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Better Buy: Vanguard Natural Resources, LLC vs. Cabot Oil & Gas Corporation

By Matthew DiLallo - May 25, 2016 at 2:50PM

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Drilling down into two natural gas-focused producers.

While oil and gas prices have been very volatile over the past couple of years, prices have started to show some signs of life in recent weeks. That's drawing investors back into the energy patch, which is clearly evident by the rally we've seen in energy stocks this year. That being said, despite the fact that oil and gas prices are rising, not every energy stock is a good buy right now. That's abundantly clear when comparing Cabot Oil & Gas (CTRA 0.21%) with Vanguard Natural Resources (NASDAQ: VNR).

Drilling down into the balance sheets

One of the most valuable lessons investors learned during the downturn is the importance of having a strong balance sheet. When comparing Cabot Oil & Gas with Vanguard Natural Resources, there's really no contest:

Company

Credit Rating

Total Debt

Debt/Enterprise Value

Cash on Hand

Total Liquidity

Cabot Oil & Gas

N/A

$1.6 billion

14%

$580 million

$2.2 billion

Vanguard Natural Resources

B+/Caa3

$2.2 billion

80%

$19 million

$113 million

Data sources: Vanguard Natural Resources, Cabot Oil & Gas, Moody's, and S&P Global.

As that chart notes, Vanguard Natural Resources is weighed down by an enormous amount of debt, which is reflected in the fact that its credit rating implies the company could default on its debt at any moment. Most concerning is the fact that Vanguard Natural Resources has pretty much maxed out its credit facility, with the company borrowing $1.69 billion of its $1.78 billion in available credit as of the end of last quarter. Worse yet, its banks are in the process of redetermining that credit facility and will very likely cut its borrowing base below what it owes, triggering a repayment clause.

Meanwhile, Cabot Oil and Gas has very little debt for a company of its size. Further, it recently sold stock and used the funds to pay down its credit facility and bolster its cash position, leaving it with ample liquidity.

That better balance sheet makes Cabot the clear winner in this category. 

Comparing the portfolios

Not only do Cabot Oil & Gas and Vanguard Natural Resources offer investors two entirely different credit profiles, but their portfolios couldn't be more dissimilar. Cabot, as the slide below shows, is entirely focused on just two shale plays:

Image source: Cabot Oil & Gas Investor Presentation.  

Vanguard Natural Resources, on the other hand, is much more diversified across a number of different production basins, as we can see from the map on the slide below:

Image source: Vanguard Natural Resources Investor Presentation.

Vanguard Natural Resources scores points for having a diversified portfolio that's filled with primarily low-decline natural gas assets. That said, its assets don't provide anywhere near the upside of Cabot's assets, with it boasting thousands of future drilling locations that can be developed once oil and gas prices reach a certain point. That upside is lacking at Vanguard, which actually just sold its assets with the most compelling upside in order to pay down some of its debt.

This one could really go either way because some investors prefer stability, while others prefer upside.

Considering the upside

Speaking of upside, there are two ways to look at the upside of these two companies. Because Vanguard Natural Resources has an enormous debt load, its unit price has been crushed over the past year, with it vastly underperforming Cabot's stock price:

VNR Chart

VNR data by YCharts.

As such, Vanguard certainly has a lot of upside to recover that lost ground. However, given its debt concerns and limited liquidity, it's really a lottery ticket right now, with units having the potential to more than double, or go all the way to zero depending on commodity prices and credit availability.

Cabot Oil & Gas, on the other hand, has very strong upside as both commodity prices and its production increase, without the downside of the possibility of going all the way to zero.

Because I believe it's better to avoid binary situations like the one Vanguard is facing, I'd give Cabot the clear edge, here.

Investor takeaway

There's a real risk that Vanguard Natural Resources could go all the way to zero, especially considering  a number of its upstream MLP peers have recently filed for bankruptcy. That's why the clear choice between the two is Cabot Oil & Gas, which boasts a strong balance sheet and lots of upside as oil and gas prices improve.

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