Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Units of Vanguard Natural Resources (NASDAQOTH:VNRSQ) plunged 14% today on triple the normal trading volume. The decline sent Vanguard's unit price to their lowest levels since the depths of the financial crisis in 2009 with a yield of 12.5%.
World oil prices slid 4% today to their lowest point in five years on a statement from the chief executive of Kuwait's national oil company. The OPEC member posed that oil is likely to remain around $65 per barrel for the next six or seven months (which coincides with OPEC's next meeting on June 5).
So What: Investors are nervous about Vanguard's inability to cover its monthly distribution in three of the last four quarters and achieving an unsustainable 0.9 distribution coverage ratio over the last 12 months.
Further spooking investors in recent months has been natural gas's slide, which while not as large as that of oil, doesn't help Vanguard secure or grow its payout any.
This is especially true given management's announcement that it's increasing its capital expenditure spending by 146% this year in order to increase production from its Pinedale Wyoming field.
Now What: The recent declines in oil and gas prices, now at $63 per barrel and $3.60 per MMbtu, respectively, poses a threat to Vanguard's distribution security in 2015.
As this table shows, at today's energy prices Vanguard's 2015 distribution coverage ratio will be approximately 0.9 -- the same as its last 12 months. This opens up the very real possibility that Vanguard will have to reduce its distribution sometime this year or be forced to borrow to maintain its current payout.
While the risk of a distribution cut is something investors need to consider, I continue to believe that Vanguard is one of the better long-term energy income options thanks to its continued focus on boosting production at minimal cost, as seen in its most recent acquisitions.
Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.