Why I'm Short Vanguard Natural Resources, Long Linn Energy

On Tuesday VNR took a 13% run after they released affirmation of their dividend payment. Note that this is payable to shareholders of record on the 30th of this month.

In doing so it just fired above LINE in returns ytd, broke the under performance streak relative to LINE, its dividend is now less then LINE's and the news Tuesday was already known to those that follow the stock.

LINE divi - 16.4%
VNR divi - 15.8%

Now, in an energy environment where aggressive expansion was happening and credit was flowing freely I could make a case for VNR to outperform given their smaller size, making it easier for them to grow very quickly.

This is of course not the environment we are currently in.

Both companies have performed well from an operational perspective so far.

However it makes no sense for VNR to be paying a lower dividend then LINE.

LINE is a much bigger operator who runs most of their own wells making them less susceptible to drilling problems.

LINE has a more favorable energy mix - 51% gas 49% oil vs VNR's 78% gas 22% oil.

LINE has better coverage against low energy prices with over 100% of their production hedged through 2011 and 67% in 2012.

VNR - 100% this year in gas, 81% oil. Then it falls to 84% gas and 72% oil until 2011.

LINE also uses a large number of puts as hedges so in the event oil and gas prices rise LINE would still have more exposure to the upside then VNR even though they are fully hedged.

LINE has less debt in relation to their market cap.

LINE has a 21 year reserve life, VNR 17.

I believe things will come "back into their proper orbit" and VNR being the riskier play will need to pay a higher yield then LINE does in the market place.

This means VNR's shares must fall relative to LINE's.

Buy LINE
Short VNR

I put this play on Tuesday and will add to it in the future if the VNR momo continues, causing the planets to fall further out of alignment.

My basis:

Long LINE @ 15.20
Short VNR @ 12.51

Disclosure: Long LINE, Short VNR

Comments

[zorro6204:]

That is a well thought out argument. The only flaw I see is that the market is not acting very rational right now, so I'm not so sure going short one and long the other will really work.

Still, if you were overweight VNR, which I was after shifting from canroy's just in time to catch the appreciation, it makes sense to re-balance. Considering yield, hedging, debt safety and appreciation potential, I also put ATN, CPNO and WPZ into the mix, even though they are all not strictly mineral plays. The best appreciation potential might be WPZ and ATN, the best yield is ATN and LINE. All appear to have no borrowing base issues, which leaves EVEP out of the picture unfortunately. BBEP is dead money right now, I'm out. EROC and MWE I also like, but I'm already heavy there, and they are not as safely hedged.

With that, and given that it makes sense to be diversified, because things can go wrong even with the best company, I split the baby and balanced evenly over VNR, LINE, CPNO, WPZ and ATN. Thanks for provoking me to action, it was a useful morning's work.

Apr 22 10:12 AM

[andydee:]

Freyda,

Do you follow LINE? Seems as though you don't.

There's a 14 minute presentation by Mark Ellis, the COO, and Kolya Rockov, the CFO, and co-founder of LINE on the web right now at... www.vcall.com/CustomEv...

Just go down to the "Day 1" 10:30AM time and click on LINE. In about 14 minutes you'll get an excellent briefing on the company, and you'd get an answer to your question...

"how long will it continue to maintain its present distribution in the face of a really tough 2010 environment?"

PS If you are interested in VNR turn to Day 2...I think their presentation is about 20 minutes long...

Apr 22 11:41 AM

[andydee:]

Freyda,

I guess we move in different circles.

I was suggesting that you listen to a recording of the LINE presentation so that you could get an answer to your question re: how long they expect to maintain their current distribution...You told me you looked at a chart of LINE prices(? - I guess...)

I don't "read charts". I'd like to know more about the companies I invest in than simply what price someone assigns to a share (or unit in LINE's case).

Since you haven't listened to the recording, and since I was trying to be helpful - I'll answer your question..."They expect to maintain the current distribution because they have hedged about 100% of their production through 2011." In other words they have, in effect, "presold" all of their output for the next three years at prices well in excess of today's price...somewhere between 2 and 3 times as much as today's NG spot price.

Apr 22 04:28 PM

[Leonard the...:]

LINE big upgrade from Citi with a 23.50 price target implying 67% upside.

On top of that VNR downgraded today by Wachovia.

:)

Apr 24 01:42 PM

[Leonard the...:]

Freya,

He was a very underrated genius.

Also this pairs trade is now up about 12% in the first week including the VNR distribution.

Not a bad idea to take some profits.

Apr 28 11:07 AM

[munny:]

Mike had a divorce settlement in which his wife took a huge number of Linn units.


On Apr 23 02:53 AM Freya wrote:

> Andydee: I do not trust the words of Management.
> I have heard similar words followed by "circumstances have changed".
> Actions speak louder than words. It was a glowing pitch but instead
> of going Up after the presentation, it sat there.
>
> I do not like that sort of reaction to good news.
>
> Besides, I can't figure out what Michael C. Linn did with about 1.9
> million shares. His holdings were around 4.2 million at the end of
> Nov. 2008 but even after a stock grant in Feb. of 278K, his holdings
> are listed at 2.3 million shares.
>
> Like I said, actions speak louder than words. This is the universe
> I travel in.

May 02 11:59 PM

[one eye:]

Oil up, nat. gas up, LINE up...

What more is there to say?

May 07 08:08 AM

[Leonard the...:]

LINE has really broken out here.

Busting through 16.50 and into the 17's clears the way for some further upside.

Spectacular trade!

May 08 10:15 PM

[hermit99:]

Three months later, how smart was your move to short VNR?

Jul 13 02:45 PM

[hermit99:]

Three months later, how smart a move was it to short VNR?

Jul 13 02:50 PM

[Freya:]

Wasn't leonard a very smart Monkey, in reality?

Apr 24 01:44 PM

[Freya:]

LINE has started to move up, am watching closely. What I want to see is volume on the breakout.

Any thoughts on PWE?

Apr 24 08:00 AM

[Freya:]

Andydee: I do not trust the words of Management.
I have heard similar words followed by "circumstances have changed". Actions speak louder than words. It was a glowing pitch but instead of going Up after the presentation, it sat there.

I do not like that sort of reaction to good news.

Besides, I can't figure out what Michael C. Linn did with about 1.9 million shares. His holdings were around 4.2 million at the end of Nov. 2008 but even after a stock grant in Feb. of 278K, his holdings are listed at 2.3 million shares.

Like I said, actions speak louder than words. This is the universe I travel in.

Apr 23 02:53 AM

[Freya:]

Andydee, I looked at the chart. Saw that even with all the positives you mention, it had not moved to the upside. It appears to be in a channel. Where it is right now is the upper end, I expect it to move to back down to $12. To do that it would have to cut its dividend. If it breaks out to the upside, I will buy it.

I do not need any more "surprises".

Apr 22 01:52 PM

[Freya:]

Line is predominantly Nat. Gas and normally its management hedges.

The question becomes, how long will it continue to maintain its present distribution in the face of a really tough 2010 environment?

Apr 22 10:28 AM