Oil and gas producer Vanguard Natural Resources (NASDAQ:VNR) announced its first-quarter results on Tuesday, April 30. Despite a few positive notes, I must confess that I am disappointed with the company's bottom-line numbers and particularly its distributable per-unit cash flow.

Highlights from the report
Most of Vanguard's numbers increased significantly compared to the year-ago quarter. For example, sales increased to $152.7 million compared to the prior-year quarter in which Vanguard had total sales of approximately $96.7 million. This was due, at least in part, to the company's higher production. Vanguard produced a total of 268 million cubic feet equivalent of oil and natural gas in the first quarter compared to 199 million cubic feet equivalent in the prior-year quarter.

Unfortunately, this higher production also meant that Vanguard's operating and sales expenses increased. But overall Vanguard's net income increased substantially, with the company reporting net income of approximately $13.2 million compared to a net loss of $27 million in the first quarter of last year.

Pinedale acquisition
In the earnings press release, Vanguard's management seemed to be quite excited about the potential that its recent $581 million Pinedale acquisition provides to grow its earnings and cash flow going forward. For that reason, this acquisition seems like a good thing to discuss here.

The Pinedale property is located in Southwestern Wyoming and consists of 14,000 acres in the Pinedale Anticline and Jonah gas fields. At the time of the acquisition, the property contained 2,000 producing gas wells with 970 wells to be developed. This second part represents a new strategy for Vanguard Natural Resources, which previously was focused on acquiring mature producing assets. This is a strategy that Vanguard shared with companies such as Linn Energy and BreitBurn Energy Partners.

While this acquisition includes assets located in two fields, most of the production in the area comes from just one of the fields. At the time of the acquisition, the Pinedale Anticline was producing a total of 88.7 million cubic feet of natural gas per day compared to just 2 million cubic feet per day from Jonah.

Of course, not all of this production will be done by Vanguard. But, this acquisition is still the largest that the company has ever made. The acquisition nearly doubled the amount of resources that the company had in the ground, increasing Vanguard's reserves by 80%.

Acquisition greatly increases unit count
This acquisition, despite its benefits, is also one of the reasons for the negative aspects of this quarter's results. You see, Vanguard's policy is to pay out nearly all of its cash flow to its unitholders. While this is great for investors who need income, it makes it rather difficult for Vanguard to accumulate cash to make acquisitions like the one in the Pinedale. Therefore, in order to raise the capital to pay for deals like this, or at least some of the capital, Vanguard needs to issue more partnership units.

We see evidence of this by looking at the year-over-year change in the company's outstanding partnership units. At the end of the first quarter, Vanguard Natural Resources had approximately 79.6 million units outstanding compared to 64.8 million units outstanding at the end of the first quarter of last year. While not all of these trust units were issued to finance the Pinedale acquisition, some certainly were.

This increase in the company's units wouldn't be so bad if Vanguard's distributable cash flow increased by enough to increase the distributable cash flow on a per-unit basis. But, that wasn't the case. In the most recent quarter, Vanguard's distributable cash flow per unit was $0.52. In the first quarter of last year, Vanguard's distributable cash flow per unit was $0.61. This is because Vanguard's distributable cash flow barely increased despite the huge increase in units outstanding. This is a trend that investors should keep an eye on, as it is a bad sign if it continues.

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Daniel Gibbs has a long position in Vanguard Natural Resources. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends BreitBurn Energy Partners L.P.. 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.