Vanguard Natural Resources, LLC (NASDAQ: VNR) was the first upstream master limited partnership to initiate a monthly distribution when it switched in late 2012. In commenting about the switch at the time, CFO Richard Robert said:
We have listened to investors and we believe that we are giving them what they want. A monthly distribution should allow investors to better manage their finances by matching their monthly cash outflows with monthly cash inflows. In addition, a monthly distribution will allow us to reward our investors in a timelier manner as we make accretive acquisitions in the future. We believe the decision to pay distributions monthly rather than quarterly will be welcomed by both our current Vanguard unitholders as well as other potential investors looking to invest in high yielding energy securities.
Since that time, the company has done just what it set out to do. It paid a distribution each month and even raised the payout 5% since it began paying monthly, thanks to making some accretive acquisitions. With that as our backdrop, let's drill down a bit deeper to see what makes Vanguard Natural Resources a solid choice for investors seeking a monthly income stream.
Vanguard Natural Resources 101
Vanguard Natural Resources currently controls 2.3 trillion cubic feet of natural gas equivalent reserves, which is enough to meet the energy needs of 2.3 million households for 15 years. As we can see in the following chart, those reserves are spread around the country.
Source: Vanguard Natural Resources, LLC Investor Presentation.
One thing pretty unique about Vanguard Natural Resources' reserves, at least in the upstream MLP sector, is how heavily weighted the reserves are toward natural gas. Currently, about 68% of the company's reserves are natural gas, which is up from just 34% in 2011. Over the past few years, Vanguard Natural Resources has taken advantage of cheap natural gas prices to load up on reserves with the hope that higher prices over the long term will earn it better returns.
Now, about that monthly payout
While the price of natural gas might be low right now, that doesn't mean Vanguard Natural Resources isn't making any money. On the contrary, the company currently earns enough to pay its investors $2.52 per year in distributions, which works out to a yield of 9.64% at the current unit price.
However, while the payout might be very generous, what's more important to income investors is its security, especially when we're dealing with volatile oil and gas prices. To help mitigate some of this risk, Vanguard Natural Resources hedges a portion of its oil and gas production. For the balance of 2014, 84% of oil production is hedged at an average price of $93.40 per barrel, while 77% of its natural gas production is hedged at $4.40 per MMBtu. Looking ahead to 2015, only about 70% of the company's oil production is hedged, while 77% of natural gas production is hedged. Because of this, it does leave Vanguard Natural Resources open to some of the volatility of oil and gas prices, but much less than most other oil and gas companies.
As the following slide points out, unless natural gas prices take a tumble, the company's distribution is pretty secure -- even at lower oil prices.
Source: Vanguard Natural Resources, LLC Investor Presentation.
Because of this, investors can rest easy in the fact that the company's monthly distribution is on pretty solid ground for the next year. Further, this forecast also assumes the company doesn't cut back on its capital expenses, which it could do if it was uneconomical to invest that money to keep drilling. That would provide a boost to the company's distributable cash flow. Further, the forecast also assumes that the company doesn't make any additional accretive acquisitions that could further boost the company's coverage ratio. So, there's definitely a margin of safety that should keep the distribution flowing to investors even if oil and gas prices take a dive.
Vanguard Natural Resources offers investors a very solid monthly payout that's primarily fueled by the company's natural gas production. That payout is on fairly solid ground as the company's strong hedging practices help to mute its exposure to commodity price volatility. Add it all up, and Vanguard Natural Resources is a solid choice for investors seeking a stable monthly income stream.
