Trade Entry: Buy Legacy Reserves LP
Yesterday, beaten down upstream MLP Legacy Reserves (Nasdaq:LGCY) announced a couple of deals that will ensure the company can maintain its large distribution for years to come.
The $440 million announced acquisition of upstream and midstream assets increases Legacy’s annual EBITDA by 25% with no dilution to the public unit equity positions. The natural gas assets purchased are low decline rate and have the ability to push that decline up to zero with minimal capital expenditures. The midstream assets will allow Legacy to increase cash flow by targeting other local drillers and processing their gas.
The “drillco” deal allows Legacy to capitalize on un-drilled, high-value assets with very little capital investment. This deal will produce high levels of cash flow a couple of years out.
With cash flow now locked in for the next 4 to 5 years at least, the LGCY unit value should be priced to yield less than 10%, or above $14.
Legacy Reserves is an MLP and tax reports using the IRS Schedule K-1.
Recommendation: Buy LGCY up to or close to $9. Target price of $12 by the end of 2015 for a 33% gain. This MLP comes with a quarterly 4% distribution that adds even more to the appeal of this trade.