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Vanguard Natural Resources, LLC (NASDAQ:VNR)

Q4 2009 Earnings Call Transcript

March 3, 2010 11:00 am ET

Executives

Lisa Godfrey – IR

Scott Smith – President and CEO

Richard Robert – EVP and CFO

Analysts

Richard Roy – Citigroup

Joel Havard – Hilliard Lyons

Michael Blum – Wells Fargo

Richard Dearnley – Longport Partners

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vanguard Natural Resources 2009 fourth quarter yearend earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday, March 3, 2010.

I would like to turn the conference over to Lisa Godfrey from Vanguard Natural Resources for opening remarks. Please go ahead.

Lisa Godfrey

Good morning, everyone and welcome to the Vanguard Natural Resources, LLC fiscal year end and fourth quarter 2009 earnings conference call. We appreciate you joining us today. Before I introduce Scott Smith, our President and Chief Executive Officer, I have some information to provide you. If you would like to listen to replay of today's call it will be available through March 16, 2010 and may be accessed by calling 303-590-3030 and using the pass code 424-6688. A webcast archive will also be available on the Investor Relations page of the company's web site at www.vnrllc.com and will be accessible 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 this morning's earnings release. Please note, the information reported on this call speaks only as of today, March 3, 2010 and therefore you're 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-K that will be filed later this week and will available on our website under Investor Relations tab and on EDGAR. In addition, please note that the Schedule K-1 will be available to download from our website on or about March 12 and mailed to our unit holders on or about March 19.

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

Scott Smith

Thank you, Lisa and welcome everyone and thank you for joining us today to review our accomplishments for 2009 as well as our financial results and outlook for 2010. As always, I'm joined today by Richard Robert, our Executive Vice President and Chief Financial Officer and Britt Pence, our Vice President of Operations. This morning, I'll start with a summary of our results for the year, briefly discuss our year end reserves and operations and then turn the call over the Richard for a financial review. Then we will open the line up for Q&A.

2009 was an excellent year in all respects for the company and its unit holders. Specifically, we achieved record adjusted EBITDA production and reserves all during a period where we saw extreme volatility in the capital and commodity markets and a weak overall economy in the U.S. and globally. We completed two complementary acquisitions in our core operating areas totaling approximately $110 million, which were funded almost entirely with proceeds of successful equity offerings in August and December. These acquisitions furthered our goal of putting together a quality portfolio of assets with a balanced commodity mix and geographic diversity.

With the addition of the expected cash flows from these acquisitions, we were able to announce the first significant increase in distributions in the upstream space in over a year. We raised our distribution by 5% and are now paying on an annual distribution rate of about $2.10 per year. Probably of most importance to our investors, VNR units were the best performing stock in the entire MLP space in terms of price appreciation last year with a total gain of 274%, which does not include distributions. We believe this performance can be attributed to the overall recovery in the MLP space, combined with investors gaining confidence each quarter as we reported good financial results and continued to excuse our business plans of making accretive acquisitions to increase our reserves and cash flow.

Now, we'll discuss our reserves. Our reserves at year end '09 consisted of 142.9 Bcf, which is up 32% over 2008 year-end reserves of 108.5 Bcf. Our reserves are 68% PDP and the composition is approximately 58% natural gas, 27% crude oil and 15% NGL's.

During 2009, we replaced 571% of our production primarily with reserves added through acquisition. While we added 75 Bcf through our acquisition program and 3 Bcf through other reserve ads primarily as a result of price revisions, our overall reserves are reduced by 44 Bcfe. Simply put, even though we added a substantial amount of new reserves to the asset base, we only saw a portion of those additions hit our year end numbers because of the new SEC mandated pricing used in the evaluation process.

Obviously, the new SEC rules for determining reserves had the opposite affect of what was anticipate by the industry. The dramatic collapse of both oil and gas prices through the first part of the year, the average pricing the industry was required to use was substantially below both the year end pricing and the forward strip pricing at year end.

In the press release we put out this morning, we included a table that summarizes both the company's reserve numbers and PV10 values using the new SEC guidelines, using the old SEC rule of year-end spot pricing and finally using the strip prices through 2021. We contend that the forward market pricing is the best indicator of the overall markets via the long-term pricing and is therefore a true indicator of value than the constant pricing used in the SEC model.

With respect to our operations, in our quarterly calls and presentations throughout last year, we made it clear that our capital spending would be substantially less than the $18 million invested in 2008, primarily as a result of the collapse in natural gas pricing. We did spend approximately $5 million last year, most of which was on recompletions of existing wells in the Permian Appalachian areas and at some select development drilling in fields where we have a small working interest and the operators have elected to continue spending throughout the year.

This year, based on our current drilling plans, we expect to invest approximately $13 million in drilling and other activities on the asset base. Capital will be spent approximately 50% in the Permian Basin, 30% in south Texas and the balance being allocated to activities in Appalachia. We continue to maintain an extensive multi-year inventory approved undeveloped drilling locations, primarily in south Texas and Appalachia and to a lesser extent in the Permian that are on acreage which is substantially held by production. We can be very measured in the timing of the development of these PUD wells.

With respect to our production, we averaged a little over 20 million Mcfe per day for the year, which is up 23% over the volumes we reported in 2008. During the year, we saw the benefit of the second south Texas acquisition only from the middle of August through the year end. And we were only able to record one month of volumes from the Permian acquisition that closed in December. Our exit rate at year end was approximately 25.8 cubic feet equivalent per day.

I'd like to comment now on our hedging. Hedging as always is a big part of the success and in 2009 it really was a huge part of our numbers. As we had realized proceeds of approximately $30 million on our commodity hedges. Hedging our acquisition will always be a critical aspect of our business as we look to ensure the cash flows from our investments on oil and gas properties.

For this year, our hedge position in great shape with approximately 89% of our expected natural gas production including NGL equivalence hedged at an average floor price of $8.42 per MMBtu. And with respect to oil, approximately 60% of our expected production is hedged at a weighted average floor price of just under $86 per barrel.

In summary, 2009 was a great year for the company and its unit holders. In spite of a difficult environment for commodities and the capital markets in general, we managed to achieve excellent results on all fronts. Our results are a reflection of the efforts of our employees and their hard work on behalf of the company to achieve its goals.

From our perspective, the MLP world in general and VNR in particular got rocked pretty hard in 2008 and 2009. Now back on its axis with equity values and yields trading closer to historical valuations. There's no better example of this than our successful overnight offering in December that funded the Permian acquisition, which in turn was the catalyst for our recent distribution increase. With access to the capital markets, we now have the fuel we need to keep growing in 2010.

Already, we are seeing many asset packages being marketed that are well suited to the MLP model. And numerous other companies have announced they will be marketing MLP suitable assets throughout the year to fund the capital intensive shale plays that are now the focus of the domestic industry. We intend to be active in the market yet be disciplined in our approach to acquisitions. With our structure and cost of capital, we feel we can compete effectively for the right type of assets and are looking forward to continuing the growth we achieved in 2009.

Now, I would like to turn the call over to Richard for the financial review.

Richard Robert

Good morning. Thanks, Scott. As Scott mentioned, we are pleased with our results for 2009 and for the fourth quarter. Let's start with our full year results. Our results for 2009 were supported by the accretive acquisitions made during 2008 and 2009. We reported adjusted EBITDA at $56.2 million which represents a 15% increase over the amount earned in 2008. We generated distributable cash flow of $45.1 million, up over 80% from the $25 million generated in 2008.

The reason I start with these two non-GAAP measures is because I feel that these are the two measures that are most meaningful to our investors who are looking for a cash yield on their investment. Adjusted EBITDA and distributable cash flow are used by management and by external users of our financial statements, such as investors, research analysts and others as a tool to measure the cash distributions we could pay our unit holders. Specifically, these financial measures indicate to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates.

Getting back to our financial results. The year-over-year adjusted EBITDA and distributable cash flow increases were driven by higher production volumes in all of our commodities and higher realized prices for natural gas when including our hedges, but offset by lower realized pricing on our crude oil and natural gas liquids after hedging. Our realized gain from commodity hedges in 2009 was approximately $30 million, compared to our realized loss of approximately $7 million in 2008. These hedge gains were the reason that we could continue to pay our cash distributions in 2009 even during periods of low natural gas and oil pricing. This is why hedging is such an important part of our business strategy. We want to be able to maintain our distribution regardless of the commodity price environment.

Continuing on, our lease operating expenses increased by approximately $1.5 million in 2009, a declined on an Mcfe basis from $1.87 in 2008 to $1.73 in 2009. Our selling, general and administrative expenses were $3.9 million higher in 2009, which is entirely related to payments made to officers under our bonus plan, which I will get to momentarily.

Finally, our production and other taxes declined by approximately $1.1 million due to lower severance taxes being paid on the sale of our commodities. 2008 generated $69 million from the sale of our commodities than in 2009 that was reduced to $46 million.

For the fourth quarter of 2009, we generated adjusted EBITDA of approximately $15 million, up 17% over the amount earned in 2008, but down 6% over the third quarter of 2009. The decrease in the amount generated in the fourth quarter over the third quarter is attributable to the payments made to officers under the phantom unit bonus plan. As more fully described in the press release issued this morning, the amount payable under the bonus plan was based on Vanguard's unit price appreciation from the beginning of the year to the end of the year, after consideration of cash distributions paid and 8% hurdle rate.

The intention of this bonus plan when it was put in place was to create alignment between Vanguard investors and management. If the unit price went up and investors did well, then management would do well. And conversely, if the enterprise did not go up from the beginning to the end of the year, then the management would not receive a bonus. As a result, in 2008, when our unit price declined, no bonuses were paid under the plan. And in 2009 when our unit price increased 274%, from the beginning to the end of the year, $4.3 million was paid under the plan.

The officers took a portion of the bonus in cash and a portion in units. Company satisfied the unit portion of the compensation by transferring units it had purchased in the open market at various times throughout the year at a weighted average price below the year end closing price of $22.7. As a result the actual cash expense as reflected in adjusted EBITDA, to satisfy the $4.3 million obligation was reduced to $3.9 million.

Excluding impact of this nonrecurring item, our adjusted EBITDA would have been $60.1 million and $18.6 million for the year and fourth quarter respectively. Reason that I can suggest that is a nonrecurring item is because the officers have recently executed new three year employment agreements which include a revised annual bonus structure, which includes two company performance elements and a third discretionary element to be determined by the company's board of directors. Annual bonus does not require minimum payment and the maximum payment may not exceed two times the respective officer's annual base salary. So, in summary if you exclude the one time item, our fourth quarter adjusted EBITDA was actually 19% higher than our third quarter adjusted EBITDA.

We reported a net loss of $95.7 million for 2009. I often receive questions from investors wanting to know how we can pay a cash distribution and yet report net losses in 2008 and 2009. The answer lies in the large non-cash charges that we are required to record under generally accepted accounting principals, otherwise known as GAAP.

2009, we recorded $110.2 million non-cash impairment charge on our natural gas and oil properties. And recorded an $18.3 million charge for non-cash unrealized net losses on commodity and interest rate derivative contracts. Neither of these items has any impact on our cash flow, nor affects our ability to make our cash distributions. Excluding the impact of the charges and other non-cash items, our 2009 adjusted net income was $26.1 million, compared to 2008 adjusted net income of $19.3 million.

As it's such a large number, I would like to take a moment to discuss the $110 million non-cash impairment charge recorded in 2009. I will attempt to explain it in Layman Terms as best I can. We utilized the full cost method of accounting for our natural gas and oil properties. Under this method, we are required to compute and compare present value of our oil and gas reserves, discounted at 10%, or PV-10, with the book value recorded on our balance sheet for each quarter that we publish financials. If the PV-10 value is more than the book value, we are required to write-down the book value compared to PV-10 value, computed at that time.

However, this computation only allows you to reduce your book value. It will never increase our book value, even if in future periods PV-10 volume improves. In other words, you can take only take write-downs, never write ups. As I Scott described earlier, our PV-10 value is significantly impacted by the natural gas and oil prices used in the valuation.

Prior to December 31, 2009, the SEC required the valuation to be based on the commodity spot prices at the end of each quarter. And under this method, we recorded a $64 million impairment charge in the first quarter of 2009, when natural gas and oil prices were $3.65 and $49.64 respectively. At December 31, 2009, as a result of the SEC's new rule we changed the price used to calculate the value of our natural gas, oil reserves to a 12 month average price rather than a year end price.

At December 31, the 12 month average price for natural gas was $3.87 and the crude oil price was $61.4. On the surface this doesn't sound like such a bad thing since we have already taken impairment on our oil and gas properties in the first quarter at lower prices. The problem becomes when you make acquisitions after the first quarter, when natural gas and oil prices had improved.

Majority of the fourth quarter impairment of $46 million was incurred on properties that we acquired in the last six months of 2009 when natural gas and oil prices were higher than the 12 month average price. We were able to lock in the higher prices at the time of the acquisitions for a substantial portion of the expected production through 2011 for natural gas and 2013 for crude oil by using commodity derivative contracts. However, the PV-10 value of our reserves do not consider the positive impact of our commodity derivative positions as generally accepted accounting only allows the inclusion of derivatives designated as cash flow hedges, which ours are not.

Additionally, if we were still under the old rules and used year end pricing to value our reserves, there would not have been an impairment charge in the fourth quarter. And hopefully this explains – hopefully this helps explain and allow people to understand how we can record such a large charge to earnings for impairments.

Our results for the year compared favorably with the updated guidance we issued in our press release in September, 2009. As is the case with our 2010 guidance, do not try to predict non-cash unrealized impact of changes in the value of our commodity interest rate hedges, nor do we attempt to predict the amount of any cash or stock bonuses to be paid in the future. With this in mind after taking out the impact of the items, we generated 2009 adjusted EBITDA of $60.1 million as compared to our forecasted guidance of approximately $56 million. As provided in our press release for 2010, we currently expect to generate between $72 million and $74 million in adjusted EBITDA and between $52 million and $54 million in distributable cash flow.

It is very important to know these estimates do not include any acquisitions of new properties and are based on a constant commodity price for the year, $5.59, for NYMEX natural gas, $75.90 for West Texas intermediate crude oil and an average composite natural gas liquids price of $1.10 per gallon. However, also keep in mind that our commodity hedges allow our 2010 cash flows to be relatively consistent regardless of changes in commodity prices and interest rates. Which is why we can show a fairly narrow range in our estimates?

This is especially true with respect to changes in natural gas prices. Based on current expectations at 89% of our 2010 natural gas production, includes our NGL production. It is hedged at weighted average floor price of $8.42 per MMBtu. We actually generate more cash if the natural gas price goes below that used in the forecast. This is a function of paying less and severance taxes as the market price goes down and receiving more in hedge settlements which are not subject to severance taxes, an interesting dynamic that only applies when we are significantly hedge on commodity, i.e., does not apply for us on oil because we only expect 6% of our oil in 2010 as hedged.

From a 2010 production mix perspective, we currently expect that approximately 50% will be natural gas, 35% will be oil and 15% will be from natural gas liquids. This anticipates that we will be spending between $12.5 million, to $13.5 million in 2010 on drilling recompletions and capital workovers. Expected result is that our distribution coverage ratio should be in the 1.3 times to 1.35 times range based on our current $2.10 annual distribution.

However, as I said in the past there will be volatility in distributable cash flow on quarter-to-quarter basis. Do not anticipate spending the same amount of capital each quarter, so that the distribution coverage will vary. We currently expect to spend a large portion of our capital budget in the second quarter of 2010. Therefore, I would encourage people to evaluate distribution coverage on annual basis as opposed to quarterly basis.

I would like to shift the discussion to our leverage and liquidity. In August 2009, we were pleased to extend the maturity of our facility to October 2012 and added two new banks. We are now currently at seven banks. Our borrowing base as determine by the banks, translated from a low of $154 million to a high of $195 million, which we currently maintain.

We do anticipate that the borrowing base will vacillate in 2010 based on the success of our drilling program. And acquisitions that we may close, hedges and production rolling off and changes to the bank's price deck. I do expect that absent to acquisition our borrowing base will be reduced at our next scheduled redetermination in April.

Currently, we have approximately $60 million available to us under the revolver, while I don't have a specific number in mind as the borrowing base will be reduced. I do feel very comfortable in suggesting that we will not have impact on our ability to operate our business or make our quarterly cash distributions.

Our 2010 forecast does anticipate generating excess cash flow which we will continue to use to reduce our debt barring on acquisition of new properties. In terms of our growth prospects, we are very encouraged by our and our peers recent successful equity offerings. We feel confident that given access to capital at reasonable cost, we will be able to successfully grow this company via acquisitions. We appreciate our investors continued support and look forward to a great year.

Those are my comments and we would be happy to take any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Richard Roy with Citigroup. Please go ahead.

Richard Group – Citigroup

Good morning.

Richard Robert

Good morning, Richard.

Richard Group – Citigroup

And just, if you look at your hedge book, you're well hedged '10 and '11. And on oil, you are hedging '12 and '13, but I noticed decided to leave 2012 and 2013 unhedged on natural gas, if you could walk us through that decision and your views on the gas price.

Richard Robert

Okay. We'd be happy to Richard. Certainly, oil prices we feel are fairly good values. We were able to hedge in the 85, 86, 87 type range we are comfortable doing that. That will provide us some very good return on our natural gas. We feel we have the benefit of time. It's certainly like every other producer, they are hopeful that prices will increase at some point at will allow us at least in the back end of the curve. It will allow us to hedge at reasonable levels, but that's not really what we are counting on at the end of the day.

We have another avenue available to us to resolve the issue of 12 to 13 hedges and that is to acquire new gas assets at these price levels, which will reduce the weighted average we have to hedge everything at. And at this point, where, based on the acquisition activity we seen thus far, we think we will be able to resolve 12 to 13 through acquisitions.

Richard Roy – Citigroup

Very good. Just a follow-up on the acquisition front, during the prepared comments you mentioned that there is quite a bit of activity. Where in – what basins are you seeing that activity in first and the second question would be what size deals would you feel comfortable? Could you just provide us with a range?

Scott Smith

With respect to geographic location, we are currently looking at things in that some our existing areas both Permian and South Texas. But then some of other basins, looking at some things in the Southeast, we are looking at a deal in the Mid-Continent. There is a real laundry list of packages coming out from the bigger companies that again are looking to shed conventional assets to – other opportunities.

So we look at them all independently making sure that if we are going to expand out of where we currently are that I will comfortable doing that. With respect to size, we are seeing things probably small as that again would be built on sort of in the $25 to $30 million range. And then in the larger deals, 100 to north just I would say around 150 to 175 would be kind of the high-end.

Richard Roy – Citigroup

Perfect. Thank you. Just one last question, would you estimate the tax accrual and the distribution to be in 2010?

Richard Robert

In 2010?

Richard Roy – Citigroup

Yes.

Richard Robert

Well, now that we are drilling program is back in place and we anticipate generating IDC and assuming that our progress doesn't change that as a tax item or tax deduction. We are anticipating some of the 90 to 100% type range.

Richard Roy – Citigroup

Great. Thank you very much.

Scott Smith

Thanks, Richard.

Operator

Thank you. Our next question comes from the line of Joel Havard with Hilliard Lyons. Please go ahead.

Joel Havard – Hilliard Lyons

Hi, good morning, everybody.

Scott Smith

Good morning.

Joel Havard – Hilliard Lyons

First of all a little background maybe on Q4. Could you kind of walk us through what happened with the acquisitions on a net well basis by field? What the number change was, if that's aggregated?

Richard Robert

The only acquisition we made was in the Permian.

Joel Havard – Hilliard Lyons

Right.

Richard Robert

And that was from the well count number think we only added about 10 wells.

Joel Havard – Hilliard Lyons

Is that net?

Richard Robert

Yes.

Joel Havard – Hilliard Lyons

Okay. All right. And you made some comments in your early remarks since I didn't – I wasn't writing fast enough. I think you gave some insight into what the CapEx program looks like for net for this year and Richard had the comment its Q2 heavy. But could you sketch out what the year looks like developmentally?

Scott Smith

I think that the total is about $13 million. I think the range was $12.5, $13.5 or $13 not have to that is the Permian Basin that is in drilling one new well in our the recent – basically, a PUD location in the Ward County acquisition that we did in December, as well as we got some recompletions there. The lion share of that capital roughly 15% of that is in the drilling of the new well.

30% was in South Texas. That's participating with Lewis and probably 5 to 6 well drilling program on our in both Dos Hermanos field and our Sun TSH field. That will be spread out some – probably fairly consistently between the second, third and fourth quarters. They are the ones who drive the bus, so that's kind of what we talked about so far.

And the last piece in the smaller around 15% are just a couple of million dollars is in Appalachian. Again, primarily focused on oil development recompletions and possibly drilling some new wells that are kind of on the books. And again, I think that will probably pretty spread out over the second and third quarters.

Joel Havard – Hilliard Lyons

And some – I'm sorry. I'm switching the model here, back to Richard's comments. Richard, was your borrowing base thoughts strictly on what's happened with gas more recently or what else are you reading into that?

Richard Robert

Well, I'm aware that I think one of the banks I talked to provided me with a updated price deck, which has lower gas in the out years its actually raise the price second and early years and lowered flattened out in the out years. And that's why we say only hedge the raising it in the front years since you do much for us, but lowering in the back years does have an impact.

In addition, hopefully offsetting that was an increase in the oil side. So I think it's mainly just a function that we have production rolling off, we have hedges rolling off and that's going to reduce value of the reserves.

Joel Havard – Hilliard Lyons

Okay. That's all, I got right now. Thanks. Good luck.

Richard Robert

Thanks, Joel.

Joel Havard – Hilliard Lyons

Appreciate it.

Operator

Thank you. Our next question comes from the line of Michael Blum with Wells Fargo. Please go ahead.

Michael Blum – Wells Fargo

Yes. Good morning, everybody.

Richard Robert

Good morning, Mike.

Michael Blum – Wells Fargo

Just one point of clarification, just to understand the capital budget for '10. So I guess is that all bring deployed affectively to maintain production, are you seeing base declines are you spending enough to maintain. How should I think about that?

Scott Smith

Well, I mean the base – the capital we are looking to spend is basically looking to convert PUDs to PDPs and with respect to production rate. We look at that capital as helping to maintain our rate not to grow it. And – but I mean I would say that we obviously identified what we think are some very higher term projects irrespective where current commodity prices are. And so our intention is to not necessarily maintain production in this price environment, but to supplement it and hopefully grow it through acquisitions.

Michael Blum – Wells Fargo

Okay. So if is there a price point where you would look to increase your capital budget?

Scott Smith

Yeah. I think if we saw long-term, if the gas market rebounded to the over $6 range a lot of the IRR's on a lot of the PUDs become a lot more attractive to start competing with the above acquisition economics. Then we might look to ramp up and drill maybe a few more wells in South Texas.

Michael Blum – Wells Fargo

Okay. That's helpful. Thank you.

Scott Smith

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Richard Dearnley with Longport Partners. Please go ahead.

Richard Dearnley – Longport Partners

Good morning. I have two questions. Picking up on the last question, is the directly is the $13 million of CapEx sufficient to maintain your current production?

Richard Robert

It is a – I don't know if we calculated the exact number.

Richard Dearnley – Longport Partners

Well, I realize it's a guessing kind of number is it close?

Richard Robert

I would say it's probably closed, yes.

Richard Dearnley – Longport Partners

Okay.

Scott Smith

Richard, you think about it. A lot of Richard, think about when the timing is. Again, we're going to be spending this money all during the year and our production is declining. So not go in key.

Richard Dearnley – Longport Partners

Yeah.

Scott Smith

And when we added it's wouldn't keep it flat throughout the entire year.

Richard Dearnley – Longport Partners

Above better on a year-to-year basis over a couple of years, $13 million?

Richard Robert

Yes.

Richard Dearnley – Longport Partners

Would do it this year and $15 to $17 next year and…

Richard Robert

Yes. That is accurate. It does keep our production relatively flat.

Richard Dearnley – Longport Partners

Okay. Then given your growth by acquisition strategy, is the game plan to over the longer term grow your production per share. It seems like the production per share has been flat to down over the last couple of years. Of course, we don't have lots of data points. But do you have any thoughts on that?

Richard Robert

Well, that's I mean clearly that's a function of what we are able to raise our capital at. And what the commodity prices require you to pay for your production. So we are very hopeful so now that our equity, unit price is higher and production is cheaper, because commodity prices are cheaper that metric is going to look very good going forward as long as we stay in this kind of environment. We will be buying more production for a less dollars.

Richard Dearnley – Longport Partners

Right. But is that your – I mean is that your goal or do you not really think about that?

Richard Robert

We feel like we have to – we need to make acquisitions in all commodity price environments as long as we can hedge for an extended period and lock in a good return. Obviously, we are – we like that. There is more upside buying in the lower price environment, but at the end of the day if we want to continue adding reserves in any price environment.

Richard Dearnley – Longport Partners

Yeah. Presumptively, your share price is less expensive when acquisition prices are most attractive. So the incentive to do stock to make an acquisition varies directly with acquisition prices. So with…

Richard Robert

Okay.

Scott Smith

I also think Richard, again when you have I would take, face it. We are dealing with I consider to be the rules that we have to get used to calculate our reserves. Again, we buy something in December. We fully hedge it and take a big beating on it.

Richard Dearnley – Longport Partners

Right.

Richard Robert

Not only that but – now only that but we record a gain on it.

Richard Dearnley – Longport Partners

Yeah.

Richard Robert

Well, we record a gain on it in the same month we take that gain and right it off, because we are using two different price tags.

Scott Smith

So that's one of the – again, so we are using reserve year and reserve numbers on what I would consider are pretty not really reflective the value of the amount of reserves we have. That's why we put out another number. So again if you have to look at the different, however you want to calculate the metrics.

Richard Dearnley – Longport Partners

Yeah. Understand. Okay. Thank you.

Richard Robert

All right.

Operator

Thank you. There are no further questions in the queue. I would like to turn the conference back over to management for closing remarks.

Scott Smith

Again, just want to reiterate, again we had a great year in 2009. We come to work every day thinking there is and believe there is lots of great opportunities this year. And we are looking forward to achieving great results this year or so. Again, thanks for joining us and we look forward to visiting with you again.

Operator

Thank you. Ladies and gentlemen, this concludes the Vanguard Natural Resources 2009 fourth quarter and year-end earnings conference call. You may now disconnect. And we thank you for using ACT Conferencing.

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Source: Vanguard Natural Resources, LLC Q4 2009 Earnings Call Transcript

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