Legacy Reserves (LGCY) has seen a steep decline from its YTD (year-to-date) highs mainly due to weakness in crude oil prices and the wider WTI Cushing-WTI Midland spread. Since then, Legacy Reserves has seen a strong recovery. The partnership has risen 45.4% from last month’s low.
Overall, Legacy Reserves has gained ~338% since the beginning of this year. At the same time, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) have risen 14.6% and 4.0% YTD, respectively. Legacy Reserve’s strong YTD gains could be attributed to strong earnings growth from production growth, gains in crude oil prices, and a significant improvement in the balance sheet position.
Can Legacy Reserves continue to rise?
The narrowing of the WTI spread and a rise in crude oil prices from here could boost the partnership’s earnings growth target for the rest of 2018. The higher earnings growth target could drive Legacy Reserves’ stock performance. However, the long-term production growth outlook from the Permian region looks very strong, which might cause the spread to widen.
Legacy Reserves announced a reduction in its earnings guidance for 2018 during the first-quarter earnings release. The reduction was due to a slightly lower production guidance and lower average crude oil differential to NYMEX of $7.94–$6.06 per barrel for 2018—compared to the previous estimation of $4.00–$3.25 per barrel. Legacy Reserves expects an adjusted EBITDA of $287.7 million–$322.7 million for 2018—compared to the previous guidance of $300.0 million–$360.0 million.
Legacy Reserve’s forward EV-to-EBITDA
Legacy Reserves was trading at a forward EV-to-EBITDA multiple of 5.9x as of June 22, which is below the three-year and one-year average of 7.5x and 6.2x. Legacy Reserves might be a good buying opportunity considering its strong 37.1% YoY earnings growth guidance for 2018, improved financial position, and the transition from an MLP to a C corporation.
The short interest in Legacy Reserves was 1.88 million shares as of June 22. At the same time, the short interest in Legacy Reserves as a percentage of float ratio was 3.4%—higher than the 30-day average of 3.0%. The higher ratio might indicate a negative sentiment in Legacy Reserve stock. An increase in the short interest in Legacy Reserve amid recent gains indicates that the market expects its stock price to go down. However, recent gains in crude oil prices might result in short covering rally in the stock.
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