Listening to today's conference call, with the back drop of a 5% down day playing out in the market, I felt good about LGCY management and my decision to hold this partnership. It took guts for the guys to put out flat guidance for 2014. They knew the reception wouldn't be good, especially on the heels of weather affected poor Q4 numbers - and right after the call wunderlich hit the downgrade button. But they won't overpay for assets and they won't paint themselves in a corner by committing to do a bunch of deals in 2014. It is this kind of discipline that has generated one of the best operating track records of any upstream - with a great balance sheet and solid coverage ratios to boot. I added to my position today and I am quite sure that 2014 will be a great year for LGCY.
I have to agree. Legacy's management is among the best in the E&P MLP sector. They are not aggressive and they are not afraid of sticking to their original plan, which is to provide steady distributions and maintain a strong balance sheet and capital structure. Growth of production, reserves and of course, cash flow and distributions comes second. They are patient and seem to be willing to wait for well priced deals. As one cane see, they closed a little over $100 million in deals in '13, but the average size was around $6 million. These are essentially "off the radar" deals that others are not interested in pursuing as it is not worth their time (Linn for example). Legacy can do 10-15 of these $6-$7 million dollar deals every year and add meaningful reserves and production without taking on much risk as these are true bolt-on acquisitions.
I expect Legacy will continue to under-promise and over-deliver, as usual. Distribution growth will likely continue to be marginal, but one must remember, they only swing for the fences when a deal comes along that is fantastic (like the Rockies Concho deal).
Otherwise, I'd expect for them to continue to grow distributions at 3% annually, continue to add moderately to their reserves and production and keep patiently waiting for the next big deal.
Yes, they alluded to January being bad during the conference call. At present, yield is around 8.9%. Probably a little bit of room for yield compression, but not too much
What will be interesting to see (in late '14, or early '15) how the horizontal Wolfberry starts to impact them. They will be balancing declines with the higher returns. What may end up happening is they will simply have to increase their maintenance capex to stem the declines..but with the long term benefit of increased production and reserves.
I still believe LGCY is one of the shining stars in the E&P MLP sector. They aren't just an asset aggregator, but have a strategic plan.
Also, they appear to be looking at gas deals, since many of the larger players are looking to divest gas to redirect that cash into oil programs. I like that they are trying to be contrarian and going after the best deals, even if it does move them away from being so oily.
The other takeaway here is that all MLPs are likely to be feeling the pressure from the higher prices demanded by sellers. The weaker players - that is those with higher yields and corresponding lower unit prices - will be particularly pressed. All of the MLPs need reasonably priced deal flow to continue growing distributions.