Legacy Reserves LP (“Legacy”) (LGCY) today announced it has entered into separate agreements with affiliates of Anadarko Petroleum and Western Gas Partners, LP to purchase natural gas properties and gathering and processing assets in East Texas for a combined $440 million. These properties represent Legacy’s entry into a new basin in East Texas and into meaningful gathering and processing operations supporting the natural gas properties. The closings of these transactions are expected to occur in the third quarter, and the purchase prices remain subject to customary adjustments. Legacy anticipates funding these transactions with borrowings under its revolver. Highlights of this acquisition are as follows:
- Estimated proved reserves of approximately 420 Bcfe of which 100% are natural gas, 95% are classified as proved developed producing, and 95% are operated
- Estimated Q3 2015 production of approximately 70 Mmcfe/d, yielding a proved reserves-to-production ratio of 16.4 years
- Multi-year development plan centered on recompletions and workovers to further flatten production declines and extend the productive life of the fields
- Significant additional drilling inventory in a higher gas price environment
- 567 miles of high-pressure pipeline and low-pressure gathering lines and a 502 Mmcfe/d processing plant with access to 5 major gas markets
- Expected NTM cash flow of approximately $60 million
Paul Horne, Legacy’s President and Chief Executive Officer, commented on the purchases. “Today we are pleased to announce the signing of two meaningful acquisitions and the ability to use our ample liquidity to position ourselves for success in 2016 and beyond. This acquisition represents a material entry into East Texas, a region we have wanted to enter for several years due to its long-lived, low-decline, low-cost nature and high potential for bolt-on acquisitions. These high-quality assets combined with the upside optionality of recompletions and a contango gas-curve make this a very attractive acquisition for us.
“The gathering and processing side will be a new operational venture for us, and one that we are confident in our abilities to execute with the anticipated addition of personnel experienced in the operation of the acquired assets. We believe these assets will provide a stable cash flow stream and some synergies with our upstream assets that would not exist with an outside operator. Given the meaningful immediate and long-term accretion to distributable cash flow per unit from this acquisition and our concurrent announcement with TSSP, the future looks bright for Legacy.”
In conjunction with the transaction, Legacy entered into the following costless natural gas swaps. 2016-2019 hedges represent an average of 83% of current production from the acquisition, providing significant insulation from natural gas price volatility.
Legacy Reserves LP and Funds Managed by TPG Special Situations Partners Sign Definitive Agreements to Jointly Develop Legacy’s Permian Basin Acreage
The operating subsidiary of Legacy Reserves LP (LGCY) (“Legacy”) announced that it has entered into an agreement with funds managed by TPG Special Situations Partners (“TSSP”) to fund horizontal development of certain of Legacy’s Spraberry, Wolfcamp and Bone Spring rights in the Permian Basin. The primary acreage covered by the arrangement is approximately 6,000 net acres in Howard, Reagan, and Crockett Counties, Texas and Lea County, New Mexico, on which Legacy estimates there are over 150 horizontal locations requiring over $700 million of capital deployment net to the Legacy and TSSP interests.
Under the terms of the agreement, Legacy will convey to TSSP an undivided 87.5% of Legacy’s working interest in the covered oil and gas properties subject to re-assignment, reversion and other adjustments. Legacy and TSSP will establish tranches of proposed horizontal locations, with TSSP funding 95% of Legacy’s drilling and completion costs and receiving 87.5% of certain of Legacy’s interests in any wells in such tranche until it achieves a 1.0x return on investment (“ROI Hurdle”). Legacy will fund 5% of the drilling and completion costs and retain 12.5% of certain of its interests prior to the ROI Hurdle. Upon achievement of the ROI Hurdle, TSSP will revert to 63% of Legacy’s initial interest while Legacy will revert to 37% until TSSP achieves a 15% internal rate of return (“IRR Hurdle”). Upon achievement of the IRR Hurdle, TSSP will revert to 15% of Legacy’s initial interest while Legacy will revert to 85%, and all the remaining undeveloped interests will revert to Legacy but remain available for future development under the agreed structure. TSSP has initially committed $150 million to fund the first tranche which, based on Legacy’s anticipated two to three rig drilling program, will take approximately one year. Additionally, TSSP has the right to participate in any future identified horizontal development opportunities in the Delaware and Midland Basins under the same economic terms.
Key highlights of the transaction for Legacy include:
- 7.5% carried working interest and reversions are expected to provide Distributable Cash Flow accretion and long-term, low-decline production.
- Asset-level structure (i) has no impact to capital structure, (ii) does not dilute unitholders, and (iii) allows proved reserve bookings attributable to projected reversions.
- TSSP’s portfolio size and acumen bring potential future investment avenues to Legacy.
- Structure uniquely balances (i) maximizing the potential of Legacy’s high-quality undeveloped Permian acreage position, (ii) reducing capital expenditures in capital intensive, high-cost horizontal drilling and (iii) maintaining a long-lived, low-decline production profile.
“We are extremely pleased to announce this definitive agreement with TSSP to create a structure that will allow Legacy to efficiently monetize a significant portion of our undeveloped assets in the Permian. With strong financial backing from TSSP, we believe we have implemented the right structure and look forward to prosecuting a multi-year plan that will harness the value of our undrilled horizontal positions, all while maintaining the key tenet of the upstream MLP model — predictable, long-lived, low-decline production,” said Paul T. Horne, the President and Chief Executive Officer of Legacy’s general partner. “We will start with a $150 million initial program and, subject to TSSP’s consent, will continue to jointly develop future similar programs. We are encouraged by the support of TSSP and believe we have found a good, long-term partner.”
Matt Dillard, a Partner of TSSP noted, “We are excited to work with Legacy to assist in unlocking value in its considerable undeveloped acreage position across some of the Permian Basin’s most active areas. Given Legacy’s operating experience, we expect this agreement to generate significant value for both parties and remain hopeful that we can deploy capital for several years into Legacy’s projects.”
Jefferies LLC acted as sole financial advisor and Andrews Kurth LLP acted as legal advisor to Legacy in this transaction. Vinson & Elkins LLP acted as legal advisor to TSSP.
To provide additional context for this transaction, Legacy has posted presentation slides at www.LegacyLP.com and a teleconference and webcast will be held on Tuesday, July 7, 2015, beginning at 9:00 a.m. Central Time. Those wishing to participate in the conference call should dial (877) 266-0479. A replay of the call will be available through Tuesday, July 14, 2015, by dialing (855) 859-2056 and entering replay code 78032712. Those wishing to listen to the live or archived webcast via the Internet should go to the Investor Relations tab of our website at www.LegacyLP.com.
Cautionary Statement Relevant to Forward-Looking Information
This press release includes forward-looking statements regarding future events. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and factors, many of which are outside the control of Legacy Reserves LP, and a variety of risks that could cause results to differ materially from those expected by the management of Legacy Reserves LP. Legacy Reserves LP undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
About Legacy Reserves LP
Legacy Reserves LP is a master limited partnership headquartered in Midland, Texas, focused on the acquisition and development of oil and natural gas properties primarily located in the Permian Basin, Rocky Mountain and Mid-Continent regions of the United States. Additional information is available at www.LegacyLP.com.