Is Vanguard Natural Resources A Good Investment?

Jun.26.14 | About: Vanguard Natural (VNR)


Growth in revenues and cash flows has been extremely impressive for the company over the last few years.

Vanguard's ability to reduce production costs along with growing its production should enable the company to enhance its cash flows.

Growing cash flows should result in an increase in cash distributions to unitholders.

Vanguard Natural Resources (NYSE:VNR), structured as an MLP, is one of the companies that pays monthly cash distributions with a distribution yield of 7.9%. As a result, the stock is a popular choice for investors looking for a regular stream of income. The company has shown impressive performance over the last five years due to which the unit performed well during the period gaining around 149% - up 7.5% year-to-date.

The cash distribution per common unit has also showed decent average annual growth rate of 5% over the last five years. Moreover, the partnership is expecting huge operational gains due to its Pinedale acquisition in the last quarter, which is its first capital expenditure investment into production growth. In this article, we have tried to analyze the growth in cash flows and cash distributions and the expected future growth. Moreover, we have tried to gauge the sustainability of growth in cash distributions through the prospects of its business segments and growth in cash flows.

Growth in Cash Distributions

The performance of any partnership can be measured by observing the growth in its distributable cash flows. The distributable cash flows of Vanguard stood at $185 million in the last year, compared to $141 million in 2012 -- showing an increase of 31% during the period. Further, this growth in distributable cash flows is also gauged by the operational performance of the partnership. Vanguard reported impressive improvements in the operational results over the last few years with an average annual growth rate of 5.5%. This massive growth in the distributable cash flows has also taken the distribution coverage ratio of the partnership to 1 (1.00x) in the last year -- with an improved estimated ratio of 1.12x for 2014. However, the ratio has declined in the last year compared to 2012 due to increased year-over-year maintenance capital expenses, up 97% during the period. Nonetheless, these expenses are temporary and are mainly increased due to increased maintenance costs of the newly acquired asset acreage, Pinedale Acquisition.

Moreover, the partnership reported revenues of $443 million in the last year, up 43% from 2012. This revenue increase has enabled the partnership to distribute $0.21 per common unit each month ($2.52 annualized) as cash distributions. Vanguard owns a natural gas heavy asset portfolio and has a decent distribution performance compared to the similar structured portfolio competitor, Linn Energy (LINE), which is shown in the table below.

Cash Distributions per common unit

Cash Distributions Average Annual growth in Five years

Operating Cash Flows (billion)





Linn Energy




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Source: Morningstar and SEC Filings

Despite smaller cash distribution per common unit and operating cash flows compared to Linn Energy, Vanguard holds an impressive average annual growth rate of 5% for the distributable cash flows. The company has substantially increased its operating cash flows and revenues over the last few years. Moreover, the recent Pinedale Acquisition will considerably enhance the operational throughput of the partnership. Further, the proven reserve growth of the partnership ensures sustainability in the cash distributions in the future.

Future Growth Prospects

MLPs derive their future growth from the assets they acquire over the resource rich areas. Likewise, Vanguard is in the continuous process of expanding its acreage across the U.S. Amongst the eight operating basins in the U.S., the largest contributing asset acreages towards the revenues remained Arkoma, Permian and Big Horn Basin with net production of 3,957 MBOE, 2,445 MBOE and 1,282 MBOE, respectively. The total proved reserves stood at 172.2 MBOE with 26% crude oil, 57% natural gas and 17% NGLs. The partnership also holds a significant advantage of having 78% proved developed reserves of its total proved reserves across the U.S.

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Source: SEC Filings

Vanguard has also planned to convert around 60% of its proved undeveloped natural gas reserves in the next three years for which it has identified 386 proved undeveloped drilling locations and over 440 other drilling locations on its leasehold acreage. This will significantly increase the operational throughput of the partnership over the next three years, which should result in considerable increase in revenues and cash flows.

Source: SEC Filings

The partnership has also been successful in considerably reducing its production costs. Vanguard has managed to reduce its production costs by around 38% over the last two years. This will enhance the operational capabilities of the partnership, resulting in an increase in the distributable cash flows. Moreover, the recent acquisition of Anadarko Petroleum's (NYSE:APC) interests in the Pinedale field of Wyoming will result in higher margins in the future.

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Source: SEC Filings


The growth in the revenues and cash flows has been extremely impressive for the partnership. The focus on increasing the production along with a decrease in the production costs will allow Vanguard to enhance its cash flows and reward its unitholders. We believe the growth in cash flows and revenues will remain strong for the partnership and it remains an extremely attractive investment choice for the long term.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.