Leggett & Platt Inc T.LEG

BMO Summary

[Risky_Business]

Legacy Oil + Gas: Strong Year-End Reserves & Operational Update; All the Boxes Continue to be Checked…
 

• Legacy provided after the close an operational update and its year-end reserves, which, in our opinion, reinforced the quality of the company’s asset base, and reminded us of mgmt’s execution over the last two years.
• In 2013, P+P reserves increased ~24% to ~117.2 MMboe (~14% per share growth), with Legacy adding ~29.9 MMboe in the year, replacing ~434% of production (~276% organically) at an all-in 2P FD&A cost of $22.01/boe (incl. FDC), driving a recycle ratio of ~2.3x based on 2013 netbacks of $49.86/boe; importantly, PDP reserves represent ~57% of total P+P reserves, and 2P FDC represents ~2 years of cash flow highlighting the high quality nature of the company’s reserves.
• From an operational perspective, Legacy drilled 22 (17.8 net) wells in Q4 with 100% success; the company notes it significantly underspent cash flow in the quarter while commencing a number of infrastructure projects to be completed in Q1; specifically, in the Midale, LEG drilled 9 (8.5 net) wells in Q4, with average 30-day rates of 210 boe/d, which are expected to generate 100% IRRs and payout in <8 months; in the Spearfish, the company highlights a modified frac fluid was used on two wells at Pierson, with these wells testing at average 30-day rates of 160 boe/d (25% watercuts), a significant improvement relative to type curves; finally, at Turner Valley, LEG notes wells drilled in late 2012/2013 continue to outperform, with average cumulative production after six months 122% higher than wells drilled by the previous operator.

• Bottom Line: very solid and high quality reserve report and operational update from Legacy, in our opinion; tough to argue with Legacy’s results over the last couple of years, especially against the current backdrop of strong WTI prices and a weak Canadian dollar; we continue to believe Legacy should begin to see multiple expansion relative to its peers due to mgmt’s track record of execution, the company’s diverse oil-weighted asset base (>2,000 net drilling locations), sustainable growth profile (10-12% growth within cash flow), and declining debt levels (~1.7x D/CF by year-end); the company is currently trading at ~4.5x 2014E DACF, well below its oil weighted peers at 5.5x-6.5x; Jim Byrne is maintaining his Outperform rating and increasing his target price to $8.50 (from $7.75) this morning.