Vanguard Natural Resources LLC (VNR) is an oil and gas E & P company that focuses on the development of mature, long lived oil and natural gas properties. VNR attempts to generate stable cash flows that it can distribute to its shareholders/unitholders. It attempts to grow its distribution over time. It has grown the dividend 43% since 2007. The dividend/distribution is currently $2.43 per year (8.5%). It is a limited liability company that behaves as an LP for distributions/dividends and tax purposes. It has no general partner and no IDRs. It pays its distribution/dividend monthly; and investors will need to file a K-1 form for this stock.
VNR has been displaying great management lately in Buffet like style ("Buy when there's blood in the streets"). When oil prices hit their low in 2009, VNR management saw a big opportunity. It proceeded to buy huge new, mostly oil assets for the next two years at bargain prices. When U.S. natural gas prices hit their low of about $1.90/Mcf in the spring of 2012, VNR management wisely started buying natural gas assets at bargain prices. In fact VNR bought such big natural gas assets that its production ratio changed from 57% oil in 2011 to 28% oil, 12% NGLs, and 60% natural gas in 2012. At the end of 2012, it had approximately 152 million Boe of proved reserves. 60% of these were gas and 40% were liquids. 74% were proved developed. The chart below shows VNR's recent buying makeup (blue is oil and red is natural gas).
Further VNR has been very frugal in its acquisitions. It has paid an average acquisition price of about $9.35/Boe; and it captured margins of about $44.70/Boe. The chart below shows that VNR has managed this without overburdening itself with debt.
VNR's $8.90 in debt per Boe is one of the lowest in the industry. It also manages this debt well as you can see from the Adjusted EBITDA / Interest chart below.
It expects EBITDA to be 4.7x interest payments by the end of 2013. The chart may show a decline; but this is still a very healthy ratio. It makes VNR a good bet in the case of a U.S. recession. The stock should not get an extra round of pummeling due to speculation about the company's ability to pay its debts. VNR can service its debts easily. It makes VNR a very safe haven.
You probably also want to know if the company is growing. You want to know if it can keep growing its dividend, etc. The following chart showing EBITDA growth and reserves growth since 2007 should do a lot to answer those questions.
An EBITDA CAGR of 78% per year since 2007 is stupendous. A reserves CAGR of 99% per year is equally fantastic. These are clearly slowing in the last year or two, as they have to as the company grows. However, VNR is still performing beautifully. It is still consistently growing its distribution payout. It has strategically set itself up for the eventually higher natural gas prices that will inevitably come in future years. The emerging market economies will demand more and more energy. This will drive prices up. This will force the U.S. (and the world) to utilize all of its various forms of energy.
BP estimates that the world will move from a demand level of approximately 13 Btoe at the end of 2012 to approximately 17 Btoe by 2030. Most of this growth will come in non-OECD countries. All three major energy categories of oil, natural gas, and coal will grow significantly. This will mean that U.S. natural gas resources will get snapped up at higher prices over time. The U.S. will use more natural gas for electricity generation, for transportation, for heating, etc. It will also export more to the non-OECD countries where the major growth in energy consumption is forecast to take place. In fact both the U.S. and Canada have LNG liquefaction facilities scheduled to come online in 2015; and those few are only the tip of the iceberg. Countries such as China, India, and Japan would happily import U.S. natural gas. Many European and South American countries would likely do the same.
If the U.S. is smart it will accelerate its own use of natural gas for such things as public transportation and trucking. This would do a lot to alleviate the U.S.' huge energy trade deficit in oil. The U.S. Congress has tried to pass such a bill several times, but it has failed each time. Eventually practicality will win out. Hopefully that will be soon. However, VNR should have a good market for its natural gas in any case in the near future.
Natural gas prices are as of this writing, April 1, 2013, at about $3.97/Mcf on the Nymex. This is much higher than the low in 2012 of about $1.90/Mcf. It means that VNR will make more profit on any of its unhedged natural gas. It is a good omen for the future of natural gas prices. However, VNR management has already ensured the near future with hedges on the vast majority of production. The following two charts show VNR's hedging program.
The charts show that VNR is 94% hedged in natural gas at $4.60/Mcf for 2013. It is 86% hedged in natural gas for 2014 at $4.58/Mcf. It is 90% hedged in oil at $92.53/barrel for 2013. It is 88% hedged in oil at $92.40/barrel in 2014. If there is a U.S. recession in the 2013-2014 time frame, VNR should weather it easily. The Adjusted EBITDA/Interest chart (far above) should further reassure you of this. The worst that will happen to VNR investors is that the stock will go down temporarily. It will almost assuredly go back up over time, if this happens. We are in a long term energy bull market. This means that investors get to collect a great 8.5% dividend will little or no worry about the future, as long as they are willing to be invested in VNR long term. It is one of the best safe havens on the market. Its distributions are much heftier than bond yields.
In terms of its most recent performance, VNR posted EBITDA attributable to VNR unit holders of $67 million for Q4 2012. This was a 24% year over year improvement. For FY2012 it posted $231 million in EBITDA, which was a 40% year over year improvement. Q4 2012 saw distributable cash flow of $41 million or $0.70 per unit for a coverage ratio of 1.15x. For the FY2012 DCF was $141 million; and the coverage ratio was 1.1x. If VNR played the same tricks with its books it says its peers play with regard to accounting from the effective data of acquisitions instead of the closing date, its coverage ratio for FY2012 would have been 1.3x; and VNR would have earned another $27 million. The fact that VNR refrains from playing these accounting tricks is a point in its favor. VNR is a stock most investors would like to own long term.
The two year chart of VNR provides some technical direction for this trade.
The slow stochastic sub chart shows that VNR is overbought. The main chart shows that VNR is in a very mild uptrend. The recent VNR asset purchases have been big; and they have been good deals. This may give VNR the impetus to move higher, although VNR may be due to cycle down first. VNR has an FPE of 17.77. It has a mean analysts' recommendation of 1.8 (a buy).
Since VNR is currently overbought, I would not choose this time to get in. However, the overall market is also overbought. It should cycle down in the near future. Some people are expecting as much as a 10% near term sell off. If the overall market sells off appreciably, that should be a good time to start to average into VNR. Since there is a good chance of a U.S. recession this year, it is probably appropriate to average in over the entire year (and possibly some of 2014). In this way you will ensure that you get a good average entry price.
NOTE: Some of the fundamental financial information above is from Yahoo Finance.