see where that comes out. So it may sound like we are trying to dodge the question, but it’s really a more difficult answer, than we can give you in one phone call, or in one formula.

So what we try to do is, give the information so that you can evaluate us versus our peers and look at – if you look at our eight year track record of how we have grown distributions and how we have performed for unitholders in good times and bad, I think you will see that we are running the company in a way that’s as sustainable as it can be. We absolutely have told our unitholders, that long term, there is commodity, both plus and negative, and so we know that that is out there, and people got to realize, if all goes down dramatically, then that has implications.

That’s one of the reasons we talk about growing to get better, not just growing, because those implications are easier to fix, the smaller you are and when you make acquisitions in a down cycle, it really helps you with lower commodity prices. So you actually, I guess the point I am making is, all of that we are looking at, and we are trying to be reasonable in how much we put back in the ground, and how much we pay out to unitholders, in a way they can count on it.

Daniel Guffey - Stifel Nicolaus

Okay. Thanks guys. I guess secondly, just moving to the Wolfberry. Of the $100 million development capital that you guys are spending this year, how much of that is geared towards the Wolfberry, and then I guess also, how many rigs do you currently run in, what counties are those Wolfberry rigs running in?

Cary Brown

I am sorry, I don’t remember all the (inaudible), exactly what percentage of the $100 million. It seems to me like it’s in the 55% range, that’s not going to be far off. Between 50 and 60 anywhere. We are running one rig, we have ran one contiguous rig, three years, four years now, and are continuing to run that rig and are continuing to be pleased with the results.

Daniel Guffey - Stifel Nicolaus

Okay. Then can you guys give us an overview, I guess of the completed well costs, I guess, projected EURs, I know they vary across your acreage. But I guess, kind of give a range and then I guess also on the last question, where that one rig is running currently?

Cary Brown

As I am sure you are aware, we generally don’t quote well results and EURs, but I can give you some typical ranges of the industry, and I think you will find that Legacy’s programs revolve within those typical ranges of the industry. Our Wolfberry well is typically going to cost all-in, somewhere between $1.8 million to $2.1 million drilled and completed online through (inaudible). I think we see EURs range dramatically within (inaudible) areas from a low of in the 100 Mboe range and a high end of 150, 160, 170 Mboe range. EURs don’t drive rate of return, what drives rate of return is the profile of that production curve, that gives you that EUR, and so (inaudible) have a higher initial rate. They may have as good of economics of a BOE well that has (inaudible), but not as high as the client.

It also matters a lot whether you had strong Atoka. Clearfork, the term Wolfberry has grown dramatically over the last several years, and continues to grow depending on what zones you are adding, and some of those zones add EURs, some of those zones don’t add much EUR but add higher initial rate. So it’s a pretty complicated question. I think that’s what you are going to find in all these plays, trying to make blanket comments about any individual play is very tough, because it changes dramatically, and especially when you start looking the four or five county, six county play, like the horizontal Wolfcamp, like the Wolfberry, like others, got to be pretty careful, because it matters dramatically, vary much less county to county.

Daniel Guffey - Stifel Nicolaus

Okay. Can you guys give us an update on inventory of Wolfberry wells that you guys have currently that you see? And then I guess, secondly, looking back at this right you’ve contiguously run for three-four years, can you give kind of an average estimate or IRR range of those wells, kind of what you are seeing across your program?

Cary Brown

We continue to have a good inventory. You got to be careful quoting that inventory, because some of the acreage that we have on a go forward basis, we have the Spraberry rights. In the past, in areas that we have had the Spraberry rights, we had gone to the owner of the Wolfcamp rights and we made agreements and put those together and drilled the Wolfberry wells, obviously with a lesser working interest than we would, with the horizontal Wolfcamp being so hot, so new, and so undefied, my gut is, it’s going to be more difficult to make those kind of deals for Wolfberry because of the perceived value of the Wolfcamp.

We have a couple of hundred locations out there, but those include, both Spraberry and Wolfberry and so, that’s about all the color I can give on that; and as far as rate of return, we don’t think we drilled wells that are less than 20% rate of return, we think on average, our Wolfberry play historically has yielded in a 30% to 35% rate of return. Total project economics, including the good and bad, obviously we have had wells that have been much better than that, but we have also had some wells that haven’t. But all in all done, we have got to look at that program being a 30% to 35% rate of return, and have been thrilled with that for an opportunity.

Daniel Guffey - Stifel Nicolaus

All right. Sounds like you guys have a lot of running room. Thanks for the info and congrats on a good quarter again.

Cary Brown

Thank you.

James Daniel Westcott

Thanks Dan.

Operator

Thank you. (Operator Instructions). Our next question will come from the line of Abhi Sinha from Wunderlich. Your line is open and you may proceed.

Abhishek Sinha - Wunderlich

Hi good morning. I apologize, I had gotten dropped out of the call accidentally early in the morning. So I apologize if I repeat this question and it’s already been answered. Just wondering, if you could quantify what, say in terms of production, how much of the effect was because of the production downtime? Or if you can give me a relative range of what was it before versus last quarter, that you guys had the impact this quarter?

James Daniel Westcott

Abhi, this is Dan. That question has not been asked, so no worries there. We have not disclosed specific number for Permian curtailments. I think it’s a couple hundred barrels a day, BOEs a day, but we haven’t been specific on that. One of the challenge for us, given our widespread nature of our asset base, but to -- that number would be difficult, if we knew very specific. So there is a lot of affirmations and we have tried to avoid (inaudible).

So you know, we have exactly this much, its increase in land pressures that’s affecting gas production, it’s also affecting oil production, but we are still producing oil and gas, this is not as much as we could, if you weren’t seeing that. We do have a scenario where there was a plant fire and a significant plant downtime, and that one is a little more calculable than others, but as a whole, it’s just pretty difficult to estimate, I agree with Dan, and now you are looking in the several 100 BOE a day range.

Abhishek Sinha - Wunderlich

But durationally, just the impact of the capacity constraints in the Permian, you think durationally has it worsened versus what you had last quarter, or is it at the same level?

Paul Horne

Increased over Q2.

Abhishek Sinha - Wunderlich

I see, increased over Q2. Okay, and do you still see the Bone Springs well that are on $6 million or $6.5 million costs, or has this changed from what DSP is in the recent times?

Paul Horne

No, I think that’s still a good number. I think they are going to be in the $6 million to $7 million range.

Abhishek Sinha - Wunderlich

Sure. And just pressing on Ethan’s question, I know you guys do not provide the base decline (inaudible) and get some idea, how is it relative to what you are experiencing in NOR above decline rate, I mean, you can provide some kind of color on that, versus one base decline versus a year ago?

Paul Horne

Sorry Abhi, I think I missed the question. Were you asking?

Abhishek Sinha - Wunderlich

Yeah, just I am trying to get some kind of color on what you have on is a base decline rate, versus what you are experiencing in your [low or above] decline?

Paul Horne

We haven’t provided base decline rates, so unfortunately, we are going to have to [drop] that question.

Abhishek Sinha - Wunderlich

Sure. One last question at the end for me is about the Wolfcamp. Correct me if I am wrong, but I was under the impression that most of the location and the potential of basin that you guys have, is basically you are having 40 acre tracts, and so I was thinking if that is the case, would it make more sense strategically to divest that and use the cash flow somewhere else in terms of PDP, because the Wolfcamp is hot, you might a better price? Or is it too early to think on those lines, anything on that would be helpful?

Paul Horne

I would say our acreage is going to average significantly higher than 40 acres of tract. So the answer is – to your question on, is it better to divest that acreage, or partner with guys, we look at that every day and every circumstance, and I like the optionality of that. Today, you got to look at, we have had press releases on the V-bench, we have had press releases on the B-bench, we have had press releases on the C-bench. There is a lot of hydrocarbon in those rocks.

So we are waiting to see kind of what things happen. We like owning it better than we like trading it, but it might be better in somebody else’s hands, if we got the right amount of PDP in return for that acreage. But I would say, it’s going to be closer to averaging 160 to 320 per track, as opposed to 40 per track. We talk about a 40 here and a 40 there, but there’s much bigger pieces of acreage than that.

The smallest piece is going to be 40-acre tracks, but that would be on the smallest end.

Abhishek Sinha - Wunderlich

That’s all I have. Thank you very much sir.

Paul Horne

Thanks Abhi.

Operator

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Cary Brown for any closing remarks.

Cary Brown

We just want to thank you guys for following us and for unitholders and for friends out there. Appreciate the support that you guys give us to the Legacy team. Once again congratulations on a great quarter and we look forward to visiting with you guys next quarter.

James Daniel Westcott

Thanks guys.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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