Legacy Reserves LP :LGCY-US: Earnings Analysis: Q1, 2017 By the Numbers : May 8, 2017

Legacy Reserves LP reports financial results for the quarter ended March 31, 2017.

We analyze the earnings along side the following peers of Legacy Reserves LP – Mid-Con Energy Partners, LP, PDC Energy Inc, Concho Resources Inc. and Approach Resources Inc. (MCEP-US, PDCE-US, CXO-US and AREX-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 99.55 million, Net Earnings of USD 16.37 million.
  • Gross margins widened from -32.07% to 19.62% compared to the same period last year, operating (EBITDA) margins now 33.77% from 5.81%.
  • Year-on-year change in operating cash flow of 292.66% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from -50.30% to 4.84%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 99.55 91.59 83.54 73.37 65.86
Revenue Growth (%YOY) 51.15 14.57 -6.66 -16.44 -19.23
Earnings (mil) 16.37 -104.59 -4.3 -52.26 105.33
Earnings Growth (%YOY) -84.46 69.61 95.22 -35.83 146.02
Net Margin (%) 16.45 -114.19 -5.15 -71.23 159.93
EPS 0.16 -1.53 -0.13 -0.81 1.47
Return on Equity (%) N/A N/A N/A N/A N/A
Return on Assets (%) 5.01 -31.08 -1.23 -14.3 26.77

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Market Share Versus Profits

Revenues History
Earnings History

LGCY-US‘s change in revenue this period compared to the same period last year of 51.15% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that LGCY-US is holding onto its market share. Also, for comparison purposes, revenues changed by 8.69% and earnings by 115.65% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from -32.07% to 19.62%, while operating margins improved from 5.81% to 33.77% over this period. For comparison, gross margins were 11.18% and EBITDA margins 34.57% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

LGCY-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to -5.32 days from 70.99 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

LGCY-US‘s change in operating cash flow of 292.66% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from -50.30% to 4.84%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 160.54% to 16.87%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Legacy Reserves LP is an oil and natural gas limited partnership company. It focuses on the acquisition and development of oil and natural gas properties primarily located in the Permian Basin, Mid-Continent and Rocky Mountain regions of the United States. Its projects include East Texas, Spraberry/War San, Piceance Basin, Lea, Texas Panhandle, Deep Rock, Shafter Lake, Jalmat, Winchester, and Denton. The company was founded in October 26, 2005 and is headquartered in Midland, TX.

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