Why Vanguard Natural Resources LLC Dropped This Week

Vanguard Natural Resources units dropped on Wednesday because of several factors related to a recent acquisition. However, management is adamant that it will still meet full-year cash flow guidance in 2014. This article is meant to take a big-picture view of Vanguard's quarter.

May 2, 2014 at 11:30AM

On Wednesday, units of Vanguard Natural Resources (NASDAQ:VNR), an upstream LLC engaged primarily in dry-gas production, dropped by almost 3% in the wake of its quarterly earnings report. This article will look at Vanguard's drop in price and offer a bigger-picture view of Vanguard with the new information we have. 

Coverage shortfall
Long story short, Vanguard dropped yesterday because the expected distribution-coverage ratio for the quarter fell well short of expectations. Management expected distributable cash flow, or DCF, to be 1 times distributions, but instead DCF came in at only 0.8 times. This is a big deal because most investors in Vanguard own units primarily for the distribution income. Adding to this is the fact that Vanguard finished 2013 with an overall coverage ratio of only 1 times DCF, leaving no margin for error. 

From the looks of things right now, the shortfall looks to be due to a convergence of factors, all of which seem to be just delays and timing issues. Management itemized the DCF shortfall for the quarter, which came out to $8 million. 

  • Half of the shortfall can be attributed to delays in the drilling of recently acquired Pinedale dry-gas acreage in Wyoming, in which Vanguard is not an operator. The issue here is that the two operators, QEP Resources (NYSE:QEP) and Ultra Petroleum (NYSE:UPL), have experienced delays in drilling 'non-consent' wells unrelated to Vanguard's working interest. As a result of these issues, QEP and Ultra have been delayed in the drilling of wells in which Vanguard does have a working interest. This is apparently 'just a delay.' In addition to this, unusually cold weather on the partnership's Arkoma acreage delayed drilling and curtailed production there. 
  • The other half of this shortfall came from higher capital expenditures in the Pinedale. Since Vanguard is not the operating partner here, management does not have final say as to when wells will be drilled and capital will be spent. QEP and Ultra elected to spend large portions of their respective full-year capital budgets in the first quarter. While this was clearly something Vanguard didn't expect, it will not change the overall capital budget for the year. 

In fact, management still expects 2014 DCF coverage to come in at 1.1 times for the year. 

Tough learning curve
At $580 million, the Pinedale deal represents Vanguard's largest acquisition ever. It also represents a change in direction for the partnership.

Vanguard previously was a cash flow-centric partnership, focusing only on well-developed gas fields which required minimal drilling. This attribute consistently gave Vanguard the lowest capex/earnings before interest, taxes, depreciation, and amortization ratio among upstream master limited partnerships. It also allowed for a simpler prospectus: Instead of having to delineate 'growth' capex from 'maintenance' capex like most other upstream MLPs do, Vanguard simply reported capital expenditures as a whole.

Pinedale may change that. The Pinedale acquisition gives Vanguard about 10 years worth of growth drilling inventory. Since drilling for growth isn't management's specialty, some of these timing mishaps, such as for capital expenditures from operating entities and the unforeseen delay in wells in which Vanguard has an operating interest, could be expected. Remember, Vanguard only closed this deal in February, and management may need some time to sort things out. 

Bottom line
As of right now, I think Vanguard still deserves the benefit of the doubt, especially because management affirmed its full-year DCF guidance. Does that make the units a buy right here? I still don't think so. In addition, Vanguard's unit price has increased steadily between the latter part of 2013 and today, while several other upstream MLPs have gone nowhere.

Finally, Vanguard's yield of 8.2%, while impressive, is actually lower than many other upstream MLPs with similar or better coverage ratios. Before either buying or selling, I think it's best to wait this one out.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Casey Hoerth owns shares of Vanguard Natural Resources. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers