Exploration & Production | Quarterly / Earnings Reports | Production | Third Quarter (3Q) Update

Legacy Ups Oil Production 60% in 3Q; Talks Oil Price Impact

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   |    Wednesday,October 29,2014

Legacy Reserves LP announced third quarter results for 2014.

Q3 and YTD 2014 highlights include:

• Record production of 32,109 and 25,004 Boe/d for the three and nine month periods, respectively.
   
• Record revenue of $149.7 million and $412.7 million for the three and nine month periods, respectively.
   
• Adjusted EBITDA of $77.7 million and $213.5 million for the three and nine month periods, respectively.
   
• Distributable Cash Flow of $36.2 million and $103.9 million for the three and nine month periods, respectively.

Cary D. Brown, Chairman, President and Chief Executive Officer of Legacy Reserves GP, LLC, the general partner of Legacy, commented: "Once again, Legacy has posted record production and record revenue this quarter. This out-performance was driven by a full quarter's impact of our WPX acquisition and great execution from our employees. Price realizations underperformed this quarter as the Midland-to-Cushing differential averaged $9.81 bringing our total company-wide differential for the quarter to $10.73. We are already seeing some improvement in Mid-Cush and expect to see continued progress as additional third-party infrastructure comes online. We continue to see interesting acquisition opportunities to accretively grow our asset base, and on October 8^th, we proactively issued equity to put ourselves in a position to play offense in this volatile oil market. Our reported distribution coverage for the quarter was 0.86x, an artificially low figure given the distribution includes the impact from our October equity offering of 11.5 million units. We view our quarterly distribution coverage as 1.03x without the equity issuance and 1.12x if we also consider Mid-Cush at $6.50 or post-Q3 levels. Through this normalized viewpoint, we posted a very good quarter and I'm thankful for the team's hard work.

"Subsequent to quarter end we have experienced a weakening oil price and a corresponding slide in our unit price. As an oil and gas producer, higher oil prices are better for us. That being said, since going public in January 2007, we have seen a wide range of commodity prices and been able to consistently deliver a strong record of financial results including thirty-one consecutive quarterly distributions. We pursue several strategies to help us in times of decreasing commodity prices. Firstly, we opportunistically hedge our production volumes. We have nearly 1.0 million and over 3.3 million barrels of oil hedged in Q4 2014 and 2015 at weighted-average floor prices of $94.22 and $91.86. Based on our Q3 oil production of 13,272 bbl/d, that equates to approximately 81% and 68% hedged in Q4 2014 and 2015, respectively. 

"Secondly, we maintain a conservative balance sheet and financial flexibility. We believe we have the strongest financial position of any upstream MLP as measured by Debt / EBITDA and availability under our revolver. Our recent $300-plus million equity offering leaves us with nearly $885 million of current availability under our recently affirmed $950 million borrowing base. In this uncertain market, we enjoy having long-term, fixed-rate debt and the ability to quickly draw down on our revolver to make attractive acquisitions.  Lower oil prices will impact the entire marketplace and it is times like these that we often find our best investment opportunities, especially when we have the balance sheet to play offense. Year-to-date, we have closed on $544 million of acquisitions, and have evaluated nearly $3.5 billion worth of properties, including several sizable asset packages that could transact before the end of the year. Despite the recent market headwinds, I am excited about the potential opportunities in front of us and Legacy's path forward."

Paul Horne, Executive Vice President and Chief Operating Officer of Legacy's general partner, added, "The third quarter gave us a full quarter's effect from all of our acquisitions made during the year. WPX volumes are coming in on plan and we continue to be extremely pleased with that acquisition. Permian volumes experienced some hiccups this quarter as significant rain and some flooding curtailed production and knocked off a few production batteries. Those issues have been alleviated and we have already seen a return to production. Rockies volumes have held up well. Our drilling activities remain focused in the Permian, split this year primarily between vertical Wolfberry and horizontal Bone Spring wells. The economics of those programs remain very strong with attractive rates of return at $80 oil. 

"I've been pleased with the progress we have seen in operating expenses. While company-wide expense dollars have risen due to acquisitions, we are seeing LOE/BOE improve across the board. Our company-wide LOE/BOE was $22.61 in Q1, $19.85 in Q2 and $17.55 in Q3, an improvement of over $5 per barrel. Adding more gas production to our portfolio has helped bring this figure down, but we have also seen cost reductions in our base properties, a tribute to our team's operational experience and an accomplishment for which I am quite proud. Excluding our year-to-date acquisitions, Q3 LOE/BOE decreased $1.03 from Q2 and $1.99 from Q1. If the recent downturn in oil prices persists, I expect us to be able to continue to drive production expenses downward. Historically, when oil prices have hovered in a lower price environment, operating costs are reduced in step. The reduction is not simultaneous, but it does indeed occur."

Dan Westcott, Executive Vice President and Chief Financial Officer of Legacy's general partner, commented, "We completed our equity offering on October 8^th, raising approximately $304 million of net proceeds. With roughly $65 million drawn on our revolver, we have approximately $885 million of current availability, a record level for Legacy. Our pro forma leverage of 2.6x 2015 consensus EBITDA is the lowest amongst our upstream MLP peers, and provides us with ample liquidity to pursue the multiple acquisition opportunities we are seeing in the marketplace. In addition to our oil hedges that Cary mentioned, our 2015 gas hedges cover roughly 69% of current gas production at an average floor price of $4.38. Our attractive debt levels, ample liquidity and strong hedge portfolio position us to be one of the most agile participants in the upstream space going into an uncertain commodity price environment.

Financial and Operating Results – Third Quarter 2014 Compared to Third Quarter 2013

• Production increased 60% to 32,109 Boe/d from 20,043 Boe/d primarily due to the WPX acquisition and other recent acquisitions.
   
• Average realized price, excluding net cash settlements from commodity derivatives, decreased 31% to $50.67 per Boe in 2014 from $73.85 per Boe in 2013 due to the significant increase in natural gas and NGL production as such products are generally less valuable per Boe than oil. Average realized oil price decreased 15% to $86.52 per Bbl in 2014 from $102.01 per Bbl in 2013. This decrease of $15.49 per Bbl was attributable to a decrease in the average West Texas Intermediate ("WTI") crude oil price of $8.56 per Bbl combined with higher realized regional differentials. Average realized natural gas price decreased 13% to $3.79 per Mcf in 2014 from $4.34 per Mcf in 2013. While the average Henry Hub natural gas price index increased by $0.39 per Mcf in 2014, this increase was offset by lower realized gas prices from gas production associated with the WPX acquisition. Finally, our average realized NGL price decreased 8% to $0.97 per gallon in 2014 from $1.05 per gallon in 2013.
   
• Production expenses, excluding ad valorem taxes, increased 41% to $51.8 million in 2014 from $36.7 million in 2013. Production expenses increased primarily due to expenses associated with our acquisitions, including $10.7 million related to the WPX acquisition as well as other recent acquisitions, development activities and, to a lesser extent, industry-wide cost increases. On a per BOE basis, production expenses decreased from $19.88 to $17.55 driven by acquisitions of properties with lower per BOE production expenses as well as cost reductions in our ongoing operations.
   
• Legacy's general and administrative expenses, excluding unit-based/Long-Term Incentive Plan ("LTIP") compensation expense, increased to $7.3 million in 2014 compared to $6.6 million in 2013. This increase was primarily attributable to an increase in salary and benefit expenses related to the hiring of additional personnel to manage our larger asset base.
   
• Cash settlements paid on our commodity derivatives were $2.4 million during 2014 compared to $6.0 million in 2013, a $3.6 million change between the periods.
   
• Total development capital expenditures were $33.5 million in 2014 and heavily weighted towards our Permian Wolfberry and Bone Spring drilling. Non-operated capital expenditures comprised 25% of our total capital expenditures in 2014 with activity primarily in the Permian and Mid-Continent.

Financial and Operating Results – Third Quarter Year to Date 2014 Compared to Third Quarter Year to Date 2013

• Production increased 27% to 25,004 Boe/d from 19,755 Boe/d primarily due to the WPX acquisition and other recent acquisitions. These increases were partially offset by production declines in our Lower Abo assets as well as downtime related to inclement weather in the first quarter of 2014.
   
• Average realized price, excluding net cash settlements from commodity derivatives, decreased 10% to $60.46 per Boe in 2014 from $67.39 per Boe in 2013. Average realized oil price decreased 2% to $89.59 per Bbl in 2014 from $91.12 per Bbl in 2013. This decrease of $1.53 per Bbl was attributable to higher realized regional differentials partially offset by an increase in the average WTI crude oil price of $1.48 per Bbl. Average realized natural gas price increased 1% to $4.52 per Mcf in 2014 from $4.46 per Mcf in 2013. While the average Henry Hub natural gas price index increased by $0.73 per Mcf in 2014, this increase was partially offset by lower realized gas prices from the gas production associated with the WPX acquisition as compared to the prices realized by our Permian and Mid-Continent assets. Finally, our average realized NGL price decreased 5% to $1.00 per gallon in 2014 from $1.05 per gallon in 2013. The large majority of our separately reported NGL production is from our Mid-Continent and Rockies regions.
   
• Production expenses, excluding ad valorem taxes, increased 29% to $133.5 million in 2014 from $103.3 million in 2013. Production expenses increased primarily due to $12.8 million of expenses related to the WPX acquisition and from expenses associated with our other recent acquisition and development activities as well as increases in well workover expenses and industry-wide cost increases.
   
• Legacy's general and administrative expenses, excluding LTIP compensation expense, increased to $26.9 million in 2014 compared to $17.7 million in 2013. This increase was primarily attributable to $4.6 million increase in acquisition related expenses as well as an increase in salary and benefit expenses related to the hiring of additional personnel to manage our larger asset base.
   
• Cash settlements paid on our commodity derivatives were $12.0 million during 2014 compared to $4.7 million in 2013, a $7.3 million change between the periods.
   
• Total development capital expenditures were $91.4 million in 2014 and heavily weighted towards our Permian Wolfberry and Bone Spring drilling. Non-operated capital expenditures comprised 24% of our total capital expenditures in 2014 with activity primarily in the Permian and Mid-Continent.