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Edited Transcript of LGCY earnings conference call or presentation 2-Aug-18 2:00pm GMT

Q2 2018 Legacy Reserves LP Earnings Call

MIDLAND Aug 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Legacy Reserves LP earnings conference call or presentation Thursday, August 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Daniel Westcott

Legacy Reserves LP - President & CFO of Legacy Reserves GP, LLC

* Kyle M. Hammond

Legacy Reserves LP - Executive VP & COO of Legacy Reserves GP, LLC

* Paul T. Horne

Legacy Reserves LP - Chairman & CEO of Legacy Reserves GP, LLC

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Conference Call Participants

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* Jiuying Ye

Imperial Capital, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the Second Quarter 2018 Legacy Reserves LP Conference Call. (Operator Instructions) Please also note that this event is being recorded.

I would now like to turn the conference over to Dan Westcott, Legacy's President and Chief Financial Officer. Please go ahead.

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James Daniel Westcott, Legacy Reserves LP - President & CFO of Legacy Reserves GP, LLC [2]

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Thank you, Chris. Good morning, everyone. We appreciate you dialing in for Legacy's Q2 2018 Conference Call. As always, we'd like to remind you that during the course of this call, Legacy management will make certain statements that will be forward-looking statements 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. Our actual results may differ materially from those discussed. This morning, we'll make references to the press release that we posted last night and to the investor presentation we posted this morning to our website at www.legacylp.com. Lastly, we encourage you to read through all of our SEC filings for important disclosures.

With that, let me turn the call over to Paul Horne, Legacy's Chairman and Chief Executive Officer. Paul?

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Paul T. Horne, Legacy Reserves LP - Chairman & CEO of Legacy Reserves GP, LLC [3]

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Thanks, Dan, and welcome, everyone, to this morning's conference call. We have made some significant accomplishments since our last call, and I want to touch on those this morning. During the quarter, we brought online 9 horizontal wells in the Permian. Included in that figure is an 8-well pad in Howard County that actually straddled Q2 and Q3 and is, therefore, only partially reflected in our quarterly numbers. While still very early, we like what we're seeing in those production results. In total, we brought online 76 wells to-date since commencing our 2-rig Permian horizontal program 3 years ago.

We recently spud our final well under our joint development agreement with TPG Sixth Street Partners. The JDA with TPG proved crucial in transforming our business model and providing needed capital to develop our substantial Permian resource through the downturn. They have been a great partner over the last 3 years, and we are thankful for TPG's support.

As we move to drilling and completing horizontal wells outside of the JDA, we are excited to gain additional exposure to our substantial Permian resource, which will serve as a growth engine for the future of the company.

Our Permian horizontal program helped us achieve record oil production of 17,901 barrels per day, even against the headwind of wellbore interference caused by our own offset fracs and those of nearby operators.

Our shallow-decline Permian base assets also played a big role in our results and, in our opinion, is a differentiating factor for Legacy relative to many other companies, exhibiting a less than 2% decline rate during the quarter and provided strong free cash flow to fund this production growth.

We achieved a quarter-end total debt to pro forma adjusted EBITDA ratio of 4.7x, representing a reduction of nearly 3x since its peak of 7.6x at year-end '16.

We worked tirelessly through the downturn to reduce operating costs, sell noncore assets, transform the business by increasing our interest in our Permian horizontal development program and, most importantly, to drill great wells efficiently. I'm really proud of the outstanding work the team has done to deleverage the business and position us for growth.

Also, our BD and land teams really improved value of the business by recently completing several trades involving a puzzle of 11 different tracts of land in the Permian Basin. The team was effectively able to monetize 8 small tracts with an average size of 55 adjusted net acres by trading them for 3 tracts adjacent to our near-term drilling prospects. The benefit of these deals are measurable, a 58% increase to our average lateral length and a 45,000-foot increase in our net lateral footage to be drilled. Not surprisingly, this will improve the projected economics of these drilling locations, and it allows us to monetize small tracts that many investors likely haven't valued within our portfolio.

We own a lot more of these small tracts and are actively working to move them from our small-tract stack to our drillable-inventory stack.

Now I'll point you all to Page 7 of the posted presentation where we present some new data surrounding these small tracts. The team has good -- done good work to identify these tracts comprising 56,000 gross or 15,500 net acres in the Midland and Delaware Basins, with (inaudible) perspective for Wolfcamp, Bone Spring and Spraberry development. These figures specifically exclude the Central Basin Platform in NorthWest Shelf areas where we see a lot of potential for these type of tracts as well, and we look forward to sharing those figures in the future. Those acres also don't include any of our 922 identified horizontal stakes.

As always, we continue to examine and reevaluate our resource potential. For those that have followed us for a while, you know that our Permian position, in particular, is a conglomeration of over 150 acquisitions, and over many years, the originally targeted mature PDP reserves. Consequently, we didn't do the upfront work to determine our horizontal development potential. As we continue to go through land files and do the corresponding engineering and geologic work, we update our views.

Page 9 of the posted presentation shows our latest look at horizontal potential in our asset base. We have and will continue to refine our technical work as well as spacing and lateral length assumptions. These figures represent both the identification of new prospects and the removal of those where we no longer see potential. There's also been some divestitures and trades running through these figures and conversion to PDP from wells bought -- brought online in the first half of the year. These are operated-only locations, generally 1-mile or greater.

We're proud to report an increase in our operated horizontal acreage to 51,500 gross and 41,000 net, and an increase in the number of operated drilling locations to 922 gross and 665 net, respectively, representing more than 25 years of inventory, assuming our current drilling pace of 2 rigs and 18 wells per rig per year.

Lastly, we continue to make good progress on our corporate reorganization. Dan will provide some details in a minute, but I'm really pleased to see how our asset development and resource delineation and expansion are coinciding with our corporate reorganization. We look forward to capitalizing on those developments in the fourth quarter and beyond as Legacy Reserves Inc.

I'll now turn the call to Kyle Hammond, Legacy's Executive Vice President and Chief Operating Officer to talk in more detail about our results of operations. Kyle?

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Kyle M. Hammond, Legacy Reserves LP - Executive VP & COO of Legacy Reserves GP, LLC [4]

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Thanks, Paul. We are proud to deliver record daily oil production this quarter as 20 new wells brought online during Q1 hit their stride in Q2. We discussed significant levels of frac interference in our last conference call, and we experienced similar levels of frac interference in the second quarter.

We brought online 9 wells during the second quarter, some of which belong to an 8-well pad in Howard County that we brought online late Q2 and early Q3. We've previously talked about our dedicated frac fleet and are pleased to realize the efficiencies of this agreement and the cost reductions it provides. Our folks were also able to procure a second fleet on the spot market to accelerate the development of the 8-well pad. This pad also served as a pilot for 2 new completion implementations for Legacy, reincreasing the use of dissolvable plugs in the lateral and increasing the use of resin-coated sand. One decrease is coiled tubing used in the initial completion, and the other reduces subsequent clean-outs once the wells are on production.

We spud our first well in Martin County during the quarter where we're drilling a 4-well pad of 2-mile laterals in the Wolfcamp B. There are a lot of offset data points as these pads sit between 2 very densely developed areas of Martin County, and we look forward to seeing those results later on this year.

We started building surface locations in Midland County, and we'll start moving the rig to that pad once we complete the drilling in Martin County. We really like this around-the-basin development strategy as it allows us to leverage data from offset operators to optimize landing and frac design heading into our batch completion. We also see -- or expect to see a reduction in wellbore interference as we're developing areas that are not direct offsets to our existing young production.

The land trades completed this quarter, as Paul mentioned, are a big deal to my operations team. Block year rate with longer laterals will help our development program on multiple levels throughout the process, and we look forward to executing more of those trades.

Our gas and NGL production and revenue had some variance this quarter, and that's driven by our non-Piceance Basin properties where we achieved record ethane recovery. This drove the large increase in NGL volumes. This is clearly a net revenue enhancing strategy by the marker of these volumes despite the reduced gas price realization you'll see in our quarterly figures.

With that, I'll now turn back -- the call back to Dan for more about our financial results and broader corporate efforts.

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James Daniel Westcott, Legacy Reserves LP - President & CFO of Legacy Reserves GP, LLC [5]

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Thank you, Kyle. I'll first touch on our financial results before providing an update on the corporate transition. EBITDA grew by 2% during the quarter to $72 million, which was driven by a 4% increase in daily oil volumes, primarily attributable to our Permian horizontal development program.

While headline NYMEX oil prices increased by 8% during the quarter, our realized price only increased by 1.5% as the Mid-Cush differential widened, increasing our total company oil differential from $2.53 in Q1 to $6.81 in Q2.

Gas price realizations also declined as NYMEX prices declined on a quarter-over-quarter basis by $0.23, or $0.17 when referencing the last 3 days' pricing by IFERC, and that's the metric by which most of our natural gas sales are determined. As expected, this was further exacerbated by the deterioration of (inaudible) and CIG differentials during the quarter. Offsetting those reductions, our Permian gas volumes increased this quarter, and those volumes include meaningful NGLs, consequently increasing our realized price.

On the cost side, LOE per BOE declined from $10.99 in Q1 to $10.84 in Q2. This includes the mix of lower Permian SWD costs and higher Permian work over activity related to the sub (inaudible). While LOE is running a little higher than we like, our core competency as a cost-efficient PDP operator will allow us to make the tweak necessary to bringing this figure down.

Development capital for the quarter was $81 million, bringing year-to-date total to $140 million, nearly all of which was spent on our horizontal Permian development. We've fracked 25 wells so far this year as we brought online our third 8-well pad, reducing our year-end DUC count. We expect that cadence to become less choppy going forward as we pursue smaller 4-well pads.

For the remainder of the year, we expect to complete an additional 9 wells. So our previously guided capital figure of $225 million remains unchanged at this point in time.

Now to address the current -- the question all Permian operators have been getting. Yes, the basin takeaway capacity is very tight. We, like other operators, continue to see the associated negative effects of the increased -- of increased operator activity. Even in Q2, we had days with limited gas flows due to third-party plant issues, and we've had leases with abnormally high tank levels because of limited truck drivers to haul the oil from our older leases. We continue to run largely unimpeded at our areas of new production, and we have great agreements in place with large, reputable midstream providers and marketers.

We've recently seen the wide Mid-Cush differentials moderate somewhat, and we anticipate, as additional projects are announced each quarter, the Permian will adequately address these issues as midstream companies cease these moneymaking opportunities. We remain thankful for our Mid-Cush hedges, which cover about 60% of our anticipated oil production in the second half of '18. And we continue to pursue tangible in-the-field strategies that will enhance our netbacks on the margin.

Now as Paul mentioned, we're encouraged by our continued march towards becoming a C corp. Since our last conference call, we entered into a settlement agreement with holders of our preferred units to settle the previously disclosed class action lawsuit. In order to avoid the additional time and expense of ongoing litigation and without admitting fault, we agreed to issue approximately 10.7 million additional shares of New Legacy to holders of our preferred units for a total of approximately 27.6 million shares to existing holders of our preferred units.

Following final approval by the court, each outstanding preferred unit will be converted into a right to receive approximately 2.9 shares of New Legacy common stock. The court has entered into a scheduling quarter and set September 12 as the date of the final fairness hearing, at which Legacy and the plaintiff will request final approval of the settlement.

Separately, we filed what we believe is our final amendment to our S-4 yesterday evening, and we're requesting effectiveness from the SEC today. We anticipate filing a definitive proxy statement and commencing the unitholder solicitation in the coming days.

Within that solicitation material, you'll notice that we have set September 19 as the date of the special meeting of unitholders to vote upon our corporate reorganization. We anticipate concluding all of this and trading under the same LGCY ticker as Legacy Reserves Inc. following that special meeting.

As we step back and look at it all, I think Paul said it well, we've got a lot of good things going forward for us, and we certainly look forward to our new life as a C corp.

With that, I'll turn the call back over to the operator and open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Irene Haas of Imperial Capital.

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Jiuying Ye, Imperial Capital, LLC, Research Division - Associate [2]

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This is Claire Ye for Irene. Well, first question is, could you speak to the realization of NGL? Is that a function of the Piceance Basin as a recovery or revenue recognition? Could you talk a little bit more about it?

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James Daniel Westcott, Legacy Reserves LP - President & CFO of Legacy Reserves GP, LLC [3]

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Sure, Irene. Thanks for the question. Relative to Q1, our NGL realizations were down, and that is a function of really increased ethane processing that is a lower component in the NGL -- within the NGL stream. And so we've seen record-level processing there in our Piceance area, so that has driven the price.

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Jiuying Ye, Imperial Capital, LLC, Research Division - Associate [4]

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Okay. And the second question is, can you talk a little bit more about the nature of the impairment?

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James Daniel Westcott, Legacy Reserves LP - President & CFO of Legacy Reserves GP, LLC [5]

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Sure. We had $35 million of impairments for the quarter. I think $34 million of it is gas related. It's really the tail price on -- so the -- when you look at 5-year NYMEX curve -- or the forward NYMEX curve, the tail price is lower than it used to be. And we've just -- we've hit some economic limit on some of our gas PDP assets.

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Operator [6]

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Ladies and gentlemen, we have no further questions. I would like to hand the conference back to the Legacy management for some closing comments.

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Paul T. Horne, Legacy Reserves LP - Chairman & CEO of Legacy Reserves GP, LLC [7]

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We'd like to thank you again for dialing into our call today. If you have any additional follow-up questions, please don't hesitate to reach out to myself or Dan. Thank you.

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Operator [8]

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Thank you very much, sir. Ladies and gentlemen, that then concludes the conference call, and you may now disconnect your lines.