Legacy Reserves LP Announces Third Quarter 2011 Results

MIDLAND, Texas, Nov. 2, 2011 (GLOBE NEWSWIRE) -- Legacy Reserves LP ("Legacy") (Nasdaq:LGCY) today announced its third quarter results for 2011. The final unaudited Quarterly Report will be released and filed on or about November 4, 2011.

A summary of selected financial information follows. For consolidated financial statements, please see accompanying tables.

Highlights of the third quarter of 2011 compared to the second quarter of 2011 include the following:

• Production increased 3% to 13,793 Boe per day in the third quarter of 2011 from 13,363 Boe per day in the second quarter of 2011 primarily due to production from acquisitions, including a full quarter of production from our acquisition of Permian Basin natural gas assets for $66 million that closed on May 5, 2011.  From the second quarter to the third quarter, our oil production decreased by 1%, our natural gas production increased by 13%, and our NGL production increased by 8%. In addition, on a year-over-year basis, our quarterly production has increased by 41%.     
   
• Average realized prices, excluding commodity derivatives settlements, were $66.49 per Boe in the third quarter of 2011, down 13% from $76.34 per Boe in the second quarter of 2011. Average realized oil prices decreased 13% to $83.96 per Bbl in the third quarter from $96.93 per Bbl in the second quarter, average realized natural gas prices decreased 3% to $6.30 per Mcf in the third quarter from $6.47 per Mcf in the second quarter, and average realized NGL prices decreased 4% to $1.32 per gallon in the third quarter from $1.37 per gallon in the second quarter. Our average realized natural gas prices are favorably impacted by the NGL content in our Permian Basin natural gas.  
            
• Oil, NGL and natural gas sales, excluding commodity derivatives settlements, were $84.4 million in the third quarter of 2011, down 9% from $92.8 million in the second quarter of 2011 due to lower realized commodity prices that were partially offset by increased production.
   
• Production expenses, excluding taxes, increased 5% to $22.1 million in the third quarter of 2011 from $21.0 million in the second quarter of 2011. This increase primarily reflects increased well count and production from acquisitions and drilling, as well as modest cost increases. Production expenses per Boe increased only 1% to $17.41 per Boe in the third quarter from $17.25 per Boe in the second quarter, as the factors listed above that caused increases were partially offset by a full quarter of lower cost production (less than $5.00 per Boe) from our May 2011 Permian Basin natural gas acquisition.    
     
• Legacy's general and administrative expenses were $3.8 million or $3.01 per Boe during the third quarter of 2011 compared to $4.5 million or $3.66 per Boe during the second quarter of 2011.  This decrease was primarily due to a decrease in non-cash compensation expense to approximately $6,000 during the third quarter from $0.5 million during the second quarter, as declining unit prices resulted in reduced LTIP compensation liability and reduced corresponding expense.  
   
• Cash settlements received on our commodity derivatives during the third quarter of 2011 were $0.8 million compared to $6.3 million paid during the second quarter of 2011, with the increase attributable to lower front month prices for oil and natural gas during the third quarter. Unlike natural gas hedges that settle during the same month in which its corresponding volumes are hedged, crude oil hedges settle during the month after its corresponding volumes are hedged. This lag effect on crude oil hedges during a period of declining commodity prices caused our cash hedging settlements to be approximately $2.2 million lower during the third quarter. In addition, our production was 68% hedged in the third quarter compared to 71% hedged in the second quarter. We also reported an unrealized gain of $106.8 million on our commodity derivatives portfolio in the third quarter compared to an unrealized gain of $41.9 million in the second quarter due to lower commodity futures prices.   
   
• Adjusted EBITDA decreased 3% to $52.1 million during the third quarter of 2011 from $53.8 million during the second quarter of 2011, as lower realized commodity prices and higher production expenses were partially offset by higher production volumes, higher realized commodity derivatives settlements, lower production and ad valorem taxes, and lower general and administrative expenses.  In addition, on a year-over-year basis, our quarterly Adjusted EBITDA has increased by 46%. (See "Non-GAAP Financial Measures" and the associated table for a discussion of management's use of Adjusted EBITDA in this release and a reconciliation of Legacy's consolidated net income to Adjusted EBITDA.)
   
• Development capital expenditures increased to $22.8 million in the third quarter of 2011 from $17.4 million in the second quarter of 2011. As announced on October 21, we also increased our 2011 development capital expenditures budget from $60 million to $70 million. These increases reflect higher working interests in our operated Wolfberry drilling projects, more non-operated development projects and modest increases in drilling and completion costs.
       
• Distributable cash flow decreased to $24.1 million in the third quarter compared to $31.4 million in the second quarter of 2011. This decrease was due primarily to higher development capital expenditures, as well as lower Adjusted EBITDA and slightly higher cash interest expense due to higher average debt outstanding during the third quarter.
   
• Distributable cash flow per unit decreased to $0.55 per unit in the third quarter of 2011 from $0.72 per unit in the second quarter of 2011, as distributable cash flow decreased during the third quarter while the average number of units stayed relatively constant between the second and third quarters.
   
• We generated net income of $125.1 million, or $2.87 per unit, in the third quarter of 2011, as higher production, higher commodity derivative settlements, lower production and ad valorem taxes, lower general and administrative expenses, and an unrealized gain of $106.8 million on our commodity derivatives were partially offset by lower realized commodity prices, higher production expenses, and a $4.7 million impairment charge on our oil and natural gas properties.  We reported net income of $65.9 million, or $1.51 per unit, in the second quarter of 2011, which included an unrealized gain of $41.9 million on our commodity derivatives.

Cary D. Brown, Chairman and Chief Executive Officer of Legacy Reserves GP, LLC, the general partner of Legacy, commented: "During a quarter of economic uncertainty and declining commodity prices, Legacy again produced strong results, as we increased production and kept our expenses in line. Through the end of October, our 2011 acquisitions of producing properties totaled approximately $166 million, of which approximately $93.5 million of acquisitions have closed and $72.5 million of acquisitions are scheduled to close prior to the end of the year. We believe that these acquisitions will be accretive to our distributable cash flow per unit. In addition, after a record second quarter in which we invested $17.4 million in development capital, we invested $22.8 million in oil and NGL-rich drilling projects during the third quarter, and increased our 2011 development capital expenditures budget from $60 million to $70 million. The results from our operated Wolfberry drilling program continue to exceed our expectations, and we have participated in an increased number of non-operated oil drilling projects that should generate attractive rates of return. We believe that this $10 million of incremental development capital during 2011 will generate organic growth that we anticipate will support future cash distributions to our unitholders. Based on our quarterly Adjusted EBITDA of $52.1 million, which was the second-highest in our history, we increased our quarterly distribution for the fourth consecutive quarter to $0.545 per unit, which will be paid on November 14, 2011. On a year-over-year basis, we have increased our quarterly distribution by 4.8%. Finally, we generated distributable cash flow during the third quarter of approximately $24.1 million, or $0.55 per unit, covering our $0.545 distribution by 1.01 times. For the nine months ended September 30, 2011, we generated distributable cash flow of approximately $79.1 million, or $1.82 per unit, covering our $1.615 distribution by 1.13 times."

Steven H. Pruett, President and Chief Financial Officer, commented, "We are very pleased with our third quarter results, as we increased our production to record levels, kept our Adjusted EBITDA at a high level during a period of declining commodity prices, and continued to produce outstanding drilling results. Also, our recently announced Wyoming and Permian Basin acquisitions for $72.5 million are expected to increase our distributable cash flow per unit and provide additional positive momentum heading into 2012. On September 30, our 13-member bank group redetermined our borrowing base at $535 million, which was significantly oversubscribed and will expand to $550 million upon the closing of our pending Permian Basin acquisition that is expected on or about November 14. At the end of October, we had a debt balance of $410 million, leaving us with approximately $125 million of current availability under our credit agreement."

Commodity Derivatives Contracts

We have entered into the following oil and natural gas derivatives contracts, including swaps, collars and three-way collars, to help mitigate the risk of changing commodity prices. As of November 2, 2011, we had entered into derivatives agreements to receive average NYMEX West Texas Intermediate oil and WAHA, ANR-Oklahoma, and CIG-Rockies natural gas prices as summarized below starting with October 2011 through September 2016:

WTI:

We have entered into multiple NYMEX West Texas Intermediate crude oil derivative three-way collar contracts. Each contract combines a long put, a short put and a short call. The use of the long put combined with the short put allows us to sell a call at a higher price thus establishing a higher ceiling and reducing our exposure to future settlement payments while also restricting our downside risk to the difference between the long put and the short put if the price of NYMEX West Texas Intermediate crude oil drops below the price of the short put. This allows us to settle for WTI market plus the spread between the short put and the long put in a case where the market price has fallen below the short put fixed price.  With our current contracts, if the market price falls below the short put fixed price, we would receive the market price plus either $25 or $30 per barrel, depending on the contract.  The following table summarizes the three-way oil collar contracts in place as of November 2, 2011:

Additionally, we have entered into a costless collar for NYMEX WTI crude oil with the following attributes:

Natural Gas (WAHA, ANR-Oklahoma, and CIG-Rockies hubs):

Additionally, we have entered into a costless collar for WAHA natural gas with the following attributes:

Location and quality differentials attributable to our properties are not reflected in the above prices. The agreements provide for a monthly settlement based on the difference between the agreement fixed price and the actual reference oil and natural gas index prices.

Quarterly Report on Form 10-Q

The consolidated financial statements and related footnotes will be available in our September 30, 2011 Form 10-Q, which will be filed on or about November 4, 2011.

Conference Call

As announced on October 21, 2011, Legacy will host an investor conference call to discuss Legacy's results on Thursday, November 3, 2011 at 9:00 a.m. (Central Time).  Investors may access the conference call by dialing (877) 266-0479.  A replay of the call will be available through Monday, November 7, 2011, by dialing (855) 859-2056 or (404) 537-3406 and entering replay code 20782217. Those wishing to listen to the live or archived web cast via the Internet should go to the Investor Relations tab of our website at www.LegacyLP.com.  The prepared portion of the call is open to all interested parties on a listen-only basis.  Following our prepared remarks, we will be pleased to answer questions from our listeners and investors.  

About Legacy Reserves LP

Legacy Reserves LP is an independent oil and natural gas limited partnership headquartered in Midland, Texas, focused on the acquisition and development of oil and natural gas properties primarily located in the Permian Basin, Mid-Continent and Rocky Mountain regions of the United States. Additional information is available at www.LegacyLP.com.

The Legacy Reserves logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=3201

Cautionary Statement Relevant to Forward-Looking Information

This press release contains forward-looking statements relating to our operations that are based on management's current expectations, estimates and projections about its operations. Words such as "anticipates," "expects," "intends," "plans," "targets," "projects," "believes," "seeks," "schedules," "estimated," and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are: realized oil and natural gas prices; production volumes, lease operating expenses, general and administrative costs and finding and development costs; future operating results and the factors set forth under the heading "Risk Factors" in our annual and quarterly reports filed with the SEC. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Unless legally required, Legacy undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

This press release, the financial tables and other supplemental information include  "Adjusted EBITDA" and "Distributable Cash Flow", both of which are non-generally accepted accounting principles ("non-GAAP") measures which may be used periodically by management when discussing our financial results with investors and analysts. The following presents a reconciliation of each of these non-GAAP financial measures to their nearest comparable generally accepted accounting principles ("GAAP") measure.  All such information is also available on our website under the Investor Relations link.

Adjusted EBITDA and Distributable Cash Flow are presented as management believes they provide additional information and metrics relative to the performance of our business, such as the cash distributions we expect to pay to our unitholders. Management believes that both Adjusted EBITDA and Distributable Cash Flow are useful to investors because these measures are used by many companies in the industry as measures of operating and financial performance, and are commonly employed by financial analysts and others to evaluate the operating and financial performance of the Partnership from period to period and to compare it with the performance of other publicly traded partnerships within the industry. 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 in the same manner.  

"Adjusted EBITDA" and "Distributable Cash Flow" should not be considered as alternatives to GAAP measures, such as net income, operating income, cash flow from operating activities, or any other GAAP measure of financial performance.

Adjusted EBITDA is defined as net income (loss) plus:   

• Interest expense;
   
• Income taxes;
   
• Depletion, depreciation, amortization and accretion;
   
• Impairment of long-lived assets;
   
• (Gain) loss on sale of partnership investment;
   
• (Gain) loss on disposal of assets (excluding settlements of asset retirement obligations); 
   
• Unit-based compensation expense related to LTIP unit awards accounted for under the equity or liability methods;   
   
• Unrealized (gain) loss on oil and natural gas derivatives; and
   
• Equity in (income) loss of partnership.

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.

The following table presents a reconciliation of our consolidated net income (loss) to Adjusted EBITDA and Distributable Cash Flow: