legacy reserves lp - the nash books · mlp basics (continued) (1) investors’ distributions are...

Legacy Reserves LP

Executive Oil Conference March 29, 2011

Table of Contents

  Overview of the MLP Sector

  Legacy Reserves LP

  Commodity Hedging

  Permian Basin Revitalization

  Legislative & Regulatory Developments

Overview of the MLP Sector

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

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

(1) Information courtesy of Wells Fargo Securities

*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

1986 1987

Products

Pipeline &

Terminal *Plastics

1988

*Refining

1989

*Timber

1991

Crude

Pipeline

1992

*Fertilizer

1993

Natural Gas

Pipeline

1994

Crude Mktg.

& Gathering

Propane

1998

Gathering,

Processing, &

Fractionation

1999

Coal

2004 2005

Shipping LNG

2006

Exploration &

Production

Refining

Compression

2010

Storage

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

7

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

COAL Royalty-oriented coal

partnerships enter into long-term leases that provide coal operators the right to mine in

exchange for royalty payments. Other MLPs are

coal operators with long-term sales contracts

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

PIPELINES & STORAGE/TERMINALS

Cash flows for pipeline and storage MLPs are very stable due to demand growth, fee-

based 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

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

Business Characteristics of Major MLP Sub-Sectors (1)

(1)  Information courtesy of Wells Fargo Securities

Comparison of MLP Sub-Sectors (1)


Market data as of 03/25/11 Note: Excludes BKEP, CEP and KSP from all calculations

2011 YTD Total Return (1)

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

Current Yields (1)

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

Institutional Investors in MLPs (1)

While MLPs attract primarily retail investors, institutions heavily invested in the sector in 2010.

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.


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

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

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 2004-05, 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

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 2010. 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

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

Valuations of Publicly Traded E&P MLPs (1)


Legacy Reserves LP

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.

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

Legacy Management Team

Name Title Years Experience

in the Permian Basin

Years Experience in the Oil & Gas

Industry

Cary D. Brown Chairman & CEO 19 21

Steven H. Pruett President & CFO 22 27

Kyle A. McGraw EVP, Business Development & Land 28 28

Paul T. Horne EVP, Operations 25 27

William M. Morris, CPA VP, Controller & CAO 29 30

William D. Sullivan Former EVP Anadarko Petroleum

G. Larry Lawrence Former Controller Pure Resources

Kyle D. Vann Former CEO Entergy – Koch, LP

Independent Board Members

William R. Granberry Former Pres & COO Tom Brown, Inc.

Senior Management averages over 26 years of experience

Legacy Ownership

GP Interest

<0.1%

Public Unitholders

75%

Sellers of Assets to Legacy

1%

Founding Investors, Directors and Management

24%

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

Note: Estimated ownership as of 12/31/10

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 Q4 2010

  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

Proved Reserves by Operating Region

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

Permian Basin Development Opportunities Wolfberry Trend • Midland, Upton, Andrews and Martin Counties, TX

• 134 gross locations • $1.7MM per well • Avg. 70% working interest

CROCKETT

Farmer Field •  Reagan and Crockett

Counties, TX •  112 gross locations •  $325K per well •  100% working interest

South Justis Unit •  Lea County, NM •  12 gross locations •  $800K per well •  15% working interest

Langlie-Mattix Unit •  Lea County, NM •  21 gross locations •  $550K per well •  52% working interest

Jordan Area Units •  Ector County, TX •  22 gross locations •  $740K per well •  Avg. 47% working interest

Spraberry Trend • Reagan, Upton, Martin and Midland Counties, TX

• 131 gross locations • $1.2MM per well • Avg. 77% working interest

Empire Field (Yeso) • Eddy County, NM • 14 gross locations • $1.3MM per well • 45% working interest

Note: Reflects proved and unproved locations

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

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

  Closed on December 22, 2010 for $101 million (including estimated post-closing adjustments)

Map courtesy of Concho & RBC Richardson Barr

2006 – 2011 YTD Acquisitions Summary

Summary Financial Information

Financial and Operating Data – Latest Twelve Months

(1)  Non-GAAP financial measures. DCF per Unit calculated using average diluted shares outstanding during each quarter.

3/31/2010 6/30/2010 9/30/2010 12/31/2010

Twelve Months Ended

($ in millions except for per unit data) 12/31/2010 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

Production and Adjusted EBITDA Profile

Quarterly Cash Distribution Profile

Since its IPO in January 2007, Legacy has increased its quarterly distribution by 28%

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% - 0.50% 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

Sources of Capital

Capital Raised Since Inception ($MM)

Equity Offerings (6) $ 539

Debt Outstanding (3/10/11) $ 348

Total Capital Raised $ 887

Equity

61%

Debt

39%

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.

Historical Impact of Hedging

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

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.

Adjusted EBITDA and DCF Reconciliation(1)

(1)  Adjusted EBITDA and Distributable Cash Flow are non-GAAP financial measures.

Reconciliation of Net Income to Adjusted EBITDA & Distributable Cash Flow

Commodity Hedging

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

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

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

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)

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)

Legacy Oil and Natural Gas Hedging Summary

Legacy Oil 3-Way Collars Summary

Permian Basin Revitalization

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)

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

Texas Permian Basin Rig Count

Courtesy of InghamEcon, LLC, Midland Development Corporation, Security Bank

Permian Basin Oil Production

Source: IHS

Permian Basin Natural Gas Production

Source: IHS

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 [email protected]

432-689-5200 President and Chief Financial Officer

legacy reserves lp - the nash books · mlp basics (continued) (1) investors’ distributions are...

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