There's a certain peace of mind in simplicity. A simple investment is often an investment that one doesn't have to look after constantly. For income-minded investors, upstream master limited partnerships, or MLPs, represent a way to pick up high-quality, mature oil and gas assets while meaningfully building income.
These days, most upstream MLPs have either a mix of oil and gas production, or are weighted mostly to oil, which offers a higher return at today's prices than does dry gas. But one upstream MLP has taken a contrarian path and has focused almost entirely on natural gas in its most recent acquisitions. That name is Vanguard Natural Resources (NASDAQ:VNR), and its simple, yet contrarian acquisition model has made the partnership stand out among the rest for a few reasons.
Between 2012 and 2013, when peers such as Linn Energy (NASDAQ:LINE) were actively acquiring oil acreage, Vanguard went in the other direction and bought gassy acreage instead. While gas assets did not provide the high returns that oil did at that time, gas-producing acreage could be bought very reasonably, and there was always the prospect of higher returns and increased drilling inventory if gas prices were to ever go higher.
Today, nobody can argue against the success of Vanguard's wager. During 2012, when Vanguard was more actively acquiring natural gas acreage than it is now, natural gas prices hovered between $2 and $3 per thousand cubic feet. Today, natural gas prices are around $4.50, and Vanguard now benefits from additional future drilling inventory in the Wind River, Piceance, Powder River, Green River, and Pinedale-Jonah Basins, all of which are Rocky Mountain basins where Vanguard has acquired acreage over the past few years. Right now, 66% of Vanguard's production volume is natural gas, with a significant portion of the remainder being natural gas liquids.
While natural gas may still be in a state of overabundance, we can see here that excess capacity in the U.S. is dwindling quickly. This comes from two different forces: Declining imports and, more importantly, increasing demand as a result of lower prices.
The biggest contributor to this demand increase is power conversion. Consumers demand the most economical form of electricity available, and that is increasingly becoming natural gas. Therefore, consumers are moving from coal to cleaner, often cheaper natural gas. In addition, liquefied natural gas exports are just beginning to grow. After all, natural gas prices in both Europe and Asia are much higher than those in the U.S. Also, pipeline exports to Mexico have been rising for the last few years. By 2016, demand should begin to outpace supply, which will lead to further increases in the price of natural gas.
Among upstream MLPs, no partnership will benefit more than Vanguard Natural Resources will. Vanguard has not only the highest weighting to natural gas among its peers, but it also has a good bit of additional inventory in the Permian, Arkansas and the Rockies, which can be activated for economical drilling in the case of higher natural gas prices.
Vanguard Natural Resources is an income-centered way to take advantage of the natural gas renaissance going on in the U.S. With a distribution yield of 8.1% and interesting growth prospects ahead of it should Henry Hub continue to climb, this partnership is worth a look.
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Casey Hoerth owns shares of Linn Energy, LLC and Vanguard Natural Resources. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.