Vanguard Natural Resources (NYSE:VNR) has always been one of my more stable income stocks. The company is a natural gas-focused upstream MLP, with a knack for acquiring mature, low decline production, oftentimes at a discount. Vanguard then hedges nearly all of the expected production to lock in cash flows for the long term.
One such transaction took place late last year, when Vanguard purchased $581M of mostly natural gas properties in Southwestern Wyoming. This transaction, which closed on February 3, was greatly accretive to Vanguard's DCF per unit, as well as offering a potential growth platform due to its 10% working interest in an 8-rig drilling program slated to drill upwards of 16 wells per month in 2014.
Vanguard boosts its distribution to $0.21 per month
On March 17, Vanguard declared a cash distribution of $0.21 per unit monthly distribution, or $2.52 per year, a small 1.2% increase from last month's $0.2075 per unit monthly distribution, or $2.49 per year.
This increase should come as little to no surprise for followers of the stock, as the company had already pre-announced the approval for the increase with its Q4 2013 results.
Yes, a 1.2% increase is pretty small. However, compared to some of the other larger upstream MLPs that have had zero distribution growth for ages now, an increase to the distribution is always welcomed. In addition, Vanguard can easily boost the distribution later on this year, as its coverage ratio is projected to remain a robust 1.12x.
Vanguard closes its preferred unit offering
However, the distribution increase is hardly the most important news out regarding Vanguard. Earlier in the month, Vanguard announced that it was offering yet another preferred unit offering.
The "7.625% Series B Cumulative Redeemable Perpetual Preferred Units", or simply the Series B Preferred units, were offered over 30 days and netted the company $169.2M after closing.
In total, the company offered 7.0M units at $25.00 per unit, with a greenshoe option for another 1.05M. They will be trading on the NASDAQ under the ticker symbol (VNRBP). Also note that these preferred units will be paying distributions on a monthly basis, much like the Series A Preferred units issued last year.
Do note that unlike typical preferred stock, Vanguard's Series B Preferred units do not pay "dividends" and instead pay via distributions, and therefore, will result in the issuing of a schedule K-1 form.
Preferred unit offering: What does it mean?
In a previous article, I mentioned that Vanguard was very likely to issue a combination of both debt and equity to fund its $581M Wyoming acquisition. The company initially funded the transaction via its credit revolver, and now needs to find a long-term funding solution. Typically, MLPs like Vanguard use a 50/50 mix for such large transactions.
The equity portion was to be funded via Vanguard's ATM equity offerings. Basically, the company has been selling units every so often as to not negatively impact the stock price.
However, what I did not expect was for the company to be issuing its debt component via preferred units.
While technically preferred stock is equity, most investors actually consider it to be more "bond-like", given that dividends (distributions) to it must come before dividends (distributions) to the common. However, under extreme circumstances, companies have stopped payments to preferred equity holders.
A 7.625% yield for long-term "debt" seems to be a rather low cost of capital, given that most upstream MLP debt carry interest rates of 8% to 9%.
As an example, Vanguard's 2020 senior notes carry an effective interest rate of 8.0%. In theory, yields on the debt should be lower than on the preferred, given that it is technically safer in the event of a default.
That being said, Vanguard actually seems to be winning over the fixed income crowd. The yield on the new Series B Preferred offering is 7.625%, down 25 basis points from 7.875% for the Series A. In addition, the size of the offering increased considerably, up to $169M for the Series B from $61M for the Series A.
With the preferred unit offering now essentially closed, Vanguard will likely not be needing to do another equity offering short to medium term. In addition, given that the company saw strong response for its Series B preferred unit offerings, I think that the company will be using this vehicle much more aggressively for future transactions.
For those looking for a natural gas-focused stock with a large yield, Vanguard seems to be a good choice.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: I am long VNR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.