"It's very important that we acquire the right kind of assets so as to avoid the meltdown of the 1980s," he told Houston Energy Finance Group members last month. "We all need long-lived, predictable assets with a low decline curve, high levels of proved developed producing assets and predictable PUD opportunities."
He said the minimum R/P (reserves to production) ratio needed seems to be about seven years, but that depends on the number of PUDs (proved undeveloped reserves) involved. Legacy has some 19 million barrels of oil equivalent proved and an R/P of 14 years.
The biggest difference in today's MLP climate is that these companies can hedge their risks, whereas in the 1980s, there was no Nymex to lay off commodity-price risk, he added.
The six upstream MLPs making up the peer group had distribution yields of 6.8% to 8.4% at the time of their IPOs. This is higher than the pipeline MLPs, which have average yields of 6.4%.
Legacy, which had private-equity backing from Quantum Energy Partners, combined assets from 11 entities controlled by two Midland oil families, the Browns and the McGraws. In March 2006, Legacy raised $85 million through a 144A offering managed by Friedman Billings Ramsey, to get ready for its January 2007 IPO, which raised $131 million. Management still owns 52% post-IPO. Cary Brown is chairman.
Most of the E&P MLPs are growing by acquisitions, which is Legacy's plan as well. "The Permian Basin is very fragmented," Pruett said. "The top five operators have 36% of the reserves and there are another 1,700 smaller operators to be consolidated.
"Many of them are distinguished older gentlemen in their 70s. The problem is, these guys have never run the numbers on their assets before. They think they are worth 20 times cash flow, when we think they are worth six to eight times."
Earlier this month, Legacy announced a $45-million acquisition of oil assets in Caddo County, Oklahoma, from a private seller-its first move outside the Permian Basin.
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