Legacy Reserves: A Second Forbearance Agreement

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About: Legacy Reserves Inc. (LGCY)
by: Elephant Analytics
Summary

Legacy received a five-day extension of the forbearance period from its secured lenders.

It hasn't entered into a forbearance agreement with its unsecured noteholders.

The end of the grace period for the June 1st interest payments looks like a hard deadline, although Legacy will likely file for bankruptcy before then.

Legacy's proved reserves look to have a PV-10 that is less than its secured debt value at current strip prices.

That doesn't fully capture the value of its Permian acreage, but I doubt its acreage is valuable enough to put its equity in the money.

Legacy Reserves (LGCY) has received a five-day extension of the forbearance period from its credit facility and second-lien lenders. This may give it additional time to gain more support for a restructuring plan. The current oil and gas pricing environment looks like it reduces the PV-10 of Legacy's proved reserves to below the total of its secured debt though. Legacy does have some additional value in its Permian acreage that isn't captured well by PV-10. However, Legacy's common stock still looks significantly out of the money when including some value for the Permian acreage.

The Annual Meeting

Baines Creek Capital's attempt to prevent Legacy from reaching the quorum necessary to hold its annual meeting came fairly close to working. Around 57.4 million shares needed to be represented at the meeting in order to reach quorum. Close to 64 million shares were actually represented, which is around 6.6 million more than what was needed. However, the number of votes that were withheld from various directors ranged from 5.6 million to 7.5 million. If those shareholders did not vote their shares at all, Legacy may not have reached quorum (depending on whether 5.6 million or 7.5 million shares weren't voted).

Source: Legacy Reserves

Another Forbearance Agreement

Legacy has entered into a second forbearance agreement with its credit facility and second-lien lenders to extend the forbearance period until June 12 (from the previous June 7 deadline). This additional time was not particularly surprising to me as I had noted that the secured lenders could give Legacy some additional time as long as it didn't make the June 1st interest payments on its unsecured notes.

The end of the 30-day grace period for the unsecured interest payments appears to be more of a hard deadline as Legacy has not entered into any forbearance agreements with the unsecured note holders. Ultra Petroleum gained some additional time by securing agreements from unsecured noteholders when it didn't make its March 1, 2016, interest payments. It gained an additional month and ended up filing for bankruptcy at the end of April 2016.

I also remembered an instance of an extended forbearance agreement involving Emerald Oil (OTCPK:EOXLQ). It entered into a forbearance agreement with its credit facility lenders on November 5, 2015, that lasted until December 18, 2015. It then signed an amendment to the forbearance agreement on December 18 that basically extended the forbearance agreement until January 29, 2016. It eventually filed for bankruptcy on March 22. The credit facility lenders probably gave Emerald some additional time there since their unsecured bond interest wasn't due until April 1.

PV-10 Value

One way to look at Legacy's asset value would be to look at its PV-10. Legacy reported that its PDP reserves had a PV-10 of $1.28 billion at the end of 2018 and that its proved reserves had a PV-10 of $1.35 billion. This was based on 2018 SEC pricing though, which used $65.56 WTI and $3.10 Henry Hub natural gas.

Based on current strip prices, Legacy's PV-10 would be substantially less, as the five-year strip for WTI oil is around $52, while the five-year strip for Henry Hub natural gas is around $2.65.

Legacy noted that a $1 decline in oil prices would reduce the PV-10 of its proved reserves by $27 million, while a $0.10 decline in natural gas prices would reduce its PV-10 by $24.6 million. It also notes that "larger decreases in oil and natural gas prices may have a disproportionate impact on our standardized measure".

If we assumed that the incremental impact of declining oil and gas prices doesn't change with larger declines, then Legacy's proved reserves would have a PV-10 of approximately $873 million based on average strip prices over the next five years. Its PDP reserves would probably have a PV-10 of approximately $830 million.

Some mature assets can sell for above PV-10 at strip prices, such as Riviera Resources' (OTCQX:RVRA) recent sale of mature natural gas assets for around 1.17x proved developed PV-10 at strip prices. A similar multiple would put the value of Legacy's assets at close to $1 billion, plus the value of its Permian acreage. I've mentioned before that I believe that Legacy's Permian acreage is unlikely to fetch a premium price on average due to its scattered nature.

Conclusion

Legacy has gained an additional five days of time from the extension of its forbearance agreement. There is also the potential for it to even get a bit more time after that since its unsecured bond interest payments won't trigger an event of default until the beginning of July. It does appear that its credit facility and second-lien lenders might have a shorter lease on Legacy than that though, given that this extension only runs until the middle of next week.

In any case, the picture for Legacy's common shares looks quite bleak given the current oil and gas pricing environment. Its proved reserves have a PV-10 at strip prices that is estimated at less than the amount of its secured debt. One could argue that some of its properties could sell for above PV-10 at strip prices, while it Permian acreage should have some additional value. However, this calculation is still likely to end up with a total value that is less than Legacy's outstanding debt.

Disclosure: I am/we are short LGCY. 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.

Additional disclosure: Short LGCY via puts.