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: Shares of Vanguard Natural Resources (NASDAQ: VNR) dropped just over 15% in the month of March. While there is no mind reading device out there that can tell us what every seller was thinking, the sell off probably had to do with the trifecta of lower commodity prices, a reduced capital budget for 2015, and an analyst downgrade.
So what: Chances are the analyst downgrade from The Street had a lot to do with the other two factors -- also, it's like, their opinion, man -- so let's focus on the commodity price slide and the decision to reduce capital expenditures. Like just about every other player in the space, Vanguard is trying to keep its budget within reason considering oil and gas prices have declined as much as they have over the past several months. On top of the 20% reduction in capital spending for 2015, Vanguard's management recently cut its distribution to shareholders by 44% in order to keep its financial house in order.
While the decline in oil and gas prices should be of some concern, they aren't the panacea that some investors might assume they would be for Vanguard. With the company's portfolio heavily weighted to natural gas and a strong hedging program for 2015, the company expects that it can cover its distributions even if oil prices were to slide below $40 per barrel.
Now what: Just like every other oil and gas producer in the nation, Vanguard has faced some very tough decisions the past several months. Fortunately, management made some wise decisions a couple years ago to move away from oil and more toward natural gas, which has not seen as drastic a decline in price as oil has. With a very conservative budget for 2015 in place, Vanguard should be able to keep things running pretty steadily at today's commodity prices. If we don't see much improvement in 2016, though, we may need to reevaluate that thesis.