Among the upstream MLPs, Vanguard Natural Resources (NYSE:VNR) has to be the most reliable. The company has been very consistent, paying out its monthly distributions while offering modest distribution increases every few quarters. Vanguard has also been fairly smart on the acquisition front, buying up smaller properties without overextending itself.
A closer look at Vanguard Natural Resources' acquisition
On August 4, Vanguard announced an acquisition of E&P assets in the North Louisiana and East Texas region. Below are some of the key details:
Purchase price: $278 million
Current production: 17.5 MCFE/D
Production mix: 67% natural gas, 33% liquids (13% oil and 20% NGLs)
Proved Reserves: 150 BCFE with an estimated reserve life of 23 years
Cost of proved reserves: $1.85 per MCFE
Working interest in more than 290 producing wells and 78 proved undeveloped vertical drilling locations
Immediately accretive to distributable cash flow at closing
This acquisition would mark Vanguard's initial entry into the North Louisiana/East Texas area. Currently, the company has a large footprint in the nearby Arkoma Basin and Permian Basin. The effective date of the acquisition is June 1, 2014, while closing is expected for sometime on or before October 1, 2014. Vanguard will be using its credit facility to fund this transaction.
It appears Vanguard paid more this production, per BOE, than in prior transactions. Earlier in the year, the company bought $581 million in production in the Pinedale and Jonah fields of Southwestern Wyoming at much lower prices. However, these acres in East Texas currently offer more oil production, around 400 BBLs/D, and thus should command a higher price.
Vanguard also noted that these assets are well-suited for EOR techniques, specifically horizontal drilling, as well as more conventional growth opportunities.
Furthermore, this production is located in a well-serviced area with sufficient pipeline capacity and buyers nearby. As a result, the realized price for natural gas is going at 115% NYMEX Henry Hub, while the oil is trading near par with WTI at only a $2.50 discount per BBL.
As typical for Vanguard, this production is of the mature, long-life type, with only a 10% annual decline rate, ideal for hedging. The company plans to hedge all of the expected natural gas and oil production. Do note that NGLs are not planned to be hedged as the pricing market for them is weak.
Conclusion: How will these assets impact Vanguard during 2014?
With closing expected for late October 2014, Vanguard will benefit somewhat from the production as the effective date is in June 2014.
This transaction represents around a 7% increase in size for Vanguard; by both equity value ($278 million versus $4 billion) and production (17.5 MMCFE/D versus 268 MMCFE/D).
In addition, these assets will not move the needle in terms of production mix as they mirror Vanguard's current portfolio, both being around 67% natural gas.
From my experience, an acquisition of this size is only modestly accretive, likely in the $0.01 to $0.02 per quarter range. Assuming Vanguard sometime in the future decides to issue debt to pay off its revolver, the accretion is even less. However, the real profits will be made if Vanguard can get some production growth out of the assets.
Hopefully this transaction foretells a strong quarterly result for Vanguard. As I have noted previously, the company has been seeing its DCF ratio worsen over the past few quarters. I expect to hear more from the company about this acquisition during its Q2 2014 conference call on Tuesday (August 5).
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: The author is long VNR. 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.