Vanguard Natural Resources (NASDAQ: VNR) has released its third-quarter earnings. A look at some of the headlines suggest it missed on both earnings and revenue. However, a closer examination reveals pretty solid results.

The number that matters
Vanguard Natural Resources reported adjusted earnings of $0.29 per unit on revenue of $103.8 million. Analysts, though, were looking for three pennies more on the earnings and another $24.1 million in revenue. Heavier-than-expected unrealized and realized losses on commodity hedges hurt, as without these revenue would have been $121.5 million. These issues are common in the oil and gas sector which is why investors always need to drill down a little deeper when an energy company reports earnings.

In the case of Vanguard Natural Resources, the number that matters most to investors is the cash flow it had available to pay its distribution. In this case the company delivered 9% more cash flow than it needed, which was good for a distribution coverage ratio of 1.09 times. As long as this number stays above 1.0 times, investors should be happy.

In fact, just having a 1.0 coverage ratio was one reason why LINN Energy (OTC:LINEQ) investors celebrated that company's quarter. It was the first time this year LINN Energy actually earned enough to pay its distribution to investors. With its coverage ratio now hitting 1.09, Vanguard's distribution is really rock-solid.

Drilling down deeper on the quarter
Vanguard's production for the quarter totaled 32,250 barrels of oil equivalent per day, or BOE/d. That's actually slightly off from last quarter's 34,957 BOE/d. That 3% decrease can simply be attributed to the natural decline of an oil and gas well.

Unlike LINN Energy, Vanguard spends minimally to organically grow its production. It basically spends just enough to keep production flat as the company acquires virtually all its production growth. Vanguard only spent about $12.8 million in the quarter on maintenance capital projects, which was $2 million less than it spent last quarter. It does plan to spend about $20 million next quarter, so investors should expect to see the company add back some lost production. However, any real gains in production will come from acquisitions. 

Vanguard's year-over-year production was up 45% thanks to acquisitions like its $275 million deal with Range Resources (NYSE:RRC) earlier this year for Permian Basin assets. The deal added a nice production boost, as well as about five years' worth of cash-flow enhancing development opportunities. That deal enhanced Vanguard's results this year while it provide Range Resources with cash to reinvest in its high-return Marcellus shale drilling program.

What's next?
Vanguard has about $900 million of liquidity that can be used to pursue deals similar to the Range Resource asset purchase. CEO Scott Smith noted that the company remains active in the acquisition market and sees Vanguard "well positioned to be competitive for MLP type assets that come to market in the fourth quarter." To me, that suggests Vanguard might make one more deal before the year is out.

Investor takeaway
Vanguard really delivered a solid quarter. The company continues to be among the most conservative in the upstream MLP sector. Furthermore, with its distribution already on solid ground, investors should expect to see a raise early next year, especially if the company is able to make another deal before the year is over.