What happened
Units of Legacy Reserves LP (LGCY) rose on Monday and were up more than 11% at 10:45 a.m. EDT. Fueling that rebound is the company's announcement that it's transitioning from an upstream master limited partnership (MLP) to a C-Corp, which is the most commonly used corporate structure for tax purposes.
So what
After spending the past two years determining the best way forward, Legacy Reserves announced today that it would transition from an MLP to a C-Corp. To facilitate the move, investors will receive one share of New Legacy's common stock for each unit currently owned. In addition to that, the company will also convert its outstanding preferred shares into common stock. These moves will reduce complexity and enable the company to move forward with a simplified corporate structure.
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Two factors are driving the decision to convert to a C-Corp. First, plunging oil prices a few years ago forced several upstream MLPs to declare bankruptcy. That has cast a "dark cloud" on the structure, according to CEO Paul Horne. In addition to wanting to get out from underneath that shadow, the other factor is that the company's asset base and business development plan have evolved over the past few years, making it no longer suited for the yield-focused MLP vehicle.
Now what
Legacy Reserves believes that by converting to a C-Corp, it can unlock the value of its assets, which the market has suppressed due to the rash of bankruptcies that hit the sector in recent years. While that change could help, a more pressing weight is the roughly $1.3 billion in debt still on its balance sheet. Until the company materially reduces that amount, this is an oil stock investors are better off avoiding.
