The once sleepy oil and gas MLP space has been a whirlwind of activity this year. Top dog LINN Energy (LINEQ) kicked things off with a bang after it announced a complex, multibillion-dollar deal for an oil weighted C-corp. That was just the first of many deals announced this year, as both Atlas Resource Partners (NYSE: ARP) and BreitBurn Energy Partners (BBEPQ) announced large asset acquisitions in excess of $700 million.
With its peers now largely busy digesting these big deals, as well as fending off the attacks of short sellers, Vanguard Natural Resources (NASDAQ: VNR) basically has the deal market all to itself. With nearly $900 million in available liquidity, the $3 billion company has the capacity to make a real big splash. Best of all, because its competition for its next deal is limited, it has the potential to score a great deal for its investors.
That's not to say Vanguard had been resting on its laurels this year. This past February it announced a $275 million deal with Range Resources (RRC 2.38%) for liquids-rich assets in the Permian Basin. The deal has worked out well for both companies, as it enabled Vanguard to solidify its distribution coverage ratio above 1.0 times while supplying Range the capital it needed to support its drilling program. For Vanguard, however, keeping its coverage ratio above 1.0 is critical.
This is why, compared with its peers, Vanguard's distribution is on solid ground, as it stood at 1.05 as of the end of the second quarter. That same quarter, LINN's ratio stood at 0.89, while BreitBurn was able to deliver a coverage ratio right at 1.0. However, unlike those peers -- and this is key -- Vanguard hasn't needed to turn to a more aggressive approach of investing its own capital to organically grow its distribution up to its current level. As the following chart shows, Vanguard invests only what is required to maintain its current level of production -- all of its growth comes by acquisitions.
Source: Vanguard Natural Resources.
That's a key competitive advantage these days, and it is one reason it hasn't drawn the attention of short sellers. However, another key advantage it has is that its coverage ratio is already above 1.0 and it still has the capacity for a big deal. When looking again at its peers, it's clear how much of an impact these deals can have. For example, if LINN is able to complete its proposed transition, its coverage ratio will go from 0.95 in the fourth quarter to 1.16, and that's after factoring in all the organic capital the company is spending this year. Further, BreitBurn's recently completed deal, when combined with its organic capital, should bring its coverage ratio up to 1.4 later this year. Finally, Atlas' big deal has it now enjoying a coverage ratio of 1.1, even after raising its payout.
The bottom line is that Vanguard is in a nice spot right now. It has the capacity to complete a large transaction, while its competition for that deal is more limited, as most of those companies are too busy to bid. That means the company has the potential to make a deal with a big impact on behalf of its investors, which would enable the company to really grow its distribution in the future.
