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Legacy Reserves LP (NASDAQ:LGCY)

Q4 2009 Earnings Call

March 4, 2010 3:00 pm ET

Executives

Steve Pruett – President, CFO and Secretary

Cary Brown – Chairman and CEO

Kyle McGaw – EVP, Business Development and Land

Analysts

Leo Mariani – RBC

Ethan Bellamy – Wunderlich Securities

Michael Blum – Wells Fargo

Richard Dearnley – Longport Partners

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Legacy Reserves fourth quarter and 2009 annual results conference call. Your speakers for today are Cary Brown, Chairman and Chief Executive Officer and Steve Pruett, President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the call, there will be a question-and-answer session. As a reminder, this crepes call is being recorded today, March 4, 2010.

I will now turn the conference over to Mr. Pruett.

Steve Pruett

Thank you for joining us. Good afternoon and welcome to Legacy Reserves LP’s fourth quarter and 2009 annual earnings call.

Before we begin, we would 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 the future events and are subject to various risks, uncertainties and assumptions. Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in Legacy Reserves' Form 10-K for the year ended December 31, 2009, which will be released tomorrow and subsequent reports as filed with the Securities and Exchange Commission along with our press releases.

Legacy Reserves is an independent oil and natural gas limited partnership headquartered in Midland, Texas, focused on the acquisition and development of long-lived oil and natural gas properties, primarily located in the Permian Basin, Mid-continent and Rocky Mountain regions.

I will now turn the conference over to care Cary Brown, Legacy’s Chairman and Chief Executive Officer

Cary Brown

Thanks, Steve and to our friends and unitholders for joining us today. Delivered another record year at Legacy, 2009, production was up just over 8% to 8,225 barrels a day in spite of only spending $13.7 million on capital expenditures and $8.5 million on acquisitions. So I thought it was a good year operationally. Reserves were up. Cash flow was up.

Although 2009 was a challenging year with commodity prices for much of the year, our ability to react quickly to a changing environment allowed us to increase our cash flow to $88 million in 2009, up from $57.4 million in 2008.

More importantly, the numbers I look at, discretionary cash flow per unit – distributable cash flow per unit was up to $2.74 per unit, up from $1.87 in 2008. Thought it was a great job. Our hedge portfolio really served its purpose, helped us to weather the roller coaster in commodity prices and maintain our distributions.

I'm real proud of what our employees accomplished in 2009 with capital efficiency, cost cutting and staying focused on our base business of generating cash by producing oil and natural gas properties. On the acquisition front, we were able to sign up our largest acquisition to date in December, closing it in mid-February. I think this is going to be an excellent acquisition.

Our Wyoming acquisition, several things I like about it. Just the base decline, the base RP, the PDP RPR is right at 15. So it's a good footprint, good fit for us from a decline standpoint. It's mostly oil which is right in line with – if you look at Legacy as a company, we're right at 90% oil and liquids by revenue. So even though we have natural gas, we're not significantly exposed to natural gas prices. These Wyoming properties fit right in with that. They're very long-lived. It gives us a new place, the Wyoming area, we think there's lots of assets that fit the MLP model and with our – we acquired iron creek or will acquire iron creek on April 1st and get the employees up there that we've been working with and we've been extremely pleased at how the integration is going so far on this acquisition and we think that with those employees, with this asset base, we should be able to grow in this area. Don't know that I would be looking for that next week but over time we think there's lots of assets that will fit the MLP model.

Yes, the other thing is we didn't have to pay for the tertiary barrels. If you're long-term positive on oil and gas prices which we are and that's our current view at Legacy is that we believe oil is going to be a good commodity to own over the long-term. It will keep pace with inflation and there will be good things happening there. The tertiary barrels will come into play some day. We didn't have to pay for them this acquisition. We didn’t pay up no one there. Not sure, if fact, I'd say you probably won't see Legacy go out and put in a tertiary flood but trading those assets for some current PDP that fit we think we'll be exploring those possibilities and at some point, we think that’s a possibility on several on this field. So feel very good about that acquisition. And we're worried about execution, worried is the wrong word. We're watching execution closely up there because it's a long way from home and it's a new area for us but we feel like we have the people in place to execute on that and we'll be watching that over the coming quarters and through time.

In January, we issued additional equity, raising about $95 million of net proceeds that was used to pay for this acquisition and pay down on our line of credit. When we go through our borrowing base, I expect that we'll be in the best liquidity position that we've ever been in as a company and positioned to grow and so that's exciting.

We also as we always do, we've taken out a significant amount of the commodity risk on this big acquisition by hedging five years of production or a significant portion of the production for five years on this acquisition. So we're especially at this last year when you look at the ups and downs we're still a big believer in managing our commodity exposure and as we've always said, we've got the long-term exposure, good or bad, but we try to take the short-term volatility out of it. So I feel really good about that.

The board has approved a $31 million capital budget for 2010. That's up from a $13 million or right at 14 that we spent last year. We've got some really good projects. Right now in oil, the rates of return look pretty good on just about all of the projects. Service costs are staying reasonable as of today, allowing you to generate a pretty nice rate of return on your projects.

We'll try to spend about a third of that in workovers and two-thirds of that in drilling and the more we can spend in workovers the better, but that's probably what you'll see come at the end of the year.

So all in all, I'd say with our liquidity position, the platform and the people we have, 2010 looks really good. And I'm – I was remembering this morning where we were a year ago and what the world looked like a year ago and I'm counting my blessings that we are where we are later.

We've weathered a pretty good storm and able to maintain distributions and I'm expecting good things. When I look around personally at my own portfolio and other things I invest in, we're trading right at a 10% yield. I would not be surprised to see us trade down through the year on a yield basis and wouldn't be surprised based on what I'm seeing today with some good acquisitions and good execution that you see us go back to increasing distributions and I think that will be positive on the unit price moving forward. So all in all, I feel very good about where we are set for a good 2010.

Steve, I'll turn it back to you to talk about any specific numbers and be happy to answer any questions after that.

Steve Pruett

Thank you, Cary. We're hosting – Legacy's hosting its banker meeting tomorrow in Houston. We're very encouraged by the expected turnout and the interest not only among our existing lenders but also prospective lenders.

Our borrowing base is scheduled to be redetermined on or about April 1, 2010. We expect an increase to our current borrowing base of $340 million due to the newly acquired Wyoming assets, associated commodity hedges and some additional smaller acquisitions.

We anticipate that a couple of new banks will join our bank group. Prior to the anticipated increase in our borrowing base we have over $70 million of borrowing capacity and we'll have well over $100 million after this redetermination, which positions us well to make additional acquisition.

We really appreciate the support our bank group provided us during the difficult first half of 2009. We have even more confidence today in the strength of our bank group and expect to expand that in the coming year.

We also want to recognize our unitholder’s patience in 2009 and thank those who stayed with us through the downturn. Investors who held our units throughout 2009 realized a 144% rate of return including distributions, reinvesting those distributions in Legacy units.

It's the consistency of these distributions and our unit price performance, coupled with the efforts of our underwriters, who enabled us to raise an aggregate $153 million of net proceeds for operating expenses into offerings consummated in September of 2009, and on January 15, 2010.

The proceeds from our January equity offering partially financed our Wyoming acquisition for a net purchase price of $125 million and yet we still have excellent liquidity from which to grow further in 2010.

We are pleased to report unaudited preliminary financial information extracted from our Form 10-K, which we will file tomorrow and we're also repeating information that was released yesterday afternoon in our earnings press release. We encourage you to read that for a more detailed disclosure. We encourage you to access our Form 10-K available in the EDGAR system tomorrow and our website.

I'll now make some comparisons of fourth quarter 2009 to the third quarter of 2009. Adjusted EBITDA increased 5% to $32.4 million from $30.8 million due to higher commodity prices in the period and increased production.

Distributable cash flow increased to $25.2 million from $23.3 million in Q3 or $0.72 per unit versus $0.74 per unit in the prior quarter, as indicated we had more units outstanding in Q4 than Q3. Coverage for Q4 was 1.38 times, 1.32 times for the year.

The reported net loss of $38.5 million equates to $1.10 per unit was negatively impacted by $47 million of unrealized losses on our commodity derivatives. That's to say the price of crude and natural gas or in our case particularly crude increased from September 30th to December 31, 2009, causing the large unrealized mark-to-market impact, pulling our earnings down to a loss.

We also have $5.2 million of impairment, primarily related to lower deal and gas prices and depletion, depreciation and amortization and accretion expense of $15.3 million. We incurred a net loss of $0.9 million in the third quarter, which included $5.7 million of unrealized losses and impairment of $2.4 million DD&A of $13.3 million.

While the unrealized loss was unfavorable we realized cash settlements on our commodity swaps and derivatives of $6.7 million in Q4, down from $10.1 million in Q3 when prices were lower. We were 73% hedged for the fourth quarter.

Now, shifting to an annual comparison of 2009 to that of 2008. Adjusted EBITDA increased 20% to $120 million from $99.8 million. Production increased 8% to 8,225 Boe’s per day from 7,582 Boe’s per day. Some of that was a result of having a full year of the acquisitions we made in 2008.

We were relatively light in our activity – acquisition activity in '09 due to both the Apollo process and limited deal flow for the industry as a whole. Having said that, we were able to sign a purchase agreement on our Wyoming acquisition, which is a record acquisition for us in December.

The net loss reported in 2009 was $92.8 million or a loss of $2.89 per unit, compared to net income of $158 million in 2008. The reason for the loss, again, were unrealized non-cash losses of $128 million recorded on our commodity derivatives in 2009, whereas in 2008 with the big drop in oil and gas prices at year end, we reported unrealized commodity derivative gains of $217 million in 2008.

Free reserves increased 20% in year end 2009 to 37.1 million barrels equivalent, compared to 30.8 million barrels at year end 2008 due to the impact of higher oil and natural gas prices and NGL prices. Excuse me, due to higher oil and natural gas liquids prices, partially offset by lower natural gas prices.

Additionally, we added reserves due to decreases in production costs year-over-year to $14.76 per Boe in 2009, which was a decrease from $17.37 per Boe in 2008. And we also booked additional PUDs and converted PUDs and probables to PDP through the year.

Year-end standardized measure of discounted future net cash flows increased 53% to $360 million, up from $235 million. This $125 million increase due to improved production performance, higher reserves and higher oil prices, offset by lower natural gas prices. And please recall the standardized measure does not take into account our oil and natural gas hedges. And we are also like the rest of the industry implementing the new rules of the SEC, using year average prices, first of month prices averaged and the arithmetic average unweighted. Had we used the old methodology, our standardized measure under previous accounting measures would have been $613 million, based on the higher year end prices.

Distributions attributable to the fourth quarter of 2009 were $0.52 per unit, paid in early February, maintaining the same level over the last certain quarters, despite a volatile price environment over the year. And again, it's the strength of our bank group, the strong hedge position that we had in place, the long-lived reserves and the wisdom of our board that enabled us to weather the storm and the performance of our employees over the first half of the year.

With that, I'm going to turn it over to our moderator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Leo Mariani from RBC.

Leo Mariani – RBC

Yeah. Good afternoon, here, guys.

Steve Pruett

Hello, Leo.

Leo Mariani – RBC

Obviously, you guys are spending a little bit more money here on the drill development program and in 2010. Just curious as to what you think the $31 million in CapEx can do to your production absent acquisitions? Do you expect that's enough money to sort of stabilize production if we kind of exclude Wyoming? Do you think you guys can grow? Just trying to get a sense of sort of organic growth here?

Steve Pruett

Leo. Absolutely we can create organic growth with that kind of a program. As a reference point, 2009 was a year of great volatility and transition. We were coming off of a peak of about 8553 barrels of oil equivalent per day in Q4 of '08, which was the results of $32 million, $32.8 million of CapEx that majority of which was drilling, a lot of Wolfberry wells which have high initial rates and with the drop in commodity prices, we basically let the rigs go and pulled in our horns. We weren't as active in workovers as we typically are in the first half of the year. And we declined and hit bottom around June and for the second quarter we averaged 8155, Boes per day, ending the year on the fourth quarter at 8250 Boes per day.

So even with the limited capital budget of $13.7 million for 2009, we were able to create organic growth off of our bottom and I think that's an indication of how productive we were with our capital. About $8 million of that $13.7 million were reactivations, major workovers, recompletions, restimulations which generate high returns on capital. And we expect to have a similar level of that type of activity in 2010 with the balance being drilling.

So if we're very confident, based on the productivity of that $13.7 million of capital based on our long history, that with $31 million which represents well over – a bit over 20% of our pro forma EBITDA, we'll be able to create mid to high single-digit organic growth.

Leo Mariani – RBC

Okay. Unrelated question here, looked like your cash G&A in the fourth quarter was up a fair bit, compared to some of the prior quarters during '09. Is that just kind of year-end bonuses or trying to get a sense of why it was up?

Steve Pruett

Well, we did have non exempt bonuses. We didn't have exempt bonuses, although we accrue for that. So there was – actually it's a very good comment. Bonuses did influence that increase but a lot of that has to do with professional service fees which are a big part of our cost structure. I would say between those two are the primary explanation. We didn't expand our payroll at all in the fourth quarter. We didn't have raises. That was primarily – the seasonal professional service fees along with the catch-up accrual for some bonuses.

Leo Mariani – RBC

Yeah. But we should kind of expect that to normalize a little bit back towards sort of third quarter '09 levels as we get into '10?

Steve Pruett

Well, I would say that, I would look at the annual numbers on a cash basis, which are about 412 per Boe and yes, we are fortunate to expand our cash flow base and production base with the Wyoming acquisition without incurring incremental G&A. The Wyoming team that we are acquiring and bringing into the fold will really be close pretty to G&A neutral. Obviously, we've got field employees but those are direct bill. So the $4 cash G&A range is not a bad steady state range for us. But as we get larger that should trend closer to 350.

Leo Mariani – RBC

All right. Thanks, guys.

Steve Pruett

Thank you, Leo.

Operator

Our next question comes from the line of Ethan Bellamy from Wunderlich Securities.

Ethan Bellamy – Wunderlich Securities

Hello, guys. I'm glad that after 2009 I'm still here talking to you and vice versa.

Cary Brown

Sure. We couldn't be happier without too, Ethan.

Ethan Bellamy – Wunderlich Securities

So couple questions for you. First, on Wyoming you've had that for a few months now. Any surprises there good or bad?

Cary Brown

We really took over operations March 1. So we've had it a couple days, not a couple months, so…

Ethan Bellamy – Wunderlich Securities

Okay.

Cary Brown

No, surprises good or bad. Give us some time to get a look at it and get it under belt and we'll be able to report how that's looking.

Ethan Bellamy – Wunderlich Securities

Okay.

Steve Pruett

Paul Horne, our EVP of Operations has been very encouraged by the number of workover and reactivation opportunities. So he's pretty positive that we can do some improvements to production as we typically do on top presentations front without the drill bit.

Ethan Bellamy – Wunderlich Securities

Okay. And do the Iron Creek guys have long-term contracts?

Cary Brown

They're going to be employees of Legacy.

Ethan Bellamy – Wunderlich Securities

Okay.

Steve Pruett

There are certainly some long-term incentives, so keep them pulling the sled in the same direction that we're pulling it. So we're excited about the quality of the team and the alignment of interest.

Ethan Bellamy – Wunderlich Securities

After including Wyoming, what's the weighted average decline rate for the entire portfolio of assets now?

Steve Pruett

It's a tough one. Dave Hartman, our Reserve Acquisitions Manager and Reserve Coordinator is sitting here and that's a – that's an interesting one. It's a function of price too because it has simply to truncate reserves that you run it on a strip one enter in the year-end price of $57 at the well had 57, 65, it's another answer. But filling it to be in a little bit…

Cary Brown

Somewhere between 0 and 10.

Steve Pruett

It’s in the range of – I'll narrow it a little bit. It's in the range of 5 to 6% steady state PDP decline. The PUDs when you model them into the mix, it ends up increasing the decline just because of the hyperbolic behavior of the Wolfberry. It's very, very another primary depression reservoir but steady state PDP on the order to five to six and you arise very insightful, the Wyoming assets are more like a 4% decline belted on to a 6% Permian type decline. And then throw it a little 4% decline from the Panhandle and you kind of have that 5% coming out of the mix master.

Ethan Bellamy – Wunderlich Securities

Okay. That's good. Remind me to that get you on the road instead of, Cary, who dials the number in a little bit more closely. Last question, I'll let other people get on. You guys are about 30% more conservative on your estimated recoveries for the Spraberry wells than Pioneer is. Can you point to anything technically or in terms of acreage or any difference in the PUDs that you guys have versus what they have that would explain that?

Cary Brown

I would say just off the top. They're the same wells. They're the same acreage. It's too early in the life of that play to know where these things are going to level out.

Steve Pruett

On the 40 acre basis. The 80s are mature.

Cary Brown

And we tend to – because of the way we look at our numbers and distributing cash. We tend to want to make sure we're at the P90 number that means – at those numbers, we're confident those are the right numbers. They could be a lot better than that, Pioneer could be right and we could be wrong. It's just too early to tell.

Steve Pruett

I think the some degree if you look at the management team that so well, Ethan, its two accountants and three petroleum engineers. So it's just been our nature. And that's kind of a flip remark but there's some truth to that. The other is that Dean Jared who works for Dave and Dave together have looked at up 3,000 wells and I would say their analysis is based on some extensive statistical studies and I'll hang my hat on that. But end of the day the rate of return is driven more by initial potential in the first two or three years of production and we really haven't analyzed our tight curve vis-a-vis anybody else. So I'll leave it at that.

Ethan Bellamy – Wunderlich Securities

All right. Thanks, gentlemen. Good luck.

Cary Brown

Thank you, Ethan.

Operator

Our next question comes from Michael Blum from Wells Fargo.

Steve Pruett

Hey, Michael.

Michael Blum – Wells Fargo

Just two questions, maybe one following-up a little bit on Ethan's question. Now, that you have kind of multiple areas in terms of your capital budget. Can you talk a little bit about where you'll be deploying that capital on a regional basis?

Steve Pruett

Well, it's a little early, Michael. We – in our modeling of the acquisition, we targeted, earmarked about $6 million of capital to Wyoming over the next 12 months. But we are opportunity driven and as you know, while our drilling program is laid out pretty well. Our recompletions and reactivations are most of a just in time inventory, they are find a good opportunity. We don't have permitting issues typically to deal with and we will execute those within a month to two months of identification. And those will preempt or supersede certain drilling projects. So it's a little early to know what the breakout is going to be but in general, I think there are, we think, and Paul, especially his team think there are fewer drilling opportunities in the Wyoming properties and frankly it's a more expensive drilling environment than there are in the Permian Basin and I would continue to expect us to see deploying the lion's share of a drilling capital in the Permian. But then Wellbore re-activations would be – that remains to be seen, what the level of that expenditure will be up in Wyoming. But we do see a lot of opportunity there.

Michael Blum – Wells Fargo

Okay. That's helpful.

Steve Pruett

If not all of our drilling will be in the Permian with possibly two wells up in west Texas and southeast New Mexico plus two wells up in the East (inaudible) unit and Municipal Nitrogen project in Oklahoma.

Michael Blum – Wells Fargo

Okay. Thanks for the detail. The other question is just more of a point of clarification, the Cary's opening comment. In terms of distribution growth, the possibility of distribution growth in 2010, is it fair to say it's somewhat dependent on how successful you are on consummating additional acquisitions this year rather than what you've already done to date?

Cary Brown

It's going to be based on execution in Wyoming and additional acquisitions and of course commodity. We've got some barrels that are open to commodity prices so we're watching that on a quarter-by-quarter basis. But I wouldn't expect dramatic increase in distributions. But I do think this year if we execute like I think we'll execute, we'll be back to increasing distributions. And we may not take the big jumps that we took early. We had some pretty big jumps. It may be more of a steady, slow growth. And we're talking about that internally. Where are we and trying to figure out what the balance between putting cash in the ground and paying out cash to shareholders and where the market goes with yield. All that plays into your model as to what the right answer is on distributions. So, we're always taking a pretty long-term look at it based on our ownership and making sure anything we do is sustainable. And so from that standpoint, I think you'll see us pretty cautious to just jump out there and pay it all out at once.

Steve Pruett

Michael, it's clear from the fourth quarter, it appears we have plenty of room to increase distributions with 1.38 times coverage and price that's -- at least oil prices that are stable and with a good hedge position. What works against that in the first quarter our coverage will be thin because we issued 4.89 million units in January and as you know, they earned the right to the distribution. So we paid out a higher distribution in the first quarter while – and this is important for everybody for calibrating their models, our Wyoming properties will only contribute from February 17th on. So roughly half of the quarter will gain the benefit of this new acquisition that's closing in on $20 million of annual cash flow contribution.

So, the first quarter coverage is impacted by the additional 4.9 million units, offset by half a quarter's contribution from the new acquisition that the equity offering helped fund. Second quarter, all of that will stabilize since we'll have those Wyoming properties for the fourth quarter but do expect thinner coverage in Q1. But when we make, when our Board makes distribution decisions and we make the recommendations, we are forward-looking in addition to backward looking and we would hope to be in a position as Cary said to make some modest increases during this year, even without additional acquisitions. Rest assured, though, we are active on the acquisition trail and the deal flow is good.

Michael Blum – Wells Fargo

Thank you very much.

Steve Pruett

Thank you, Michael.

Operator

(Operators Instructions) And our next question comes from Richard Dearnley from Longport Partners.

Richard Dearnley – Longport Partners

I'd like to combine the answer to the last question with the answer to the first question about organic growth. And the first question is the ability to grow production on a per share basis?

Steve Pruett

What was our ability to grow production on a per share basis?

Richard Dearnley – Longport Partners

Yes.

Steve Pruett

We have a chart in our investor presentation we'll be using again tomorrow with our banks that shows production per unit. And when we're particularly levered as we were in the fourth quarter of '08 and were very aggressive with the drill bit, we hit a peak of 101 Boe's per day per unit, that's in thousands. So it's 0.1 barrels per day per unit. And we've been in the 95 and 96 range since then and, frankly, we have been aggressive in issuing equity to prefund our acquisitions and living through high leverage of early 2009.

We've been wanting to be preemptive and loading our balance sheet for opportunistic acquisitions. We just shut down equity issuance. That's the best way to grow because we are growing production in absolute sense. We would expect that utilizing our revolving credit facility over the next several acquisitions exclusively, will put us back on a nice growth trend. We were 0.94 barrels in Q3. We're 0.95 in Q4 and with recreating organic growth and then once we have the Wyoming acquisition loaded in, we're going to see some nice re-establishment of our production per unit. If you go all the way back to our IPO in '07, we were 52 or 0.52 barrels per day per unit and so we've doubled that over time and that's a pretty good record. We've got a 24% compounded annual growth rate in production per unit. And I'm actually off a digit. It's hard for me to imagine. It's 0.05 barrels per unit but anyway, to answer your question. And we anticipate resuming that growth as we incorporate the Wyoming acquisition into our unit holder base.

Richard Dearnley – Longport Partners

Is there a formula as to the or I'm sure there's some working formula about the price paid for an acquisition and the price to either book or cash flow or whatever of the unit that makes an acquisition accretive.

Steve Pruett

Well, there is, but that's the result of the valuation techniques are very consistent and that is we project the production performance of every producing well. We apply the cost to operate it. If we identify a project, we input the cost of exploiting that project and the timing and then the resulting production flow and reserves and cost. And apply a price forecast to that which embeds the hedges that we think we can put in along with our long-term oil and natural gas price outlook and all of that results in a discounted cash flow analysis and it's up to the management team and the Board to determine what's the appropriate discount rate for the type of reserves that we're evaluating.

So step one, that discounted rate of return needs to exceed our cost of capital. Number two, then we boil out or I should say back out or calculate the metrics associated with that. An important metric to your point is cash flow, cash flow multiple. And we do then load that acquisition model that's done by really coordinated by Dave Hartman who's here, our acquisitions manager but then we incorporate that into a corporate model that looks at the financial structure of the Company.

Number one, you value the asset without consideration of the financing and that's a detailed ground up well by well evaluation. Number two, we do look at it from a corporate standpoint to calculate accretion per unit and calculate and embed the type of financing we're going to have to do, not just for that discrete acquisition, because it would be unfair to burden one acquisition versus another.

Cary Brown

With the next one or whatever, yes.

Steve Pruett

Exactly. But we do look at accretion and we do find there is a, and I won't say what it is but there is a point where paying a certain cash flow multiple is no longer accretive so we do have a sense in our head given our type of high PDP acquisitions where we see gee, X times cash flow is just not accretive, we'll pass. Or bless you for getting it but that would not have been accretive in our model. And, we'll pass.

Cary Brown

The environment changes every day because as we're looking at cash flows, if you're running an $80 price and that's what you can hedge that day, you may pay a little bit more for that barrel. If the price goes down to $40, you're going to pay a lot less for that barrel. So we don't dwell a lot on how many barrels per unit we're producing. We look at those numbers, but we're really looking at how much cash per unit we're producing which is what I told you. We went from a $1.80 something to $2.74 from '08 to '09. So we feel real good about the amount of cash we're generating per unit. It tends to be the number we really hang our hat on.

Richard Dearnley – Longport Partners

Right. Thank you. Good explanation.

Steve Pruett

You're welcome. Sorry, that was a little detailed.

Richard Dearnley – Longport Partners

No, it needed to be.

Steve Pruett

Okay.

Operator

Our next question is a follow-up from Ethan Bellamy.

Ethan Bellamy – Wunderlich Securities

Thanks, guys. Just one follow-up. The political environment in New Mexico appears to be thawing a bit. Can you tell us what you're seeing there and how that might change your development plans and if there were to be significant declines in cost structure and drilling cost there, would that change your reserves in any way?

Cary Brown

Kyle is speaking to me. He's had his finger on that pulse more than we have. Ethan, it's our hope that things are going to change. Kyle, why don't you go ahead and take that?

Kyle McGaw

We've heard of some positive gains politically. There's nothing that's changed regulatory wise. It's still a very difficult regulatory environment. You're still working with closed loop systems. You're still dealing with moratoriums on shut-in wells, the limits you on the number of those you can have, the fact that they stay on you to get wells plugged. So we have hopes that Ethan it will turn in the near future but at this point we're still under the same environment.

Cary Brown

Ethan, also resurrect from our recycle bin, the article or the surveys of the Midland Reporter Telegram took of operators including Legacy about their plans in New Mexico. Just about every operator said that given the regulatory environment, they're drilling fewer wells. In fact, we have no wells budgeted to be drilled in New Mexico this year and that's not to say we won't. There's a couple. There's a joint venture opportunity that may cause us to participate in some wells. But the bias of drilling in the Texas side of the Permian is very great among our industry and again, as Kyle said, we're hoping the pendulum is going to swing on the elections that are coming up in November and get things rebalanced a bit.

Because the state is suffering a budget crisis and they are recognizing their policies have moved a lot of rigs out of New Mexico and into Texas.

Kyle McGaw

So that means, Ethan, we – from the acquisition front, the harder it is to work in New Mexico, the better it is for us. Because we're there, we're going to be there, we're going to figure it out. And our model is not heavily dependent upon drilling. So, producing at those PDP barrels we think we know how to do really well. And we see quite a few opportunities of guys that are just tired of doing business in New Mexico.

Ethan Bellamy – Wunderlich Securities

Okay. That's helpful. Just one more that I thought of which is the arena resources had a tough quarter this week with some liquids that were shut in because they didn't have appropriate gas processing capacity when a DCP plant went down. Are there any infrastructure constraints anywhere across the system that give you pause or any specific asset that we should focus on that might result in some similar production curtailment for you guys?

Steve Pruett

You had it, Ethan. You hit the nail on the head. Fortunately, we're not a one field company or virtually one field company like Arena but we had DCP curtailments and industry curtailments or I should say DCP system issues in the Texas Panhandle in December along with down time related to severe weather, snow, ice that caused power outages. So that impacted our fourth quarter performance. It's just – our issue is not that the plant has a problem. The gathering system is very old, it's on a vacuum.

So, It puts the system under a lot of stress and pulls in a lot of atmospheric and oxygen and creates problem. And they're just having a hard time keeping up. We have suffered weather related and system related problems. We do have one more than gatherer in the Panhandle but generally those gathering systems are localized or county wise. And it's not easy just to flip a switch and move to another gather, although it is possible with some expenditures but nothing so severe or concentrated as what Arena suffered.

Ethan Bellamy – Wunderlich Securities

How many barrels would that have been that you would have otherwise produced?

Steve Pruett

Well, I know the monthly impact in December was about – what was it, about 150 boes per day, I believe in total. But that's just one month.

Ethan Bellamy – Wunderlich Securities

Okay. Thanks. That's helpful.

Steve Pruett

You bet.

Operator

I'm showing no further questions in the queue, sir.

Steve Pruett

Very good. No further questions.

Cary Brown

Well, thanks, guys, and appreciate all of our unit holders who are supporting us and we hope you're pleased with our performance. We're pleased with what we see and we're looking forward to a good 2010. And we'll be talking on the acquisition trail and see if we can't spend some of this liquidity. Thanks.

Steve Pruett

To the analysts, thank for your continued following us and interest and to the investors, thanks for continuing to show interest and to hold our units. And we're happy to be unit holders as well. Good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.

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