In a report published Wednesday, Oppenheimer analyst Bernard Colson downgraded the rating on Legacy Reserves LP LGCY, following the Q2 results. The analyst believes that a meaningful recovery in oil prices would be needed to justify the current share price.
"The recent double-dip in crude prices crushes LGCY's cash-generating ability. As a result, if oil prices don't recover, we believe LGCY will be slashing the distribution again in 1Q16," Colson stated.
The company reported its Q2 EBITDA ahead of the estimates and the consensus, with DCFPU beating the estimates and flat distribution quarter-on-quarter.
According to the Oppenheimer report, "LGCY announced two deals in July, adding G&P assets in E. Texas and allowing TPG Special Situations to develop part of its Permian acreage. We view these as an incremental positive, but with oil prices where they are, it just doesn't move the needle enough to matter."
While the stock would be far less than the level it trades at currently if there is no oil price recovery by 2016, the Legacy Reserves' financial leverage is too high to be sustainable, even in 2016.
"With equity financing options limited, this becomes like quicksand. There is no quick fix for this aside from higher oil prices," Colson added, while mentioning that the stock represents "a speculative bet on future oil prices."
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