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Vanguard Natural Resources' (NASDAQ: VNR) unit price is down an abysmal 50% since the start of the year. However, that performance would have been worse if it was not for the fact that the company won just enough leniency from its banks to give it time to repay a portion of its bank debt. That big win is the reason why the upstream MLP has not joined its larger peers in bankruptcy. That said, it needs another big win this fall just to stay alive.

Just lenient enough

Over the past decade, Vanguard Natural Resources spent $5 billion to complete 25 strategic acquisitions to build a geographically diversified oil and gas producer. However, the problem with that growth is that the company funded too much of it with short-term debt via borrowings under its revolving credit facility. As of the end of last year, it borrowed $1.7 billion of its $1.8 billion in borrowing capacity.

That became a grave problem this spring because its banks were scheduled to redetermine its borrowing base, which would likely result in a deep cut due to the crash in oil and gas prices. Vanguard, however, was proactive and closed an asset sale around that same time, which reduced its outstanding borrowings to $1.424 billion. That saved the day because its banks cut its borrowing base by 26% to $1.325 billion. While the company still had a deficiency of $103.5 million against only $40 million of cash on hand, its credit agreement allowed the company to make six equal monthly installments to cover the deficiency, which it projected to cover with excess cash flow generated by its oil and gas hedges.

However, the fact that Vanguard's banks only cut its credit facility 26% was a big win because other producers had their facility cut even further. For example, Denbury Resources' (DNR) banks cut its credit facility by 30%, down to $1.05 billion. That said, the cut did not have that much of an impact on Denbury Resources because it only had $310 million outstanding under its facility, leaving it with ample breathing room despite the deeper cut. If Vanguard's banks cut its credit facility as deeply as Denbury's, it would likely have declared bankruptcy.

The clock is still ticking

The fact that Vanguard's banks were lenient in the spring does not mean bankruptcy is off the table. That is because its reserve-based credit facility gets redetermined twice a year, with the next redetermination coming this fall. There is no guarantee that its banks will continue to be lenient this fall, especially given that commodity prices remain weak.

That is a risk that CFO Richard Roberts noted on the company's second-quarter conference call. He warned that Vanguard has "one distinct problem":

Too much of our debt is under our reserve-based credit facility with our banks who redetermine the value of our reserves and our borrowing base every six months based on their own price decks. As commodity prices have declined, bank price decks have been lowered, our borrowing base has been reduced, and our liquidity has declined. Although commodity pricing has improved since the spring redetermination, we cannot be certain that our bank group will increase their price decks to the same extent or at all. We believe that simply hoping for a better price environment or improved bank price deck is not an advisable strategy, and we are actively considering all of our options to resolve our bank debt problem and position Vanguard for a brighter future.

While Roberts notes that the company is considering all of its options to address its bank debt problem, it has yet to announce any moves in that direction. While rivals like Denbury Resources are selling assets, making debt exchanges, and completing other moves to reduce debt, Vanguard has been mostly silent since the spring. That silence is unnerving for investors because Vanguard has to do something or else it runs the risk of losing big this fall.

Investor takeaway

This spring Vanguard Natural Resources sold a key asset just in time to cut its debt. That won it leniency from its banks and bought it more time to address its biggest problem. But the company has not completely resolved its debt problems, which puts it in a precarious position because it might not survive the year if it does not make the right moves to win additional leniency from its bank group.