Legacy Reserves: Cooking with gas now

Will Atkinson | Apr 14, 2008 9:14am EDT | Comment

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Legacy Reserves LP (Nasdaq:LGCY)
Midland, Texas
http://www.legacylp.com/

52-week low / high: $17.95 / $30.42
Shares Outstanding: 29.72 million
Market Capitalization: $620 million

With giant oil companies posting record earnings, small-cap investors may wonder which smaller companies can profit off soaring oil prices. Enter Legacy Reserves LP (Nasdaq:LGCY), an independent oil and natural gas company with soaring revenue.

During fiscal 2007, Legacy’s revenue totaled $112.2 million, up 88% from $59.8 million in 2006 and up 340% from $25.5 million in 2005. In 2007, natural gas sales rocketed 49% to $21.4 million from $14.4 million during 2006. Clearly, the Midland, Texas-based company is doing something right.

Legacy has two primary segments: buying oil-producing and natural gas properties, and developing producing properties. As of Dec. 31, Legacy owns 214 oil fields in Texas and Oklahoma. The company also operates 1,547 wells and owns an interest in 2,207 other wells. Seven fields account for about 57% of Legacy’s reserves, the company said in a regulatory filing.

The company is expanding its holdings. On March 13, Legacy announced that it entered into a deal to acquire oil and natural gas producing properties in Texas, Oklahoma and Kansas for $82 million. Legacy said it expects the acquisition to be immediately accretive. The acquisition is the largest in Legacy’s history. Productive properties have been paying off for Legacy. In 2007, the company’s average production rose 63% to 4,970 barrels of oil per day.

Legacy’s Wall Street coverage has been mostly positive. On Feb. 1, Stifel Nicolaus & Co. analysts reinitiated coverage of Legacy with a “buy” rating and a $24 price target. In a note to investors, Stifel Nicolaus said Legacy has been successfully consolidating small deals in the Permian Basin since 2006 and is now expanding into nearby regions. The investment bank also said Legacy’s experienced management team provides a competitive edge. On Jan. 10, Friedman Billings analysts reiterated their “outperform” rating on Legacy. However, Friedman reduced Legacy’s price target to $28 from $29.

Out of six Wall Street brokers that cover Legacy, the average price target is $27.67. The average rating on the stock is 1.4, with 1 being a “strong buy.” For fiscal 2008, analysts expect earnings of $1.88 per share on revenue of $178.8 million. In 2007, Legacy lost $2.13 per share on revenue of $112.2 million.

Although it’s shown volatility, Legacy shares are up more than 6% since early March, but investors should still be careful: Legacy shares are down more than 25% from a year ago.

Note: Legacy Reserves (Nasdaq:LGCY) is on the "Watch List" of Growth Report, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, Legacy displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Growth Report portfolio at a later date.