Legacy Reserves LP (LGCY)

Q2 2011 Earnings Conference Call

August 4, 2011 10:00 ET

Executives

Cary Brown – Chairman and Chief Executive Officer

Steve Pruett – President and Chief Financial Officer

Analysts

Kevin Smith – Raymond James

Michael Blum – Wells Fargo

Ethan Bellamy – Robert W. Baird

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Legacy Reserves Second Quarter Results Conference Call. Your speakers for today are Cary Brown, Chairman and Chief Executive Officer and Steve Pruett, President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the call there will be a question-and-answer session. As a remainder, this call is being recorded today August 1, 2011.

I’ll now turn this conference over to Mr. Pruett.

Steve Pruett – President and Chief Financial Officer

Thanks, Caron. Welcome to the Legacy Reserves LP’s second quarter earnings call. Thank you for joining us this morning. Before we begin, we 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 risks, 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, 2011, which will be released on or about August 4th, that’s today, and subsequent reports as filed with the Securities and Exchange Commission. We also encourage you to review our 10-K, which was filed in March along with our press releases. Legacy Reserves LP is an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition development of long-lived rock oil and natural gas properties primarily located in the Permian Basin, Mid-Continent and Rocky Mountain regions in the United States.

I’ll now turn the conference over our founder Cary Brown, Legacy’s Chairman and Chief Executive Officer.

Cary Brown – Chairman and Chief Executive Officer

Welcome guys. Thanks Steve and thanks to our friends and unit holders for joining us today. I have been looking for this call for a while. I guess since about the last call as I saw the April numbers coming in and our Legacy team members have just done an outstanding job. They always do. It was a tough first quarter, but they have done just a wonderful job this quarter. We’ve grown production by about 18% on a quarter-over-quarter basis. And yet I was thinking about how did they do it? They’ve grown about 40% if you look year-over-year, but 18% this quarter how did they do it. It is a thousand different decisions. We’re now up to about 5,500 wells. We told you guys last quarter that we had some plant downtime issues and some weather issues and our guys just got after – got the wells back online and with no rain out in the Permian I’m thankful to say we don’t have any weather related issues. We’d like to have some rain, but they have gotten production up and they just continued to do a wonderful job on that. We’re still experiencing some plant downtimes, but we’re not having the weather issues and that was a big, big impact on our production.

The other impact we see is from our capital program. Our capital program has been outperforming our expectations and it continues to do so. What you’re seeing this quarter from our capital program is really from the capital program. Probably last quarter and the quarter before that, as you generally see a lag effect. But our capital has continued to do well. It’s been about half of our capital on Wolfberry. Those results are just outstanding. We got one rig running and we completed a well about every three weeks. The other half of our capital program is scattered through our asset base. What I’m noticing is that in all the areas that we’re in, new technology is really making a difference. We’re finding that with a lot of oil in place and you give a little bit of new technology – it’s not new technology, it’s just different applied. We’ve been practicing all of my career. But we’re doing – using that technology in a little better ways to get more oil out.

That other half of our capital program, I’d like to point to one project and say this is the one that did it, but it’s really a bunch of different projects. But the rates of return on those projects are the best I’ve seen in my career and that’s attributed to the employees we have, the price environment we’re in, the oily rock we’re in and the way they are able to stay on top of the new technologies and figure out ways to apply them on our assets. So, with that we’re growing our CapEx. We grew our CapEx from $11.9 million in the first quarter to $17.4 million. I think you’ll see us continue to spend CapEx as we’re seeing projects coming in from our partners where we’re not operating a percentage as well as on our own asset base that are just outstanding rates of return.

The other thing that impacted the production is we continued to do what we do which is make acquisitions. We closed a $66 million deal in May that brings us to $93 million for the year roughly on pace for our $200 million a year of acquisitions. We still have a pretty good pipeline there. So, I’d say that’s really cool to grow production, but when you at growing production while strengthening expenses in this environment you've just got to. once again take our hats off to employees, who actually reduced our expenses by about 2% quarter-over-quarter, I don’t know that it’s – I would say that a long-lasting impact what I would say is the first quarter was out of phase and we maybe back on the run rate now, in the environment we’re entered into questions, performance by the employees again.

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