Earn an 8.4% Yield Plus Natural Gas Upside at Vanguard Natural Resources

Photo credit: Anadarko Petroleum. 

Vanguard Natural Resources  (NASDAQ: VNR  )  pays its investors an 8.4% distribution. And it doesn't make shareholders wait the usual three months between payments, instead delivering monthly dividend payouts. On top of that, investors can expect to see a steady income boost each year. Since its IPO in 2007, Vanguard has increased its payout annually; the payout is up by more than 46% over the past seven years. 

Natural gas-fueled growth
One reason for this is that the company continues to acquire new oil and natural gas reserves. Vanguard has been particularly aggressive in acquiring natural gas reserves in the recent low price environment. Late last year the company made a transformative deal with Anadarko Petroleum  (NYSE: APC  ) to acquire $531 million in natural gas assets in Wyoming. The deal included 2,000 producing wells and at least another 970 future drilling locations, with the potential for another 5,200 sites that could be added over time.

The addition of those future drilling locations is what made this a transformational change for the company. Instead of just investing to keep production steady, Vanguard will now join some of its more aggressive master limited partnership peers in organically growing its production. The company will in 2014 spend an extra $50 million in growth capital to join Ultra Petroleum  (NYSE: UPL  )  and other partners in drilling about 192 wells next year.

Stepping on the gas to grow
The company sees this strategy shift as necessary to open up new doors to continue growing by acquisition. Typically, Vanguard only buys assets that require minimal investment to keep the oil and gas flowing at a steady rate. However, going forward it will be more open to deals that offer future upside to additional drilling.

Furthermore, its willingness to buy natural gas assets when others are selling could prove highly rewarding to investors in the future. We've seen natural gas-focused companies such as Ultra Petroleum and Bill Barrett Corp. (NYSE: BBG  ) focus a lot of attention on adding more oil production. Ultra Petroleum came up dry in its attempt to find oil in Colorado, then went out and went out and bought some oil assets. Meanwhile, Bill Barrett actually found oil in Colorado.

Vanguard Natural Resources, on the other hand, has taken advantage of the opportunity to snap up unwanted natural gas assets from oil-seeking peers. This included plucking 2,822 natural gas wells from Bill Barrett in late 2012. The company paid just $328.8 million for more than 300 billion cubic feet equivalent of proved natural gas reserves that could be a whole lot more valuable if the price for gas rises. It wouldn't surprise me to see Vanguard continue to acquire cheap natural gas assets from its oil-focused peers. 

Investor takeaway
Vanguard Natural Resources offers investors two very compelling opportunities. Income-seeking investors can pick up a secure monthly income stream that pays more per month than the average savings account pays in a year. On top of that, investors are picking up a lot of upside to natural gas once prices increase. Given that the assets Vanguard acquires will typically produce for more than a decade, long-term investors will do very well as the company begins to realize higher prices for the natural gas that it bought at bargain prices over the past few years.

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  • Report this Comment On February 12, 2014, at 9:14 PM, HoerthCM wrote:

    I like Vanguard too, but frankly there isn't as much upside as you might think. Vanguard hedges the vast majority of its production, and does so in swaps or collars. This means that if nat gas prices increase significantly, Vanguard will not have upside exposure for awhile. If gas prices stay up here Vanguard will have increased inventory in the Rockies and Arkansas.

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