Legacy Reserves' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Legacy Reserves Lp (LGCY)

Q2 2012 Results Earnings Call

August 2, 2012 10:00 AM ET


Cary Brown – Chairman, President and CEO

Jim Lawrence – Interim CFO, Vice President, Finance and Treasurer

Paul Horne - Chief Operating Officer and EVP, Legacy Reserves GP


John Ragozzino – RBC Capital Markets

Ethan Bellamy – Baird

Kevin Smith – Raymond James

Praneeth Satish – Wells Fargo

Bernie Colson – Global Hunter

Chris Sighinolfi – UBS

Michael Peterson - MLV & Co.



Ladies and gentleman, thank you for standing by. Welcome to the Legacy Reserves Second Quarter Results Conference Call. Your speakers for today are Cary Brown, Legacy Reserves Chairman, President and Chief Executive Officer; and Jim Lawrence, Interim Chief Financial Officer, Vice President, Finance and Treasurer. At the 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 2, 2012.

I will now turn the conference over to Mr. Lawrence.

Jim Lawrence

Welcome to Legacy Reserves LP’s second quarter earnings call. 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 would be forward-looking statement 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’ Form 10-Q to be -- for the quarter ended June 30, 2012, which will be released on or about August 3rd and subsequent reports as filed with Securities and Exchange Commission.

Legacy 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 of the United States.

I will now turn the conference over to Cary Brown, Legacy’s Chairman, President and Chief Executive officer.

Cary Brown

Thanks, Jim, and thank you to our friends and unitholders joining us today. It was an interesting second quarter for us. Good operational results and strong acquisition efforts were over showed by several factors that negatively impacted our adjusted EBITDA.

We saw swing from high in the first quarter to the low in the second quarter approximately $30 in oil prices and that create some usual things that look little different for us.

Due to WTI average oil prices of approximately $106 in March and $82 in June, we had an unusually large negative oil lag effect about $5.2 million burdened our adjusted EBITDA on second quarter.

In addition, our realized oil price in the second quarter were impacted by increased average oil differentials, we saw the Permian and Midland-to-Cushing differential with all to about $5, historically that’s been about a $50. Those are -- that’s a space where we are unhedged and gave us little bit concern, we are happy to report that it already back inside of what it was back to the norms in the first quarter.

So it’s down from $5 differentials on oil Midland-to-Cushing to about $50 or even inside that. So that could have been the long-term impact. It was a short-term impact affected us in the quarter. Also saw some issues around Wyoming differentials but those were also coming back.

These factors combined with the impact of falling commodity prices on the portion of our quarterly production that was unhedged were the primary contributors to our decline in adjusted EBITDA from the first quarter to the second quarter.

On a positive note, we think those are short-term issues because the refineries are backup until one of those differentials are back to normal.

On the acquisition front, we closed seven acquisitions of producing properties for about $105 million, we believe to be highly accretive, including our acquisition of oil properties in North Dakota and Montana, these are new states for us, we are growing at Rocky Mountain division and feel good about being up there.

Our $105 million of acquisitions in the second quarter makes that one of our strongest quarters ever and our best since the fourth quarter of 2010 on acquisitions. The production from these acquisitions along with several successful workovers in Wyoming and Permian Basin helped keep our production relatively flat during the second quarter despite not drilling any of our operated Wolfberry locations during March and April.

In addition, we continued to keep expenses in line and made larger than expected investments in some several attractive non-operated drilling projects in the quarter.

Overall, the performance for the first half of 2012 was strong, as we generated $95 million of adjusted EBITDA and $55 million of distributable cash flow. We look forward to realizing the full impact of our acquisitions during the second half of 2012, and we feel good about our pipeline of potential acquisitions and our inventory of development projects.

Based on these results over the first half of ‘12 and our positive long-term outlook, we increased our quarterly distribution for the seventh consecutive quarter to $0.56 per unit, which was paid on August 10, 2012. Since the second quarter of 2011, we have increased our quarterly distribution about 3.7%. So, all in all, we feel really good about where we are.

On slide might be that first quarter was as good as, it might look, and the same quarter is not as bad as you look, but when you look the full half -- first half of year and you look those results will run on track with where we expected to be and with continued commodity prices in this level, we see good things for the rest of the year.

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