Legacy Reserves (LGCY) has had a dream run in 2018. The upstream MLP, which was close to bankruptcy during 2016, has recovered significantly in recent quarters driven by debt restructuring and strong earnings growth resulting from production growth and gains in crude oil (USO) prices.
The partnership has gained ~400% since the start of this year. At the same time, the Energy Select Sector SPDR ETF (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are up 6.2% and 11.0% YTD, respectively.
Can LGCY continue to rise?
The widening of the spread between WTI Midland and WTI cash and a decline in crude oil prices from here could limit the partnership’s earnings growth target for the rest of 2018, which could further weigh on LGCY’s stock performance. Last month, the spread between WTI Midland to WTI cash hit its lowest level since August 2014. The widening of the spread is due to insufficient pipeline capacity to cater to the demand of strong Permian production growth.
The partnership recently lowered its earnings guidance for 2018 due to the slightly lower production guidance and lower average crude oil differential to NYMEX for 2018 compared to the previous estimate. The company now expects adjusted EBITDA of $287.7 million to $322.7 million for 2018 compared to the previous guidance of $300.0 million to $360.0 million.
LGCY’s forward EV-to-EBITDA
LGCY was trading at a forward EV-to-EBITDA multiple of 6.2x as of May 11, which is below the three-year and one-year average of 7.6x and 6.3x, respectively. For now, LGCY still seems like a good buying opportunity considering its strong 37.1% YoY earnings growth guidance for 2018, improved financial position, and the partnership’s transition from an MLP to a c-corporation.
MLP structure has remained a challenge for upstream MLPs since the rout in energy prices as a result of their inability to distribute income under the challenging energy price environment.
Short interest in LGCY
Short interest in LGCY was 1.0 million shares as of May 11. At the same time, short interest in LGCY as a percentage of float ratio was 1.9%, which is lower than the 30-day average of 2.0%, which indicates a positive sentiment in LGCY stock. The decline in short interest in LGCY despite recent gains indicates that the market expects its stock price to rise more.
For more such coverage on master limited partnerships, check out Market Realist’s Energy MLPs page.