Drilling Down into Vanguard Natural Resources’ Earnings

Oil and gas producer, Vanguard Natural Resources (NASDAQ: VNR  ) is out with its first-quarter earnings. The company, known for its monthly distribution to investors, is one of a growing number of oil and gas production companies structured as an MLP/LLC. This makes the high yielder a favorite of income-starved investors. Let's take a quick look to ensure that income won't be drying up anytime soon.

First quarter financial highlights
Vanguard's results were in line with management's expectations, with revenue of $96.7 million, which led to adjusted EBITDA of $72.4 million and distributable cash flow of $41.4 million. While adjusted EBITDA rose 36% year over year, distributable cash flow dipped by 7%. Distributable cash flow was affected by higher expenses, as well as commodity prices; however, the company still was able to deliver a distribution coverage ratio of one times, meaning that it is secure.

Production
Oil and gas production skyrocketed in the quarter to 33,122 barrels of oil equivalent per day, which is up 144% over the 13,569 barrels of oil per day produced in the first quarter of last year. Natural gas production was the big driver in the quarter, as the company produced 68% more gas than last quarter. Oil production was up, as well, though it only increased by 4%, while NGL production was up by 23% over last quarter. The company's acquisitions over the past year have been a key driver in boosting its production. 

Vanguard's production mix for the quarter was 67% natural gas, 24% oil, and 9% NGLs; however, the revenue is made up of 55% oil, 35% natural gas, and 10% NGLs. That revenue mix was not only affected by a higher proportion of natural gas production, but challenges in the quarter due to oil and NGL price differentials, as well. Overall, there is nothing to be concerned about here as the company expects the pressure on oil prices to abate going forward. 

Looking ahead
Vanguard recently completed its $268.8 million acquisition of assets in the Permian Basin from Range Resources (NYSE: RRC  ) . These were liquids-weighted assets, with only 43% of the reserves weighted toward natural gas. It was a good deal for both sides, as Range is focusing its resources and personnel on the highest return projects in its portfolio, making these cash flow assets a much better strategic fit for Vanguard as they enable the company to grow its liquids production and related cash flow.

The Range assets contributed to Vanguard's ability to raise its monthly distribution from $0.2025 to $0.205. The company expects to continue to be active on the acquisition front, which could allow for additional steady distribution increases throughout the year. Also contributing to the increase was the company's decision to accelerate some of  its second-quarter drilling capital budget into the first quarter, which then brought that cash flow forward. Vanguard will likely increase its capital budget this year, which could yield additional distribution increases as that cash flow comes online.

Finally, the company discussed on its conference call that it's exploring the opportunity to follow in the footsteps of LINN Energy to develop a similar structure to its LinnCo model. LinnCo has been highly successful in the marketplace, and Vanguard sees a similar structure as an option to fund future growth. This could have a significant future impact on how Vanguard operates going forward, so this is a key area for investors to watch.

Foolish bottom line
Overall, it was a solid quarter for Vanguard, and the company is set up to have a solid year. One last item of note: The company made mention on its conference call that it really needs investors to vote their 2013 proxy this year. They have an important item on the ballot that requires shareholder approval, so if you haven't voted yet, you really should take this opportunity to exercise your rights as an investor. Remember, you didn't simply buy a ticker symbol -- instead, you're a part owner of the future success of the company. 

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  • Report this Comment On May 01, 2013, at 8:11 PM, zorro6204 wrote:

    One always needs to keep in mind the conservatism of management in reporting DCF, charging all capex, rather than just "maintenance" capex, especially in light of the accelerated work done this quarter.

    As management said more than once, expect steady, but slow, increases in distributions, but the hedging is very comfortable now. Not a security to speculate in, but one to hold for cash flow long term.

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