Legacy Reserves LP. Executive Oil Conference. March 29, Page 1

Transcription

1 Legacy Reserves LP Executive Oil Conference March 29, 2011 Page 1

2 Table of Contents Overview of the MLP Sector Legacy Reserves LP Commodity Hedging Permian Basin Revitalization Legislative & Regulatory Developments Page 2

3 Overview of the MLP Sector Page 3

4 MLP Basics (1) Currently, there are approximately 62 Energy MLPs (2), with a total market capitalization of approximately $226 billion (compares to XOM at $414 billion) Must receive at least 90% of gross income comes from qualifying sources Income from the transportation, storage, processing, refining, marketing, exploration, production, or mining, of any mineral or natural resource Other MLP qualifying income includes interest, dividends, real estate rents/ income, and income/gains from commodities Trade on public securities exchanges ( units as opposed to shares ) without paying entity-level income taxes Taxes are paid by public limited partner unitholders on a pro rata basis Similar to REITs, MLPs pay out the majority of their free cash flow in the form of distributions to unit holders (1) Information courtesy of Wells Fargo Securities (2) Excludes publicly traded general partners and i-shares Page 4

5 MLP Basics (continued) (1) Investors distributions are mostly tax-deferred Given high payout of cash flow, MLPs require access to the capital markets to fund growth initiatives The basic MLP value proposition is the combination of tax-advantaged yield and sustainable distribution growth MLPs generally pay quarterly distributions that imply an annual yield in the mid/ high single digit percentage range Analysts expect average annual total returns (distributions plus price appreciation) in the low double-digit percentages Compression Propane Refining Products Pipeline & Terminal *Plastics *Refining *Timber Crude Pipeline *Fertilizer Natural Gas Crude Mktg. Pipeline & Gathering Gathering, Processing, & Fractionation Coal Shipping LNG Exploration & Production Storage *Note - The Plastics, Refining, Timber, and Fertilizer MLP(s) introduced in the above time line were either dissolved or converted into another entity. Source: Partnership reports (1) Information courtesy of Wells Fargo Securities Page 5

6 MLP Value Proposition (1) Investors Tax efficient income plus distribution growth Energy exposure with managed commodity price risk Portfolio diversification Distribution growth and potential exposure to oil fundamentals provides hedges against inflation MLPs have outperformed the S&P 500 in 8 of the last 10 years Estate planning tool cost basis is reset at the time of transfer Population demographics favor total return vehicles search for yield Issuer Tax-advantaged structure provides an improved cost of capital Potential for premium valuation Ability to maintain control through GP interest Upside from Incentive Distribution Rights (not included in most E&P MLP structures, including Legacy) (1) Information courtesy of Wells Fargo Securities Page 6

7 Business Characteristics of Major MLP Sub-Sectors (1) PIPELINES & STORAGE/ TERMINALS Cash flows for pipeline and storage MLPs are very stable due to demand growth, feebased contracts, and in some cases, FERC regulation SHIPPING Shipping MLPs seek to secure multi-year, fixed-rate time charters with reputable counterparties to carry various types of cargo PROPANE Propane distribution is a cost plus margin-type of business. Changing nature of competition has allowed margin to expand in the face of rising propane prices COAL Royalty-oriented coal partnerships enter into longterm leases that provide coal operators the right to mine in exchange for royalty payments. Other MLPs are coal operators with long-term sales contracts GATHERING & PROCESSING G&P MLPs seek to minimize cash flow volatility by utilizing hedging and entering into fixed-fee contracts that are not tied to commodity prices UPSTREAM Most have hedges that lock in prices for 70-90% of their anticipated production for 1-3 years, which leads to visible, stable cash flows (1) Information courtesy of Wells Fargo Securities 7 Page 7

8 Comparison of MLP Sub-Sectors (1) Market data as of 03/25/11 Note: Excludes BKEP, CEP and KSP from all calculations (1) Information courtesy of Wells Fargo Securities Page 8

9 2011 YTD Total Return (1) (1) Information courtesy of Wells Fargo Securities as of market close on 3/25/11 Page 9

10 Current Yields (1) (1) Information courtesy of Wells Fargo Securities as of market close on 3/25/11 Page 10

11 Institutional Investors in MLPs (1) While MLPs attract primarily retail investors, institutions heavily invested in the sector in MLP closed end funds put over $2.0B to work in the sector in Q4. Kayne Anderson, Tortoise and Clearbridge all introduced new funds in 2010, and CEFs are active in 2011 as well. (1) Information courtesy of Wells Fargo Securities Page 11

12 Upstream MLPs of the 1980s Monetization scheme in some cases Some had shorter-lived reserves (several offshore GOM MLPs) Retail drilling partnerships (Southwest Royalties, Parker & Parsley) Retail Acquisition partnerships (Graham Royalty, American Exploration, Geodyne Resources) No hedging Often too much leverage given lack of hedging Many rolled up by sponsor and others sold Not to be confused with U.S. Royalty Trusts Page 12

13 Reincarnation of the U.S. Upstream MLP Royal Bank of Canada (RBC) helped bring the Canadian Royalty Trust concept to the U.S. in the already established MLP structure 68% of the Canadian Trusts outstanding units were owned by U.S. investors Quantum Energy Partners took RBC s advice and with their help, took Linn Energy LLC public as the first U.S. upstream MLP in January 2006 after a year-long effort in preparing audits and registration statements Kolja Rockov left RBC to join Linn in early 2005 as the CFO Mark Ellis, Linn s current President and CEO, was hired in late 2006 as EVP and COO to help take Linn to the next level John Walker and Mike Mercer at Enervest starting planning an upstream MLP in 2004, resulting in taking EVEP public in October 2006 with Enervest assets Page 13

14 Reincarnation of the U.S. Upstream MLP (continued) Scott Smith sought to convert a U.S. Royalty Trust (Eastern American Natural Gas Trust) to an upstream MLP in , but failed to get the unitholder vote required to convert. Scott moved on to found Vanguard Natural Resources, which he took public in November 2008 After initially working on Linn as part of Quantum, Steve Pruett went to Midland to form a Permian Basin MLP, which lead to teaming with Midland-based businesses owned by the Brown and McGraw families that resulted in Legacy s creation in 2005 $85 million private placement in March 2006 and IPO in January 2007 Encore, Constellation, Pioneer all tapped the MLP market to monetize upstream assets Quantum followed up Linn and Legacy by raising institutional funds to create Quantum Resources in 2008, and took a portion of the assets public in late 2010 as QR Energy, LP Page 14

15 Reincarnation of the U.S. Upstream MLP (continued) Atlas Energy Resources was consolidated back into its C-Corp parent in 2009, while Quest Energy Partners and its C-Corp and midstream affiliates were combined and renamed PostRock Energy (C-Corp) in early 2010 After Denbury bought the GP and 46% of the LP units of Encore Energy Partners ( ENP ) as part of its acquisition of Encore Acquisition Company in 2010, Vanguard bought Denbury s GP and LP interests in ENP in late On March 25, Vanguard offered to buy the remaining outstanding units of ENP from public unitholders There are now 9 Upstream MLPs, including Constellation Energy Partners, which is excluded from the analyses on prior pages due to its suspended distribution and financial difficulties Page 15

16 Profile of U.S. Upstream MLPs Total equity market capitalization of over $15 billion in 9 upstream MLPs Total enterprise value of over $20 billion Long-lived reserves with predictable production decline rates Extensive use of hedging to provide greater cash flow stability Reasonable use of debt financing Ability to make accretive acquisitions of producing properties given cost of equity and debt capital versus purchase price of assets Ability to maintain or modestly grow production through moderate levels of capital reinvestment Page 16

17 Valuations of Publicly Traded E&P MLPs (1) (1) Information courtesy of Wells Fargo Securities Page 17

18 Legacy Reserves LP Page 18

19 Forward-Looking Statements Statements made by representatives of Legacy Reserves LP (the Partnership ) during the course of this presentation that are not historical facts are forward-looking statements. These statements are based on certain assumptions made by the Partnership based on management s experience and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Partnership, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include risks relating to financial performance and results, availability of sufficient cash flow to pay distributions and execute our business plan, prices and demand for oil and natural gas, our ability to replace reserves and efficiently exploit our current reserves, our ability to make acquisitions on economically acceptable terms, and other important factors that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. Please see the factors described in the Partnership s Annual Report on Form 10-K for the year ended December 31, 2010 in Item 1A under Risk Factors, our Quarterly Reports on Forms 10-Q, and subsequent filings with the Securities and Exchange Commission. The Partnership undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events. Page 19

20 Legacy Reserves: Investment Thesis Mature, oil-weighted asset base (86% PDP, 74% liquids) with a stable production profile that is supported by moderate levels of capital reinvestment Strong acquisition track record, with approximately $750 million of acquisitions of various sizes in the Permian Basin, Rockies and Mid-Continent regions since 2006 Local network that provides steady, negotiated deal flow in the Permian Basin and Texas Panhandle to complement larger acquisitions Alignment of interests through approximately 24% management and insider ownership and no Incentive Distribution Rights ( IDRs ) Hedge position that provides strong distribution and credit support Extensive development inventory that is not fully reflected in proved reserves Attractive balance sheet with moderate debt levels and ample capacity under our revolving credit facility Growth in distributions driven by future acquisitions and development of our portfolio of drilling locations Page 20

21 Legacy Management Team Name Title Years Experience in the Permian Basin Years Experience in the Oil & Gas Industry Cary D. Brown Chairman & CEO Steven H. Pruett President & CFO Kyle A. McGraw EVP, Business Development & Land Paul T. Horne EVP, Operations William M. Morris, CPA VP, Controller & CAO Independent Board Members William R. Granberry Former Pres & COO Tom Brown, Inc. G. Larry Lawrence Former Controller Pure Resources William D. Sullivan Former EVP Anadarko Petroleum Kyle D. Vann Former CEO Entergy Koch, LP Senior Management averages over 26 years of experience Page 21

22 Legacy Ownership Ticker: LGCY Exchange: NASDAQ Unit Price (3/25/11): $31.73 per unit Quarterly Distribution: $0.525 per unit Current Annualized Yield: 6.6% Market Capitalization: $1.4 billion Founding Investors, Directors and Management 24% GP Interest <0.1% Sellers of Assets to Legacy 1% Public Unitholders 75% Note: Estimated ownership as of 12/31/10 Page 22

23 Legacy Asset Base Diversified across more than 5,300 producing wells 52.8 MMBoe of proved reserves (1) 86% PDP 74% Oil and NGLs Properties in three core areas Permian Basin (West Texas and SE New Mexico) Mid-Continent (primarily Texas Panhandle and Oklahoma) Rockies (primarily Wyoming) 10,337 Boe/d of net production during Q Approximately 70% of pro forma production is operated Long-lived reserves with history of maintaining production with moderate reinvestment rates Extensive development drilling inventory, primarily in the Permian Basin (approximately 450 locations) NOTE: (1) SEC proved reserves at Dec. 31, 2010 as disclosed in Legacy s Form 10-K Map courtesy of Raymond James & Associates Page 23

24 Proved Reserves by Operating Region Page 24

25 Permian Basin Attributes Fit the MLP Model Over 24.3 BBbls and 75.8 Tcf produced since 1921 (1) Produced over 917,407 Bopd and 4.6 Bcfpd in 2010 (1) Multiple producing formations Established infrastructure and ample take-away capacity Long-lived reserves Predictable, shallow decline rates Fragmented ownership (1) Source: IHS, 2010 Map Source: Midland Map Company Page 25

26 Permian Basin Development Opportunities Empire Field (Yeso) Eddy County, NM 14 gross locations $1.3MM per well 45% working interest Langlie-Mattix Unit Lea County, NM 21 gross locations $550K per well 52% working interest South Justis Unit Lea County, NM 12 gross locations $800K per well 15% working interest Jordan Area Units Ector County, TX 22 gross locations $740K per well Avg. 47% working interest CROCKETT Note: Reflects proved and unproved locations Wolfberry Trend Midland, Upton, Andrews and Martin Counties, TX 134 gross locations $1.7MM per well Avg. 70% working interest Spraberry Trend Reagan, Upton, Martin and Midland Counties, TX 131 gross locations $1.2MM per well Avg. 77% working interest Farmer Field Reagan and Crockett Counties, TX 112 gross locations $325K per well 100% working interest Page 26

27 Historical Acquisitions Summary Approximately $750 million of acquisitions since 2006 Permian Basin, Mid-Continent and Wyoming 71 acquisitions of mostly producing properties since 2006 averaging: $16.30 per Boe of proved reserves (including estimated development capital expenditures) 89% PDP 75% of production from oil and NGLs R/P ratio of 14.5 years $79,626 per Boepd 5.5 times cash flow Averaged over $200 million of acquisitions annually during 2007 and 2008 Approximately $280 million of acquisitions during 2010 Page 27

28 Concho Permian Acquisition On November 8, Legacy announced an acquisition of Permian Basin properties from Concho Resources Estimated production of 1,418 Boe per day 47% oil Natural gas sells at a premium due to NGL content Estimated proved reserves of 5.8 MMBoe 87% PDP 60% operated Attractive development and recompletion opportunities Expect operational synergies Map courtesy of Concho & RBC Richardson Barr Closed on December 22, 2010 for $101 million (including estimated post-closing adjustments) Page 28

29 YTD Acquisitions Summary Page 29

30 Summary Financial Information Financial and Operating Data Latest Twelve Months ($ in millions except for per unit data) 3/31/2010 6/30/2010 9/30/ /31/ /31/2010 (1) Non-GAAP financial measures. DCF per Unit calculated using average diluted shares outstanding during each quarter. Twelve Months Ended Production (Boe/d) 8,767 9,516 9,804 10,337 9,611 Revenue with Realized Hedges $54.5 $55.8 $59.1 $67.1 $236.5 Adjusted EBITDA (1) $32.7 $32.3 $35.7 $39.7 $140.4 Development Capital Expenditures $5.2 $5.1 $9.0 $13.6 $32.9 Distributable Cash Flow (1) $22.1 $23.3 $22.2 $21.5 $89.0 Distributable Cash Flow per Unit (1) $0.55 $0.58 $0.55 $0.52 $2.21 Page 30

31 Production and Adjusted EBITDA Profile Page 31

32 Quarterly Cash Distribution Profile Since its IPO in January 2007, Legacy has increased its quarterly distribution by 28% Page 32

33 Financing Strategy Legacy s long-term strategy is to fund its acquisition program at approximately 50% debt and equity over time, keeping leverage at moderate levels for financial flexibility Debt / LTM EBITDA of 2.3X (as of 12/31/10, without pro forma adjustments to EBITDA for LGCY s Permian Basin acquisition from Concho) LTM EBITDA / Cash Interest Expense of 8.7X (as of 12/31/10) Legacy recently entered into an amended and restated five-year, $1 billion revolving credit facility with an increased borrowing base of $500 million Legacy s LIBOR loan margins are 0.25% % lower and other major terms improved or remained the same compared to the previous agreement With a debt balance of $348 million as of March 10, 2011, Legacy s availability of $152 million will provide substantial capacity for additional acquisitions and further development activities Page 33

34 Sources of Capital Capital Raised Since Inception ($MM) Equity Offerings (6) $ 539 Debt Outstanding (3/10/11) $ 348 Total Capital Raised $ 887 Debt 39% Equity 61% Page 34

35 LGCY Performance vs. Peers and Broad Market As disclosed in our Annual Report, the value of $100 invested in LGCY at our IPO on January 11, 2007 through March 4, 2010, with distributions, versus an equally weighted upstream MLP peer group index (BBEP, ENP, EVEP, LINE, PSE, QRE and VNR) with distributions and the S&P 500 Index over the same period. Page 35

36 Historical Impact of Hedging Page 36

37 Legacy Core Competencies Evaluation of Acquisitions and Development Projects Review property performance history Apply specific reservoir and operating knowledge Finance Capital Requirements Manage liquidity and flexibility in credit facility Access and place equity appropriately Execute the Plan Integrate properties efficiently Identify and implement opportunities to increase production and reserves Page 37

38 Adjusted EBITDA & Distributable Cash Flow Reconciliation This presentation, the financial tables and other supplemental information, including the reconciliations of certain non-generally accepted accounting principles ("non-gaap") measures to their nearest comparable generally accepted accounting principles ("GAAP") measures, may be used periodically by management when discussing Legacy's financial results with investors and analysts and they are also available on Legacy's website under the Investor Relations tab. Adjusted EBITDA is defined in our revolving credit facility as net income (loss) plus interest expense; depletion, depreciation, amortization and accretion; impairment of long-lived assets; (gain) loss on sale of partnership investment; (gain) loss on sale of assets; equity in (income) loss of partnerships; non-cash compensation expense and unrealized (gain) loss on oil and natural gas swaps. Distributable Cash Flow is defined as Adjusted EBITDA less cash interest expense, cash income taxes, cash settlements of LTIP unit awards, and development capital expenditures. Adjusted EBITDA and Distributable Cash Flow is presented as management believes it provides additional information and metrics relative to the performance of Legacy's business, such as the cash distributions we expect to pay to our unitholders, as well as our ability to meet our debt covenant compliance tests. Management believes that these financial measures indicate to investors whether or not cash flow is being generated at a level that can sustain or support an increase in our quarterly distribution rates. Adjusted EBITDA and Distributable Cash Flow may not be comparable to a similarly titled measure of other publicly traded limited partnerships or limited liability companies because all companies may not calculate Adjusted EBITDA and Distributable Cash Flow in the same manner. Page 38

39 Adjusted EBITDA and DCF Reconciliation (1) Reconciliation of Net Income to Adjusted EBITDA & Distributable Cash Flow (1) Adjusted EBITDA and Distributable Cash Flow are non-gaap financial measures. Page 39

40 Commodity Hedging Page 40

41 Why Hedge Commodities? Mitigate impact of price volatility on property cash flow Support collateral value of borrowing base Provides visibility on cash distributions Underwrites economic return on acquisitions Buying puts supports development drilling budget Page 41

42 Legacy Commodity Hedging Policy Maintain a 5 year oil and gas commodity hedging position in a stair step profile Hedge our acquisitions for up to 5 years with no more than 85% of the forecasted Proved Developed Producing reserves Legacy s Credit Agreement limits our hedging to 85% of the PDP reserve forecast Hedging Credit Bank Credit Agreement requires hedging with members of our bank group with A rating or better No margin or cash collateral required as bank counterparties rely upon the mortgages they hold on our proved oil and gas properties 5 years of hedging credit is hard to come by, as the exposure by the banks is large Banks have right-way risk with the reserve collateral Page 42

43 Description of Current Commodity Hedges Swap Swap of floating commodity prices for fixed for a defined volume over a defined period of time (effectively sell a call and buy a put at the same strike price) Hedge natural gas on regional hubs (Waha) or pipelines (ANR-OK) close to our sales points to mitigate basis risk Greatest revenue certainty and impact on borrowing capacity, but does not provide a hedge against rising costs in a rising commodity price environment 2-Way Costless Collar Features a short call or ceiling above the current market price and a long put or floor below the current market price If market price is between the floor and the ceiling, no money changes hands If market price is above the ceiling, producer pays the difference between the market price and the ceiling Page 43

44 Description of Current Commodity Hedges (continued) 2-Way Costless Collar (continued) If market price is below the floor, producer receives the difference between the floor and the market price Less revenue certainty compared to swaps, but provides some upside price participation and a partial hedge against rising costs while providing firm downside protection 3-Way Costless Collar Features a short call, a long put, and a short put, which is typically well below the current market price The proceeds from selling a put typically allow for higher strike prices on the short call as well as the long put compared to 2-way collars If market price is between the short call and the long put, no money changes hands If market price is above the short call, producer pays the difference between the market price and the short call (ceiling) Page 44

45 Description of Current Commodity Hedges (continued) 3-Way Costless Collar (continued) If market price is below the long put but above the short put, producer receives the difference between the long put (high floor) and the market price If market price is below the short put (low floor), producer receives a total net price of the market price plus the difference between the long put and short put ($25 or $30 per barrel on all current LGCY contracts) Provides less revenue certainty compared to swaps and 2-way collars, including less downside protection in a period of significantly depressed prices compared to 2-way collars Provides more upside price exposure, a better hedge against rising costs, and better downside protection against moderate price declines compared to 2-way collars due to a higher long put (high floor) and a higher short call (ceiling) Page 45

46 Legacy Oil and Natural Gas Hedging Summary Page 46

47 Legacy Oil 3-Way Collars Summary Page 47

48 Permian Basin Revitalization Page 48

49 Permian Basin Revitalization Wolfberry development Initial discovery and development by Henry Petroleum, extended by its partners and former partners and employees One of the most active plays in the industry with over 100 rigs running Emerging plays in Bone Spring, Avalon/Leonard Shale, Wolfbone, Wolffork Oil pipeline expansion plans: Plains Basin Pipeline from Midland to Cushing (increase from 400,000 bpd to 450,000 bpd by Q2 2012) Sunoco Logistics West Texas Gulf (WTG) to Houston Ship Channel (100,000 bpd, 18+ months) Magellan s Longhorn products pipeline reversal (200,000 bpd, timing pending) Page 49

50 Conventional Oil Valuation by Quarter (1) Includes $50+ million onshore oil transactions with an R/P ratio of at least 10 years. Courtesy of RBC Richardson Barr Page 50

51 Texas Permian Basin Rig Count Courtesy of InghamEcon, LLC, Midland Development Corporation, Security Bank Page 51

52 Permian Basin Oil Production Source: IHS Page 52

53 Permian Basin Natural Gas Production Source: IHS Page 53

54 Legislative and Regulatory Developments State of Texas Issues: Statewide Rule 15 (HB 2259) regarding inactive wells in Texas TCEQ "Permit by Rule emissions measurement Fracture fluid disclosure legislation (HB3328) Ad Valorem tax legislation regarding property valuation methods (HB889) Water use and disposal is the next frontier, already happening in PA Contact: Legacy Reserves LP (NASDAQ: LGCY) Steven H. Pruett President and Chief Financial Officer Page 54