Vanguard Natural Resources Remains a Strong Income Play

Several weeks ago, I wrote an article that suggested that Vanguard Natural Resources (NASDAQ: VNR  ) could offer a way to hedge the costs of heating your home this past winter given the exceptionally cold weather and high bills. Well, now the winter is beginning to wind down (the snow that some of us saw this past winter not withstanding), and soon it will be spring with its accompanying lower heating bills. So, should anyone who bought Vanguard as protection against high heating bills sell their shares now? There is little reason to, as the company still offers a very strong monthly dividend and reported very strong results at the end of last month.

Very strong results
Vanguard Natural Resources reported its fourth-quarter and full-year 2013 results on February 26, 2014. The tag line to the company's earnings announcement states that Vanguard achieved record adjusted EBITDA, production and proved reserves in 2013. This was indeed the case. Vanguard had an adjusted EBITDA of $74.3 million in the fourth quarter, an increase of 11.7% over the fourth quarter of last year.

In addition, Vanguard had an adjusted EBITDA of $309.7 million in 2013, an increase of 34.4% over 2012's result. Vanguard also achieved vastly higher production in 2013 than in 2012. The company averaged 35,448 barrels of oil equivalent per day in 2013 compared to 18,298 barrels of oil equivalent per day in 2012.

Strong forward growth prospects
Towards the end of 2013, Vanguard announced that it is spending $581 million to acquire a stake in two of the most prolific natural gas fields in the United States. These two fields are the Pinedale Anticline and Jonah fields located in southwestern Wyoming. The fields currently contain 2,000 producing wells between them, but Ultra Petroleum (NYSE: UPL  ) and QEP Resources (NYSE: QEP  ) , the operators for the fields and Vanguard's partners in the development of these fields, plan to drill another 970 wells, which will obviously substantially increase Vanguard's production from the fields going forward.

Vanguard itself will embark on a development program in these fields once the deal to acquire them is completed. The company plans an eight-rig drilling program in 2014 with the goal of drilling two wells per month. All in all, the acquisition of these properties is expected to increase Vanguard's proved reserves by 80% and the company's average daily production by 55%. Both of these things are very good news for Vanguard Natural Resources and its unitholders. The increase in production is especially good for income-focused investors as the increased production is likely to boost Vanguard's distributable cash flow, which means that Vanguard's unitholders may begin seeing higher monthly distributions.

Vanguard predicts greatly rising output
Vanguard provided its forward-looking production guidance as a part of its earnings results and, as I outlined above, Vanguard expects its production to increase significantly. In 2013, Vanguard produced 8,462 barrels of oil per day on average. The company expects to increase this to 8,800 to 9,400 barrels of oil per day on average in 2014.

This is certainly a respectable increase but it is nothing compared to the increase that the company expects to see in its natural gas production. In 2013, Vanguard Natural Resources averaged 137,632 Mcf/day of natural gas production and 4,047 barrels per day of natural gas liquids production. In 2014, Vanguard Natural Resources expects to produce an average of 215,000-229,000 Mcf of natural gas per day and 7,200-7,650 barrels of natural gas liquids per day. Clearly, this is a very substantial increase that should prove greatly accretive to revenue and cash flow so long as natural gas prices remain somewhat steady.

Maintaining a high distribution yield
Vanguard maintains a very high yield that should appeal to income-focused investors. On March 17, Vanguard announce  that it intends to pay a cash distribution of $0.21 per unit in the month of April. As Vanguard pays its distributions monthly, this corresponds to an annualized distribution of $2.52 and a distribution yield of 8.4% at the company's current unit price. This yield could make Vanguard quite appealing even in the absence of growth, but the fact that Vanguard is likely to see forward growth could make the company a very appealing play.

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