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Legacy Reserves: Abandon Ship Or Full Steam Ahead?


  • I've written several articles on Legacy Reserves over the years.
  • While I have never recommended the common, at times I've considered the preferred and debt to have favorable risk versus reward.
  • The debt and preferred trade at significant discounts to par but a long ways from zero.
  • Q3 results came out Wednesday with several material updates. Let's analyze and see if this investment vehicle is hanging tough or in dire straits.
  • This analysis will be a concise review of Q3 results and Legacy's current position. I'll take more time to go through covenants and credit line details after the conference call when I have more information.

Legacy Reserves LP (NASDAQ:LGCY) with preferred tickers LGCYO and LGCYP, is a Permian Basin-headquartered and focused firm with assets also located in the Midcontinent, East Texas, and the panhandle as well as the Rocky Mountain formation located in, you guessed it, the Rockies. This analysis will be a concise review of Q3 results and Legacy's current position. I'll take more time to go through covenants and credit line details after the conference call when I have more information.

Upstream MLP Graveyard

Legacy is one of few upstream master limited partnerships ("MLP") and one of exceptionally few highly levered MLPs still in existence after the new three-year downturn in crude oil prices and fairly stagnant natural gas market. The names Memorial Production Partners (MEMP), Atlas Resources (OTCPK:TTEN), Linn Energy (LNGG), Breitburn Energy Partners (OTCPK:BBEPQ), among others, give feelings of regret, remorse, and perhaps even physical pain. I consider graveyard fitting, and as a bonus, it is in the Halloween spirit.

Legacy Reserves LP, to its credit, has refused to go down easy. Despite shuffling its asset base, slashing costs, eliminating dividends to common and preferred shareholders, the market came to the somewhat justified conclusion that Legacy still had to do more or it would soon join the upstream MLP graveyard. Legacy unsecured bonds collapsed to levels suggesting a 95%+ chance default.

I got long the bonds and preferred near the bottom as shown above and have stayed long ever since. Almost exactly a year ago, Legacy Reserves LP did what many thought was impossible and secured a $300 million second lien term loan via prominent oil and gas credit investors GSO Capital Partners, a division of Blackstone Group (BX).

Their borrowing base was reaffirmed at $600 in March of this year. Then in August of this year, Legacy announced the

This article was written by

Experienced institutional investors tackle all angles of income investing

Williams Equity Research ("WER") is led by two portfolio managers with 30 years of combined market experience as hedge fund analysts, traders, due diligence officers, and leading complex and alternative investment research for large institutions. The portfolio managers have a CFA, BS in Business, BA in Economics, and MS in Engineering between them as well as numerous security licenses. WER analyzes individual stocks across all asset classes and global markets with a specialization in income, commodities, international stocks, and special situations.

Institutional Income Plus, WER's marketplace service, is its primary focus and applies an institutional quality risk management framework to investment opportunities in REITs, BDCs, dividend stocks, and credit oriented Closed-end funds and interval funds.

Analyst’s Disclosure: I am/we are long BXMT, HMC, CF, POT, RY, MRCC, GST-B, F, GST-A, SBRA, QCP, HCP, OAS, LGCYO, KMI, NFX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The author owns senior unsecured bonds issued by Legacy Reserves LP. The author may enter into long or short positions in any part of the capital structure of any of the firms mentioned in this article. Readers should always conduct their own independent due diligence and not rely upon information or opinions provided by the author.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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