Anadarko Petroleum Wyoming

Photo credit: Anadarko Petroleum 

Vanguard Natural Resources (NASDAQ:VNR) reported first-quarter results after the closing bell yesterday. The oil and gas MLP delivered earnings per unit of $0.31, which missed estimates by $0.07 per unit. That said, this isn't the number that matters most for investors, so let's drill down into the company's results.

A look at the numbers that matter
The highlight this past quarter was oil and gas production. Thanks to its acquisition of Anadarko Petroleum's (NYSE:APC) interests in the Pinedale field in Wyoming, Vanguard Natural Resources saw its production surge -- 35% over the first quarter of last year. The natural gas field had a noticeable impact on natural gas production, which was up 34%, with an even bigger impact on the production of natural gas liquids, which was up 123%.

Unfortunately, this production boost didn't translate into much of a boost in distributable cash flow. Vanguard Natural Resources' distributable cash flow was $41.8 million on the quarter, up just 1% from last year's first quarter, while decreasing 2% sequentially. Meanwhile, the distribution-coverage ratio slipped from 1.0 times in last year's first quarter to just 0.83 times. While a big part of that is due to the fact that Vanguard Natural Resources has more units outstanding, this still isn't the direction investors want to see this ratio heading. This also marks the second straight quarter of a coverage ratio below one, as the coverage ratio was 0.88 times last quarter.

In addition to more units, the other big reason the coverage ratio slipped is due to a big year-over-year increase in maintenance capital expenses, which went from $14.6 million last year to $28.8 million this year. Vanguard Natural Resources invests capital for two reasons. First, it invests to maintain its production, which is supposed to stabilize its distribution to investors. Second, it will invest to grow production, which is what the deal for Anadarko's interests in Pinedale brought into the fold. That said, organic growth capital spending totaled just $2.4 million last quarter, so nearly all of the capital spent was done to maintain production. By spending more money just to maintain production, Vanguard Natural Resources had less money available to distribute to investors.

More wheeling and dealing
The other item of note on the quarter was the asset exchange deal the company entered into with Marathon Oil (NYSE:MRO). In that deal, Vanguard Natural Resources will acquire natural gas and liquids properties in the Wamsutter field in Wyoming from Marathon Oil. Vanguard Natural Resources is exchanging its 75% working interest in the Gooseberry Field properties it owns in Wyoming. In addition to that, Vanguard Natural Resources will pay Marathon Oil $12 million to balance out the value of the asset exchange. This is an interesting exchange because Gooseberry is predominantly an oil field, so its another example of Vanguard Natural Resources being one of the few companies not afraid to invest in natural gas while everyone else is focused on oil.

Marathon Oil Wyoming

Photo credit: Marathon Oil

Looking ahead
Vanguard Natural Resources expects to concentrate more of its capital to grow production at the assets it acquired from Anadarko Petroleum. The 2014 capital plan will see the company spend between $105-$110 million, with about 71% of that money being spent on the Pinedale assets. This capital is a crucial part of its new strategy to grow production and cash flow through the drill-bit. That said, the company needs to do more than just grow production, as distributable cash flow growth is what investors really want to see as Vanguard Natural Resources needs to get its coverage ratio back above one.

Investor takeaway
This wasn't a real stellar quarter by Vanguard Natural Resources, as its distribution-coverage ratio continues to slip. However, the company does have a plan to grow, as it's just beginning to spend its organic growth capital. This should yield solid returns and fuel increased cash flow, so investors don't need to be worried just yet.

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Matt DiLallo has no position in any stocks mentioned. 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.

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