Vanguard Natural Resources LLC's CEO Discusses Q1 2013 Earnings Results - Earnings Call Transcript

May. 1.13 | About: Vanguard Natural (VNR)

Vanguard Natural Resources LLC (NASDAQ:VNR)

Q1 2013 Earnings Call

May 01, 2013 11:00 am ET

Executives

Lisa Godfrey – Investor Relations

Scott Smith – President, Chief Executive Officer

Richard Robert – EVP, Chief Financial Officer

Britt Pence – Senior Vice President

Analysts

Kevin Smith – Raymond James

John Ragozzino – RBC Capital Markets

Michael Peterson – MLV

Amy Stepnowski – Hartford Investment Management

Mike – Robert W Baird

Operator

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the Vanguard Natural Resources First Quarter 2013 Earnings Call.

During today’s presentation, all participants will be in a listen-only mode. (Operator Instructions) And as a reminder this call is being recorded today, May 1, 2013.

I would now like to turn the conference over to Lisa Godfrey, Director of Investor Relations. Please go ahead, ma’am.

Lisa Godfrey

Good morning everyone, and welcome to the Vanguard Natural Resources, LLC first quarter 2013 earnings conference call. We appreciate you joining us today.

On the call this morning are Scott Smith, our President and Chief Executive Officer; Richard Robert, our Executive Vice-President and Chief Financial Officer; and Britt Pence, our Senior Vice President of Operations.

If you would like to listen to a replay of today’s call it will be available through June 1, 2013 and may be accessed by dialing 303-590-3030 and using the passcode 4614057#. A webcast archive will also be available on the Investor Relations page of the company’s website at www.vnrllc.com and will be accessible online for approximately 30 days.

For more information, or if you would like to be on our email distribution list to receive future news releases, please contact me at 832-327-2234 or via email at lgodfrey@vnrllc.com. This information was also provided in Tuesday’s earnings release. Please note the information reported on this call speaks only as of today, May 1, 2013. And therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

I would also like to remind our investors that proxy ballot cards and notice and access information was mailed out on or about April 22, 2013 to all unit-holders of record as of April 5, 2013. Your vote is very important. Please keep in mind for special voting items the vote is required by the actual unit-holder and cannot be voted by your broker. Online voting is also available at www.proxyvote.com.

Before we get started, please note that some of the comments today could be considered forward-looking statements and are based on certain assumptions and expectations of management. For a detailed list of all the risk factors associated with our business, please refer to our 10-Q that will be filed tomorrow, May 2nd, and will be available on our website under the Investor Relations tab, and on EDGAR. Also on the Investor Relations tab of our website, under Presentations, you can find the Q1 2013 earnings results supplemental presentation.

As a reminder, the most recent record date of our monthly cash distribution is today May 1, with a May 15 payable date. Unit-holders of record will receive $0.2025 for each common unit held or $2.43 per common unit on an annualized basis.

Now I’d like to turn the call over to Scott Smith, President and Chief Executive Officer of Vanguard Natural Resources.

Scott Smith

Thanks, Lisa. And welcome, everyone, and thanks for joining us this morning on the first quarter 2013 call. This morning I’ll start with the summary of the Permian transaction we completed with Range Resources last month. Then we’ll review our operational results for the quarter. Richard will then proceed with the financial discussion and then we’ll finish up with the Q&A.

First I’ll discuss our acquisition activity in the first quarter. We started the year off by announcing and subsequently closing the acquisition of Permian properties from Range Resources for $275 million. These assets are mature, low risk properties of significant upside potential through the ongoing opportunities and infill development drilling and are an excellent addition to our current portfolio of Permian assets.

We believe we can deploy approximately 25% of the free cash flow from these assets and grow production and cash flow over the course of the next 4 to 5 years. I’d point out that although we have modeled this transaction using the slow in steady type of development plan we have the ability to accelerate capital spending on the assets through should we choose to do so.

We are continuing to evaluate the inventory of projects at our disposal and look to work on a total of 19 wells over the course of 2013 beginning this month. The total capital spends for the year is expected to be approximately $4 million on these assets.

We continue to see a lot of assets come to market both negotiated and marketed and we expect to be very active in this year on the acquisition front. We’re excited about our prospects and look forward to continue to create value on the unit holders through making accretive acquisitions.

We’ll now review our production results and capital spending for the quarter. First off, average daily production for the first quarter of 2013 was 33,123 BOE per day up 45% over the 22,803 BOE per day produced and the fourth quarter of 2012 and up 144% over the first quarter of 2012. This significant increase in production from 2012 is a direct result of the Arkoma acquisition completed on June 30 of last year from Antero Resources and the Barrett transaction which closed at the end of last year.

Production for the quarter was approximately 67% natural gas, 24% oil and 9% NGLs. That being said even with our significant increase in natural gas production, our revenues are still more weighted to liquid with 55% coming from oil, 10% from NGLs and the balance from natural gas.

I want to quickly point out that NGL volumes are less than anticipated primarily due ethane rejection occurring in the Piceance assets we acquired in the Barrett transaction, which amounts to more than 450 barrels per day. Although we are seeing NGL volumes our natural gas pricing will be positively impacted as we saw the benefit of ethane in our natural gas stream. So though we are seeing less NGL volume, our realization is going to be up and we expect this to continue through the second quarter.

Turning to our capital spend, we were very active during the first quarter as you saw in our press release. As we mentioned on our last call, we put together a capital budget of approximately $55 million with an additional $5 million to $10 million in operated projects identified should we need to reallocate resources to some of the non-op development plans fell behind which definitely is not the case what happened in the first quarter.

Our capital budget is focused on deploying capital on high rate of return projects that are aimed at offsetting the cash flow associated with the natural declines in our oil and natural gas production base and our projects include new development drilling in the Woodford Shale, Fayetteville Shale and non-operated horizontal Bakken wells in addition to other higher return activities across our asset base.

During the first quarter, we spent just a bit less than $15 million which is ahead of our originally anticipated amount of $10 million. The breakdown of the capital spend is as follows. Approximately 55% or $8 million of our total capital spend in the quarter was on our non-operated properties, with the other 45% of $6.5 million on our operated assets.

We spent almost $3 million in the Williston, where majority of the work was focused on completing five Bakken wells. The average initial rate for these wells is 525 barrels oil per day and 420 Mcf per day on gross basis with Vanguard’s average working interest is approximately 18%.

The best well of the group was this Energy GNR Federal’s 1522 which IPed at almost 1,150 barrels oil per day and just over 1 million cubic feet per day. We have a 25% working interest in this well and production came online in late February.

These wells were primary drivers as to why our CapEx came in above forecast; however, not because of spending more than we had budgeted, but because they were completed earlier than anticipated. We’d originally forecasted no capitals being spent on these type of projects in the first quarter, but a large amount being spent in the second quarter. So we’re pleased that we’re ahead of our original timeline.

The Fayetteville is another area where we continue to see a significant amount of drilling but where hadn’t allocated any value for additional drilling when we made the Arkoma acquisition. We participated in 10 wells in the quarter and had – which came in with an average gross IP of approximately 3 – 2.75 million cubic feet per day.

That being said, our average working interest was less than 3% for these wells. However, recently we have received almost $6 million in AFEs from operators in this area, which is a reflection of how quickly drilling activity can turn on in these higher natural gas prices that we’re seeing today.

What I hope I’ve conveyed is with a large non-op component to our budget we try to err on the conservative side building in extra leeway time for when the projects would be completed. Fortunately, activities have been accelerated instead of delay and we should realize the benefits for the balance of the year.

Another major area of development for the company was in the Woodford Shale where we spent roughly $5 million in the first quarter, which includes both operated and non-operated wells.

As I discussed in our last call, we have determined along with our operating partner in the area that the best development plan is to drill up to five wells in a section and complete all the wells at the same time. This allows us to achieve efficiencies in both drilling and completion cost while also not fracking into currently producing offset wells which impacts cash flow.

I am very pleased to report that we have seen the benefits of this strategy in our operating wells. And our operating wells are abjuring at a total cost of around $3.75 million or a 20% reduction what we had initially forecast. The first five wells were completed early in the second quarter, and are currently flowing back after flowing back water after the frac. We have a 41% working interest in these wells and we had forecasted that they would come on in June, so we’re about a month ahead of schedule.

Additionally, we participated in the completion of four other non-operated Woodford wells with the working interest in the range of 14% to 15%. These wells should be coming on line here in the next couple of months. So although we spent approximately $5 million more than we had originally forecasted in our guidance a majority of that was modeled initially to be spent in the second quarter or from additional non-AFE that came in during the month.

As you would expect, we should see a reduction in the $19 million of drilling capital we had forecasted, being spent in our guidance for the second quarter. All-in-all, we’re very excited about the rapid pace and efficiencies, we’ve been able to achieve year-to-date and look forward to receive an increased cash flow through the balance of the year.

We have continued access to the capital markets and a very active acquisition market as evidenced by our growth during the last 10 months. We’re poised to continue the momentum that we’re seeing so far in 2013. We are excited about our prospects for the balance of the year and remain confident that with our structure, cost of capital and excellent group of employees, we can compete effectively for the right type of assets, which will prepare our growth for 2013 and beyond.

With that, I’ll turn the call over to Richard for the financial review.

Richard Robert

All right. Thank you, Scott. Good morning, everyone. The first quarter of 2013 did not slowdown for Vanguard as we closed to $9.2 million unit offering for net proceeds of $246 million and raised another $10 million in common equity under our at-the-market offering program. We quickly put that to work via our acquisition of the Range Permian assets for $275 million.

There are four topics I’d like to discuss this morning, financial results for the quarter, an update on our hedge profile, our credit facility, liquidity update and lastly a quick update on our outlook for 2013.

With respect to our financial results, we reported adjusted EBITDA attributable to Vanguard unit-holders of just over $72 million, and which represents an increase of 36% when compared to the $53 million reported in the first quarter of 2012, and an increase of 9% from the $67 million in the fourth quarter of 2012.

There were no surprises as it relates to our adjusted EBITDA results for the first quarter. It was in line with where we had forecasted. As Scott discussed, we are pleased with the acceleration of our drilling plan and the results we are anticipating and when combined with the Range Permian acquisition, we are expecting a successful 2013.

As I mentioned on our last conference call, we were forecasting a continued widening of all differentials in the first quarter, especially in the Big Horn and Permian Basins. These are one of those times when we wish we were not right, but we were. All differentials came in at the tune of more than $13 in the Permian and $26 in the Big Horn.

On a company wide basis our published guidance anticipated a negative differential of $13.85 for the first quarter and the actual result was virtually the same at negative $13.70. While it is nice to be accurate in forecasting, the financial result was significant, although as expected. To put it into perspective from a dollar and cents standpoint, if we had mentioned the average oil differentials in the first quarter as those we had experienced in the fourth quarter of 2012 we would have generated an additional $5.5 million in revenue.

Now for the good news, our published guidance does anticipate a significant improvement in the company wide oil differentials through the remainder of 2013. Specifically, we anticipate that the negative differential improving by a little over $5 per barrel in the second quarter. A big driver of this improvement is the Permian oil differential hedges that we put in place late February or early March, which I’ll discuss in more details in a moment during my hedging update.

The takeaway from this is that we are just hoping things will get better on differentials. We know they will get better at least in the Permian because we now have the hedges in place or the Permian.

Moving on to lease operating expenses. LOE has decreased from over $15 per BOE in the first quarter of 2012 to approximately $8 per BOE in the first quarter of 2013, so almost cut in half. This is partially a function of producing more natural gas, which has lower LOE costs on a BOE basis, but some of the decline is due to realizing cost efficiencies as we grow in size and scale.

As an example, on the Barrett acquisition, there were approximately 45 employees working in the field prior to our taking over operations on April 1. Currently, there are 26 Vanguard employees working on the field on those same properties. The Range properties had eleven employees before we took over our operations on April 1. Now there are seven employees.

Similarly, our cash G&A has decreased from approximately $3.30 per BOE in the first quarter of 2012 to $1.60 per BOE in the first quarter of 2013. And again, is a function of producing one natural gas and achieving cost efficiencies as we grow.

In terms of our distributable cash flow, the first quarter of 2013 totaled just over $41 million or $0.61 per unit generating coverage ratio of one times based on our current distribution of $20.25 per month or $60.75 per quarter.

As, Scott mentioned, we spent about $5 million more in capital than anticipated. Again, not due to cost overruns, but because of non-operated and operated projects being completed quicker than anticipated.

In the past, we’ve been negatively impacted from projects being delayed, so this is a much better side of the fence to be on. Unfortunately, because we assume all capital as maintenance this lowers distribution coverage for the quarter, but for the full-year which is a more important metric, we should have a positive impact as we will have increased production and thus cash flow for more of the year than originally anticipated.

For the first quarter, we reported adjusted net income of $17 million or $0.26 per unit. Our GAAP reported net loss was $27 million or $0.42 per unit.

Moving on to our hedging portfolio, as I regularly note, we continuously evaluate our hedge book and opportunistically add to our current positions. We were quite active in the first quarter adding to our hedge positions primarily as a result of the Range Permian acquisition.

In terms of percent of production hedged, 2013 expected gas production is 94% hedged, 2014 is 86%, 2015 is 93% and 2016 is 95% hedged and the first half of 2017 is approximately 48% hedged all at weighted average prices of about $4.62, which we are hopeful that by 2017, we can re-hedge future natural gas production at comparable levels, thus avoiding a cash flow cliff.

On the oil side, 2013 expected oil production is 100% hedged, 2014 is 88% hedged and 2015 is 36% hedged. As I regularly note, we still have significant upside potential as we utilize both traditional callers and three-way callers, which constitute a relatively large portion of our overall hedged portfolio and has been a reason in the past why our cash flow can vary from quarter-to-quarter even though we are as well hedged as we are.

Three-way callers and traditional callers as a percent of our hedged portfolio comprise approximately 35% in 2013 and 40% in 2014. As this shows, we still have a significant portion of our portfolio that will allow us to have the ability to participate in upside above our weighted average floor price of approximately $92.47. So bottom-line, we like higher oil prices as long as they are being offset by higher negative oil differentials.

More recently, we have also added NGL hedges on 500 barrels a day or about two-thirds of the NGL production through 2014 associated with the Barrett transaction. To do this, we hedged the individual components of the NGL stream, also called the basket at a weighted average price of $40.30 per barrel or $0.96 per gallon. Again, we felt it was prudent to lock in these prices to insulate us from any major future swings in NGL prices for these properties.

Lastly, we have also been very active in adding oil basis differentials where the market allows. Currently we have put our oil basin hedges to cover both West Texas sour and the Midland-Cushing differential as well as our LLS production in 2014. We now have hedges in place that fix the differentials for approximately, what we think is the 100% of our oil production in Permian at significantly better pricing.

Our Permian sour production differential has hedged at an average price of negative $1.05 for both 2013 and 2014. Our Permian sweet production differential has hedged at a negative $1.24 for 2013 and negative $1.05 in 2014. Compared to the negative $13 differential we realized in the first quarter these hedges represent a significant improvement.

Clearly, this was a very important step in providing stability to our cash flow out of that area. We are continuing to look at ways to mitigate our cash flow volatility in the Big Horn and Williston areas, but have nothing substantive to report at this time.

More details regarding our current hedge portfolio and percent hedge as well as the recent hedges entered into for the Range Permian acquisition can be found in the supplemental Q1 2013 information package posted to our website.

Let me turn to our credit facility and liquidity for a quick update. In connection with the closing of the Range Permian acquisition on April 1 and our semi-annual borrowing base re-determination process, our borrowing base increased to $1.3 billion in April. But we have elected to keep commitments at $1.2 billion since we do not currently need the additional liquidity. This lowers the fees we have to pay upfront as well as on the unused commitments.

However, our credit agreement is set up, so that if we were to need the extra capacity we can ask for the commitments to increase to the higher borrowing based amount without the need to go through a long credit process. Additionally, we also extended that credit facility, an additional year and a half so that it does not mature for another 5 years.

Another important development that I have to share with you, is that we have increased our flexibility when it comes to our hedge covenants in our credit agreement. I won’t bore everyone with the specific details, but the net result was to give us higher tolerance levels for hedging our projected production from our drilling activities.

So we now have more flexibility to not only hedge acquisitions that may have a higher drilling component like the Range Permian acquisition, but also gives us additional flexibility on our bore – on our base production, should we increase our capital spending.

This is important as it allows us to further lock-in margins and take out risk related to price fluctuations that may impact our expected drilling results.

As previously mentioned, we completed a $9.2 million common unit offering in February raising proceeds of approximately $246 million and raising an additional $10 million using our ATM program. All proceeds were used to repay debt under our revolving credit facility.

As of April 30, Vanguard has $714 million in outstanding borrowings under the revolver which drives us with approximately $600 million in current liquidity after taking it into consideration about $15 million in cash and the increased $1.3 billion borrowing base.

In regards to the high-yield bond market, we were very pleased that at the end of March our corporate rating was upgraded by Moody’s from B2 to B1, which also translated to an upgrade on our unsecured notes from Caa1 to B3. We had also received an upgrade from S&P in November of last year to B+ on our corporate rating and booking notes. This was a very important hurdle for Vanguard as it opened the door to a larger group of investors who can buy our bonds and has translated to some good performance on those bonds.

As it relates to our outlook for 2013, when we issued our guidance last quarter, we did not include the impact of Range Permian acquisition because we felt that it would be more prudent to wait until we close the acquisition before including.

This acquisition has a significant amount of accretion that is largely driven by the increase in EBITDA approximately $25 million to $30 million for the nine months it contributes in 2013.

Based on these expectations and the improvement in our oil differentials, our Board of Directors has authorized an increase through our monthly distribution of $0.25 effective for the April distribution to be paid in June. Keep in mind that $0.25 translates to an increase of $0.03 when annualized or 1.2% increase over our current annual distribution of $2.43.

Assuming our previous guidance assumptions but updated for actual first quarter results, current strip prices, the Range Permian acquisition and its distribution increase, we anticipate our distribution coverage improving to between 1.15 and 1.2 times versus the 1.11 times previously published in our guidance in March.

I’d like to quickly comment that as of April 23, we voluntarily left the New York Stock Exchange and are now listed on the NASDAQ. Also I want to point out that there is a very important proposal on the proxy that was recently mailed out.

The item that I am referred to is the proposal to increase the number of units available of our long term incentive plan from 1 million units to 4 million units. We’ve been fortunate to grow, this growth has reflected in total assets, EBITDA as well as employee head count. We had four employees when we went public 5.5 years ago today we have approximately 165 employees.

To track and retain quality employees and also incentivize them so that their interests are more lying with our unit holders, we need to be able to reward them units under our LTMs. If we didn’t do this, we couldn’t compete for good talents as virtually all other public energy companies offer eligible awards to incentivize their employees.

Because of our growth, we have virtually no units left to issue under the LTM. Last year, we tried pass the same proposal but it failed to get the necessary quorum to approve increasing the amount. The problem is not getting the approval of those that did vote, but rather getting 50% of our unit holders to vote in the first place to constitute a quorum.

Under SEC rules brokers cannot vote this proposal on behalf of the unit holder, the unit holder must vote on this proposal themselves. So please do vote on this proposal. I believe it is critical that the future success of the company that we have units to incentivize employees. And also keep in mind that it took us 5.5 years to issue just under 1 million units, so I expect the additional 3 million units will last quite a long time.

Overall, 2013 is off to a good start as we have discussed that length in the past, we are having challenges as it relates oil price differentials and NGL price realizations. But our conservative philosophy of slow and steady distribution increases continue to serve us very well. We did not immediately declare large increases to our distribution as a result by acquisitions, but shows to keep some coverage in reserve should uncontrollable variables such as the differentials in NGL pricing remain volatile.

It continues to be our goal to judiciously increase our distribution in a manner that we feel is sustainable for the long-term. We intend to continue our track record of slow and steady increases as seen by our announcement yesterday that our board approved an increase to our monthly distribution by $0.25.

While this doesn’t sound like much an increase, keep in mind that it applies to a monthly distribution. So on an annualized basis, our distribution is increasing from $2.43 to $2.46. And when you consider yesterday’s closing unit price of $28.45, we are trading at what I believe is an attractive yield of 8.6%.

If our financial results continue to meet our expectations, our unit-holders can expect small but safe distribution increases for the remainder of the year.

This concludes my comments. We’d be happy to answer any questions at this time.

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen at this time we will begin the question-and-answer session. (Operator Instructions). And our first question does come from the line of Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hi. Good morning.

Scott Smith

Good morning, Kevin.

Richard Robert

Good morning, Kevin.

Kevin Smith – Raymond James

Just curious about your five Woodford wells, how long have they been flowing back? And do you plan on maybe updating us as far as production rates on the next quarter’s call?

Scott Smith

Well, the answer to the second question is definitely, yes. And they’ve been – I think we started flowing that – Britt Pence is here with me. I think we started about a week ago.

Britt Pence

Yes. And they are cleaning up. We have two wells currently turned to sales. The other three we are still flowing back frac fluid – actually on all five of them, but we’re going to need to put on tubing in the wells, so we’ll start – we’ve already started that this week, and hopefully that will all finish by next week. So that will help to unload those wells as the well, but very encouraging initial results right now.

Scott Smith

But I do – that’s something we’re going to want to highlight after we kind of see more of a sustained 30 day type of number, efforts all claimed out, so expect more information on that front.

Kevin Smith – Raymond James

Okay. Great. And congrats on getting that drilled so economically. And then, I guess where do we stand then on the next five well program? Since you had the schedule do you point on jumping right into that one or you want to stay and start that again in the third quarter?

Scott Smith

Our current thoughts are we are working with our operating partners as to depending on rig availability which I understand hopefully is not going to be a problem. We’ll probably look to start in the July timeframe and at the current time, I think we made just a elect – because of the results that we’re seeing and the cost and the returns which are pretty nice at these levels, looks like we’ll probably just keep one rig moving – one rig going for the entire rest of the year.

Kevin Smith – Raymond James

Okay.

Scott Smith

It will be actually increasing our level actively by a little bit.

Kevin Smith – Raymond James

Got you. And then I guess the last question then kind of rolls into CapEx. How comfortable are you with that 55 million? Do you think there is maybe some upside to that number?

Scott Smith

Well, that’s – it’s very timely question. We spent a lot of time on that with our Board yesterday. We are seeing a lot of interesting opportunities, a lot of it, it is coming out of the fact that with gas prices in this $4.40 plus type range a lot of other operators are coming to us with attractive things to drill that will generate nice returns. So I would anticipate that we probably will increase somewhere in the order of around what 10%, something like that?

Richard Robert

Yes. We haven’t gone through all the numbers yet, but certainly it’s something we are evaluating, but we obviously want to see sustainable prices where they are. And our concern obviously is that if everyone turns on this picket that prices won’t stay where they are. So we want to be a little cautious about committing to more dollars at this point.

Kevin Smith – Raymond James

All right, understandable. Thanks for your time.

Scott Smith

Thanks, Kevin.

Operator

And our next question does come from the line of John Ragozzino with RBC Capital Markets.

John Ragozzino – RBC Capital Markets

Good morning everyone from a blizzard entrenched Denver this morning.

Richard Robert

Good morning.

Scott Smith

Global warming.

Richard Robert

Yes.

John Ragozzino – RBC Capital Markets

Yes, exactly, keep it coming. Scott you mentioned that you could grow the production from the acquired Permian assets with reinvestment rate of just 25% of EBITDA. Can you give us a feel for what kind of growth levels that would generate and then additionally what percent of reinvestment have you assumed for just maintenance?

Scott Smith

Well, you know what John, we call everything maintenance. So we didn’t really break it out as to what the numbers would be. But I think again we are talking about we look at it with the level of – I think we have somewhere in the neighborhood of like 100 opportunities that we’ve identified recompletions and infill drilling. And again, we’re looking at doing this very judiciously over a period. So the level of increase is actually – it’s very modest.

Richard Robert

Well, I think it’s actually 10% to 15% a year.

Scott Smith

That’s modest. But again that’s also – that level of spending takes care of the natural decline and increases 10% to 15%.

So it’s – and as we said in the call have – do we have the ability to ramp it up, yes, we’ve been fortunate to bring on some new engineering talent that is dedicated just to this project, and if we do see the type of result that we’re hoping for, obviously we have the latitude to put the accelerator to it and speed up the program. So again, we didn’t mile it that way, because again if – like we said over and over again, we do think it’s on a pretty conservative nature around here.

Richard Robert

Yes. But I would say John that we certainly are considering the benefits are possibly going to a growth capital wedge as you know all of our peers have a growth capital wedge in their drilling budget. And certainly we have considered that our strategy would have to include that if we went to LinnCo type model or we call it VanCo around here. Yes, you can argue the premium that LinnCo trading at versus Linn. We’re certainly noticing that I guess that – those are important enough to leave 100 basis points on the table.

So if we went down that road, which obviously we are considering down along with other avenues for raising capital including preferred stock. If we go down that path and we would be forced to change our strategy and start including growth capital. So all these things are on the table, we’re considering all of them seriously.

John Ragozzino – RBC Capital Markets

Great. That’s helpful. Clearly your strategy last year of targeting a great deal of gas assets is beginning to make a lot more sense. Can you comment on the state of the A&D market currently and with respect to seller’s pricing expectations specifically for gas assets?

Scott Smith

We look as seller’s expectations are the strip price. If they think it’s anything higher than that they are not going to be selling to us, I’ll put it that way. I think that’s – people are aware that’s especially us and our peer that buy high PDP assets that’s the number we’re looking at. There is – no one is getting probably anymore aggressive that. But just the long term number is probably in the 450 type range, because the curve is just so flat right now. But I do think from a state of the acquisition market there are some interesting assets in the market today.

We know there is four things coming. It’s not being the size we are because we are pretty much getting to see all the opportunity, and we have such a broad base of assets that we’re seeing even quasi negotiated small group type projects where only a select group of companies are being offered and we are being included in those in places like the Rockies and others. So deal flow around here is excellent and like I said, we think we’re in a great position to continue to make some nice acquisitions.

John Ragozzino – RBC Capital Markets

Okay. Great. And just a couple of more quick ones. Richard, did your stress test the distribution coverage levels for this year and next and that what prices would you see bridge the 1.0 time level for the full-year?

Scott Smith

It’s funny you asked that because I just Ryan asked this morning.

John Ragozzino – RBC Capital Markets

Well, I’ll expect to call this afternoon then.

Scott Smith

Well – we didn’t run that because we hadn’t put guidance out and it just occurred to me that now that we have guidance out and the Range transaction is done, there is no reason why shouldn’t update that slide and start including it in our investor presentation going forward. So expect to see that in our next presentation.

John Ragozzino – RBC Capital Markets

Okay. Great. And then finally, you mentioned proposal for the increase in the number of units in the proxies – would you expect the non-cash comp component of G&A to be zero until that’s past?

Richard Robert

No, no. I mean we already have units outstanding that are vesting currently. So non-cash comp is going to continue to have some numbers there, but – and the reality is that as we continue to grow, the numbers are going to go up, because we have to incentivize more and more people, which in my mind is not necessarily a bad thing.

John Ragozzino – RBC Capital Markets

Absolutely, all right, well thanks for the clarity.

Scott Smith

Thanks John.

John Ragozzino – RBC Capital Markets

Congratulations on the quarter.

Richard Robert

Thanks.

Operator

And our next question does come from the line of Michael Peterson with MLV & Company.

Michael Peterson – MLV & Company

Hi, good morning everyone.

Scott Smith

Hi, Michael.

Michael Peterson – MLV & Company

With regard to the Permian acquisition today, you were set to assume operatorship, did that happen?

Scott Smith

Yes. It’s was actually April 1, April 1, we assumed operatorship of both Permian and the Bear properties on April 1.

Michael Peterson – MLV & Company

Okay, my apologies, I thought it was a May 1 for operatorship and closing on April 1, okay. Nat gas differentials seem to be a little wider than I expected. Was the $2.30 per Mcf un-hedged realization inline with your projections?

Richard Robert

They worked close to our projections actually. But the difference is not in our projection was the ethane rejection we actually realized it a little bit better. Keep in mind that in some of the areas that we operate, transportation costs eat into that realized price considerably. So that’s why we see some lower prices for us.

Michael Peterson – MLV & Company

Okay. Thanks for that, Richard. Lastly, you talked about a pretty active program in terms of basis in the first quarter. I noted that you put on some LLS-Brent hedges for basis. Can you talk a little bit about the rational for that?

Scott Smith

Well, we obviously want to protect the premium that we’re getting on some of our Gulf Coast production, in particular. You know, in Gulf Coast and Pacific we realized a premium, we wanted to ensure that we continue to realize that premium. And having talked to a variety of oil experts, so to speak, some of the banks that we do business with, they felt that Brent had a better chance to keep up a floor on it because of OPEC and the big hammer that they carry. So we simply chose to hedge it via Brent as opposed to WTI.

Michael Peterson – MLV & Company

Okay. Thank you. Lastly, your comments on the LTIP were helpful. If that isn’t approved by shareholders, would your option B be a component of cash compensation versus equity?

Scott Smith

That would be the only thing we could turn to.

Michael Peterson – MLV & Company

Thought that was the case, I just wanted to clarify. Thank you very much for your help.

Scott Smith

Yes. That’s – from our perspective that’s not a good alternative. That doesn’t create the alignment we’re looking for, yes.

Michael Peterson – MLV & Company

Right.

Scott Smith

We obviously want these units to vest over time and it kind of serves as a caret for people to stick around and do a good job. So hopefully, we’ll get passed.

Michael Peterson – MLV & Company

Great. Thanks again.

Scott Smith

Thanks.

Operator

(Operator Instructions) And our next question does come from the line of Ethan Bellamy with Robert W Baird.

Mike – Robert W Baird

Good morning, gentlemen. It’s Mike in for Ethan Bellamy here at Baird. I just want to follow-up on some of your earlier comments about the potential for a VanCo strategy. Can you at all share what the barriers to potentially pursuing that strategy would be? Again, given the success we’ve seen of LinnCo today?

Scott Smith

Well I mean barriers I think LinnCo has proven that there is a market for this type of security, so and I think that’s not a barrier. From our perspective it’s really a change in strategy that’s overcoming that philosophically to have growth CapEx is not something that we’ve done in the past. And that’s what’s necessarily to make that structure work. I mean you have to create the significant amount of tax shield to make that structure work.

So that’s the principal barrier so to speak. And frankly we also would want to do it in sufficient size to create enough liquidity in that security to make it worthwhile. And for that we need a significant acquisition to make that work. So I guess that’s the barrier per se

Mike – Robert W Baird

Great. Thank you. If I could turn now back more towards the operational side and ask, what’s the potential for continuing to see this nice operational momentum we’ve seen and although we expense control can we in fact continue to see that head lower over the balance of 2013?

Scott Smith

In terms of and LOE and G&A?

Mike – Robert W Baird

Yes, specifically on LOE?

Scott Smith

Yes. I think we are going to see some of the benefits. We took over operations on those two assets and I think we’re going to reap those rewards. I told you that the employee headcounts that we improved, are you getting any sense, any difference Britt.

Britt Pence

I think that’s your job on those properties significantly, that’s a – pretty large portion of the LOE is the manpower.

Scott Smith

So we do continually look Britt and his team are always looking where we can cut cost and just for instance in one place, it’s not moved the needle big, but we recently drilled a salt-water disposable well in one of our Permian areas because basically the salt-water trucking companies have everybody over a barrel just really exorbitant pricing, And so we drilled the well and now we are taking considerable amount of our own water at basically no cost and now we’re bringing in third party water from offset operators.

That project is going to be a nice little LOE producer going forward for a long-long time. So we continually look for places where we can do it and we will continue that. That’s the guys in the field. Now we’ll see it and we talk about peoples compensation that’s – we have incented our field guys to – that’s a part of their compensation plan, is looking at budgeted cost and how they can improve that. So.

Mike – Robert W Baird

Great. Thanks for that color. Can I lastly ask about the ATM issuance program? Can you update us on how much has been issued to-date and how much remains outstanding under the ATM?

Scott Smith

Well as I mentioned we issued $10 million. In the first quarter, we issued a few more million before we were blacked out in the second quarter. And I think it’s a 200 million program, so we saw there’s a substantial amount of capacity left in the ATM program.

Mike – Robert W Baird

Great. Thanks a lot guys. I’ll hop back in the queue.

Scott Smith

Thanks.

Operator

And our next question does come from the line Amy Stepnowski with Hartford.

Amy Stepnowski – Hartford

Hi, just wanted to follow up a little bit on discussion regarding on the basis differentials and particular in the Big Horn. I was just wondering you’ve hedged the Permian as I understand it for the production for the rest of the year with regards to that basis. Is it possible to do that for the Big Horn and if not, you had mentioned that your projections for that differential were pretty much on target. Can you share with us your views on how it’s going to look for the rest of the year and if there any other alternative aside from hedging to improve that situation?

Scott Smith

Sure, Amy. Unfortunately hedging is not available in that area or we would have done it.

Amy Stepnowski – Hartford

Okay.

Scott Smith

Long time ago. But what we are doing, there is real capacity coming on line in that area fairly a variety of different things. Our marketer, our Director of Marketing that’s his number one goal, we’ve made that’s his number one goal to figure out alternatives.

A lot of the alternatives from infrastructure standpoint look like they’d be available first part of 2014. That’s helping to improve things even now. And that’s evidenced by – people are willing to do fixed price contracts. We’ve been offered $14 at this point. So that actually is a big improvement over $26. So, it has come down substantially and we do anticipate doing something over the next few months to make that more stable.

Amy Stepnowski – Hartford

Okay. Thanks very much.

Scott Smith

Yes. Thank you.

Operator

And at this time there are no further questions. I would like to turn the call back over to Scott Smith for any closing comments.

Scott Smith

Thanks everybody again for joining us this morning. Again, we really feel like we’re off to a great start here in 2013, good results for the quarter, exciting news I think on our capital spending front.

As we said it’s nice, the forecast sometimes, you don’t want to ever spend too much, but we don’t mind spending money faster, because we get the benefits faster. It’s much better to spend dollars earlier in the year than later.

So we look forward to providing more input on the outcomes of how we’ve done in the Woodford in our next call. And hopefully, there will be more good news to come – we’re working on every day. So again, thanks for joining us and we’ll talk to you in few months, great, August. Thanks. Bye.

Operator

Thank you. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.

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Vanguard Natural Resources (VNR): Q1 EPS of $0.26 misses by $0.01. Revenue of $102.4M misses by $10.55M. (PR)