Legacy Reserves LP (LGCY) CEO Paul Horne on Q2 2018 Results - Earnings Call Transcript

Legacy Reserves LP (NASDAQ:LGCY) Q2 2018 Results Earnings Conference Call August 2, 2018 10:00 AM ET

Executives

Dan Westcott - President and Chief Financial Officer

Paul Horne - Chairman and Chief Executive Officer

Kyle Hammond - Executive Vice President and Chief Operating Officer

Analysts

Claire Ye - Imperial Capital

Operator

Good morning, and welcome to the Second Quarter 2018 Legacy Reserves LP Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note that this event is being recorded.

I would now like to turn the conference over to Dan Westcott, Legacy's President and Chief Financial Officer. Please go ahead.

Dan Westcott

Thank you, Chris. Good morning everyone. We appreciate you dialing in for Legacy's Q2 2018 conference call. As always, we'd like to remind you that during the course of this call, Legacy management will make certain statements that will be forward-looking statements as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions.

Our actual results may differ materially from those discussed. This morning we’ll make references to the press release that we posted last night and to the Investor Presentation we posted this morning to our website. That’s www.legacylp.com. Lastly, we encourage you to read through all of our SEC filings for important disclosures.

With that, let me now turn the call over to Paul Horne, Legacy's Chairman and Chief Executive Officer. Paul?

Paul Horne

Thanks, Dan and welcome everyone to this morning's conference call. We’ve made significant accomplishments since our last call and I want to touch on those this morning; during the quarter we brought online nine horizontal wells in the Permian included in that figures an eight well pad and Howard County that actually straddled Q2 and Q3 and is therefore only partially reflected in our quarterly numbers; while still very early we like what we're seeing in those production results. In total, we brought online 76 wells to date since commencing our two-rig Permian horizontal program three years ago, we recently spud our final well under our joint development agreement with TPG Sixth Street Partners.

The JDA with TPG proved crucial in transforming our business model, and providing needed capital to develop our substantial Permian resource through the downturn. They’ve been great partner over the last three years and we are thankful for TPG’s support; as we move to drilling and completing horizontal wells outside of the JDA we are excited to gain additional exposure to our substantial Permian resource, which will serve as a growth engine for the future of the company. On Permian horizontal program helped us achieve record oil production of 17,901 barrels per day, even against the headwind of wellbore interference caused by our own offset tracks and those of nearby operators.

Our shallow decline Permian basin assets also played a big role in our results. In our opinion, is the differentiating factor for legacy relative to many other companies exhibiting less than 2% decline rates during the quarter and provide a strong free cash flow the firm's production growth. We achieved at quarter end total debt to pro forma adjusted EBITDA ratio of 4.7 times, representing the reduction of nearly 3 times since its peak of 7.6 at year end ’16. We worked tirelessly through the downturn to reduce operating costs, sell non-core assets, transform the business by increasing our interest in our Permian horizontal development program, and most importantly to drill great wells efficiently.

I am really proud of the outstanding work the team has done to deleverage the business and position us for growth. Also our BD and land teams really improved value of the business by recently completing several trades involving a total of 11 different tracts of land in Permian basin. The team was effectively able to monetize eight small tracts with an average size of 55 adjusted net acres by trading them for three tracks adjacent to our near-term drilling prospects. The benefits of these deals are measurable, 58% increase to our average lateral length and 45,000 foot increase in our net lateral footage to be drilled. Not surprisingly, this will improve the projected economics of these drilling locations and allowed us to monetize small tracts that many investors likely have a value within our portfolio. We own a lot more of these small tracts, and are actively working to move them from our small tracts back to our drillable inventory stack.

Now Page 7 of the posted presentation where we present some new data surrounding these small tracks. The team has done a good work to identify these tracks comprising 56,000 [barrels] or 15,500 net acres in the Midland and Delaware basins with deep perspective. For Wolfgang [rate] development. These figures specifically exclude the central basin platform in North [self] areas were we see a lot of potential for these type of tracks as well and we look forward to sharing those figures in the future.

Those acres also, don't include any of our 922 identify horizontal six. As always, we continue to examine and reevaluate our resource potential. For those that are followed us for a while you know that are Permian position in particular is a conglomeration of over 150 acquisitions and over many years that originally targeted mature PDP research. Consequently, we didn't do the upfront work to determine our horizontal development potential. As we continue to go through land files into the corresponding engineering and geological work we update our views. Page 9 of the posted presentation so it shows our latest look at horizontal potential in our asset base.

We have and will continue to refine our technical work as well as spacing in lateral length assumptions. These figures represent both the identification of new prospects and removal of those where we no longer see potential.

There is also been some divestitures and trade run through these figures and conversion to PDP from Wells Fargo brought online in the first half of the year. These are operated only locations generally 1 mile or greater. We’re proud to report an increase in operating horizontal increase of 51,500 rows and 41,000 net and in increasing the number of operated drilling locations to 922 groups and 665 net respectively represented more than 25 years of inventory. Assuming our current drilling place of two rigs and 18 wells per rig per year.

Lastly we continue to make progress on our corporate reorganization. Dan will provide some details in a minute but I’m really pleased to see our asset development and resource delineation and expansion our quarter siding with a corporate reorganization. We look forward to capitalizing on those developments in the fourth quarter and beyond as legacy reserves. I will now turn the call to Kyle Hammon, Legacy’s Executive Vice President and Chief Operating Officer to talk in more detail about our results from operations.

Kyle Hammond

Thanks Paul. We’re proud to deliver record annual production this quarter as 20 mini wells brought on line during Q1 hit their stride in Q2. We discuss significant levels of track interference in our last conference call, we experienced similar levels of fracture in the second quarter. We brought online nine wells during the second quarter, some of which belong to an 8-well pads in county that we brought online late Q2 and early Q3. We previously talked about our dedicated fleet and we’re pleased to realize the efficiencies of this agreement and the cost reductions that provide.

Our folks were also able to procure a second fleet on the spot market to accelerate the development of the 8-well pads, this pad. This can also serve as a pilot for two new completion of the patient's for Legacy. We’re increasing the use of dissolvable close in lateral an increase in the use of resin coated sand, one decreases call to the near term initial completion and the other reduced the subsequent clean ones once the wells are on production. We spud our first well in Martin County during the quarter where we’re drilling a full well pad of two-mile laterals in the Wolfcamp B.

There’re a lot of offset data points as this pad fits between two very densely developed areas of Martin County and we look forward to seeing those results later on this year, we started drilling surface locations in Midland County almost leading the rig to that pad once we complete the drilling in Martin County. We really lack this round the basin development strategy as it allows us to leverage data, and offset operators to optimize landing and frac design heading into a batch completion. We also see or expect to see a reduction in wellbore interference as we are developing areas that are not great offset to our existing yield production. The land trades completed this quarter, that Paul mentioned are a big deal of operations thing. Blockage or acreage with longer laterals will help our development program on multiple levels throughout the process. We look forward to executing more substrates.

Our gas and NGL production and revenue has variance this quarter and that’s driven by non-op basin properties, where we achieved record ethane recovery. This drove the large increase in NGL volumes which is generally a net revenue enhancing strategy by the marker of these volumes despite reduced gas price realizations you'll see in our quarterly figures.

With I'll now turn back the call back to Dan for more about our financial results and broader corporate efforts.

Dan Westcott

Thanks, Kyle, I’ll first touch on our financial results before providing an update on the corporate transition. EBITDA grew by 2% during the quarter to 72 million which was driven by 4% increase in daily volumes primarily attributable to our Permian horizontal development program. While headline NYMEX oil prices increased by 8% during the quarter, our realized price only increased by 1.5% as it made to us differential wide, increasing our total company oil differential from $2.53 in Q1 to $6.81 in Q2, gas price realizations also declined as NYMEX prices declined on a quarter-over-quarter basis by $0.23 or $0.17 when referencing the last three days pricing for I-Ferc, and that’s the metric by which most of our natural gas sales are determined.

As expected this was further exacerbated by the deterioration of [Huaha] and CIG differentials during the quarter, offsetting those reductions our Permian gas volumes increased this quarter, and those volumes include meaningful NGL's consequently increasing our realized breadth. On the cost side LOE per BOE declined from $10.99 in Q1 to $10.84 in Q2. This includes a mix of lower Permian asset to be declassed and higher Permian work over activity related to sub [indiscernible].

While LOE is running a little higher than we like our core competency has a cost efficient PDP operator will allow us to make the tweaks necessary to bring this figure down. Development capital for the quarter was $81 million bringing year-to-date total to $240 million, nearly all of which was spent on horizontal Permian development. We fraced 25 wells so far this year as we brought online our third eight well pad reducing our year-end dug count. We expect our teams become less choppy going forward as we pursue smaller four well pads. For the remainder of the year, we expect to complete an additional nine wells so our previously guided capital figure of 225 million remains unchanged at this point in time.

Now to current that question all Permian operators have been getting yes, the basin take away capacity is very tight. We like other operators continue to see the associated negative effects of the increase operator activity. Even in Q2, we had days with limited gas close, due to third party plant initiatives and we had leases without normally high tank levels because of limited truck drivers to hold the oil from our older leases. We continue to run largely unimpeded at our areas of new production and we have great agreements in place with large ritual machine providers and marketers. We have recently seen the mid differentials moderate somewhat and we anticipate as additional projects are announced each quarter the Permian will adequately address these issues as formula we address these issues as midstream companies see these moneymaking opportunities.

We remain thankful for our mid hedges which covered our 60% of our anticipated oil production in the second half of 18 and we continue to pursue tangible in the field strategies that will enhance our net backs on the margin. Now as Paul mentioned what occurred by our continued march towards becoming a C Corp, since our last conference call we entered into a settlement agreement with holders of our preferred units to settle the previously disclosed class action lawsuit. In order to avoid the additional time and expense of ongoing litigation and without admitting fault we agreed to issue approximately 10.7 million additional shares of new legacy the holders of our preferred units. For a total of approximately 27.6 million shares to existing holders of our preferred units.

Following final approval by the court each outstanding preferred unit will be converted into a right to receive approximately 2.19 shares of new legacy common stock. The court has entered into a scheduling quarter and set September 12 as the date of the final hearing at which Legacy and the plant final approval of the settlement. Separately we file what we believe with our final amendment to our S4, yesterday evening and we’re requesting effectiveness from the SEC today. We anticipate following a definitive proxy statement and commenting the unit holder solicitation in the coming days. Within that solicitation material you will notice that we have set September 19 as the date of the special meeting of unit holders to vote upon our corporate reorganization.

We anticipate concluding all of this and trading under the same LGCY ticker as Legacy Reserve Inc following that special meeting. As a step back and add it all I think Paul said it well, we got a lot of this things going forward and we certainly look forward to her new life of the C Corp. With that I will turn the call back over to the operator and open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Irene Haas of Imperial Capital.

Claire Ye

Good morning Claire Ye for Irene. Well first question could just speak to the realization of NGLs, is that a function of the Piceance Basin as a recovery or revenue recognition? Could you talk a little bit more about it?

Paul Horne

Relative to Q1 our NGL realizations were down and that is a function of really increased ethane processing. So I would say a lower component in the NGLs -- within the NGL stream and so we’ve seen record level of processing there in our Piceance area, so that has driven the price.

Claire Ye

And the second question is can you talk a little bit more about the nature of impairment?

Paul Horne

Sure. We’ve $35 million of impairment for the quarter, I think 34 million of it is gas related it’s really the tail price on -- so that when you look at the five year NYMEX curve, the forward NYMEX curve the tail price is lower than it used to be and we’ve just -- we have hit some economic limit on some of our gas PDP assets.

Operator

Thank you very much. Ladies and gentlemen we’ve no further questions. I would like to hand the conference back to Legacy management for some closing comments.

Paul Horne

We’d like to thank you again for dialing in to our call today. If you’ve any additional follow-up questions please don’t hesitate to reach out to myself or Dan. Thank you.

Operator

Thank you very much sir. Ladies and gentlemen that concludes this conference call and you may now disconnect your lines.