The operating subsidiary of Legacy Reserves LP (Nasdaq: LGCY) has entered into an agreement with funds managed by TPG Special Situations Partners (TSSP) to fund horizontal development of certain of Legacy's Spraberry, Wolfcamp, and Bone Spring rights in the Permian Basin.
The primary acreage covered by the arrangement is approximately 6,000 net acres in Howard, Reagan, and Crockett counties, Texas, and Lea County, New Mexico, on which Legacy estimates there are over 150 horizontal locations requiring more than $700 million of capital deployment net to the Legacy and TSSP interests.
Under the terms of the agreement, Legacy will convey to TSSP an undivided 87.5% of Legacy's working interest in the covered oil and gas properties, subject to reassignment, reversion, and other adjustments.
Legacy and TSSP will establish tranches of proposed horizontal locations, with TSSP funding 95% of Legacy's drilling and completion costs and receiving 87.5% of certain of Legacy's interests in any wells in such tranche until it achieves a 1.0x return on investment (ROI Hurdle). Legacy will fund 5% of the drilling and completion costs and retain 12.5% of certain of its interests prior to the ROI Hurdle. Upon achievement of the ROI Hurdle, TSSP will revert to 63% of Legacy's initial interest, while Legacy will revert to 37% until TSSP achieves a 15% internal rate of return (IRR Hurdle).
Upon achievement of the IRR Hurdle, TSSP will revert to 15% of Legacy's initial interest while Legacy will revert to 85%, and all the remaining undeveloped interests will revert to Legacy but remain available for future development under the agreed structure. TSSP has initially committed $150 million to fund the first tranche, which, based on Legacy's anticipated two to three rig drilling program, will take approximately one year. Additionally, TSSP has the right to participate in any future identified horizontal development opportunities in the Delaware and Midland basins under the same economic terms.
Jefferies LLC acted as sole financial advisor and Andrews Kurth LLP acted as legal advisor to Legacy in this transaction. Vinson & Elkins LLP acted as legal advisor to TSSP.
Additionally, Legacy has entered into separate agreements with affiliates of Anadarko Petroleum and Western Gas Partners LP to purchase natural gas properties and gathering and processing assets in East Texas for a combined $440 million. These properties represent Legacy's entry into a new basin in East Texas and into gathering and processing operations supporting the natural gas properties.
The closings of these transactions are expected to occur in the third quarter, and the purchase prices remain subject to customary adjustments. Legacy anticipates funding these transactions with borrowings under its revolver.