Tuesday, December 08, 2015

Wall Street Traders Doubt Legacy Reserves' Survival

The markets continue to signal that energy MLP Legacy Reserves (LGCY - $1.76) is on the brink – of a potential bankruptcy filing: the price of common units have fallen more than 57% since 3Q earnings release on November 5.  

Chief executive Paul Home – at least in public – continues to assuage analysts and investors alike, emphasizing management’s combined experience in working through prior cycle lows.

Granted, LGCY does have good geographic diversification, with operations in the Permian basin, Rocky Mountain, and Mid-Continent regions. Nonetheless, Wall Street is signaling that the MLP’s significant leverage is unsustainable – total debt of $1.46 billion swamps equity (after the latest round of asset write-downs) more than 8 times: the 8.0% preferred stock has lost almost 40% in value – current yield is 29%; the 6.625% bond maturing December 01, 2021 has plunged more than 70% in the last sixty days and currently trades for twenty cents on the dollar!

CFO Dan Wescott insists, however, that going forward the MLP will continue generating free cash flow. True, adjusted EBITDA in the latest quarter easily covered bond interest and preferred dividend payments more than 2:1 times.

As indicated, current trading suggests Wall Street isn’t buying management’s optimism. Additionally, as hedges roll off (natural gas hedges cover only 45% of current production for 2016), distribution coverage of even bond payments is suspect.

Going forward unless the MLP monetizes some of its untapped acreage positions – or seeks out a buyer for its lucrative midstream assets (567 miles of high-pressure pipeline & low-pressure gathering systems) – to cure debt-related obligations, there will be no “legacy” for investors to inherit.

Editor David J Phillips holds a financial interest in the stock mentioned in this article. The 10Q Detective has a Full Disclosure Policy.