Vanguard Natural Resources: Circling The Drain?

| About: Vanguard Natural (VNR)

Summary

Vanguard Natural Resources reported weak fiscal first-quarter results in May.

Results were under the impression of lower price realizations and writedowns on oil and natural gas properties.

I continue to expect the Linn Energy bankruptcy to weigh on shale-focused upstream companies, including Vanguard Natural Resources.

Investors should stay away.

As expected, energy companies suffered from the energy price rout in the first quarter. Though crude oil prices have recovered to ~$50/barrel in May, oil and natural gas companies continue to have to fight for their survival, negotiating credit facility amendments and selling assets. Oil and natural gas producer Linn Energy, LLC (LINE) failed to turn the ship around, and recently said that it filed a voluntary petition for a Chapter 11 restructuring. A bankruptcy was widely expected, though, and reflected in Linn Energy's unit price. That being said, Linn Energy's bankruptcy shines a light on the dismal state of levered, high-risk oil and natural gas companies in the U.S.

Linn Energy is far from being the only company having to deal with the fallout from the energy price crisis. Other producers, think, Chesapeake Energy Corp. (NYSE:CHK), or Vanguard Natural Resources, LLC (NYSE:VNR), for instance, are also fighting for their survival. Chesapeake Energy achieved some major victories lately, including successfully negotiating for the reaffirmation of its borrowing base (though pledging additional collateral) and being able to sell $470 million in assets to Newfield Exploration Company (NYSE:NFX).

Vanguard Natural Resources is in a similar position as Chesapeake Energy Corp., selling assets to repair its balance sheet and pay down debt under its revolving credit facility. While this is good news, the energy price rout continued to hurt Vanguard Natural Resources in the fiscal first quarter of 2016, and the results were not looking good, to put it mildly.

Another Round Of Impairments

Vanguard Natural Resources had to write down the carrying value of its oil and natural gas properties by $207.8 million on the back of falling energy prices in the first quarter. Impairments were expected, though. A year ago, Vanguard Natural Resources took an impairment charge of $132.6 million.

Impairments were not the only way in which lower energy prices hurt Vanguard Natural Resources in the last quarter. The company said that its average realized oil price/Bbl, excluding hedges, slumped 37 percent Y/Y to $26.57, whereas Vanguard's average realized natural gas price (again excl. hedges) crashed 38 percent Y/Y to $1.30/Mcf. Thanks to lower price realizations, Vanguard Natural Resources' oil, natural gas and natural gas liquids sales decreased ~18 percent to $81.44 million. All considered, it was an expectedly weak quarter for Vanguard Natural Resources (even though the company made a ~$90 million gain on the extinguishment of corporate debt).

Linn Energy Bankruptcy Weighing On The Sector

In my last piece on Vanguard Natural Resources, titled "Vanguard Natural Resources: A Potential Linn Energy Bankruptcy Is A Major Risk Factor", I speculated that the fear levels in the sector would likely grow if Linn Energy, a major producer, failed to restructure its balance sheet and went out of business.

Now that Linn Energy has filed for bankruptcy, we know that things are really serious. At the very least, Linn Energy's bankruptcy filing fuels speculation over which company will be the next domino to fall, and Vanguard Natural Resources is certainly a candidate: Its balance sheet is highly levered, the company had to yet again write down the carrying value of its oil and natural gas assets in Q1-16, and its cash flow remains strained thanks to lower price realizations.

Unappealing Reward-To-Risk Ratio

Vanguard Natural Resources' units sell for a little more than $1, reflecting a high degree of default risk.

The reward-to-risk ratio is NOT attractive at this point in my opinion as the oil patch will likely see more bankruptcies.

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Your Takeaway

Oil prices have recovered from their lows earlier this year, and traded up to almost $50/barrel, but the recovery has not helped Vanguard Natural Resources' units much at all. Linn Energy's bankruptcy is a dangerous precedent in the sector, and other upstream companies, including Vanguard Natural Resources, could circle the drain just as well unless lenders make serious concessions to energy companies and oil prices continue their recovery. Linn Energy's bankruptcy casts a shadow over other oil and natural gas producers, including Vanguard Natural Resources, which makes the reward-to-risk ratio not very appealing. Investors should stay away.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.