I am submitting this article to Seeking Alpha. LGCY, along with MEMP are The Dividend Hunter portfolio holdings. Legacy has been the one big miss out of my recommendations to date, but still has done better than most of the upstream MLPs. My crude oil crystal ball was cracked last Fall. If you have not yet taken a position in LGCY, but were considering this high yield MLP, today’s announcement makes the future income stream outlook much more secure.
Legacy Reserves Fails to Find a Deal, Cuts Distribution Rate
Today, April 20, Legacy Reserves LP (Nasdaq: LGCY) succumbed to energy commodity price realities and announced a large reduction in the company’s quarterly distribution to unit holders. Legacy had been one of just a couple of hold outs in the upstream MLP sector that had not deeply slashed its distribution rate.
For the 2015 first quarter, Legacy announced a $0.35 per unit distribution to be paid on May 15 to shareholders of record on May 1. This will be a 43% reduction from the rate investors earned for the previous three quarters. Prior to Q2 2014, the LGCY distribution had been slowly increasing. This is the first reduction in the company’s history, which launched with a January 2007 IPO.
When I last covered Legacy Reserves, about six weeks ago, I stated that the company needed to make a strongly cash flow accretive acquisition to be able to maintain the distribution rate. With this announcement it is obvious that no deal was put together in the first quarter. At that time – with the LGCY unit price in the mid-$10 range – I stated that either action, a distribution saving acquisition or a distribution reduction would probably be viewed as a positive for the unit price. So far today, that outlook is proving true with the unit price up 5% to about $13.30. This price is also more than 60% above the company’s value in the dark days of early January and $44 per barrel oil.
It’s a New Day in the Legacy Oil Patch
According to the press release, the new distribution rate gives an “Expected 2015 distribution coverage of greater than 1.3x.” From this point investors in LGCY have more certainty of a 12.7% yield on the current value, with the opportunity for upside with either a continued rally in the price of oil or some acquisitions by Legacy Reserves. One very important point in the press release was that Legacy’s $700 million credit line was reaffirmed by its lenders. There currently is $570 million of liquidity available from the facility. If Legacy can find an add-on asset purchase, it will not need to bring in outside capital to be able to close a deal as have its peers like Breitburn Energy Partners LP (Nasdaq: BBEP) and Linn Energy LLC (Nasdaq: LINE), which I covered here for BBEP, and here for LINE.
Your (and mine) feelings on LGCY probably depend on where you were able to buy into the company. Investors with cost bases in the mid to high $20s that were in effect prior to the crashes in crude and natural gas have taken close to a 50% hit. This fact applies to every upstream MLP except for Memorial Production Partners LP (Nasdaq: MEMP), which seems likely to be able to maintain its ongoing distribution rate. If you bought in at $10 to $11, you are sitting on a nice gain with a positive outlook for the future based on a now, more stable distribution rate.
As noted, Legacy has dry powder if acquisitions can be made and still yields above 12%. The one possible problem may the difficulty in finding good acquisition prospects even in the current low energy price environment. When I listened to the Kinder Morgan (NYSE: KMI) conference call for my latest article, Chairman Rich Kinder noted that it was still tough to put together good deals because there is so much “cheap” money (both corporate and private equity) chasing assets in the energy patch. I continue to rank Legacy as one of the better investment options to both generate income and profit from any future recovery in the prices of crude oil and natural gas.