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Executives

Lisa Godfrey – Investor Relations

Scott W. Smith – President, Chief Executive Officer & Director

Richard A. Robert – Chief Financial Officer, Executive Vice President & Secretary

Douglas Pence – Senior Vice President Engineering

Analyst

Ethan Bellamy – Robert W. Baird & Co., Inc.

Michael Blum – Wells Fargo Securities, LLC.

Justin Kinney – Stifel Nicolaus & Company

[Erin Terry] – Kane Anderson

Vanguard Natural Resources, LLC (VNR) Q4 2011 & Year End Earnings Call March 1, 2011 11:00 AM ET

Operator

Welcome to the Vanguard Natural Resources Q4 and year end earnings conference call. During the presentation today, all parties will be in a listen only mode. Following the presentation the conference will be opened to questions. (Operator Instructions) This conference is being recorded today, Thursday, March 1, 2012. I would now like to turn the conference over to Ms. Lisa Godfrey, of Investor Relations.

Lisa Godfrey

Welcome to the Vanguard Natural Resources LLC fourth quarter and year end 2011 earnings conference call. We appreciate you joining us today. If you would like to listen to a replay of today’s call it will be available through April 1, 2012 and may be accessed by calling 303-590-3030 and using the pass code 4510399. A webcast archive will also be available on the investor relations page of the company’s website at www.VNRLLC.com and will be accessible online for approximately 30 days.

For more information or if you’d 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 earning release. Please note the information reported on this call speaks only as of today, Thursday, March 1, 2012 and therefore, you are 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 the Vanguard 10K that will be filed by early next week and will be available on our website under the investor relations’ tab and on EDGAR.

In addition, our Schedule K1s will be available to download from our website on or about March 9th and mailed to our unitholders on or about March 12th. Please note on December 1, 2011 Vanguard Natural Resources acquired an interest in the publically traded partnership Encore Energy Partners, LLP. As a result, if you held Encore units through December 1, 2011 you will receive a K1 from both Encore and Vanguard.

We are pleased to report as we continuously strive to provide useful information of our operations and financials to our analyst and unitholders, we have created a presentation of supplemental Q4 and full year 2011 earnings results and 2012 outlook which can be found online at our website under the investor relations’ tab in the presentation folder. I now would like to turn the call over to Scott Smith, President and Chief Executive Officer.

Scott W. Smith

Thanks for joining us to review the results of the fourth quarter and full year 2011. With me this morning on the call are Richard Robert, our Executive Vice President and Chief Financial Officer and [Brett] Pence, our Senior Vice President of Operations. I’ll begin with a summary of our acquisition activity in 2011 and then review our results for the year and briefly discuss our year end reserves and operations. I’ll then turn the call over to Richard for the financial discussion and then we’ll open the line up for Q&A.

2011 was a very active and successful year for Vanguard in the acquisition front. Most notable was completing the merger of Vanguard and Encore Energy Partners. Real quickly, the first step of this transaction began in October of 2010 when we reached an agreement to acquire 100% of the general partner and a 46.7% limited partnership ownership position in Encore Energy Partners from Denbury Resources. We closed this first step on December 31, 2010.

The second step of this transaction was completed 11 months later on December 1st of last year when both Vanguard and Encore unitholders approved the merger between the two companies. Under this merger agreement each Encore unitholder received .75 of Vanguard common unit for each Encore common unit that they owned.

With this acquisition completed, we dramatically expanded our operating platform in both Williston and Big Horn basins and substantially increase our presence in the Permian basin. The Encore properties account for over 55% of our year end 2011 reserves and have helped us achieve our goal of becoming a much more liquids focused company. This acquisition also provide other significant benefits to the company. Along with increasing our liquids reserves the significant increase in size and scale allows us to better compete for acquisitions that in the past may have been too large for us to consider.

In addition, with these additional operating areas there are now more bolt on opportunities that otherwise wouldn’t have been on our radar screen. Additionally, we’ve made significant technology and human capital investments in improvements that will allow us to continue on the growth path and to create new assets efficiently and effectively. The Encore acquisition truly transformed the company and has put us in a great position for future growth opportunities.

I want to point out that even though we were very focused on completing the Encore merger, we remained active in the acquisition market closing on over $200 million of acquisitions in 2011. Based on internal valuations, the total reserves acquired were 14.4 million barrels of oil equivalent of which 65% are oil and natural gas liquids. On a per BOE basis we paid approximately $14.27 per BOE for assets with a combined R over P of about 14.5 years.

The acquisitions were split geographically between the Permian basin, a Wyoming natural gas NGO property, an upper Texas Gulf Coast oil property, and a small bolt on in Montana and North Dakota, and lastly an acquisition of additional interests in our Parker Creek field in Mississippi. In total, these acquisitions increased our free reserves by almost 20% from our year end 2010 levels of 69.3 million barrels. We didn’t see much of an impact from these acquisitions during the year as they all closed in the second half but we are looking forward to seeing a full year’s impact on our operating results in 2012.

On a different note, last week we announced we have entered into an agreement for the divestiture of our Appalachian properties in exchange for 1.9 million Vanguard common units. The assets exist of approximately 37 BCFE of which 92% are natural gas reserves and 65% are proved developed. This region comprises 8% of our total reserves at year end 2011 and was forecasted to contribute only 2% of our 2012 cash flows after retiring the 1.9 million VNR common units.

This was a very strategic decision to exit a non operated position in an area of limited growth opportunities through future acquisitions and ultimately this transaction allows us to achieve a good realization for these assets. This transaction should close later this month.

With the Encore merger and other 2011 property acquisitions behind us, combined with our exit from Appalachia, we fulfilled the strategic goal we established 2.5 years ago to become a much more liquids focused company. Looking back at year end 2009 our proved reserves were 58% natural gas whereas at year end 2011, and taken into account the Appalachian divestiture liquids now comprise 75% of our proved reserves. On a revenue basis at year end 2011 liquids accounted for 85% of our sales which is a long way from 52% in 2009.

However, all this being said it doesn’t mean that we rule out acquisitions that are primarily natural gas. We are off constantly evaluating both liquids and natural gas deals and feel like given the right price we’d like to do a natural gas deal this point in the cycle. The basic concept being that if a gas acquisition is accretive based on recent reserves and the current price deck which can be hedged, we feel a good deal today can become a great deal four or five years down the road as gas prices recover. The roadblock however, tends to be that sellers aren’t too realistic about the value of proved undeveloped reserves and we won’t give value today on a theoretical much higher price in the future.

Now, I’ll head on to our reserves. Year end 2011 total free reserves were 79.3 million barrels of oil equivalent, up approximately 14% from our year end 2010 reserves of 69.3 million barrels of oil equivalent. From a commodity perspective, our 2011 activity strengthened our exposure to oil and natural gas liquids from 63% of free reserves to 66%. In addition, our percentage of proved producing reserves increased from 80% to 86%. At 2011 average production rate of 13,405 BOE per day, our reserve life is approximately 16 years.

However, after the announcement of the Appalachian divestiture I felt it important to highlight our new reserve numbers. Pro forma for the divestiture, total free reserves will be 73.2 million barrels equivalent of which 71% are liquid and 88% a proved producing reserves making Vanguard the second most liquids rich of the established B&P MLPs, only behind Pioneer Southwest.

Now we’ll go on to our production and capital spending for the year. Average daily production for the fourth quarter 2011 was 13,686 BOE per day, up 180% over the 4,891 BOE per day produced in the fourth quarter of 2010 and a 2% increase over third quarter 2011. On a product basis, daily production was 8,942 barrels of oil and NGLs and 28,000,461 MCF of gas. For the full year, average daily production was 13,405 BOE per day. This represents 8,651 barrels of oil and NGLs and 28,000,520 MCF of natural gas per day.

As we discussed earlier, our production mix is becoming increasingly liquids based. Our production in 2010 was 52% oil and NGLs and 48% natural gas. In 2011 our oil and NGLs production increased to 65% of total production and natural gas declined to 35%. This shift in commodity mix is attributable to both oil focused acquisitions as well as oil focused capital spending.

Now, I’ll briefly talk about our capital spending for the year. During the year as we indicated in our previous conference calls, the second half of the year was planned to be our most active for the year in terms of spending. Specifically, in the fourth quarter we spent $10.4 million on capital projects on a consolidated basis. If you include the $15 million we spent in the fourth quarter, we spent approximately 74% of our capital budget of $34 million in the second half of the year.

As we mentioned on earlier calls with the Encore transaction, we’ve established an acreage position in the Bakken Trend in the Williston Basin through our portfolio producing assets. In this Trend operators can statutorily force pool leasehold interest in order to facilitate development. During the quarter we were pooled into three drilling units and participated with an average of about a 12.5% working interest. Two of the wells have been completed at initial rates of 700 barrels a day and 525 barrels a day respectively while the third well had a mechanical problem during completion. The operator is working to repair the problem and hopefully this will be resolved here in the second quarter.

Our total capital spending in the Bakken during the quarter was approximately $3.3 million. For the year our total capital spend was $34 million which equates to a 15% EBITDA reinvestment rate in the asset base which I believe is a testament to our low decline in production and is one of the lowest reinvestment rates of our peer group.

For 2012 we’ve already begun several strategies we’re confident will bring long term value. Our engineers have reviewed the drilling prospects available and created a drilling and capital expenditure for 2012 that has been approved by our board of directors. Our strategy for 2012 is to increase capital expenditures marginally to between $35 and $40 million excluding any acquisitions which compares to $34.1 million we spent in 2011.

The capital budget is to focus on deploying capital in high rate of return projects that are aimed at reducing the impact of the natural declines in our production base and includes new development drilling in the Bone Springs, non-operated horizontal Bakken wells and other liquids based activities. We plan on initiating our drilling operations in the later part of the first quarter.

In summary, 2011 was a great year for Vanguard. We managed to achieve excellent results on all fronts and most of all successfully completed the Encore acquisition and the full integration of the two companies. Our results are a reflection of the efforts of our employees and their hard work on behalf of the company to achieve its goals. With the addition of accretive acquisitions and associated increase in our cash flow, we were able to increase distributions 5% in 2011 and an overall distribution growth of approximately 38% since 2008.

We’re extremely proud of the fact that this 38% increase is the highest in our peer group over this period of time. It continues to be our goal to judiciously increase our distribution in a manner that we feel is sustainable for the long term. Our current distribution is $2.35 per year. Our 2012 guidance suggests we’ll have a distribution coverage ratio between 1.35 and 1.4 times and based on yesterday’s closing price of $27.54 we’re trading at an attractive 8.5% yield which is approximately 100 basis points higher than our oil focused peers.

We hope that when investors focus on these facts they’ll consider making an investment in Vanguard. With continued to access the capital markets and active acquisition market, we’re poised to continue the momentum for growth in 2012. After the Encore merger, we are now larger enough to pursue more and larger opportunities that would have been much more difficult earlier.

Although we intend to remain active in the market, we will not waiver from our disciplined approach to acquisitions. With our structure and cost of capital, we feel we can compete effectively and competitively for the right type of assets.

Now, I’ll turn the call over to Richard for the financial review.

Richard A. Robert

Let me first say that we’re all very pleased with our results and accomplishments in 2011 and are excited to move forward as one company in 2012. One of the many benefits of the merger is that the Vanguard financial statements will become much easier to understand going forward in 2012. However, in 2011 for all but December, the Encore financial statements are consolidated into the Vanguard financial statements and then the 53.4% ownership interest that we didn’t know is backed out in one lump sum as a line item titled non-controlling interest.

When we look at the results January through November has the 53.4% we did not own prior to the merger backed out and December is 100% consolidated. This makes it difficult to make comparisons to results in 2010. I believe a better indicator of how we did this year is to compare our results to the third quarter of 2011 as well as the 2011 guidance and expectations that we provided a year ago. Therefore, I’ll be making certain comparisons to third quarter results when talking about the fourth quarter and 2011 guidance when talking about actuals for the year. With this in mind, let me turn to our operating results.

We reported adjusted EBITDA attributable to Vanguard unitholders of $53.5 million for the fourth quarter 2011 which is a 45% increase over the $37 million reported in the third quarter of 2011. Again, please remember that this had one month of Encore’s results consolidated where the third quarter did not. If you looked at both quarters on a 100% consolidated basis, the fourth quarter saw 17% quarter-over-quarter growth.

This growth can be attributed to a few different things: the Exxon and Enterprise pipeline closures we saw in Wyoming and South Texas that I discussed on the third quarter earnings call were resolved which improved realized oil pricing in Wyoming and resumed production in South Texas. We had new LLS oil pricing contracts for Vanguard’s Mississippi production and combined with higher oil prices improved the company’s oil differentials and realized pricing.

We had a full quarter impact from the three acquisitions we made in the third quarter, and we realized some of the benefit from our drilling program that was weighted towards capital spending in the third and fourth quarters. Because of these, we were able to see significant growth quarter-over-quarter, but more importantly, we expect to continue to see these improvements into 2012.

Distributable cash flow attributable to Vanguard unitholders totaled $37 million for the fourth quarter and is an increase of 95% when compared to $19 million generated in the third quarter. Like the EBITDA comparison, this is not completely apples-to-apples because of the one month of being 100% consolidated so if you look at DCF on a 100% consolidated basis, the fourth quarter increased 43% over the third quarter.

When we talk about distribution coverage for the quarter, you have to use the 100% consolidated DCF because although the merger occurred on December 1st the distribution we paid a couple weeks ago attributable to the fourth quarter was paid on all the converted ENP units and the Vanguard units for a full quarter. Simply stated, the distribution was paid as if the merger had occurred so distributable cash flow as if the merger had occurred needs to be used to calculate the distribution coverage. If this isn’t done it would appear that our distribution coverage for the quarter was very well when in fact, it was quite high. Our DCF on 100% consolidated basis was $44 million which equates to a coverage of 1.4 times based on our increased distribution of $0.58 ¾ per unit as compared to 1.09 times in the third quarter.

Moving on to adjusted net income, Vanguard reported a 62% increase in adjusted income per unit coming in at $0.76 per basic unit compared to $0.47 per unit earned in the third quarter. However, under GAAP accounting you will notice that Vanguard actually reported a net loss attributable to Vanguard unitholders of $0.42 per unit for the fourth quarter as compared to net income of $2.51 per unit for the third quarter. This enormous swing in GAAP earnings is primarily attributable to unrealized non-cash fluctuations in Vanguard’s commodity hedges.

When commodity prices go down for one quarter and to the next quarter end we report large amounts of unreported income due to unrealized gains. Conversely, when commodity prices go up quarter-to-quarter, we record large losses due to unrealized losses. If it seems counter intuitive that we record losses when commodity prices go up, it is because it is counter intuitive. Fair Value Accounting ignores the fact that we can sell the underlying commodities supporting the hedge at a higher price and only focuses on the amount of money we will have to pay to settle the hedge in the future based on today’s price. It’s a frustrating reality that these large swings can mislead investors about our actual cash flow which is why we use reconciliation schedules in the press release to arrive at adjusted EBITDA and adjusted net income.

Now, on a more detailed level I would like to discuss the revenue and operating expense results. We had a 16% increase in fourth quarter oil, natural gas, and natural gas liquid sales which, as I previously noted, can be attributed to increased production due to full quarter impacts of our acquisitions, resolving the pipeline closures and destructions we saw in the Elf Basin and South Texas, new LLS oil pricing contracts for Vanguard’s Mississippi production, and the impact of our development drilling that was weighted to the second half of the year.

In addition, we saw a 5% increase in the average NYMEX oil prices in the third quarter but our realized pricing included by 25%. As I discussed on the last call the pipeline disruptions we had to overcome in the third quarter were temporary, were resolved in the fourth quarter, and most importantly were unrelated to our operations.

With the addition of LLS oil pricing contracts for Mississippi production, the fourth quarter was able to show a large improvement in the company’s oil realizations which is very important considering that liquids revenue accounted for over 85% of our sales in the fourth quarter. Overall, the improvements we saw in the fourth quarter make us optimistic about 2012’s potential especially considering today’s oil prices.

Now on to the expenses side of our operations. Lease operating expenses for the fourth quarter came in at $20 million or $15.87 on a BOE basis which was an increase from $12.51 on a BOE basis seen in the third quarter. The increase can be attributed to a few different things: we incurred some additional costs due to wells that had been drilled in the later part of the year; we replaced tubing and had some expensive pump overhauls all in one quarter; and finally, some repairs to water tanks were necessary due to lightening strikes in the Big Horn Basin.

Overall for 2012 we are expecting LOE to be above 2011 levels of below fourth quarter on a BOE basis. Specifically, we expect LOE to be in a range of $13 to $14 per BOE but I’ll discuss that further when I turn to guidance for 2012. Now, let me talk about full year 2011 results. We reported adjusted EBITDA attributable to Vanguard unitholders of $165 million for 2011 which exceeded our guidance range of $140 to $147 million. Again, please remember that this had one full month of Encore results with the rest of the year having the 53.4% interest that we did not own backed out.

Distributable cash flow attributable to Vanguard unitholders totaled $110 million for 2011. Like I said a little while ago, you have to include fourth quarter DCF on a 100% consolidated basis and when compared to the total distributions we paid for the year, our coverage ratio for the year was the same as the fourth quarter at 1.4 times. Vanguard reported adjusted net income attributable to Vanguard unitholders of $74 million or $2.33 per unit after excluding the unrealized non-cash items and material transaction costs incurred on acquisitions and mergers as reflected in the reconciliation schedules attached to the press release. GAAP reported net income was $62.1 million or $1.95 per unit for the full year.

On a detailed level year-over-year, we had 267% increase in the oil, natural gas, and natural gas liquids sales primarily due to having Encore included in the financials for 2011. So although this is not quite apples-to-apples, I believe what is important is to note that liquids sales grew from 70% in 2010 to 85% in 2011.

As Scott mentioned, about 2.5 years ago we made a strategic decision to make Vanguard more liquids focused to capture the increasing margins that we expected to see and as a result of the higher NYMEX oil and NGL pricing. Since that strategic decision was made, we have consummated 10 acquisitions, nine of which were liquids focused and the result has transformed us from a natural gas oriented company to a crude oil oriented company.

On the expense side, lease operating expenses for 2011 were $64 million or $13.07 on a BOE basis which was in line with our 2011 guidance range of $12.85 to $13.50 per BOE. G&A expenses were $17 million after excluding unit based compensation or $3.42 on a BOE basis. This was above our 2011 guidance range of $3.00 to $3.30 per BOE primarily due to merger related expenses and bonus estimates that were not included in our guidance. However, starting with 2012 guidance, we are going to include bonus estimates to avoid any confusion. Lastly, production taxes were $29 million or 9.1% of well head revenues which was slightly above our guidance of 8.8%.

On to the hedging front; as I regularly note, we continuously evaluate our hedge book and opportunistically add to our current positions. We have been quite active in adding to our hedge positions in the last half of 2011 and in the first part of 2012. To highlight this, I want to discuss the improvements we have made. At June 30, 2011 we had approximately half of our expected natural gas production hedged in 2012 and 2013 and none hedged in 2014. Today, pro forma for the divestiture of Appalachia, 2012 expected gas production is almost 80% hedged, 2013 is 100% hedged, and 2014 is 40% hedged all at weighted average floor prices that are significantly above current [script] levels.

On the oil side, when you compare hedging percentages from June 30th of last year to today, 2012 increased from 73% to 91%, 2013 increased from 64% to 84% and 2014 increased from 55% to 65%. Not only has the percentage hedged increased but the weighted average price over these three years increased from $87.37 to just under $90 and the other good news is that the average price is increasing each year which will only help to sustain our cash flows over these three years.

Finally, I hate to get too granular but it is very important to note that the types of oil hedges have changed significantly also. Where we used to use fixed price swaps almost exclusively to hedge our oil production, we now utilize [inaudible] collars and three way collars for a significant portion of our hedges. What this means is that we do have the ability to participate in upside above the weighted average price of $90. The $90 is only taking into account the floors on those collars when in actuality we have many ceilings in excess of $100 and even some as high as $120. So there is ample room to take advantage of today’s high prices.

Hopefully, based on this long winded description you will recognize that we are very active in the hedging market and consider it an extremely important asset of our jobs as we look to stabilize our cash flow and ultimately our distribution to our unitholders for the current year and future years. Please note that we have provided a 2012 distribution coverage sensitivity chart to varying commodity prices in the guidance press release issued this morning. We feel very confident that this hedge book will shield us if commodity prices decline while also allowing us to participate in upside if commodity prices increase.

Now, on to our credit facility and liquidity. On December 1, 2011 in conjunction with the successful consummation of the merger with Encore, we entered into an amended five year credit facility. In addition to extending the maturity of the facility by five years, several key covenant limitations were amended to provide Vanguard greater flexibility including increasing the percentage of production that can be hedged into the future, increasing the permitted debt to EBITDA coverage ratio from 3.5 times to four times, eliminating the required coverage ratio, eliminating the 10% liquidity requirement to pay distributions to unitholders, and allowing for unsecured debt. Also, a new interest rate pricing grid lowered Vanguard’s cost of bank debt by half a percent.

With 20 supportive banks in this new facility, I feel that we will have ample liquidity to achieve our growth initiatives into the future. At December 31, 2011 Vanguard had indebtedness under our reserve base credit facility totaling $671 million with a borrowing base of $765 million and $100 million outstanding under the second lien term loan facility. However, we have since reduced our borrowings by $133 million utilizing proceeds from the equity offering in January to pay down our debt. Currently Vanguard has $581 million in outstanding borrowings under its senior facility and $67 million outstanding under the second lien facility. This provides us with $184 million in current capacity under the senior facility.

Now, let me turn to our outlook for 2012. We are expecting some very good results in 2012 but before I get into the details, let me reiterate as stated in the press release and as a matter of policy, we do not attempt to provide guidance on a variety of items, but most notably we do not include the impact of any potential future acquisitions or the impact of unrealized non-cash gains or losses from hedging instruments.

Additionally, our guidance estimates are 100% consolidated for the Encore merger and incorporates the benefits and synergies of the merger. Lastly, our guidance does include the impact of the Appalachian divestiture announced last week that we expect to close later this month. The Appalachian properties do not continue to our results in 2012 since the exchange is effective January 1st of this year.

We are expecting our total daily production to be between 12,900 barrels of oil equivalent and 13,700 barrels of oil equivalent. 72% of the production is expected to come from liquids which is a 12% increase over 2011. On the expense side, as I mentioned earlier, we are forecasting LOE per BOE to be in the range of $13 to $14 which is a little above the 2011 rate of $13.07 per BOE but includes a full year impact from our liquids based acquisitions which generally incur higher LOE costs on a BOE basis as compared to gas properties. Additionally, with the exclusion of Appalachia, a gas assets, you’re going to see a little bit of an increase in LOE on a per barrel equivalent.

Production taxes are forecasted to be between 9% and 10% which is in line with 2011 results. Finally, in the past our copious overhead charges that we bill out on our operated properties were credited against LOE to reduce our overall LOE cost. In 2012 we will be recording that credit against G&A costs. With respect to our cash G&A expenses, we are guiding a little differently than in the past. For the first time we are including an estimated bonus accrual in our guidance. We felt it was a needed change to ensure that we don’t miss published analyst estimates because we did not include it in our guidance range.

The other change relates to the recording of the credit for copious overhead we are charging on our operating properties which I already mentioned. Also, as a result of getting the merger completed, we expect to be able to take advantage of synergies created from operating as one entity. Taking these three things into consideration, cash G&A is forecasted to be between $1.55 and $1.75 per BOE.

Based on our a 2012 strip of $108 per barrel for oil and $2.88 per MMBQ for natural gas and the above cost assumptions, we expect to generate between $225 million and $235 million in adjusted EBITDA. This is a significant increase over the 2011 EBITDA of $165 million. Scott has already discussed our 2012 capital spending which is expected to increase slightly from 2011 levels to between $35 and $40 million from the $34 million spent in ’11. As is normal, we are expecting some lumpiness in the capital spending quarter-to-quarter so I caution that distribution coverage will vary quarter-to-quarter.

Interest expense is expected to decline from the 2011 amount of $34 million to between $20 and $24 million. This is primarily due to lower amounts borrowed in 2012 as a result of the equity offering in January, the lower interest rate we pay under our new credit facility, as well as lower LIBOR rates. We are anticipating a significant increase to our distributable cash flow primarily as a result of our merger with Encore and the acquisitions we made in 2011.

Based on the numbers outlined in our guidance and based on our current annual distribution rate of $2.35 per unit, we expect to generate a distribution coverage ratio of between 1.35 and 1.4 times. Our number one goal is to provide stable yet growing distributions to our unitholders for the long term. Therefore, we feel very comfortable with our distribution coverage for 2012 and as seen in our guidance release we are well prepared for almost any price environment.

In conclusion, we’re very happy to have completed the Encore merger and look forward to moving forward as one company. This should definitely ease our financial reporting process and simplify our financial statements. Acquisitions continue to be our focus for growth. We continue to look at bolt ons to existing areas and will enter into new areas that have appropriate MLP characteristics.

As Scott said, this does not specifically limit us to oil assets. We believe now is a good time in the cycle to acquire mature long life natural gas assets that will not only provide accretive cash flow today but significant commodity price upside in the future. As Lisa mentioned at the beginning of the call, we have for the first time posted a number of supplemental schedules on our website. We hope these supplemental schedules will provide investors and analysts a lot of useful information in one easy to find locations. It certainly beats sifting through an entire 10K which we do plan on filing early next week.

This concludes my comments. We’d be happy to answer any questions you have at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ethan Bellamy – Robert W. Baird & Co., Inc.

Ethan Bellamy – Robert W. Baird & Co., Inc.

A couple of questions here, first with respect to the performance Richard and we talked about this a little bit earlier but do you attribute the lagging performance on VNR to the lose hands of former Encore holders or do you have a better hypothesis than that?

Richard A. Robert

It’s hard to understand why our stock might lag some of the others, obviously our yield is much higher than some of our oil weighted peers. When you look at it, we’ve issued 25 million new units when you consider the converted ENP units as well as the recent stock offering. That’s a lot of new units to absorb into the market so I would expect it’s going to take a little time before our units land in the hands of people who want to continue to hold them and until them we’re going to see a fair amount of volume trading hands. But we’re certainly hopeful that when people focus on the results and focus on our potential, and our expected 2012 numbers, they’ll be compelled to start investing.

Ethan Bellamy – Robert W. Baird & Co., Inc.

With respect to the guidance, obviously tons of moving parts here but could you maybe forefront for me the top two or three variables that would take you either to the top or low end of the guidance? [Inaudible] is commodity prices and maybe some of the results on the cap ex?

Richard A. Robert

Well, commodity prices have some impact as you would expect but because of the hedges we have in place I think not as much as most people think. That’s why we’re trying to put our distribution coverage sensitivity charge everywhere we can in all of our presentations, now in our press releases so that people really understand that commodity prices they have some impact but it’s fairly well mitigated based on our improved hedging portfolio. One of the variables that is a pretty big number are LOE costs. It’s certainly an area that we look to and we have to do a good job of controlling. That probably is the biggest variable out there to be honest.

Ethan Bellamy – Robert W. Baird & Co., Inc.

What’s the weighted average decline rate on the PDP right now?

Douglas Pence

It’s 10% on PDP.

Ethan Bellamy – Robert W. Baird & Co., Inc.

With respect to NGLs, it looks like there aren’t any direct NGL hedges. Should we think about NGL as being unhedged as dirty hedged with crude?

Richard A. Robert

It’s true, we don’t have any specific components that are being hedged on the NGL side, we have looked at layering some dirty hedges. We used to use gas as a proxy and that worked out very well for us. We’re not looking at essentially using oil as a proxy. The issue with NGLs, as you well know, is the hedging market for liquids is not very liquid and hedging out beyond a year and a half or so is difficult and you often have to take a big haircut to do that. And, also the different NGL components, the lights versus the heavies, the proxy doesn’t necessarily work well for both sides.

That saying propane doesn’t necessarily track oil very well but the heaviers do track oil well. One of the things we do have going for us is a lot of our NGL production, especially in the Rockies area are heavies. We don’t produce ethane in the Rockies so an oil proxy would work better for us than others that produce a lot of ethane. So going forward I think you’ll see us utilize that more.

Ethan Bellamy – Robert W. Baird & Co., Inc.

Kind of a softball question on acquisitions, ex Encore what’s the biggest thing that you guys have looked at and what would be – I mean, do you have a sort of target of what you would like to acquire or is it just purely opportunity and weight of return?

Scott W. Smith

It truly is opportunity, being able to buy the right type of assets. Obviously, as we mentioned during the call, a bigger company you look at bigger deals and we’ve looked at bigger deals. The bigger deals bring more competition to be honest with you, but I think on a minimum we would hope to do what we did this year. That would really be a bare bones kind of number. Obviously, I think we’re going to have the ability and capacity to do substantially more than that.

I know it’s a softball question, but again our goal is we’re always looking to add the right type of assets. Obviously, we have the ability to finance them. We have ability under our line, obviously the capital markets are available and if we can find the right kind of asset I’m confident Richard is going to find us the money to pay for it.

Operator

Your next question comes from Michael Blum – Wells Fargo Securities, LLC.

Michael Blum – Wells Fargo Securities, LLC.

Just one other question I had which is can you guys give a little bit of the background on sort of how the Appalachian divestiture came about? Was that something from your side, from the founder’s side? Just the thought in terms of swapping the units in terms of cash, just a little bit more background on that?

Scott W. Smith

Obviously, Majeed Nami was the founder and basically he had sold some of his stock overtime. We had looked [inaudible] at different times of acquiring his interest and we were never able to make a transaction. I think probably the biggest catalyst was he and his team made an acquisition of a fairly significant group of properties in the same general area from another company and they basically had a bigger operating platform that they owned 100% and they were going to have a lot of integration issues of trying to integrate pipelines, and drilling, and all the rest of it.

We looked at it and said this isn’t really an area where we feel we can expand. Being an operator in that part of the Appalachian basin there really isn’t a lot of any real upside that we could see. It just made sense for us in looking at what we were going to get back from retiring the units perspective, that’s really the asset he had to offer. Doing it with cash, I think from a value perspective, we would have achieved a lower number but from what he’s looking at he’s able to take those assets that we will give him and integrate it into his portfolio which basically the two parts are greater than the individual pieces when they’re combined.

For us, it’s just a strategic exit. Being a non-operator in an area where basically these types of gas prices in the foreseeable future, we weren’t going to be doing anything. It just made more sense for us to put our attention and focus doing bolt ons in the Permian, doing them in the Williston, those types of areas. At some point in time we’ll reissue that paper and it will be deployed in other assets that are going to be accretive.

Michael Blum – Wells Fargo Securities, LLC.

I guess the follow on to that is are there any other assets in your portfolio that you look at and you think you might want to divest or trim here and there?

Scott W. Smith

There’s nothing right now that jumps out at us. We have sold some small things that were strategic to other people and they were willing to pay a very, very attractive price. But right now, we’re pretty focused. You look at our Permian assets, Williston, Big Horn, we don’t have any quote outliers from an operated standpoint and the non-operated we have really doesn’t take a lot of effort. Probably the biggest non-operated position we have is in South Texas and then the Arkoma.

South Texas, it’s like we’re almost operating because we get lots of data and lots of information. There’s nothing right now that is on the radar screen and South Texas is still a good asset because of the NGL component.

Operator

Your next question comes from Justin Kinney – Stifel Nicolaus & Company.

Justin Kinney – Stifel Nicolaus & Company

Did you guys see any significant oil takeaway constraints in the quarter or other gathering system issues that affected production?

Scott W. Smith

No, I don’t believe we had anything. Obviously, the biggest pipeline issues we had which Richard referred to earlier happened mostly in the third quarter up in the Wyoming area where the Exxon pipeline ruptured. I’m sure everyone saw it there in the Yellowstone River and that basically prevented us from using the pipeline and we had to go ahead and truck a lot of barrels which blew out our base. But no, we haven’t seen any issues.

We talk pretty consistently with our purchasers out there. I will tell you they’re always trying to clip an extra $0.50 or something like that to quote ensure our barrels move. But I don’t believe we’ve seen anything with respect to takeaway. We’ve managed some of our drillings, we’ve got all our gas we’re not being curtailed anywhere. We signed up some term agreements with Target and DCP on those [inaudible] volumes. But no, we really haven’t seen any issues with respect to getting barrels moved.

Justin Kinney – Stifel Nicolaus & Company

Then thinking about the production run rate, of course excluding the divestiture, is the fourth quarter number a good rate? Where I’m going is I believe previously, going back to maybe November, you had mentioned production was on a 14,000 plus BOE a day run rate so I’m just trying to calibrate that change?

Richard A. Robert

I think when you take out the divestiture you get back to that level actually. If you add back the Appalachian volumes on a BOE basis.

Justin Kinney – Stifel Nicolaus & Company

You’re not reporting that in the fourth quarter?

Richard A. Robert

No, we are reporting that in the fourth quarter. That was in there.

Scott W. Smith

But again, we didn’t get a full quarter’s worth of add on for some of the acquisitions.

Richard A. Robert

Not for all of them but we did for the three that we did in the third quarter.

Operator

Your next question comes from [Erin Terry] – Kane Anderson.

[Erin Terry] – Kane Anderson

I just wanted to follow up also kind of on those production questions, it looks like on the Encore properties oil production was down a little bit quarter-over-quarter about 500 barrels a day. Was there anything that kind of affected production on those properties and where do you guys expect production to go long term as far as those properties.

Douglas Pence

We did not see anything operationally that negatively impacted our production, Encore production. The decline rate that we see again, on the PDP is 10%.

Richard A. Robert

When you look at some of the West Texas stuff we did have to replace a lot of rods and pumping units and stuff like that so I imagine there was some down time related to those.

Scott W. Smith

Then we had that salt water disposal well issue. They’re all small things that perhaps added to the number.

Douglas Pence

You’re going to have well pumping units go down and that’s sort of a normal course of business, but we haven’t had any major disruptions.

[Erin Terry] – Kane Anderson

When I look at Q1 through Q3, production is really flat. Actually, a little bit of growth in Q3, is that probably a better run rate expectation, what you guys were kind of trending on for the first nine months of the year?

Richard A. Robert

Well again, a lot of our cap ex is backend weighted so I would expect some improvement from that but not a significant amount, so I would say the run rate would probably be a little bit better.

[Erin Terry] – Kane Anderson

It looks like when you guys kind of compare where oil and liquids production is at the end of 2011 and look towards guidance, you guys are expecting a little bit of growth. Can you talk about maybe a little bit of details on 2012 capital budget? I know you guys said $35 to $40 million, maybe how much allocation you’ve got between some of the different liquids please?

Scott W. Smith

2012 again in that $35 to $40 million, about $22 to $24 million is going to be spent on drilling, what we have kind of identified as drilling opportunities. The rest is focused on recompletions, some reentries, refracs, and work overs on existing wells that we already have either adding pay, like I said recompleting to additional zones. I know one area that we’re going to do some refracs, something we’ve done recently up in the Wyoming area, fraced an area in a zone that had never been fraced before and had some pretty good results. Again, it’s probably for the most part maybe 60% focused on drilling and the balance just basically on kind of remedial type work on existing well ports.

Richard A. Robert

One thing I would note is that all of the capital is liquids focused and so what you might find is gas production going down while oil production goes up. So on an BOE basis our production could actually go down and yet our cash flow could go up.

[Erin Terry] – Kane Anderson

As far as within the drilling budget as far as expectations for Bones Springs versus in the Bakken, I know you guys spent around $3 million on the Bakken in Q4, where do you guys see those two plays going in terms of the full year budget?

Scott W. Smith

Right now I think we’re looking at one well in the Bones Springs which is in that $7 to $8 million range. Then I think Bakken we’ve targeted about $4 to $5 million. Again, one thing about that Bakken area, as a non-operator we’re obviously going to be at the mercy of the operators that we deal with. I know we’ve got one well that is planned for no later than July and then we’re in discussions with several other partners about getting wells drilled. Again, I’d imagine most of that Bakken activity is going to be towards the second half. It just takes a while up there to get permitting, to get rigs, to get everything aligned but hopefully once it gets started these guys are going to continue on a development program for the balance of the year.

Operator

(Operator Instructions) Your next question comes from Ethan Bellamy – Robert W. Baird & Co., Inc.

Ethan Bellamy – Robert W. Baird & Co., Inc.

Just to follow up on the last question, remind me who your partner is on the wells up in the Bakken?

Scott W. Smith

We’ve drilled one with St. Mary, SM Energy, another one with Continental and there’s another one planned and then we had one with Brigham Statoil and then we have one of the new ones coming up with Oasis and then we’re also in discussions with some other independent operators up there on some deals we haven’t closed yet.

Operator

There are no further questions at this time so I will turn it back to management for any closing remarks.

Scott W. Smith

Thanks everyone for joining us today. Again, we’re very pleased to be able to share the results of what was really an excellent year for Vanguard. Needless to say our results kind of speak for themselves. It’s a new company, think of it as only one company now that we have to talk about going forward. We’re looking forward to a great 2012 and we’ll visit again in May when we do our first quarter results. If anybody has any questions, feel free to reach out to Richard or Lisa.

Operator

Ladies and gentlemen this does conclude the Vanguard natural resources Q4 and year end earnings conference call. ACT would like to thank you for your participation. You may now disconnect.

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