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This Cut Is a Really Ominous Sign for Vanguard Natural Resources

By Matthew DiLallo - Apr 20, 2016 at 3:43PM

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Denbury Resources' recent borrowing base cut of more than 30% doesn’t bode well.


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Earlier this week Denbury Resources (DNR) announced that its lenders had completed the spring redetermination of the borrowing base on its credit facility. The result was that its borrowing base was reduced by 30% to $1.05 billion due lower oil and gas prices. While Denbury handled that cut in stride, the sheer size of the cut is a bit concerning for Vanguard Natural Resources (NASDAQ: VNR), given that its credit facility, which is basically fully utilized, is also being redetermined this spring.

Drilling down into Denbury Resources' credit line
Prior it its spring credit facility redetermination, Denbury Resources' banks had committed to lend it up to $1.5 billion. However, it's a facility that the company actually used very sparingly, having only borrowed $175 million as of the end of last year. Though, more recently its outstanding balance had risen to $310 million, partially due to the company borrowing $55.5 million to buy back some senior notes on the open market at a significant discount. In fact, it was able to buy $152.3 million in bonds by face value, leading to a net debt reduction of $98.8 million.

Furthermore, despite the borrowing base reduction, Denbury's lenders are also permitting it to incur $1 billion of junior lien debt, which can be used for future debt repurchases or exchanges. So, not only does the company maintain a significant level of liquidity despite the deep cut to its borrowing base, but it has additional flexibility.

Why this could matter to Vanguard Natural Resources
Liquidity and flexibility, however, are not something that Vanguard Natural Resources has in abundance at the moment. As of the end of last year it had borrowed $1.69 billion of the $1.8 billion available to it on its credit facility. Though, that borrowing base decreased by $18.9 million after the company completed a second lien exchange earlier this year, which triggered a 25% reduction in the borrowing base for every dollar in second lien debt it issued. As a result, it was down to just $96.6 million in spare capacity after borrowing a staggering 94% of the available capacity on its borrowing base.

With its spring redetermination just around the corner, Vanguard Natural Resources recently announced the sale of its STACK/SCOOP assets for $280 million in cash. Its intention is to use that cash to pay down its credit facility and give it a bit more breathing room. However, even if 100% of those proceeds were applied to its credit facility, it would still have borrowed 79% of its current capacity. That's a big concern given that there's a very real possibility that its borrowing base could be cut 30% like Denbury's. If that were to happen, it would then owe its banks the difference between the borrowing base and its outstanding borrowings, though the repayment clause does allow for it to repay its banks the deficiency in six equal monthly payments.

While the company has crunched the numbers and believes it can produce enough internally generated cash flow to meet these payments, it's still in a very tight spot right now. It would be left with little to no breathing room for the next six months, at which time its credit facility would be up for another review. If oil and gas prices were still weak, its borrowing base could be cut again.

That situation is in stark contrast to Denbury, which despite the 30% cut to its borrowing base, still has nearly $700 million of liquidity as only 30% of its newly reduced capacity has been used. That's on top of the $1 billion it can tap via junior lien notes, which gives it ample options to address its own balance sheet concerns. 

Investor takeaway
Because it had barely touched its credit facility, Denbury Resources easily withstood the impact of seeing its credit cut 30%. The same can't be said for Vanguard Natural Resources, which has already nearly maxed out its facility, meaning a similarly deep cut would tie its hands for the next few months. That could prove to be very problematic because if oil and gas prices take a turn for the worse, it might not generate enough cash flow to make those payments given that not all of its production is hedged this year. In a worst-case scenario, it could lead to a bankruptcy filing before the year is up, especially if a number of its peers are forced to file due to similar liquidity problems. 

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