Vanguard Natural Resources Put Itself In Good Hands With Its Recent Deal

Generally, there are three things you want to know when an oil and gas company buys assets: Where are they? Are they proven or developed assets? And how much did the company pay? However, the recent deal that Vanguard Natural Resources (NASDAQ: VNR  ) begs one more important question: Who will they be working with? Let's look at why the fact that Vanguard's partnering with Ultra Petroleum (NYSE: UPL  ) and QEP Resources (NYSE: QEP  ) is quite possibly just as important as purchasing the assets themselves.

Source: US Bureau of Land Management

The what and the how much
For those who may have missed it, Vanguard just bought 14,000 net acres in the Pinedale and Jonah natural gas fields of Wyoming from Anadarko Petroleum (NYSE: APC  ) for $581 million. These fields contain about 847 billion cubic feet equivalent of natural gas, and currently produce 113 million cubic feet equivalent per day.

$581 million for just 14,000 acres may seem like a pretty steep price to pay, but it actually is a pretty good deal when compared to other deals in the region. Back in 2012, LINN Energy (NASDAQ: LINE  ) made a similar purchase for assets in the Jonah field that had proved reserves of 730 billion cubic feet equivalent and total production of 80 million cubic feet equivalent per day. For this haul, LINN forked over $1 billion. So for similar reserves and production, Vanguard paid just over half of what LINN paid. 

The reason that LINN and Vanguard, both upstream master limited partnerships, were willing to dive into these natural gas fields is because they are a great fit for an MLP. The 1 year decline rates in the Pinedale and Jonah fields -- the metric used to describe how quickly an oil and gas reservoir loses production -- are in the 20%-30% range. This is much better than some of the other tight and shale gas reservoirs in the U.S. like the Barnett and Haynesville shales, which have decline rates of 55% and 86%, respectively.

These low decline rates translate into wells that will produce commercial amounts of natural gas, and therefore generate cash, for several years. For MLPs like LINN and Vanguard looking for predictable cash flows to cover their large distribution payments to shareholders, these are ideal assets. 

The who
As appealing as these assets may be, it is the partners in the project that really make this a great deal for Vanguard. Across all of the acreage Vanguard just purchased, it will only hold an average 10% working interest. Also, the stake is a non-operator stake, so any drilling and exploration will be conducted by either Ultra Petroleum or QEP Resources. 

For many companies, putting your fate in the hands of another company to deliver results would be rather concerning. Luckily for Vanguard, having Ultra Petroleum and QEP Resources do the exploration and production work is actually a major benefit. Across the entire Pinedale field, both Ultra and QEP have brought well completions costs to $3.8 million and $4.2 million respectively, almost half what it cost to drill a well in the Pinedale six years ago. In fact, both Ultra and QEP are well below the industry average for all-in costs per thousand cubic feet equivalent of natural gas. 

Source: Ultra Petroleum Investor Presentation

What is also encouraging for Vanguard is the pace at which both Ultra and QEP will be completing wells in 2014. For the past two years, QEP has been completing over 100 wells per year, and management has stated it wants to remain strong in the Pinedale. Despite Ultra's recent slowdown in capital expenditures, it projects that it will start to increase development spending, and much of that will be split between the Pinedale and Jonah fields and its recent acquisition in the Uinta Basin. 

So for Vanguard, its sole responsibility will be to hand over a check for about 10% of the costs for the development of this acreage and let Ultra and QEP do all the work. In the Pinedale field, it would be hard to find better companies to partner with.

What a Fool believes
Vanguard has been known as a bit of a contrarian in the energy space. When everyone else was abandoning natural gas assets in favor of more liquid plays, Vanguard started gobbling up natural gas plays and decreasing its total oil production mix. The company also sees the future of natural gas as much brighter than many other players in the space today. Deals like this is further proof of that sentiment, and partnering with players like Ultra and QEP will certainly increase Vanguard's chances of being successful based on that outlook.

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  • Report this Comment On January 06, 2014, at 2:16 PM, zorro6204 wrote:

    It sounds rather unlikely for one company to pay half what the other paid for similar assets, so I looked into this further. Let's compare the two:

    LINE -

    Purchase price $1.025B

    Production 145 MMcfe/d

    Proved reserves 730 Bcfe, 73% dry gas

    Potential reserves 1.2 Tcfe

    Position - controlling, 55%

    VNR -

    Purchase price $581M

    Production 113.4 MMcfe/d

    Proved reserves 847 Bcfe , 80% dry gas

    Potential reserves not stated

    Position - minority, 10%

    You said the reserves were similar, and that's obviously not quite true, is it? VNR paid 57.6% of LINE's cost and got 78.2% of the production, but it was nearly 10% gassier, and therefore less valuable. Moreover, we don't know the untapped potential of VNR's property (acreage alone doesn't tell the story), and LINE's business model is geared towards large growth capex projects, the potential may be what they paid for.

    Finally, maybe VNR's partners are good operators, or have been, but in business one would always prefer to be in control, for all kinds of reasons.

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