What: July was a really awful month for Vanguard Natural Resources LLC (NASDAQ: VNR) investors as the stock crashed 28%. A combination of factors drove the stock lower last month including a 20% slump in oil prices as well as the fact that a major upstream MLP surprisingly suspended its distribution. Neither event bodes wells for Vanguard's immediate future.
So what: The slump in the oil price last month is an ominous sign for Vanguard Natural Resources as it will weaken the company's cash flow should the price remain low. That has the potential to put the company's distribution in jeopardy of being cut again or even eliminated, which is just what one of its major peers recently did. Because of this concern, investors bailed on the stock before things could get any worse.
That being said, Vanguard has yet to signal that another distribution cut is in the works as there was no hint of a looming cut when the company reported its second-quarter result in early August. In fact, the company reported solid results as its distribution coverage ratio was a strong 1.16 times and the company noted that its driving lease operating costs were lower, which is boosting cash flow. Further, the company actually expects its cash flow to get a boost when it closes its pending acquisitions of two smaller rival upstream MLPs during the third quarter.
Now what: At the moment investors are very concerned about the future of upstream MLPs as the steep downturn in the oil price has exposed flaws in the business model. But Vanguard Natural Resources did enter the downturn in a stronger financial position than its peers and that position will actually improve once its acquisitions are complete. Still, it really needs higher commodity prices in order to thrive, and there's no telling when prices will improve so it could continue to be a bumpy ride for Vanguard's investors.
