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Legacy Reserves LP (NASDAQ:LGCY)

Q1 2010 Earnings Call

May 6, 2010 9:30 AM ET

Executives

Cary Brown – Chairman and CEO

Steve Pruett – President and CFO

Kyle McGraw – EVP, Business Development and Land

Analysts

Kevin Smith – Raymond James

TJ Schultz – RBC Capital

Ethan Bellamy – Wunderlich Investments

Richard Roy – Citigroup

Michael Blum – Wells Fargo

Todd Blue – Private Investor

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Legacy Reserves First Quarter Results Conference Call. Your speakers for today are Cary Brown, Chairman and Chief Executive Officer and Steve Pruett, President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the call there will be a question-and-answer session and as a reminder this call is being recorded today, May 6, 2010.

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

Steve Pruett

Welcome to Legacy Reserves LP’s first quarter earnings call. Thank you for joining us this morning. 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 as defined by securities laws.

These statements reflect our current views with regard to future events and are subject to various risk, 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 LP’s Form 10-Q for the quarter ended March 31, 2010, which will be released on or about May 7th, and subsequent reports as filed with the Securities and Exchange Commission. We also refer you to our annual report filed on Form 10-K that’s available on our website.

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 Cary Brown, Legacy’s Chairman, Chief Executive Officer and Co-Founder.

Cary Brown

Thanks, Steve. Thanks to our friends and unitholders for joining us today. We’ve had a great start to 2010 with over $154 million of oil and gas properties either acquired or under contact.

In the first quarter we issued 4.87 million units receiving net proceeds of that $95.4 million which we used to fund our largest acquisition today that would be Wyoming purchase of properties for $125 million closed on February 17th. We’ve been successful in opening our Cody office and I got some great people up there, we’re really proud of what they’re doing and feel like that’s off to a good start.

We are integrating the assets with these acquisitions although we only have a portion of the first quarter results are that we’ve increased production to 8,767 barrels a day up from 8,250 50 barrels a day in the prior quarter.

Very pleased to report, first quarter we generated $0.55 of distributable cash flow covering our $0.52 distribution 1.06 times. Even as with the increase in CapEx, we’ve decided to double our CapEx little over double going to $31 million from $13 million this year.

Rather than increased distributions and felt like increasing CapEx, we’ve got great projects to drill, it’s a good time to be drilling oil projects, most of the wells we are drilling are oil projects. So we are very pleased with what we’re doing with CapEx and that should lead to move in the right direction. We even added a few hedges recently not the first quarter but just this week, Steve will talk about that. We were able to get those off at pretty attractive prices.

So all in all, I feel great about where we are and where we are headed. Balance sheet is in good shape with less than two times EBITDA drawn, we got over $140 million of undrawn capacity to make acquisitions. So we can do quite a bit of acquisition even without issuing new equity.

We got solid protections with our hedges in place and because of the contango or the increasing nature of our hedged prices should see increase in EBITDA even without additional acquisitions.

Although, we expect to continue to make acquisitions and if we continue to make acquisitions and continue to execute on our current asset base, I think you’ll see us start looking at increasing distributions here in the next few quarters – no, that will be next quarter or even this year, but I would expect potentially later this year with some acquisitions that we’d be headed towards increasing distributions.

With that, I’ll turn it over to Steve.

Steve Pruett

Thank you, Cary. On March 31st, our bank group increased our borrowing base to $410 million from $340 million, which reflects the impact of the Wyoming acquisition and the conversion of PUDs and probables to PDP status.

In addition to the increased borrowing base, we added two new banks to our syndicate, which now has 11 banks, and we’re very grateful to our banks for their support. And I will say that our banks are once again enjoying, having outstandings and are very supportive of our business plan.

We’re borrowing money on a marginal basis at 3% today. We expect that’s going to drop overtime, which is why we have in place $264 million of LIBOR swaps at an average interest of about 3.05%.

We have about $264 million of debt drawn today, which means we have $146 million of availability under our credit facility.

We’re very excited about our deal flow and expect to close additional acquisitions during the balance of 2010. As Cary mentioned, we’re off to a record pace this year, by the end of May, we’ll have closed over $154 million of acquisitions. So we’re very pleased with the efforts of our acquisitions team, and Kyle McGraw is here with us today.

As we disclosed on Form 8-K filed on Monday morning, May 3, 2010, the SEC, Securities and Exchange Commission has requested that Legacy voluntarily produce specified documents and information in connection with the April 3, 2009 proposal from Apollo Management VII, LP to acquire all the outstanding Legacy units. Legacy intends to fully cooperate with the SEC’s request.

In its letter the SEC states that it is not determined that this matter involve violations of securities laws and that it should not be taken as a reflection up on any person, company or security. That’s a quote from the inquiry letter or the request. This is not an unusual request according to our attorneys given the nature of the state, private or any M&A process.

Now we are pleased to report unaudited financial information extracted from Form 10-Q which we will file tomorrow morning. I’ll make comparisons of the first quarter 2010 to the fourth quarter of 2009 results.

This information is contained in our earnings release that was released to the public last night for the fourth quarter. For more detailed disclosure, we encourage you to access Form 10-Q which will be available on the EDGAR system and on our website tomorrow, Friday, May 7th.

I’ll now talk about the highlights of the first quarter compared to the fourth quarter. Production increased 6% to 8,767 barrels of oil equivalent per day from 8,250 barrels of oil equivalent per day due to a combination of acquisitions and development projects, partially offset by weather related power outages and third-party gathering system downtime in Texas Panhandle.

I might remind you that we had 41 days of contribution from our Wyoming acquisition, so in the second quarter we’ll have a full benefit of that acquisition that will improve our production materially in addition to two other acquisitions that are closing this month, smaller acquisitions.

Oil and natural gas liquids and natural gas sales were almost $50 million, up 12% from $44.5 million in the fourth quarter, due primarily to increased production and secondarily to higher realized prices.

Combined realized prices were $62.95 per Boe in the first quarter, up 7% from $58.59 in the fourth quarter. Realized oil prices were just shy of $75 a barrel, compared to $72.91 per barrel in Q4.

While average realized natural gas prices increased to $6.72 per Mcf in the first quarter from $5.80 in the fourth quarter. So I wish we were still getting $6.72 per Mcf. Our gas prices are much lower now but realize that gas represents less than 15% of our revenue stream. We are an oil based company.

Production expenses increased largely due to the additional producing properties around our portfolio increased to $14.2 million or $17.94 per Boe, up from $11.6 million of $15.33 per Boe, that’s due to two factors, we are seeing cost escalation in our business related to higher oil prices. And secondarily, the Wyoming properties because of the large volumes of water that we move there have higher average lifting cost in our Permian portfolio.

General and administrative costs increased to $4.8 million or $6.03 per barrel that’s up from $4.2 million or $5.58 per barrel in the fourth quarter due primarily to our seasonal professional services related to year-end audit, tax, legal and reserve report preparation.

Non-cash compensation expense which is tied to our Long Term Incentive Program for our employees contributed another $1 million in the first quarter and $1 million in the fourth quarter, again that’s related to rising unit price and therefore the cost and value of our Long Term Incentive Program goes up quarter-over-quarter. Excluding those effects the cash may, would have been $4.73 in the first quarter compared to the $4.23 in the fourth quarter.

Our commodity hedges continue to work well for the company. We realized $4.8 million of cash settlements in the quarter that was down from $6.7 million in the fourth quarter. Our production was 80% hedged in the first quarter, compared to 73% in the fourth quarter. Going forward, our hedges were about 73% hedged on oil and natural gas and natural gas liquids for the balance of the year.

In the first quarter, we reported an unrealized gain of $7.1 million on our commodity derivatives, compared to an unrealized loss of $47.1 million in the fourth quarter. The decline in natural gas prices quarter-over-quarter contributed to that unrealized gain.

Adjusted EBITDA increased to $32.7 million, up from $32.4 in the prior quarter due to increased production, higher commodity prices, offset partially by higher production costs.

Development capital expenditures increased to $5.2 million in the quarter, up from $3.3 million in the fourth quarter as we commenced our 2010 drilling program. At the end of the quarter, we contracted and initiated drilling with two rigs for primarily shallow well drilling. We’ll have benefit from that drilling later in this quarter as we completed the wells in the second quarter.

Distributable cash flow, that’s what’s available to pay to our unitholders after deducting capital development and that’s our full development capital expenditure and interest, and cash settlements on our employee LTIP awards. That distributable cash flow was $22.1 million in the quarter, down from $25.2 million as we increased our development CapEx and we settled $1.7 million of employee Long Term Incentives Awards during the first quarter.

That translates into $0.55 per unit distributable cash flow, down from $0.63 per unit in the fourth quarter. And again, that’s because of the higher -- increased unit count as a result of our January equity offering where we issued 4.9 million units. So we refinanced our Wyoming acquisition. We paid distributions on a larger unit count which is approximately 40.07 million units, while we realized 41 days of benefit from that Wyoming acquisition that the equity offering funded.

So we expect our coverage to be restored to normal level for the second quarter and for the balance of the year, recognizing that we’re increasing our development program that should create organic growth this year compared to last year.

Net income was $10.2 million in the first quarter, or $0.26 per unit. That was favorably impacted by $7.1 million of the unrealized gains on our commodity derivatives portfolio and that was more than offset by $7.9 million of impairment related to low natural gas prices at the end of the quarter.

We, as Cary mentioned, we implemented new hedges – oil hedges, WTI hedges on Monday, this past Monday. We hedged 500 barrels a day at $92.85 per barrel over the period of July 2010 through June 2011.

And we also entered into three-way collars, it’s the first time that Legacy has done this in the out years. And these hedges were both for acquisitions and for adding and extending our hedge portfolio.

Over the period of July 2013 through June 2014, we have a costless collar acting between $85 per barrel and $124 per barrel, so if prices settle in between that range, no money changes hands. If the price of oil was above $124, we will pay a counterparty for that overage, so for example if oil was $130, we’ll pay the counterparty $6 per barrel.

Below $85 per barrel however we’ll realize $25 margin or the gap between what’s called the short put at $60 per barrel and the long put at $85 per barrel. So as an example, if the price of oil drops to or settles at $50 a barrel out in 2013, we would receive from our counterparty $75 per barrel on that commodity derivative.

In July 2014 to June 15, our collar range was $85 to $130 per barrel where there is no cash settlement between those two and again the short put of $60 per barrel at the same way on the downtime protection as the prior year’s hedge. So quite pleased with those hedges and look for us to do more creative hedging down the road.

I would remind our unitholders and thank you for joining us this morning, so please vote your proxies. This is the first year that the SEC has implemented a new rule that requires or does not allow brokers to do designated voting. So every vote counts.

We’re marching towards our threshold of over 50% but we do need every unitholder to vote their proxies either through a web based service if that’s permitted to your broker, phone calls or as a last resort mailing them since it’s getting close to our annual meeting which will be held in Midland at 10:30 AM on May 12th, that’s next Wednesday at the Midland Petroleum Club, Downtown on Wall Street. We would love to have any of you that can come to Midland to join us.

And also a reminder, pay day for our investors is coming up on May 14. We are paying $0.52 per unit to unitholders of record on May 3rd.

With that, we would like to open the floor up for questions. Again, we want to thank you for your continued support, your confidence in our business plan and our employees and please review our earnings release in full. We’ve always encouraged you to look at our EBITDA and distributable cash flow reconciliation on the back page of our earnings release to fully understand the reconciliation of these non-GAAP financial measures to net income.

At this time, let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Kevin Smith from Raymond James.

Kevin Smith – Raymond James

Good morning, gentlemen, and congratulations on your strong start to 2010.

Cary Brown

Thank you.

Kevin Smith – Raymond James

Just a few questions. Can you talk about the other $20 million roughly in acquisitions you signed? And I assume some of it closed, so excluding the Permian and the Wyoming transaction?

Cary Brown

Yeah. We’ll let Kyle McGraw answer that for us.

Kyle McGraw

Well, we’ve had a number of local transactions that we dealt with. Properties in Martin County, oil producing properties, Martin and also down your Big Lake in Reagan County that came from an acquaintance and longtime friend, and someone who wanted to actually own Legacy units also to cash in units.

We’ve also had some acquisitions where we’ve bought interest owners out of existing properties operated by Legacy. That’s always a very good project because it’s easy to bring in the integration part. That’s very easy, obviously.

And then we – would include in our number would be our just in closing tomorrow, we’ve got an acquisition from Brigham Exploration. That’s been publicly announced. We close on it tomorrow, 18 to 20 operated producers in the Permian with about 50 to 60 non-operated wells also.

So that’s kind of the sampling and some of the deals we’ve done. Again, the Brigham is in the $14 million range and the others are in the $8 to $9 to $10 million, those kinds that we’ve been bolting on for some time.

Kevin Smith – Raymond James

Okay. Great.

Kyle McGraw

We also had a purchase and sale agreement in place right now that has been announced with Fairway Resources on some Southeast Mexico properties that they have that also would be 30, 40 wells there and it’s a, in the $10 million range.

Steve Pruett

All very oily acquisitions and right up our fairway.

Cary Brown

Look quite a bit like what we currently had.

Kevin Smith – Raymond James

Got you. Have you seen anything attractive in Wyoming? I mean, I know it’s early and I guess the other question is where you think you are in the integration process of those properties?

Cary Brown

It’s, I’ve been encouraged by what we’ve seen up there. We look at – I use the number we look at 10 deals to buy one, so looking at deals doesn’t necessarily mean we’re going to buy anything else up there but we’ve got some deals to look at and we sure like the profile of what we’re seeing on the assets that we purchased and real pleased with the team that we’ve got up there, I think we’re going to have no reason right now to believe we’re going to have anything but continued success up there.

Kevin Smith – Raymond James

Great. Sounds good. And one last question, on operating cost. I know you mentioned first quarter kind of ticked up because you had the Wyoming’s properties there for only 41 days. Should we expect a decent step up again in the second quarter or do you think the kind of Q1 run rate is fairly good one for at least operating expense?

Steve Pruett

That’s a good question, Kevin. That almost amounts to the guidance but when we – going forward if we see oil prices hang in this – what was a few days ago, $87 range, I think we’re going to see a little upward pressure on production cost.

However if it pulls back into the 70s, I think we will see where we are and maybe even a little mitigation of it. Our costs are amazingly elastic to oil and gas prices, a little of a lag effect so it all comes down to what oil and gas prices do.

The rig count in the Permian as you know is very strong that has a secondary effect on access to well service rigs, I mean access isn’t a problem today but certainly the costs are an issue. And to the extent there’s more completions going on, we’re going to see a little pressure in that area of the business. But the most pressure we’ve seen has been in pump pressure, pumping services both supports the mining and for hydraulic fracturing and acidizing that’s normally associated with drilling. But we do have secondary effects on our workovers and on our other lifting cost.

Cary Brown

I would, personally I’d be surprised that we saw another step like we saw this last quarter, it may go up a little but it’s, I think it will probably hold flat or go up just a little.

Kevin Smith – Raymond James

Fine, thank you.

Steve Pruett

We still have pretty level of workover activity in the first quarter, Kevin, we had a number of major workovers related to casing squeezes, so we did have an elevated level of lower care that we don’t expect to have this quarter.

Kevin Smith – Raymond James

Thank you very much.

Steve Pruett

Thank you, Kevin.

Operator

Thank you. Our next question comes from the line of TJ Schultz from RBC Capital.

TJ Schultz – RBC Capital

Good morning, guys.

Steve Pruett

Hi. How is Austin?

TJ Schultz – RBC Capital

Austin is great, as always.

Steve Pruett

All right.

TJ Schultz – RBC Capital

I think I heard you guys mention that you would possibly look to increase distributions maybe later in the year depending on acquisitions. Just trying to get a feel for what kind of distribution coverage you guys are comfortable with and would like to keep kind of connection with potentially increasing that?

Cary Brown

Yeah. We look at distributions several different ways. We like the one-to-one-to-one feed coverage depending on where our balance sheet was and where we’re in the cycle of issuing equity. So you’ve got to look at that number today with as much dropout as we have.

The real question for us on distribution is you pay out the distribution and you go drill some more wells. And right now, we’re saying, we think it’s better to go invest and we’ve got some real nice rates return on it, today’s oil prices.

So, it’s not so much can we increase distribution, we’re going to – we have CapEx down, we could increase distributions pretty nicely today, but we don’t think that’s in the long-term best interest of Legacy.

So, I’d say if you’re asking, hey, what kind of coverage do you want, then 1-1-1-2 feels pretty good, depending on where we are in the cycle of distributing equity and what our balance sheet looks like. But the big issue is how much CapEx do we want to spend and how fast do we want to develop our inventory PUDS.

Steve Pruett

One unique thing about Legacy, TJ, is that next year our average hedge price ticks up to about $88 per barrel. We have some $140 swaps and some $120 collars that help us pick up. And the $60 hedges we’ve put in place in our formation in 2005 roll off this year, I think, you know.

And so, that’s going to help our coverage. Our coverage might be a little bit light this year relative to last year’s 1.3 times. But the outlook for 2011, without any additional acquisitions, provides some very strong coverage due to the growth profile we’re going to see out at this year’s capital program and the improvement in our hedge position for next year for oil, and natural hedge position ticks up as well next year.

So, this year, if we do distribution increases. We’re going to do them very incrementally and modestly as we have done in the past and grow into that coverage. And as Cary said, because of the very attractive economics of oil development projects, we’re going to push some organic growth this year that we didn’t have last year. So, it’s a balancing act.

TJ Schultz – RBC Capital

Okay. Great.

Steve Pruett

And obvious, to increase distribution in our models.

TJ Schultz – RBC Capital

Okay. Make sense. Just following up on some of the acquisition activity. Obviously, you listed a number of bolt-ons – good bolt-ons in the Permian. Permian seeing a lot of industry interest right now, just curious if that’s affecting some of these bolt-on opportunities and what the market looks like there right now.

Cary Brown

We’re real pleased with what we’re seeing in the market. I think we’ve get a pricing level that sellers are comfortable selling at. Right now oil in the Permian is hot, so you’re not getting any bargains, you will not find anybody in distress but needs to tell you happen to go out and buy things that fit.

So, we found good values in these smaller acquisitions – the bigger acquisitions that we’ve seen, for us don’t move the needle value-wise like we would want them to go out and pay the levels if they could get them.

So, and that’s a cycles, we’re going through cycles where gas is in and oil is out, and we’ll go through a cycle where oil is in and gas is out. Right now, we’re in one of those oil is in and gas is out, so the oil assets are going little more expensively.

But we’ve always had competition its just part of it and I don’t think the landscape has dramatically changed. It’s just a hard business you’ve got to knock on lock the doors and work pretty hard to find the ones that fit us.

TJ Schultz – RBC Capital

Okay. Just one last one more housekeeping. You had some downtime weather related and power outages and third-party system downtime in first quarter can you try to quantify that a little bit?

Steve Pruett

We thought at least in the – with regard to the Panhandle there was some modest effects in the Permian was about 150 Boe’s per day is what I recall, Paul is not here today but that’s what our prior discussion was.

And again it’s a consequence of just a very harsh winter in the Panhandle lot of snow, ice pulled down a lot of power lines and then we’ve just got a particular data and companies got an old system and they’re just not maintaining at the same the way that they had in the past. So, I think we – the industry has gotten their attention hopefully it will be little bit more response in keeping align.

Some of them was upgrades of some compression and others just the routine replacement of old lines on a vacuum system. So, as you know, we are clearly sucking the gas out of the ground in the Texas, Panhandle asset reservoirs but it’s very deplete. That’s a unique challenge for gas gathers in that area but it’s a rewarding one because the gas is still very rich.

TJ Schultz – RBC Capital

Okay. Great. Thanks guys.

Steve Pruett

Thanks, TJ.

Operator

Thank you. Our next question comes from the line of Ethan Bellamy from Wunderlich Investments.

Ethan Bellamy – Wunderlich Investments

Good morning, gentlemen.

Cary Brown

Good morning, Ethan. It’s a bit earlier there than it is here.

Ethan Bellamy – Wunderlich Investments

It is I hope I don’t stay on the – like I haven’t had my coffee yet. And are you going to look at Encore Energy Partners?

Cary Brown

You know, they are great fit for us Ethan, so I’d just say is that’s what I know, is they’re great fit for us.

Ethan Bellamy – Wunderlich Investments

Okay. In terms of the extra CapEx. Can you ballpark for us what you would expect that to do in terms of the percentage increase on base production?

Steve Pruett

Oh my Ethan, you’re asking us for guidance. I would say, as we’ve done in the past and we’re investing close to 25% of EBITDA but it’s a little bit less. We ought to get to mid to high single-digit organic growth and I would hope that we will beat that.

And so its just a question of the timing of when those wells are drilled and completed, and whether they contribute to the fourth quarter, we think first or I would say first ourselves in a few cases. By drilling late in the year and not getting wells online for the New Year, and so you really don’t see that contribution until Q1 of the subsequent year and we may have a bit of that effect as well.

But it’s a great inventory and we’re juggling and high-grading all the time. We approved the project last week for a Delaware well that wasn’t even in our inventory. It wasn’t in my mental inventory and I hadn’t seen it before. And spudding that in early June and we’ve got four Wolfberry wells that were spudding in July with one rig, just back-to-back programs.

So, we expect to – we’ve gotten a little bit ahead of the curve with two rigs running this quarter for the shallow wells that we mentioned in the Farmer Field and West Jordan Unit had some good preliminary results in West Jordan. The Farmer is still pending.

And then, we’ll get a nice kick from the Wolfberry drilling. As you know, those wells typically come on at pretty high rates. Hopefully, we’ll be pushing upper single-digit organic growth with that program.

Ethan Bellamy – Wunderlich Investments

Okay. That’s helpful. With respect to the CapEx increase and the CapEx for the rest of the year, is that going to be lumpy or should we model that equal weighted for the balance of the year?

Cary Brown

It’s going to be a little heavier weighted towards third quarter if it all planned out. But everyday it changes, Ethan. The timing of CapEx is one of the more difficult things we have because when we think all of the rigs are available, all of a sudden everybody wants to drill and it’s tougher to get rigs.

We’re, I mean, you’re sliding 30, 45 days here or there, so it might actually look like the third quarter is a little heavier than the fourth quarter. That may end up being the fourth quarter is heavier than the third quarter. But we’re not planning on it being way lumpy but it will be a little bit lumpy.

Steve Pruett

Cary, that’s absolutely right, because of the Wolfberry rig which are most expensive wells in our program, their 81% average interest at about one – a little shy of $1.5 million, we will spend a little more than we did in the first quarter and in the second quarter, but then in each of the third and fourth quarters its going to be in the $10 million range.

Ethan Bellamy – Wunderlich Investments

Okay. Just two more questions, with respect to the acquisitions, where are you on a natural decline rate for the asset portfolio with all of the pro forma for everything you’ve got paid for PFA on now?

Steve Pruett

You mean, what are the – what’s the P -- declines on the $154 million of acquisitions?

Ethan Bellamy – Wunderlich Investments

Yeah. Everything, whole portfolio.

Cary Brown

All in, all done? If you take that Permian decline and that’s going to be 7%, 8%, I’d be surprised if our company was much different than the overall market.

Ethan Bellamy – Wunderlich Investments

Okay. And last question on – with – again, pro forma for everything in the pipeline, where is the oil price at which you are breakeven on your DCF coverage?

Cary Brown

The issue there, Ethan, is we’re talking five years out, we’re talking six months out. In the next three years it’s hard to get to the breakeven because we get such flexibility in CapEx. If oil – you saw we did last year, when oil was down we cut CapEx we still have a maintained production so it is a function of how much CapEx do we want to do.

We’ve got very – lot of leverage we can pull to stay healthy financially with the balance sheet where we are I don’t – we haven’t even run the numbers, okay, how bad we will have to get. We’re so hedged in 2011, 2010 that that number has got to be way, way down.

Ethan Bellamy – Wunderlich Investments

Okay. I guess that will have to do. Thank you.

Cary Brown

All right, Ethan.

Steve Pruett

As you know, as everyone knows we don’t provide guidance so it’s a, I know that makes your job is more difficult. But the reason we don’t provide guidance other than some hinting about distribution is that it requires the follow-up to update guidance every quarter, every time anything changes that’s a burden that we don’t want to put on the company and frankly don’t want to put on you all to have your update guidance very frequently. And we do like and you all can critique us for this, but we feel like that’s worked so far in our three plus year history of being public.

Operator

Thank you. Our next question comes from the line of Richard Roy from Citigroup.

Richard Roy – Citigroup

Good morning.

Cary Brown

Good morning, Richard.

Richard Roy – Citigroup

Most of my questions have been answered but just a few follow-up. On the acquisition front, I mean, you’ve mentioned that oil is hot, Permian is hot, I mean would you contemplate looking a bit at gas acquisitions or looking at another area of – do you spend into another core area?

Steve Pruett

We do know that there is some big transactions on the horizon, big companies that everyone knows about are going to be bringing properties to market. And I think there’s going to be a higher gas mix in some of those. We recently looked at a big market in package that had a pretty hard percentage gas.

So we still consider all our sweet spot then yet – but yeah we’re always looking at cash flow, looking – we still stay regionally disciplined, I think. And so – but yeah, we’re seeing -- seem to be seeing plenty of gas deals also.

Richard Roy – Citigroup

Great. And as it relates to the SEC inquiry, do you have any idea how long other process is going to take?

Steve Pruett

Okay. Richard, based on our historical experience on filing, it could be easily a year. Based on what our attorneys are telling us, well, we were given two weeks to respond and fortunately, we’ve got most of the material together and we’ll get it to them.

But I expect they’ll go silent for some period of time. They may follow-up with some additional questions and then they will go silent. And they’re going – it’s a lot of material to go through and they’ve got, pardon the expression, bigger fish to fry than this situation, I’m sure.

And it could be easily be a year. So, we do not expect a lot of updates from Legacy and there aren’t any, I don’t assume there is something that we know that you don’t know. As we find out more information, we’ll keep the public apprized of any developments. But we expect it will be a very slow process given the burdens on the SEC these days.

Cary Brown

And on this insight of trading issues, they’re really – they’re looking for people who traded in our stock. It really has very little to do with the company. The company didn’t have much, I’m not aware of any activity. The officers and directors haven’t been traded in the stock. I don’t believe.

So, I don’t know what the enquiry is about. I know Legacy is going to do everything it can to comply. We don’t think that we have been a part of or know anybody that’s the part of feel on inside information.

So, I fully expect that this is just part of the process the SEC goes through. It’s kind of a unique in that – when our stock price was down it’s when Apollo came along. When the stock price is down, you get lots of people who know you, who say, hey there, that company is way under valued and they were buying.

So, the circumstances can make things look bad but I think you’re going to find that there is nothing in the allegations and but we will do everything we can to comply and make sure that the SEC does their job. We appreciate them that keeping a level playing field is what keeps everybody buying stocks and bonds and so we’re happy to participate in the process to make sure it is a level playing filed.

Richard Roy – Citigroup

Great. And just one last housekeeping question. Can you say what your production run rate was at the end of the quarter?

Cary Brown

I think we’ve announced that.

Richard Roy – Citigroup

Okay.

Cary Brown

So we – no.

Richard Roy – Citigroup

Okay. Great. Thank you very much.

Steve Pruett

Thank you, Richard. You can do some math just kind of little algebra and so solve for it, as you think about Wyoming acquisition as 41 day out of 90 day contributions its – it will be helpful.

Of course, we had a little bit of effect from downtime and hopefully we’ll have some benefit from CapEx, so there is a lot of moving parts there so its not quite as easy as I described.

Operator

Thank you. (Operator Instructions) Our next question comes from Michael Blum of Wells Fargo.

Michael Blum – Wells Fargo

Hi. Good morning, guys.

Cary Brown

Good morning, Michael.

Michael Blum – Wells Fargo

Just one quick one, everything has been asked pretty much. Just little more on the drilling program? You said you’re getting really nice for change, any change you can quantify what those returns look like.

Cary Brown

They’re all over the map, you can get 100% returns and 20% returns somewhere in between there, what kind of wells we’re drilling but we really don’t look at drilling things if we don’t think we get a 20% return on.

Steve Pruett

I would say, our portfolio went at $60 price environment above the 30% rate of return and the $60 flat, which we want to make sure it works. That environment we’re not convinced that we’re going to have $80 oil for all times, we’re going to see a lot of volatility we think long-term it will go higher.

But in general, we’re looking at development projects that on the drilling side or above 30% and 2 to 1 just kind of ROI sometimes $1.5 on some of the longer payout project. And of course, the workovers and re-completions and we expect to drill about $8 million of high pipe projects this year generate often times 100% plus rates of return.

So, those continue to be important part of our settlement portfolio. And we will contribute higher returns. It help us get a mild returns that’s very, very solid. And of course, with drill costs where they are and $80 oil I think we can produce that flush oil particularly from the Wolfberry wells at $80 plus – $80 plus that’s really jazzes the rate of return above the 40s.

Michael Blum – Wells Fargo

Great. Thank you very much, guys.

Steve Pruett

Well, thank you, Michael.

Operator

Thank you. Our next question comes from the line of [Todd Blue]. He is a Private Investor.

Todd Blue – Private Investor

Good morning, guys.

Cary Brown

Good morning, Todd.

Todd Blue – Private Investor

I’ve got a little more of a big picture almost abstract question for you.

Cary Brown

We’re a company of engineers, we are pretty boring, Todd.

Steve Pruett

Thanks you’ve come, it’s very great (inaudible).

Todd Blue – Private Investor

You know, just through over what you guys have done been a long time holder, really believe in you guys and in that just realizing when you guys went public you had insider zone 40% something, give or take, right?

Steve Pruett

It’s down to 27 – yeah, when we went public and…

Todd Blue – Private Investor

Yeah, yeah. Now we’re down at 27 after the big equity raise in January, I think. What I was wondering is since you guys own the largest block of stock, how do you think about dilution down the road? Is there an amount of ownership that you want to keep or is it case-by-case, depending on the deal and the equity that it’s going to take? I was just kind of want to know how you guys think about that?

Cary Brown

I’ll give you the big picture abstract, which is when we decided to go public, we decided what’s in the best interest of all of the unitholders.

Todd Blue – Private Investor

Okay.

Cary Brown

It never crosses our mind whether we own 30% or 5%.

Todd Blue – Private Investor

Okay.

Cary Brown

So, the decisions we’re making are, is this best long-term. And we are going to have a long-term view as opposed to a short-term view, you go get...

Todd Blue – Private Investor

Right.

Cary Brown

...nickel of accretion or $0.10...

Todd Blue – Private Investor

Right.

Cary Brown

... double the size of your company.

Todd Blue – Private Investor

Right.

Cary Brown

If it’s the wrong double, that makes it harder to do the next $0.05 or $0.10. So, it’s one of the reasons you haven’t seen us – the big deals are marginally accretive.

Todd Blue – Private Investor

Right.

Cary Brown

And there will be, there we’re going to be playing that marginally accretive game, a day we are choosing not to buy anything that we don’t think is accretive. And we kind of have some internal numbers that we say, hey, if it adds this much, it’s a good deal. But a thing that goes back down. We really start with a basic, this dollar that I’m spending, is it going to be worth more than a dollar after I buy it and do something with it.

Todd Blue – Private Investor

Sure.

Cary Brown

Look at what happens to accretion in the company. So, I think that view is probably skew us to growing slower, more profitable.

Steve Pruett

Todd your question made me realize, I felt that I address something earlier and that is we – Cary mentioned that our leverage is about 1.8 times debt-to-EBITDA pro forma on a run rate basis and so we have a lot of debt capacity as I mentioned our marginal borrowing cost is 3% or you may call 3.5% with B’s. And so, these acquisitions that we’re pursuing and closing now and hopefully we’ll close and pursue and close later in the year are very accretive since the equity is already in place.

Todd Blue – Private Investor

Right.

Steve Pruett

So, cash flow flows right into the investors hands and that’s what is going to give us a lot of leverage or benefit towards increasing distributable cash flow per unit presumably distributions. But one – the track that some companies get into and we’ve avoided and we’ve been referred to as turtles because of it and they insist on being blind turtles. That is, but, we don’t look at instantaneous accretion as investment bankers often do...

Todd Blue – Private Investor

Right

Steve Pruett

...no offence taken…

Todd Blue – Private Investor

Right.

Steve Pruett

… in the audience but, so we can play games and say well, we traded 8.7 times EBITDA and therefore we can buy at 8 times and that they work in one-year but we look at the long-term accretion and we do classic discounted cash flow analysis and it doesn’t exceed what we think out weighted average cost of capital is and if we don’t think we can add value to those assets we’re not going to purse it’s just because bigger and that’s because we do own a lot of it and we do look at as Cary, always likes to say we’re value players and we’re long-term value players.

Todd Blue – Private Investor

Well, I like to hear all those things and I’m definitely one to vote for the turtles so to speak. In fact, I really appreciate it. I would much rather have my money with guys like you or making decisions that are going to affect us accretively maybe four years down the road even if it may not four months down the road.

And so I – for that I applaud holding the distribution even just to keep the accretion building overtime and the balance sheet clean. And so, I’m thrilled, thrilled that it’s like that and I appreciate your answer in that.

Cary Brown

Well, we appreciate you being a good unitholder and we hope to – one thing about owning a bunch of it is if it’s good for you, it’s good for those of us sitting at this table and...

Todd Blue – Private Investor

Right.

Cary Brown

...that’s a good way to live.

Todd Blue – Private Investor

Yeah.

Cary Brown

So, I appreciate it.

Todd Blue – Private Investor

Okay. Thanks guys. Good luck.

Cary Brown

Thank you, Todd.

Operator

Thank you.

Steve Pruett

It’s hard to say that.

Operator

Thank you. (Operator Instructions) I’m showing no further questions at this time.

Steve Pruett

Well, very good. Thanks so much for joining. Cary do you have any closing thoughts.

Cary Brown

No. I’m good. Thanks guys. Thank you for joining us this morning. Take care.

Operator

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

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