Vanguard Natural Resources' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.31.13 | About: Vanguard Natural (VNR)

Vanguard Natural Resources, LLC (NASDAQ:VNR)

Q3 2013 Earnings Conference Call

October 31, 2013 11:00 AM ET

Executives

Lisa Godfrey – Director, Investor Relations

Scott Smith - President, CEO

Richard Robert - CFO, EVP, Secretary

Britt Pence - VP, Engineering

Analysts

Kevin Smith - Raymond James

John Ragozzino - RBC Capital Markets

Michael Peterson - MLV & Company

Ethan Bellamy - Wunderlich Securities

Praneeth Satish - Wells Fargo

Abhishek Sinha - Bank of America/Merrill Lynch

Daniel Guffey - Stifel Nicolaus

Operator

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the Vanguard Natural Resources Third Quarter 2013 Earnings Conference Call.

During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is also being recorded today, October 31, 2013.

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

Lisa Godfrey

Good morning, everyone and welcome to the Vanguard Natural Resources, LLC's third 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 Executive Vice President of Operations.

If you would like to listen to a replay of today’s call it will be available November 30, 2013 and may be accessed by dialing 303-590-3030 and using the pass code 4645271#. 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 Wednesday’s earnings release.

Please note the information reported on this call speaks only as of today, October 31, 2013. And therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

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 later today and will also be available on our website under the Investor Relations tab as well as EDGAR.

Also on the Investor Relations tab of our website, under Presentations, you can find the Q3 2013 earnings results supplemental presentation.

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

Scott Smith

Welcome everyone and thanks for joining us on our third quarter 2013 call.

I will start with a brief summary of our operational results and then review our capital spending during the third quarter and our plans for the balance of the year. Lastly, I will quickly discuss our acquisition outlook. Richard will then proceed with a financial discussion and then we will open the line up for Q&A.

First, let’s review our production results for the quarter. Average daily production for the third quarter was 35,250 BOE per day down 3% over the 36,477 BOE per day produced during the second quarter of 2013 and a 45% increase over the 24,367 BOE per day produced in the third quarter of 2012.

The significant increase in production from 2012 was the result of the acquisitions closed last year and the Permian acquisition which we closed in April of this year. Production for the quarter was approximately 64% natural gas, 24% oil and 12% NGLs. However, even with our significant increase in natural gas production, our revenues were still more weighted to liquids with 64% coming from oil, 11% from NGLs and the balance from natural gas.

The small decrease in production is primarily attributable to the expected declines in our Oklahoma gas properties along with the effect we are seeing from pipeline operators forcing us to shut in or flare gas productions in some of our Permian oil field due to capacity issues. Notwithstanding the decrease in production, our revenues increased 4% over second quarter revenues.

Turning to our capital spending during the quarter, we spent just under $13 million, as I mentioned last quarter based on the successful results of our initial Woodford program and recent non-operated completions, we plan to continue our JV with Jones Energy, which covers 10 township and ranges and includes most of our high Btu Woodford acreage.

This partnership covers 360 sections and over 13,000 net acres. The Vanguard-Jones Woodford teams have identified and ranked the 10 most attractive sections and as mentioned previously we initiated a 2-rig continuous drilling program at the end of the third quarter.

The expected average IP per well is 3.6 million per day and 290 barrels of NGLs. The total gross cost per well is expected to be between $3.8 million to $5 million depending on the number of frac stages and the length of the lateral.

Our average working interest is approximately 25%, we are expecting rates of return of approximately 35% based on the current product strip pricing. However, I do want to point out that production is not expected to come online until the first quarter of next year.

[Indiscernible], we had quite a bit of success acidizing wells and started installing artificial lift equipment. We began this program in July and have completed work on 28 wells at a net cost of $2.7 million and for this investment we got an uplift of about 4.4 million cubic feet per day. Rates of returns on these projects are over 100% and we have an inventory of these projects that we will continue to pursue this quarter and into 2014.

In regards to the Fayetteville activity, we spent over $2.5 million during the quarter and participated in completion of 14 non-operated wells where we had an average working interest of approximately 7%. These wells had an average 7 day gross IP of over 3.5 million cubic feet per day. This area was the largest component of our non-operated CapEx and continues to be a very active area for us.

During the second quarter, we began our Permian recompletion frac program which was the upside we had identified as part of the Range acquisition, which closed in April. To-date, we have completed 13 workovers which includes both fracs and acid jobs. Initial results have been good and we look forward to fully ramping up this program during the fourth quarter and into 2014.

Lastly, we have completed another successful [inaudible] stimulation program this year achieving an uplift of over 450 barrels gross oil per day, 275 net in the 12 wells we have worked on between May and September. These were projects that deliver excellent returns and we are already working on continuing this program next year.

Looking to the fourth quarter, we are anticipating a capital spend of approximately $20 million. I will quickly go into some more details and some of the larger capital outlays that we have planned. As I have previously mentioned in the Woodford we have an active drilling program with Jones as well as other non-operated drilling activities that are currently under way. We expect to spend $5 million during the fourth quarter on operated wells and another $2 million on non-operated Woodford wells.

We believe all the wells will be drilled this quarter but will not be completed until the first quarter of 2014. Five of the wells are within the original Jones, Vanguard area mine, four on acreage Jones as formed in from BP and six are on Pablo operated acreage. Depending on the area, our working interest in these wells ranges from 10% to 25%.

In the Fayetteville, Southwestern continues to be the most active driller, we will participate in several wells that are supposed to be completed this quarter with production coming on toward the end of next year or early – toward the end of this quarter or early next year.

Net to Vanguard we expect to spend between $2 million and $3 million in this quarter. In the Permian, we expect to spend between $3 million and $4 million which encompasses our Range Permian workover plans as well as other non-operated activity.

The last activity we have going on in the fourth quarter takes place in Mississippi where we recently participated with 20% working interest in the drilling of the development well. We set casing on this well which has five zones of interest including a [indiscernible] and Cotton Valley and members of the Cotton Valley, the initial completion should come on from the three Cotton Valley zones which occurred to be productive on the logs we should expect some production from this well this quarter.

We will be going on to acquisitions, we continue to evaluate numerous transactions of various sizes and remain prudent in our bidding approach to ensure the assets we successfully acquired are accretive to our unitholders. In total, we bid on over 20 deals throughout through the third quarter, with the total value of more than $3.5 billion. These excludes the acquisitions that we closed.

While it remains a very competitive market for MLP type asset, I continue to believe we are well-positioned to be very competitive for the asset packages currently in the market and those we understand will be coming to market before the year end.

With about $900 million of liquidity available we can move swiftly in this acquisition market. As you know, several of our peers have announced large acquisitions in the last couple of quarters or engaged in previously announced transactions. So we think for the balance of the year, we are in an enviable position having a significant amount of liquidity and hope to see less competition for quality asset acquisitions.

That being said, we continue to be disciplined in our approach to evaluating acquisitions, we would rather buy nothing than to spend dollars on a marginal transaction that isn’t accretive. Our goal has always been to grow cash flow which ultimately benefits our unitholders in the form of increased distributions.

That wraps up my portion of call. And I will turn it over to Richard.

Richard Robert

Thank you, Scott. Good morning everyone. I would like to start this morning by first discussing our quarterly financial results then turn to my regular update on our hedging portfolio and credit facility, and then turn to our outlook for the fourth quarter.

Starting on the natural results, we reported record adjusted EBITDA of approximately $83 million for the third quarter of 2013, an increase of 25% when compared to the $66 million reported in the third quarter of 2012 and an increase of 3% from the $80 million reported in the second quarter of 2013.

The unhedged average realized oil price in the third quarter increased by approximately $10 to just over $97 due to the increase in WTI prices from second quarter to third quarter. However, being fully hedged is a double-edged sword; we are protected from a decline in prices but also do not get to fully participate in the upside.

During the third quarter, oil differentials companywide weakened by almost $2 from the second quarter, increasing to a negative $8.44. After taking into account a larger differential and being fully hedged, our average realized oil price including hedges decreased by approximately $2 in the third quarter.

We have seen some continued softening in differentials for the fourth quarter specifically in the Big Horn Basin, where it’s not unusual to see why it swings from quarter-to-quarter. To date, oil differentials have performed better than our guidance but suspect that if the Big Horn basis continues to stay at current levels, we expect the differentials to widen in the fourth quarter.

Gas realizations continued to average approximately [70%][ph] of NYMEX and have increased slightly quarter-over-quarter. This may seem like a lower realization but keep in mind that this also includes transportation cost that are quite high on our Arkoma assets and the acquired [indiscernible] assets. This netting of transportation cost against natural gas revenues is nothing new and it’s just how we choose to report those costs.

Natural gas liquids or NGLs on the other hand continue to be depressed but are slightly improved. Average realized NGL pricing has improved quarter-over-quarter and specifically during the last couple of months as primarily due to the strengthening of propane and the heavier components of the NGL stream.

Our average realized price in the third quarter increased to 5% to $35.51 per barrel from the $33.85 per barrel we realized in the second quarter. That being said, oil prices increased at a higher rate than NGL prices, so the realization as a percent of WTI slightly decreased quarter-over-quarter.

Since our NGLs are largely unhedged, the recent increases from these loads will have a positive impact on revenues going forward.

As I noted on our last conference call, both NGLs and natural gas realizations are challenges that face our entire industry. However, the decline in NGL realization creates opportunities to buy natural gas assets which include an NGL stream at more attractive valuations from a long-term perspective.

We are able to acquire these assets with little to no value being placed on undeveloped drilling locations because in certain cases it is not economics drilling at current prices. But, what we are gaining is the opportunity to participate in the pricing recovery over the long-term. There are a number of demand catalyst that should allow natural gas and NGL prices to recover in the next few years, which we hope will allow us to replace natural gas hedges and higher prices while also creating future drilling opportunities.

Now, turning to lease operating expenses and general and administrative costs. I won’t go over all the numbers in the release but I will point out that our LOE and G&A expenses through the third quarter are running at expected or better than expected levels as compared to our 2013 guidance. And it is attributable to efficiencies we have achieved thus on a corporate level and out in the field.

In terms of our distributable cash flow, the third quarter of 2013 totaled approximately $53 million or $0.68 per common unit generating a covered ratio of about 1.1x based on our current monthly distribution of 20.75 per month or 62.25 per quarter.

For the third quarter, we reported adjusted net income of approximately $23 million or $0.29 per common unit. Our GAAP reported net income was approximately $2 million or $0.02 per common unit.

Moving on our hedging portfolio, as I regularly note, we continuously evaluate our hedge and opportunistically add to our current position. During the third quarter, we took advantages and strength in the oil curve and added to ops in 2015 where we also sold a $75 put do enhance the swap price we could achieve. We understand that in 2015, we have additional volumes, we need to put on.

And over the last two quarters, we have been taking advantage of positive movements in the market and doing just that. To put in perspective how much headway we have made this year, at the beginning of the year our 2015 oil production was only 20% hedged. And today it is now about 60% hedged.

We still have some work to do but we believe we are well on our way to lowering this exposure and providing additional security to our future cash flows in 2015.

In terms of percent of production hedged. 2013 expected oil production as 100% hedged, 2014 is 93% hedged and 2015 is 60% hedged all at a weighted average price of $92.82 and that is a floor price.

On the natural gas side, 2013 expected gas production is 92% hedged, 2014 is hedged at 86%, 2015 is 93% hedged, 2016 is 95% hedged and first half of 2017 is approximately 46% hedged. All at weighted average prices of about $4.60, which we are hopeful that by 2017, we will have opportunities to hedge that year and beyond at higher or at least comparable levels.

During the quarter, we also layered in some propane swaps to take advantage of recent improvements in propane pricing. We added 250 barrels a day for 2014 and 2015 and $1 per gallon or $42 per barrel. Including this swap, our NGL volumes are approximately 15% hedged through 2014.

More details regarding our current hedge portfolio and percent hedged can be found in the supplemental Q3 2013 information package posted on our website.

Let me now turn to our credit facility and liquidity for a quick update. We are currently in the process of our semi-annual borrowing base redetermination and we expect to complete this in the next week. We are anticipating that our borrowing base will remain unchanged at $1.3 billion or we do expect to increase commitments by adding two new banks into our facility. No other material or [indiscernible] or changes are expected.

As of today Vanguard as $420 million in outstanding borrowings under the revolver which provides us with almost $900 million in current liquidity after taking into consideration the current $1.3 billion borrowing base and $10 million in cash.

I will turn to an quick update on our outlook for our fourth quarter, as mentioned in our last conference call, we increased our full year capital budget between $60 million and $65 million which encompasses capital associated with the Range Permian acquisition a 2-rig Woodford drilling program and an increase in another non-operated capital because of this increase in CapEx and multiple capital raises we felt that it was more prudent to keep our monthly distribution flat for October.

Fourth quarter is expected to be our highest quarter from a capital spend perspective and due to the lag when you spend the dollars and when production comes on, we will see no benefit in the fourth quarter over the year. But, we will have the burden of the CapEx spent.

In the past we have made small monthly increases at the beginning of each new quarter, with our distribution coverage forecast should be around 1x for the full year, we feel that our unitholders are better served keeping our distribution flat and increasing the distribution once we have an accretive acquisition in hand.

As Scott mentioned, we feel that we are in an enviable position of having a lot of liquidity at our disposal, while many of our peers are business and some [indiscernible] recently announced acquisitions. That being said, we will remain disciplined in our valuations to make sure we create long-term value for our unitholders. We are focused on growth in our distributable cash flow not just growth in production or reserves.

Maintenance capital has received a lot of attention over the last few months and I want to reiterate that Vanguard’s policy to spend enough capital to keep cash flow flat not production or reserves. And at this time, we do not have a growth component.

As we all know, one barrel of oil is not equal to 6 Mcf of gas on a value basis. And as an MLP, we are paying out of majority of our cash flow to our unitholders, so our focus is on cash. A company can keep their production on an equivalent basis flat through gas drilling ultimately ending up with a declining cash flow profile and potentially not being able to maintain their distribution. In that scenario, we do now believe you are spending enough or the right kind of maintenance capital.

MLPs are in the business of maintaining and ultimately growing their cash distribution and we believe the capital program should be focused on achieving that goal.

All this being said, theoretically even if we look back and determine that we over or under spend on our capital program by $10 million or over 15% of our current capital spending program, this would only equate to 0.05 times coverage impact to the full year whether be to the upside or the downside. So in my opinion this topic should not dominate discussions about the upstream MLP section.

Acquisitions on the other hand will have a much more meaningful impact to our investors in the long-term. Acquisitions over drive distribution growth and it is the most important factor in the long-term sustainability of our structure. This is why we spent much more time analyzing potential acquisition to make sure the cash flow that we forecasted is achievable and that our purchase price is at a level that makes the acquisition accretive.

As Scott said, we would rather not do a deal to do a marginal transaction that only makes us larger and makes it that much hard to increase the distribution down the road. Finally, we have begun our 2014 budget process and our engineers are currently gathering our inventory of potential projects we will then evaluate to come up with what is necessary to maintain our cash flow next year. We will provide updated guidance and have a detailed CapEx plan with our fourth quarter and full year 2013 results at the end of February, which is our customary practice

This concludes my comments and we will be happy to answer any questions that you may have at this time.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Kevin Smith [Raymond James]. Please go ahead.

Kevin Smith - Raymond James

Hi, good morning.

Scott Smith

Good morning, Kevin

Richard Robert

Good morning, Kevin.

Kevin Smith - Raymond James

Any updates on when you expect that next round of Woodford shale wells to come online. I’m just trying to think about how you should be looking at Q1. Are we talking in the beginning of the quarter or backend or how much impact do you think that will have?

Scott Smith

I think it will be – I’m going to knock on wood here, it should be in January.

Kevin Smith - Raymond James

Okay. So, it should be pretty…

Scott Smith

We have - we should be seeing the production come on at various times in January.

Kevin Smith - Raymond James

Okay. So it’s going to be very meaningful for Q1’s numbers?

Scott Smith

That’s what we’re anticipating, yes. We’ve got an interest in 15 wells. Again, interest would vary from 10% to 25%. So we are looking forward to a good January in terms of the production increase.

Kevin Smith - Raymond James

Got you. And then can you talk about what’s driving the sequential decline in operating -- lease operating cost, if you just lower workover activity this quarter or is it something else?

Scott Smith

I mean I think our workover activity remains pretty close to where it was before. Britt Pence, our VP of Operations is here, do you have any thoughts on that?

Britt Pence

Yes. Kevin, you are quite right. Our workover activity has lessened. We done a lot of things to try to be more efficient. And for an example in the Permian basin, there is a -- we’ve done some things to reduce our salt water disposal cost by drilling a salt water disposal well, that helped to reduce our LOE. We’ve…

Richard Robert

Converted diesel pumps to nat gas fired.

Britt Pence

Yes. We had diesel rental equipment that we converted over to purchased gas driven engines that helped to reduce LOE. So there’s just a whole number of things that we watch – we watch personnel headcount as well. So we kept that down. And I think all that together has really helped us to keep our LOE down.

Kevin Smith - Raymond James

Got you. And then lastly, Scott, how would you characterize A&D market, I appreciate your prepared comments but are deals getting done just at higher metrics than you are comfortable with or stuff just not -- buyers and sellers just not agreeing?

Scott Smith

I think transactions were getting done, but there are metrics where -- and again, I don't want to put myself in someone else’s shoe, I know how we look at transactions and how we model them. And because of our structure, the nature of it, I think a lot of it has to do with the PUD development, if there is – to the extent there is PUD activity. We can’t with our structure put a lot - put a really aggressive drilling program in place to develop PUDs - good quality PUDs. And I think in that case where we are looking at a more modest development program, we’re going to lose on a value -- on a PV basis to the company who is going to drill, let’s say there is 300 wells, we’re going to drill 50 a year and they are going to drill a 100 a year. We lose. We lose that battle every time. So again, we can only approach the acquisitions how we run our business and I think that’s part of it. And I do think there are people that are paying bigger multiples either they have a different view of commodity pricing. Again, we look at the strip and hedge it. But it’s a big business. And there is a lot and there is nothing [inaudible] space, there is a lot of money chasing transactions.

So everybody obviously has their own rationale for why they do a deal, all I can say is, we look at obviously lots of transactions with our accretion head-on and as we said doing a deal just to get bigger it might make you feel good at the end of the day but it’s not going to help us in the long run.

Kevin Smith - Raymond James

Fair enough, thanks.

Scott Smith

Thank you.

Operator

Our next question comes from the line of John Ragozzino [RBC Capital Markets]. Please go ahead.

John Ragozzino - RBC Capital Markets

Good morning, gentlemen. Happy Halloween.

Richard Robert

Good morning, John.

Scott Smith

Are you dressed up?

John Ragozzino - RBC Capital Markets

Absolutely. Richard, this one is for you. Can you give us a little color and I know this is probably a long shot, but I’m wondering if you give us a little bit of detail on 2014 spending program particularly trends in the quarterly spending levels, geographic allocation and then non-ops versus [operations] [ph] at that level?

Richard Robert

Well, John, we are very early in the stages of developing our capital plan for next year. I think it would be safe to say that [we are solely] [ph] focused lot of dollars in the Woodford area with the two-rig program. We don't see Southwestern slowing down in the Fayetteville, it would seem so on the non-op side that’s where we would probably be spending a lot of dollars but those are the two principle areas that I think…

Scott Smith

Permian recompletions.

Richard Robert

Permian recompletions on the Range deal, yes. Exactly that’s also going to be a focus for next year as well. We hope to maybe accelerate that program a little bit beyond kind of what we had initially modeled. So Permian, Woodford and probably Fayetteville are the three principle areas.

Scott Smith

That we know for sure.

Richard Robert

That we know for share today. Obviously, we’re hopeful to get an acquisition done and have maybe some reallocation to capital at that point.

John Ragozzino - RBC Capital Markets

Okay. And then just directionally relative to the last couple of years, you expect a similar kind of dip in 3Q spike in four just a very similar uneven quarter-on-quarter spending levels?

Richard Robert

Yes, spending levels will vary quarter-to-quarter. I guess if we have a continuous two rig program in the Woodford it will flatten out somewhat. So I think perhaps the next year, there may be some more stability or in that spending pattern.

John Ragozzino - RBC Capital Markets

Okay. And then Scott, can you quantify the impact of the Permian curtailment and flaring issues you saw in the third quarter? And then any idea when you anticipate these constraints to be lifted?

Scott Smith

Well, fortunately, they’ve actually been lifted here this month.

Britt Pence

There are two main areas where we’ve had problems and about half of that is in Glasscock County, we’ve been -- we’re in the process of returning a lot of the wells, gas to sales, so that should take care of about half of it over the next month. And then the other half may take a little longer, it’s in New Mexico. And we expect that will take care of that probably in the first quarter next year. One way or another because there is – some of the agreements run out at the end of the quarter and we’re going to find another alternative that then get fixed.

Scott Smith

And as far as the impact goes, I think it was somewhere around net 750 Mcf a day so.

John Ragozzino - RBC Capital Markets

That’s very helpful. All right. And then I guess one more for Richard, given the competitive cost of capital you have on the equity side in sizable revolver cash flow that you have, can you comment on your willingness to get slightly more aggressive in the A&D market and you bid on $3.5 billion, I think you mentioned then came up empty handed but you seemed like it could be very easily putting some deals away with the steadier liquidity position?

Richard Robert

Yes. We’re certainly in a very good position liquidity wise. Does that create a situation where we’re going to be more aggressive, I think no. I think that’s what we were trying to get across today is that we think it’s better for us to continue to be disciplined and expect certain accretion levels for the money we spend. I think that’s what is going to benefit our unitholders long-term and in the meantime, we continue to evaluate lots of opportunities and we’re relatively confident. Something will come to pass in the near future.

John Ragozzino - RBC Capital Markets

All right. That’s all I got. Thank you very much. Gentlemen, have a good one.

Scott Smith

Thank you, John.

Operator

Our next question comes from the line of Michael Peterson [MLV & Company]. Please go ahead.

Michael Peterson - MLV & Company

Hi, good morning everyone. Hoping not to exhaust your patients on the topic, I would like to follow up again on the A&D market, if I could. I think we can all appreciate the competitive position that you are in both on an absolute basis in terms of financial flexibility as well as relative to your peer group in terms of bidding. Can you characterize for us whether this is an expectation over the near term in terms of an advantage or whether this is more tangible in terms of packages that are under evaluation or soon to be under evaluation, can you give us any more colors as regards to the topic?

Scott Smith

I think the competitive advantage is obviously having the availability under our revolver, obviously, there is no financing continues to cease. We don't have to come to the market to raise -- to close the very sizable transaction, sellers know that. So we are obviously getting involved and getting exposed and invited to every process that out there. But as I said before there is a lot of work, you’re looking at the public universe and our peers well there is probably even a larger private equity backed universe that equally earn more money. So although we’re -- we think, we’re in a good position with respect to our peers.

Again, there is a whole universe of people out there, there are again backed by private equity typically and they all have the access to capital handy and can close deals. Again, if there are more drilling focus and are willing to put a higher evaluation on those pud locations then we have had the ability to do. And then obviously, a lot of times we will fall short in our bid process. So but, I do feel good about it, people know that if we get engagement in a deal, we close and there is, there are some need -- opportunities in the market today. And we know we’re something that will probably be coming here in the next few weeks. And again, we’re cautiously optimistic. We can get a deal of size done before the end of the year but everything as we’ve seen again, it is a competitive, very competitive market.

Michael Peterson - MLV & Company

Okay.

Richard Robert

And Michael, I would add that one of the nice things by having this liquidity is that we will have the flexibility to not have to come to the market any particular time even after getting a sizable transaction done. We can be optimistic on how we ultimately raise additional capitals. I think we’ll certainly look at becoming more active on the ATM side and it’s pretty more preferred as well which is certainly a better cost of capital to date in our account.

Michael Peterson - MLV & Company

Sure. I appreciate the color and my objective Richard was not to challenge your assertion of positioning but try to get some clarity on, if there were things in the pipeline that you can’t discuss specifically but see and it sounds like from Scott’s comment, an expectation in the coming weeks, specific packages that might be of interest that detail was helpful.

If I can change gears --

Richard Robert

Go ahead.

Michael Peterson - MLV & Company

Well, I’m sorry, please go ahead.

Richard Robert

No, I’m saying there typically isn’t a time that we’re not evaluating six, seven, eight deals. So now it’s no different. And there is more to come.

So, there is no shortage of deals that we feel might work.

Michael Peterson - MLV & Company

Fair enough. Even somewhat of a pioneer in terms of innovating within the sub-sector, are there any ideas instruments, innovations that you’re thinking about internally or you’ve seen others look at that that you might find interesting and be willing to comment on?

Richard Robert

Well, Scott mentioned that on deals that have a lot of pud content, a lot of drilling activities. We often fall short because we can’t execute an aggressive drilling program. So there has been some discussion here in the office about potentially creating a side car drilling company, that is funded via private equity. And that would allow us to look at some of those packages and be more competitive. And also obviously, ultimately allow for us to have somewhat of a drop down vehicle.

Michael Peterson - MLV & Company

Looking at packages in a joint venture, kind of circumstance with the side car entity?

Richard Robert

Exactly where we would buy the PDB and then side car would buy the majority of the pud.

Michael Peterson - MLV & Company

That’s helpful. And thank you, Richard.

Richard Robert

And as it’s developed over a period of time, it would be dropped down into the MLP. That’s deal.

Michael Peterson - MLV & Company

Okay.

Richard Robert

I think of interest that we have been talking about recently.

Michael Peterson - MLV & Company

It’s helpful. I appreciate it. Those are my questions this morning. Thank you.

Scott Smith

Thank you.

Operator

Our next question comes from the line of Ethan Bellamy [Wunderlich Securities]. Please go ahead.

Ethan Bellamy - Wunderlich Securities

Hey guys. Would you have any interest in buying Eagle Rocks upstream segment?

Scott Smith

Ethan, you know, we can’t comment on anything that’s out there in the market. That’s obviously, Eagle Rock has -- the only hybrid out there. And obviously a bit challenge at the moment but I think they will – they have got lots of bankers and advisors and if some process is underway, I’m sure we will get a call.

Ethan Bellamy - Wunderlich Securities

There is no shortages of investment bankers, that’s for sure. Do you anticipate any asset impairment at year end?

Richard Robert

No.

Ethan Bellamy - Wunderlich Securities

Okay. What’s Ryan modeling internally for oil differentials overall for the fourth quarter and for Big Horn specifically?

Richard Robert

Well, right now, I can tell you Big Horn is trading at about a minus $20 differential whether it was trying to close to about a $10 differential for the third quarter. But the other areas I don't – I haven’t heard any kind of lightening. So that’s the only area that I have significant concern over. But I would expect that differential to get a size -- get close to $10 I would expect for the companywide.

Ethan Bellamy - Wunderlich Securities

Okay. That’s helpful. I appreciate the comments on your philosophy on replacing cash flow. Are we going to see from you guys as you do the 2014 budget more disclosure about the calculation and the map behind me in the CapEx?

Richard Robert

That is our goal because you made it our goal. We will endeavor to do to be as transparent as possible.

Ethan Bellamy - Wunderlich Securities

I appreciate that. I just want to let you know for Halloween tonight, I’m going to put on a pink striped suit and I’m going to leave at 6 amended S4 documents on Ragozzino’s door step that would be my costume.

Richard Robert

Okay. Happy Halloween to you.

Scott Smith

Is that a trick or a treat?

Operator

Our next question comes from the line of Praneeth Satish [Wells Fargo]. Please go ahead.

Praneeth Satish - Wells Fargo

Hey, guys. Good morning.

Scott Smith

Good morning.

Praneeth Satish - Wells Fargo

Just a couple of quick questions for you. So, it looks like NGL production was up quite a bit sequentially, can you just talk about what’s driving that and whether that’s a good run rate for the rest of the year?

Richard Robert

Well, actually no, it’s not and let me tell you why. It was really, it was a function of the Range transaction which we started counting for in April. We did not have enough information to book NGLs in the second quarter. So we basically that the increase you saw in the third quarter was a function of moving volumes out of gas into NGL.

Scott Smith

In an accounting forward on a pre-stream basis.

Richard Robert

Yes, an accounting forward on a pre-stream basis.

Praneeth Satish - Wells Fargo

Got it.

Richard Robert

So some of the gas define was related to that reclassification into NGLs. So it essentially had two quarters of NGL for the Range transaction in the third quarter.

Praneeth Satish - Wells Fargo

I see, I see, okay. And can you just give us an update on how much you’ve issued through the ATM or aftermarket program so far. It looks like from what I can tell you, you taking a break from using that program, what would cause you to start issuing equity through that again?

Richard Robert

When I don't have $900 million in liquidity that would likely start that program up again.

Praneeth Satish - Wells Fargo

Okay, got it. And just last question for me, so we’ve seen some other upstream MLPs make changes to the way they report or present earnings, do you think could be [indiscernible] to make any meaningful changes, just curious to buy your thoughts on that?

Richard Robert

At this point, we have no reason to believe that we’re going to have to make any changes.

Praneeth Satish - Wells Fargo

Okay, very good.

Richard Robert

But never say never. I don't know, if the SEC is finish their enquiry and what the ultimate result maybe but as of right now, we are continuing to report the way we always have.

Praneeth Satish - Wells Fargo

Okay. Thanks guys.

Scott Smith

Thank you.

Richard Robert

Thank you.

Operator

Our next question comes from the line of [ph] Mike Smith. Please go ahead.

Unidentified Analyst

Yes, thank you. Based on your initial work, can you just update us on what you think your inventory is in the Permian and any changes or surprises you’ve seen since you started your work there?

Scott Smith

Would this inventory from the Range transaction?

Unidentified Analyst

Correct, yes.

Scott Smith

I think our inventory, I think we have identified like 150 opportunities and no I think the opportunities are still there. It’s just a matter of prosecuting these in a timely fashion and getting them. We only have so many rigs and so many bodies to put on these projects that we’re doing our best to try to accelerate this. So we got a long inventory that will continue well into 2014, hopefully and beyond.

Richard Robert

And actually what’s kind of exciting about that area is that closer we look at it, the more opportunities we’re actually finding. There are some drilling locations that I think that have been filled that we may have as well as -- just as recompletion opportunities. So, it is an exciting area for us.

Unidentified Analyst

Great, thank you.

Scott Smith

Thank you, Mike.

Operator

Our next question comes from the line of Abhi Sinha [Bank of America/Merrill Lynch]. Please go ahead.

Abhishek Sinha - Bank of America/Merrill Lynch

Yes. Hi, good morning everybody. Just one quick question on A&D again, just trying to understand how do you guys basically, internally decide on the A&D market for a particular year. Do you set how to fix capital for a year? In other words, let’s suppose if you don’t make an acquisition this year what would that do to your capital budget for acquisition next year?

Richard Robert

We were very opportunistic on acquisitions. We certainly set goals for ourselves. We always want to do better than we did the year before. But, it wouldn’t necessarily change our outlook or reason to do more or less the following year. Clearly, we are just trying to do good deals whatever they may come into pause.

Abhishek Sinha - Bank of America/Merrill Lynch

So like last year, you had much – invested much more dollars than what you had [indiscernible] this year or so but – if you don’t make a deal this year, the next year it would still be a similar capital budget that you had laid out this year.

Richard Robert

Well, next year is a new year and we certainly continue to have that liquidity to put to work and we certainly expect to put that in a more way. It just really depends on the deal flow and waiting and being patient for the right deal. So again, we love to do $3 billion next year. But, you just never know what’s the deal flow might look like and then how successful you are.

Abhishek Sinha - Bank of America/Merrill Lynch

Sure. That’s all I have. Thank you very much.

Scott Smith

Thank you.

Operator

And our next question comes from the line of Daniel Guffey [Stifel Nicolaus]. Please go ahead.

Daniel Guffey - Stifel Nicolaus

Hi, guys. You shown to be conservative in your capital allocation in the past and have removed CapEx from areas that were generating marginal economics specifically the Bakken. I wonder if you can walk us through current year internal hurdle rates and then I guess breakeven prices in your non-op Fayetteville and in the Woodford?

Scott Smith

Okay. That’s positive. Basically what type of returns we are looking at in those various areas.

Daniel Guffey - Stifel Nicolaus

Yes. Exactly. And then what are those hurdle rates, when would you start removing capital from each of those areas?

Scott Smith

If you look at all of our activity on a quarterly basis and obviously, was very clear earlier this year, Bakken and the dollar grew, spending we are not generating a typical return. I think we are looking at in our – in the Fayetteville sort of in the mid to high 20s is what we are seeing from those investments, which again, we have a small working interest in lots and lots of wells but its very repetitive and the wells are very consistent so it makes sense for us to standout.

Our Woodford, again, I think if we said during the call is around 35% based on that current strip pricing. Our Permian, we look at – probably those opportunity the recompletions are all in a 100% type range. Again, low dollars and not adding a lot of barrels that again you add those two together, you do lots of them, they make an impact on the company.

Let’s see, Mississippi again, that’s only a single well, but they are in the 50%, 60% type of return. We are drilling, we will probably have a 25%, 30% type cut off, its sort of our goal that we wouldn’t want to do anything below that because when start risking things, I think [indiscernible] at least you need to start at that level. I think we have covered most of the areas, if we miss anything any other areas you have specific questions about.

Daniel Guffey - Stifel Nicolaus

No. I think you covered the areas. I guess specifically in the Fayetteville, you said you are kind of nearing that cut off economic threshold, set prices went down $0.30 or $0.40, would you start non-contenting on wells with stuff lesser than BHP?

Scott Smith

Well, the strip would have to go down. Well, most of our activity, I don’t think we have any with BHP, its almost all Southwestern. Their well cost are better again, being the biggest company in the play are the best. So we can, we are looking everything and kind of on a strip basis. And if you look at our, since we hedged so heavily, we are comfortable because we already have a lot of that gas production baked into our numbers, who is comfortable continuing to drill at that level because again we have the hedges in place.

Daniel Guffey - Stifel Nicolaus

Okay. That’s all from me. Good luck on the acquisition in the fourth quarter.

Scott Smith

Thank you.

Operator

That does conclude our question-and-answer session. I would now like to turn the call over to management for closing remarks.

Scott Smith

Again, thanks everyone for joining us this morning. If you are at Houston try to stay high and dry and everyone have a happy and safe Halloween. Then we look forward to visiting with you again in 2014.

Operator

That does conclude our conference for the Vanguard Natural Resources third quarter 2013 earnings conference call. We’d like to thank you for your participation. You may now disconnect.

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