9/15/09 Breaking News – Aggressive MLP
Aggressive Portfolio holding Legacy Reserves (NSDQ: LGCY) priced a 3.3 million unit offering today at $15.85 per unit, roughly a 6 percent discount to its closing price on Monday. The offering includes an additional 495,000 unit over-allotment option that’s valid for the next 30 days. If the entire offering and over-allotment is sold, Legacy would raise a little over $60 million before fees.
As we explained in the July 2, 2009 Viewpoint Rising Income, most partnerships that announce secondary offerings suffer a short-term hit in the stock market because additional unit offerings dilute existing unitholders’ stake in the firm. Sure enough, Legacy’s units are trading 2.5 to 3 percent lower today.
Over the longer term, such offerings are a big positive for two reasons: They raise cash the MLP can use to finance growth and indicate that the capital markets are once again open for business. This view has largely proven correct as most of the MLPs that have raised capital via secondary offerings are now trading well above their pre-offering prices.
In this case, Legacy has said that it will use the cash for general corporate purposes, including future acquisitions. Legacy owns primarily oil-producing properties and, as noted in last week’s Aggressive Portfolio update, the returns generated by oil-producing properties are attractive right now. This offering is likely to be deployed in strategic purchases that will ultimately mean higher distributions for unitholders. Take advantage of the drop in Legacy to buy the stock under 18.