Legacy Reserves LP (NASDAQ:LGCY)
Q2 2016 Earnings Conference Call
August 04, 2016 10:00 AM ET
Dan Westcott - Chief Financial Officer
Paul Horne - Chief Executive Officer
Brian Brungardt - Stifel
Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2016 Conference Call for Legacy Reserves LP. [Operator Instructions] As a reminder, this call is being recorded today, August 4, 2016. I will now turn the conference over to Dan Westcott, Legacy's Chief Financial Officer. You may begin.
Good morning. I appreciate everybody dialing in for Legacy's quarterly conference call. As always, we would like to remind you that during the course of this call, Legacy management will make certain statements concerning future performance and other statements that will be forward-looking statements as by defined by Securities Laws. These statements reflect our current views with regard to future events and are subject to various risk, uncertainties and assumptions. Our actual results may differ materially from those discussed and you should refer to Legacy's 10-Q, which we filed last night with the Securities and Exchange Commission.
With that, let me turn it over to Paul.
Thanks, Dan. I would like to welcome everyone to this morning's conference call. We appreciate you joining and allowing us the opportunity to provide an update of our financial results and our business in general. Let me start with the quarter's results and then update you on our recent initiatives and near term plans forward. Q2 was quite a rebound from Q1 in terms of commodity prices and our cash flow for the quarter improved accordingly. Relative to Q1, the average price of WTI improved 36%, while the average Henry Hub gas price improved 22% and such increases helped our results. During the quarter, we continued to hammer away at our stated initiatives, which are aimed at improving our credit profile.
First, we continued to drive down operating costs, realizing an 11% reduction in LOE from last quarter and, on a comparable basis, a 21% reduction from Q2 2015. This reduction was largely driven by the sale of higher lifting costs, marginal cash flow assets and continuing efforts to drive down costs throughout the system. Production only decreased 2% from Q1 to Q2, even after $87.5 million of asset sales completed through the end of the quarter. I am incredibly proud of the work our employees are doing in this environment.
Second, we remain very disciplined with our capital spending, as during the first half of 2016 we've only spent 32% of our previously announced $37 million annual budget. Based on current strip pricing, we believe we will spend $37 million but may deviate from those plans depending on market conditions. Approximately 22% of our first half capital was spent on recompletions and workovers in our east Texas region, with the majority of balance deployed in the Permian on workovers and horizontal development under our development agreement with TPG. We now have 12 wells online and in the development agreement. Five in Lea County, New Mexico; one in southern Reagan County, Texas; and six in Howard County, Texas. After about six months of inactivity, we recently resumed drilling in the program and again have two rigs running. One in Howard County and the other in Lea County, New Mexico. We completed 87.5 million of asset sales in the first half and with an additional 5 million in July and August, we have sold 92.5 million to date. That is slightly less than our target of 100 million by the first half, but that was partly by choice as we decided to retain certain assets for valuation purposes. As noted in the release, the assets sold generated over 500,000 of negative cash flow during the last 12 months preceding the sales.
In summary, I'm proud of the progress we made in Q2 and over the last several quarters. Our macro environment remains challenging, but our team continues to make meaningful operational improvements. We continue to focus on maintaining liquidity and reducing debt outstanding. As always, we will continue to closely watch the market and respond with business objectives that match accordingly. Dan?
Thank you, Paul. Let me start with some additional color on our financials. We produced about 44,600 BOEs a day in Q2, which is, as Paul mentioned, is slightly down from Q1. The 2% decrease in production was driven by asset sales and plant downtime. As Paul mentioned, we reduced LOE by approximately $5.1 million this quarter, putting us at $10.23 per BOE, which is a new all time low for us on lifting cost. G&A, excluding LTIP and transaction expenses were roughly flat for the quarter.
Relative to last quarter, our EBITDA was up about $10.5 million to 39.7 million, and that increase is a little, a little over half of which is due to commodity pricing and the rest due to cost reductions. Hedge realization in total were basically flat quarter over quarter. Oil hedge realizations were down due to volumes rolling off. But this was offset by increased gas realizations due to May and June swaps that we added during the second quarter. As Paul mentioned earlier the rally we saw in both oil and gas prices during the quarter. I would like to note that generally speaking, our gas production is sold at a price peg until the last three days of the preceding month. We didn't benefit as much as the Henry Hub index moved. The good news is that our hedges are based on that same last three days, or last day basis. And so they have benefited as expected.
We spent a lot of time on risk management since last quarter. We increased our second half 2016 oil hedge percentage from 29% to 63% with swaps at an average price of $50.56 a barrel. We increased our 2017 oil from 10% to 41% hedged with collars that are 45 by 58.89. On the gas side, we increased our second half 2016 percent hedged from 52% to 82% with swaps at an average price of $2.46.
We increased our 2017 gas hedges from 49% to 70% with collars at 2.90 by 3.44. I will point out I had an issue in my quote in the press release that said 49% to 54%. The right number is 49% to 70%. And the tables in the back of the release are correct. We think we achieved a great pricing for the contracts that we executed. But unfortunately, our banks have been unwilling to act as counterparty for additional hedges for more trades. We believe this is based on our credit profile and their desire to reduce exposure to the oil and gas sector.
Turning to the balance sheet, we continue to chip away at total debt. We completed a debt for equity swap in the quarter with 15 million of our 8% notes. In addition, through internally generated cash flow and approximately $92 million of asset sales year to date, the combination of all that has really enhanced our liquidity, reduced future plugging obligations and improved our leverage statistics, by reducing debt $272.4 million since year end. We currently have over $100 million of availability on our $630 million borrowing base and we are very pleased with our asset sales to date.
I will note, we do not anticipate additional asset sales for the balance of the year. As Paul said, we are working hard to adjust to the environment that an environment in which we operate and we will continue to adjust to position Legacy for success.
With that, I will now ask the operator to open us up for Q&A.
[Operator Instructions] Our first question is from Brian Brungardt from Stifel. Your line is open.
Good morning. Thank you for taking my questions here.
Good morning, Brian.
To start off, it looks like you guys were very busy during the quarter. And as we look into the remainder of 2016, here, how should we thing about the decision to improve liquidity and leverage versus incremental drilling activity?
Yes, this is Paul. I will answer that. In the current environment, as I mentioned, we plan on spending $37 million capital budget. If prices change significantly, we will respond accordingly, either up or down depending on the environment. But in this current environment, I don't see us overspending that 37 million, so any free cash flow available will be used to continue to pay down debt.
Maybe a little bit different here would you anticipate that the incremental activity would be at the Legacy level? Or within the joint development agreement?
Brian, this is Dan. First of all, I want to say thanks for your comments. We have been busy. We have been working hard. Specifically, on the operations front, if I can be so bold as to get in front of Kyle Hammond here in the room, but we've been very busy. So, we just picked up two more rigs under our JDA and our guys are working hard at drilling those horizontal wells efficiently. I guess what I would say is, under the JDA, as you know well, Brian, the operating activity far exceeds the capital that we see in our cash flow statement and balance sheet. That's really driven by the promoted structure we have. I would say we are running two rigs, we're doing a lot of work. It's just on a net capital basis, that has very little impact to us.
Got it. Switching gears here and I realize it's early but where do you feel comfortable with liquidity in front of the fall redetermination and taking into consideration your comments regarding the banks and their counterparty exposure with incremental hedges?
I think you are asking the multibillion dollar question that lots of folks want to know. I'm not sure really anybody has the answer, including the commercial bankers that we deal with, or that I communicate with regularly. I think they view the fall as a long way away and, in tough times, time just moves a little slower. So, I don't have an answer for that. I don't think anybody has an answer for that. When we look at our internally generated numbers, we feel pretty good about our own estimates. But, unfortunately, we are absolutely at their mercy and those guys are going to come up with their own engineering and own figures. We are doing what we can do to control what we can control and we are heading into the fall with doing the best we can.
Thank you. At this time, I'm showing no further questions.
Terrific. Listen, guys, we appreciate everybody dialing in, again. If you have any additional follow up questions, this is Dan Westcott. Please don't hesitate to reach out to me. My contact information is at the bottom of the press release. With that, thank you again.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.
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