Legacy Reserves LP (LGCY)
Q2 2010 Earnings Call Transcript
August 5, 2010 9:30 am ET
Steve Pruett – President, CFO and Secretary
Cary Brown – Chairman and CEO
Kyle McGraw – EVP, Business Development and Land
Paul Horne – EVP, Operations
Ethan Bellamy – Wunderlich Investments
Kevin Smith – Raymond James
Richard Roy – Citigroup
Michael Blum – Wells Fargo
Previous Statements by LGCY
» Legacy Reserves LP Q1 2010 Earnings Call Transcript
» Legacy Reserves LP Q4 2009 Earnings Call Transcript
» Legacy Reserves LP Q3 2009 Earnings Call Transcript
Good day, ladies and gentlemen, and welcome to the Legacy Reserves second quarter 2010 results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator instructions)
And now your host for today’s conference President and CFO, Mr. Steve Pruett. Please begin sir.
Thank you very much, and thank you for joining us today. Welcome to Legacy Reserves LP’s second quarter earnings call. Before we begin, I would like to remind you that during the course of this call, Legacy management will make certain statements concerning the future performance of Legacy and other statements that will be forward-looking as defined by securities laws.
These statements reflect our current views with regard to future events and are subject to various risk, uncertainties and assumptions. Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in Legacy Reserves LP’s Form 10-Q for the quarter ended June 30, 2010, which will be released on or about August 6, and subsequent reports as filed with the Securities and Exchange Commission.
Legacy Reserves LP is an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition and development of long-lived oil and natural gas properties primarily located in the Permian Basin, Mid-Continent and Rocky Mountain regions.
I will now turn the conference over to Cary Brown, Legacy’s Chairman, Chief Executive Officer and Co-Founder.
Thanks, Steve, and thank you to our friends and unit holders for joining us today. We are very pleased with our results in the first six months 2010. We remain very active on the acquisition front, closing 11 transactions during 2010 for a total of $157 million. In February, we closed our largest acquisition to date in Wyoming for $125 million, and we continue to make several smaller acquisitions within our core areas, as many owners within the Permian Basin have been motivated to sell their properties during 2010, due in part to the anticipated increase in capital gains, and ordinary [ph] income tax rates in 2011.
We are continuing to evaluate potential acquisitions of various sizes and feel confident about our ability to grow both through acquisitions, and through our drilling and recompletion projects. With a full quarter of ownership in our Wyoming properties, we increased production in the second quarter to 9,516 barrels per day, up from 8,767 barrels day in the first quarter of 2010 and 8,250 barrels per day in the fourth quarter of 2009.
We generated adjusted EBITDA of $32.3 million this quarter despite a 5% decline in commodity prices and additional production expenses related primarily to our Wyoming acquisition. Our financial results this quarter are a testimony to our successful acquisition and development program, as well as our hedging strategy and sound financial approach. Finally, we are pleased to report that during the second quarter we generated $0.58 per unit of distributable cash flow, covering our $0.52 distribution by 1.12 times.
To take advantage of favorable drilling economics, please note that we’re planning to spend approximately two thirds of our $31 million capital expenditure budget during the third and fourth quarters of 2010. While these capital expenditures will have a negative impact on our coverage in the third and fourth quarters of this year, this budget will allow us to generate a moderate organic production growth in 2010, as we discussed on previous calls.
In addition, given our expected production increase and more favorable hedge position in 2011, I think our average oil price moves up to $88 from $82. We expect coverage ratios to be much higher during 2011, assuming no increase in distribution [ph]. All in all, a very solid quarter and I’m really pleased with the results that we are achieving and the execution of the team.
With that I will turn it over to Steve to go more specifically over the financials.
Thank you Cary. As of August 4, we had approximately $130 million of borrowing capacity under our credit agreement with a borrowing base of $410 million. Our debt-to-EBITDA or debt-to-earnings adjusted EBITDA on a trailing 12 month basis is about 2.2 times, while our debt-to-EBITDA covenant in our credit agreement is 3.75 times.
In addition, our debt to book capitalization is 42% as of June 30, 2010. We received positive feedback from our investment in commercial bankers regarding our ability to finance a broad variety of potential acquisitions. We are excited about our deal flow and our drilling inventory. As Cary said, it is a great time to be drilling oil wells, and the inventory has very strong economics, and we look forward to a very strong second half of 2010.
I must say, I was very encouraged by our exit rates in June, and I think that sets us up very well in the third quarter, and Paul will talk more about it later. But we do have a Wolfberry drilling rig just complete, or just finished drilling a well. We expect to have two Wolfberry drilling rigs operating during part of the fourth quarter, along with seven gross operating wells we completed in the second quarter, which we will talk about later.