What: Units of Vanguard Natural Resources (NASDAQ: VNR) rebounded sharply in April despite the fact that the company didn't have any news-driven catalysts. Instead, a big rally in crude oil was all that was needed to spark last month's surge.
So what: Crude oil jumped nearly 20% last month, closing above $45 per barrel. Initially, that surge was fueled by word that OPEC and Russia were working together to freeze their output, however, those talks ended without a deal. Instead, the market chose to focus not on the lack of a deal, but on the fact that supplies were already starting to come under pressure.
In fact, oil production in the U.S had declined to an average of just 9 million barrels a day last month, which was roughly 700,000 barrels per day below its peak last April. Meanwhile, further production declines of nearly 900,000 barrels per day were projected by the end of the year. That's on top of supply disruptions in Libya, Venezuela, and Nigeria.
These higher oil prices are coming at a crucial time for Vanguard Natural Resources, which is currently having it's reserve-based revolving credit facility redetermined by its banks. The concern is that its banks will cut deeply into its available credit, which would be a problem given that the company had borrowed $1.69 billion of its $1.78 billion borrowing capacity as of the end of the month. While Vanguard Natural Resources did close out March by announcing the sale of its STACK/SCOOP assets, which will enable it to pay down some of its borrowings, it still runs the risk that its banks will cut deeply into its borrowing base. However, with oil on the rise it is increasing the possibility that its banks might not cut as deeply into its available credit as feared. Further, higher oil prices also means more cash flow for Vanguard Natural Resources' unhedged oil volumes, which would enable it to pay down its borrowings a bit quicker.
Now what: Times are very tough for Vanguard Natural Resources right now. However, with oil rallying it is providing investors with some hope that better days lie ahead. That said, the company still must get through its redetermination period, which will determine how much financial breathing room, if any, it has going forward.
