A strong balance sheet to weather the downturn
Legacy Reserves L.P. (ticker: LGCY) announced yesterday that it will cut its annual distribution by 43% to $1.40 from $2.44 a unit in order to maintain financial flexibility. In a company press release, Paul Horne, President and Chief Executive Officer of Legacy, said the decision was made after carefully considering the company’s options in the current low price environment.
The company also announced that its borrowing base has been reaffirmed at $700 million, unlike many other master limited partnerships (MLPs) that have seen their borrowing bases lowered during recent redeterminations. The reaffirmed borrowing base leaves the company with approximately $570 million in liquidity.
A recent note from Kevin Smith of Raymond James applauded management’s decision to cut the distribution, even though it was below the firm’s estimation of a 47% cut. “We estimate the distribution cut will save Legacy roughly $70 million per year in the form of lower cash distributions,” said the note.
Based on EnerCom’s E&P MLP Weekly for the week ended April 17, 2015, LGCY has a debt-to-market cap of 108%, one of the lowest in the weekly and below the median debt-to-market cap of 122% for the group. Combined with the company’s reaffirmed borrowing base and remaining liquidity, the company looks well positioned to handle 2015. Its 2015 capital budget is only $30 million.
The $70 million per year saved by the distribution cut will go a long way to help the company through 2015, says Smith, but 2016 may be more precarious. “We now model the company will generate a distribution coverage ratio of 1.17x and 0.80x in 2015 and 2016, respectively, not leaving much room for error next year.” To avoid this risk, Raymond James expects Legacy to complete an acquisition within the year.
Utilizing liquidity to make acquisitions
Paul Horne said that the company plans to use its liquidity to make acquisitions this year. “We remain active in our business development efforts … [we] expect to have an opportunity to utilize our liquidity in making a significant acquisition in 2015.” Year to date, the company has evaluated more than $1 billion worth of acquisition opportunities, said Horne.
Raymond James believes that with $500 million in acquisitions both this year and next, Legacy’s distribution will grow in 2016. “We project the company’s distribution coverage will average 1.25x in 2015 and 1.54x in 2016, even getting as high as 1.89x in Q4’16.”
According to the company’s most recent investor presentation, Legacy made seven acquisitions in 2014 and 16 in 2013. LGCY currently has 139.0 MMBOE of proved reserves, with liquids accounting for half of the mix. Production is currently at 32.77 MBOEPD from 11,121 gross (4,307 net) producing wells. Legacy has operations in the Rocky Mountains, Mid-Continent and the Permian Basin.
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