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Vanguard Natural Resources LLC (NASDAQ:VNR)

Q1 2012 Earnings Call

May 2, 2012 11:00 am ET

Executives

Lisa Godfrey - IR

Scott Smith - President & CEO

Richard Robert - EVP & CFO

Britt Pence - SVP, Operations

Analysts

John Ragozzino - RBC Capital Markets

Ethan Bellamy – Baird

Harry Chernoff – Pathfinder Capital Advisors

Justin Slipher - RBC Capital Markets

Operator

Ladies and gentlemen, Welcome to the Vanguard Natural Resources Q1 2012 Earnings Conference Call, on Wednesday, 2nd of May 2012. Throughout the day, the quarter presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Lisa Godfrey, Investor Relations. Please go ahead.

Lisa Godfrey

Thank you. Good morning everyone and welcome to the Vanguard Natural Resources, LLC, first quarter 2012 earnings conference call. We appreciate you joining us today. Before I introduce Scott Smith, our President and Chief Executive Officer, I have some information to provide to you.

If would like to listen to a replay of today's call it will be available through June 2nd, 2012, and may be accessed by calling 303-590-3030, and using the pass code 453-2676. 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 would 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 earnings release. Please note the information reported on this call speaks only as of today May 2nd, 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 our 10-Q that will be filed later this week and will be available on our website under the Investor Relations tab and on EDGAR.

Also on the Investor Relations tab of our website under "Presentation" you can find the Q1 earnings result supplemental presentation. As a remainder to you, our next record date for our quarterly cash distribution is May 8th, 2012, with a May 15th, 2012, payable date. Unitholders will receive $0.5925 for each unit held or $2.37 per unit on an annualized basis.

Now, I would like to turn the call over to Scott Smith, President and CEO of Vanguard Natural Resources, LLC.

Scott Smith

Thank you, Lisa, and thanks to everyone for joining us this morning on the call to review our results for the first quarter of 2012. Joining me are Richard Robert, our Executive Vice President and Chief Financial Officer; and Britt Pence our Senior Vice President, Operations.

This morning I'll start with a summary of our results for the quarter, briefly discuss what we have accomplished in the field, and then review capital spending and acquisition activity. Richard will then takeover the call for financial review and will open the line up for Q&A.

Before we get started, I want to remind everyone that because of the Appalachian Exchange closed on March the 30th, in accordance with GAAP Accounting Rules our reported results are consolidated with the full contribution of the Appalachian.

Now I'll provide a summary of the production and capital spending, which took place in the quarter. On a production basis our average daily production for the first quarter was 13,569 BOE per day, which is up 2% over the 13,273 barrels per day produced in the first quarter of 2011, and down slightly over the fourth quarter of 2011 production of 13,686 barrels per day. On a product basis, average daily production was just over 7600 barrels of oil, just over 1500 barrels of NGLs per day, and 26,684 MMcf per day.

Pleased with the level of production we saw in the first quarter, considering that much of the capital spending was focused on projects where production gains will come in the third -- will come in the second or third quarter. Furthermore as we stated before, our capital program is not designed to maintain production but to maintain cash flow. Simply because of the nature of our capital program, which is liquids focused, our cash flow may actually while our production on unit base may decrease. This is a function of reporting production on a conventional six to 1 GAAP overall ratio when it's back to oil prices as you all know we are trading at more than 45 times that of GAAP. Over the course of the year, absent any acquisition, we would expect our GAAP production to decrease or we would expect our liquids production to increase.

Respect to the CapEx program, during the first quarter we spent $8.2 million, which compares to $3.5 million that we spent in the first quarter of 2011. Approximately $3.7 million was spent on operated properties primarily focused on workovers; download pumps, facilities, and returning wells to production. The remaining $4.5 million or 55% of the total capital spent was related to our non-operated properties. $2.5 million of those funds were spent on drilling in the Bakken, Cleveland, and Rock Springs wells, and $1.3 million on projects related to our Gold Coast acquisition, which we completed in 2011. The balance of the spending was on water floods in the Permian basin and other miscellaneous work.

A particular note I want to highlight, a couple of our operated projects. In the Parker Creek field in Mississippi in mid-March we competed the Butler number 3 to the upper Hoskins zone at a total cost of approximately $185,000. As of last week, cumulative production, from this recompletion is just under 14,000 barrels, which equates to about an average of 400 barrels a day on a gross day. Our working interest in the wells is 65%. The well was previously doing about 70 barrels a day so the project has already more than paced itself.

Of equal importance just the 70 barrels a day in the lower Hoskins down where we were originally producing is still below our retrievable bridge block. So that 400 barrels a day is a true addition and at some point we will combing of the production from both sets of the Hoskins completion.

We are currently recompleting another well in the field to the upper Hoskins zone, the (inaudible) and if this effort is successful, we have several other wells that can be worked on in the field over the next few months.

Additionally in the Out Basin field in Wyoming, in mid-February we fracked one of the Madison wells that we drilled last year and saw production increase to over 100 barrels a day, up from the 13 barrel a day rate we were seeing pre-frac. This well is still making over 90 barrels per day. So for a total of investment of about 250 billion, we have seen a very nice return.

We currently have two more wells that we frac in April that will hopefully add to more result.

These are just two examples of the type of low risk, highly return, liquids focused projects that make up our capital program and are designed to maintain our cash flow for 2012.

For the total CapEx budget of approximately $37.5 million, we have quite good actively planned for the next several months and anticipate setting approximately 50% of our total budget in the second and third quarters.

I want to briefly talk about we have gone on to the Bakken. This was some information that was in our previous earnings release. We have made some significant headway in the development of that area.

In March we entered into a joint operating agreement with Oasis Petroleum covering a 1280-acre drilling and spacing unit in the Bakken play and William County, North Dakota. The transaction contemplates Oasis commencing the drilling of a Sheppard 5501 well prior to July 1st of this year with Encore selling assignment of roughly 50% of the it's held by production leasehold to Oasis for a total proceeds of approximately $1 million and then we will participate in the drilling of the Sheppard well with a 25% working interest and a 23.25% net revenue. Lease signed proceeds of approximately $1 million will fund approximately 40% of the cost attributable to this 25% working interest. This well started on April 20th and will have an approximate 10,000 foot lateral length and is offsetting several prolific Bakken producers that are operated by Oasis.

In addition, at the end of March, we entered into a participation agreement and joined operating agreement with Triangle USA Petroleum Corporation that provides for the joint development of four 1280 acre drilling and spacing units in the Bakken trend in Mackenzie County, North Dakota. Triangle, as operator, will commence the first well on or before September 1st and thereafter will drill subsequent wells every 150 days.

We sold a half acres in our leasehold to Triangle for an aggregate proceed of $4.4 million, retaining the other half of our working interest, and plan to participate in the drilling of these wells of the first four wells with an average working interest of approximately 20% and a net revenue interest of 17.75%. Pending successful results of the initial wells in each of these DSUs, infill drilling of additional wells is planned.

In summary, through these two transactions we generated $5.4 million in proceeds, which will fund approximately 90% of our well cost for three Bakken wells at a working interest level, which we feel appropriate for this type of program. We are looking forward to growing the wells with the very experienced operators, continuing to work with them as we drill subsequent wells in 2013.

Just a few comments on the Appalachian Exchange. As I said before on March 30th, we closed that transaction where we exchanged our Appalachian ownership of the entities that held our Appalachian assets for 1.9 million in our common unit. This was a strategic decision to exit our non-operative position in the Appalachian Bay. The region comprised about 8% of our total year-end 2011 reserve, which forecast could contribute approximately 2% of our 2012 cash flows after the retirement of the 1.9 million in our common unit. There are limited growth opportunities for the company for future acquisition in this area, unless a transactional allowed us to achieve a good realization with this asset.

I want to march further the call here and talk about acquisition. During the quarter we were very busy evaluating asset packages and making offers on MLP suitable properties. Unfortunately, we don't have a lot to show for our efforts as the valuation paid by some of our peers and private equity firms precluded our ability to get a sizable transaction though. That being said, I want to point out the size of the transaction we are seeing is not confined to just smaller sellers. We have been approached by multiple sellers from much larger deals than we have historically closed, which is a testament to our consolidating size though.

Additionally, with our inaugural high yield offering under our belt, well with our January of equity offering we are poised and ready to continue our growth through acquisition strategy. Well, we do expect to close some larger transaction this year. We still intend to look at and acquire small Bolton asset. And at the end of March we closed the small transactions that added up 90 barrels a day with some additional upside drilling at Wyoming for another $2.5 million.

Yield flow continues to pickup both prior to [seller] companies that are bring assets to market to take advantage of the current capital gain tax rate that may potentially increase next year. Our acquisition strategy has always been to grow our cash flow, which ultimately allows us to increase our distributions to the unitholder. It is not our intention to grow just for the sake of growth.

With that in mind we remain conservative in our approach to acquisition. Our confidence this practice will serve up and our unitholders well in long-term as we continue to build the company.

Now, I will turn the call over to Richard.

Richard Robert

Thank you, Scott. Good morning everyone. Our goal during the first quarter was to improve our capital structure and generate more liquidity so that we effectively can compete the larger acquisitions. With our equity offering in January and our bond offering completed in April, I believe we accomplished our goal. I will get into those efforts in more detail but first I would like to focus on our financial results.

As Scott mentioned, I will point out again that although the Appalachian exchange with effective January 1st, it did not close until March 30th, so it's results are included in our financials as required by Generally Accepted Accounting Principles. Appalachia results will not be included for the remainder of the year.

We reported adjusted EBITDA attributable to Vanguard unitholders of $53.2 million for the first quarter of 2012 as compared to $37.6 million reported in the first quarter of 2011 and essentially flat compared to the $53.5 million in the fourth quarter of 2011.

Distributable cash flow attributable to Vanguard unitholders totaled $44.5 million or $0.06 per unit for the first quarter. This level of distributable cash flow generates…

For the first quarter this level of distributable cash flow generated a distribution coverage ratio of 1.44 times based on our increased distribution of $0.5925 per unit. As a reminder, we would like to look at this distribution coverage on an annual basis not quarterly since capital expenditure swing from one quarter to the next.

We do continue to feel constant about our expected results for second quarter and the full year of 2012, and our coverage for the year should be around 1.3 times assuming no new acquisitions. You will note that this is a small decrease to our previously issued guidance of 1.35 times to 1.4 times because it takes into account the dilutive impact of the recital debt offering which increases our interest expense for the balance of the year but is mitigated by the $5.4 million reduction in capital expenditures from the sale of a portion of a Bakken leasehold interest.

A large reason for the high yield debt offering was to provide liquidity for potential acquisition this year, but since we do not forecast acquisitions in our guidance the additional interest expense lowers our full year distribution coverage. But like Scott said, we are expecting a very active acquisition market and feel very confident and will be able to put that capital to work.

Moving on to adjusted net income. Vanguard reported adjusted net income per unit attributable to Vanguard unit holders of $0.41 per unit compared to $0.55 per unit earned in the first quarter 2011. However, under GAAP counting you will notice that Vanguard reported a net loss of $0.04 per unit as compared to a net loss of a $1.1 per unit in the first quarter 2011. This enormous swing in GAAP earning is primarily attributable to unrealized non-cash fluctuations in Vanguard's commodity hedges.

As a reminder, when commodity prices go down from one quarter end to the next quarter end we record a large amounts of income due to unrealized gain. Conversely, when commodity prices go up for a quarter we record large losses due to unrealized losses. These large swings can be very misleading to investors about our actual cash flow which is why we use reconciliation schedules in the press release to arrive at adjusted EBITDA, distributable cash flow and adjusted net income.

Now, on a more detail level I would like to discuss the revenue and operating expense results. We had a 15% increase in first quarter oil, natural gas and natural gas liquid sales over the first quarter 2011, which is primarily due to increased production from acquisitions we made in 2011 and higher commodity prices.

In terms of oil revenue, we saw a 9% increase in the average NYMEX oil price from first quarter 2011, and our realized pricing improved by 14%. However, when compared to the fourth quarter of 2011, we again saw a similar 9% increase in the average NYMEX oil price but our realized pricing actually decreased by 1% from the first quarter to the first quarter. This clearly shows the impact of the widening oil price differentials, which was primarily seen in the Big Horn and Williston Basin, and is normal for this time of year. Typically, these areas average less than $14 negative base differential to NYMEX. However, we saw steady decline over the first quarter, and the negative differential. That being said, we expect this come back down to a more normalized range, getting this May business, as it did last year.

Finally, with respect to the timing of capital expenditures, many of the projects that were completed during the quarter, such as the two very successful projects in Mississippi and Wyoming, that Scott highlighted, did not occur until mid-March and mid-February respectively. So we did not see a full quarter impact of these benefits will be seen in the second quarter.

Now to the expenses side of our operation. Lease operating expenses for the first quarter of 2012 were $18.6 million or $15.03 on a BOE basis, which was an increase from $10.33 per BOE seen in the first quarter of 2011, and a decrease from the $15.87 per BOE we saw in the fourth quarter of 2011. The increase relative to first quarter can be attributed to a few different things. First of all, first quarter did not have the impact of the liquids focused acquisitions slated in 2011, and oily assets typically have a higher LOE cost. So, as we continue to focus our capital spending on oil related prospects, and our production mix becomes more oily, we do expect to incur a higher LOE cost on a BOE basis. Another reason for the increase was $1.9 million of prior period adjustments related to 2011 booked in the first quarter of 2012. Absent these prior period adjustments we would have fallen in our guidance of $13 to $14. It is our expectation that we will see more normalized LOE starting in the second quarter.

On to the hedging front; as I regularly note, we continuously evaluate our hedge book and opportunistically add to our current positions. We were quite active in adding to our hedge positions in the last half of 2011 and in the first part of 2012. 2012 expected gas production is almost 74% hedged, 2013 is a 100% hedged, and 2014 is 40% hedged, all at weighted average prices above $5, which is significantly higher than current strip levels.

However keep in mind that gas revenues make up a small part of our overall revenue stream. So our gas hedge book is much less relevant than our oil hedge book based on our current reserve and production.

On the oil side, 2012 expected oil production is about 91% hedged, 2013 is 81% hedged, 2014 is 60% hedged. Unlike gas, the weighted average oil price is below current market prices. But you must remember one thing, the weighted average price we report only take into consideration of floors of our callers. Traditional callers and freeway callers constitute 45% of our hedges in 2013 and all most 30% in 2014. What this means is that we do have the ability to participate in upside above our weighted average price of approximately $90. 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 oil prices.

Another thing to consider is that we are not dependent on cash flow from hedges to pay our distribution. In fact, our cash flow is expected to increase as hedges roll off based on the current oil strength. I believe that this should give our investors a peace of mind that we are likely to improve our cash flows as hedges roll off and can replace them with oil hedges at higher levels.

More details regarding our current hedged portfolio as percentage of hedge can be found in the supplemental Q1 information package posted to our website this morning.

We had a very busy quarter as it relates to capital market activity. In January, we had the largest equity offering to date selling approximately 8.2 million units at a price of $27.71. the 8.2 million units included Denbury Resources 3.1 million VNR units that they received as part of the acquisition consideration in the first step of the on-core transaction. As such, our net proceed from this offering were approximately $135 million.

The proceeds were used to reduce borrowers under our borrowings under our CM credit facility and secondly term loan. The overall size of this equity offering was significantly lower to that any of our previous offerings and I believe it is encouraging as it indicates that we should be feasible of financing larger transactions in the future.

Major milestones at Vanguard evolution at end of March and closed in April was our inaugural high yield bond offering. In early March we met with rating agencies and on March 26, launched our initial public offering of $300 million in senior notes due 2020. After a comprehensive marketing process involving investor meetings across the United States and significant investor interest we were able to upsize the initial offerings to $350 million at 7 7/8th preset coupons deals 8% at maturity.

Senior notes were allocated to diverse group of investors consisting of over 70 high quality accounts. Proceeds were used to pay off the second lien term loan and reduce our borrowings under the senior credit facility. As I mentioned a moment ago, we had meetings with both Moody's and S&P where we described them to the low risk nature of our liquids rich asset base and our acquisition growth strategy. We received a corporate rating of B2 from Moody's and a B from S&P and our senior notes received a CAA1 from Moody's and B- from S&P.

Unfortunately, on a peer reserve side metric where one barrel of oil is equal to 6 Mcf of gas, we are a little smaller than our peers, which puts us at a slight rating disadvantage even though on a value and credit metric basis we measure up well with our peers considering oil prices are trading is more than 45 times current natural gas prices.

However, as we continue to pursue our strategy of growth through acquisitions, our reserves and production will increase and we will continue to use the high yield market for debt financing and we believe that our credit rates full in turn improve.

All in all, we are very happy with the execution of this offering. The combination of the equity offering in the January and the introduction of long-term debt into our capital structure has strengthened our balance sheet providing ample liquidity for us to execute our acquisition strategy.

Frankly, having senior note as a major component of the debt structure to make cents for the MLP model. It is a long-term piece of paper with a consistent interest expense which contributes to predictable full cash flows. And we run less risk and our liquidity can be constrained from borrowing base re-determinations.

Finally, the senior notes provide Vanguard with a new financing tool that will allow us to act quickly for larger transactions rather than solely rely on our credit facility for debt financing.

Speaking of the credit facility, in March our borrowing base was reaffirmed at $765 million but was reduced to $740 million on March 30th for the Appalachian exchange. Taking this into consideration at March 31, 2012 Vanguard had indebtedness under its reserve based credit facility totaling $583 million and $57 million as standing under the second lien term loan. However, as I discussed we have since reduced our borrowings under our credit facility utilizing proceeds from a high yield bond offering and cash flow from operations. And currently, Vanguard has $294 million in outstanding borrowing under a senior facility and has completely repaid the second lien term loan. This provides us with $376 million in current capacity under the senior facility.

Including the high yield notes current total debt outstanding is $644 million and with a market cap of about $1.5 billion Vanguard has total enterprise value of just under $2.2 billion. When we consider that our enterprise value is approximately $240 million when we IPOed a little over four years ago, we have come a long way and we are most proud of the fact that our growth has been profitable growth allowing us to increase our distribution unit holders by 39% while still maintaining a very strong disputation coverage ratio. All that being said we are now done. In fact, we believe we have a long way to go and should be able to continue to create long-term value for our unit holders.

This concludes my comments. We would be happy to answer any questions one have at this time.

Question-and-Answer Session

Operator

Thank you. (Operator instructions)

First question comes from John Ragozzino from RBC Capital Market, please go ahead with your question.

John Ragozzino - RBC Capital Markets

Scott, going back to the transactions in March with Oasis and Triangle, can you kindly share with us your remaining leasehold position in Bakken and perhaps disclose the counties that it is most prevalent in?

Scott Smith

I'm trying to come exactly with a number. We still have some but rough, what I call the good, the better counties. The stuff we did was in we have some in Golden Valley, we have some over in Richland County, Montana, maybe a little of Billing, but this the stuff the transactions we did with Oasis and with Triangle is really the better activity we have. We are also drilling some wells with Continental over in Montana that is still part of it. I am guessing that we probably still have a couple maybe 3000 to 4000 acres left, but again it is not prime time acreage.

We did look to expand this area of over different areas but between talking to the different operators this was the area that had the most interest, and then these two parties wanted to do transactions. And we have also drilled some other well. And we already participated with SM Energy (inaudible) on getting admission Continental. We have already basically converted some of our HPPA bridge from Shower Production to Bakken production already.

John Ragozzino - RBC Capital Markets

Okay. Thanks. Can you update us on the well that you guys talked about last quarter but had some mechanical problems?

Scott Smith

That is the Ron well. That was -- we have about a 8 forking interest in that well what stand that the operator now Statoil has prepared the whole in the casing not -- it may not be an easy to fix. They just fixed and we understand that they are thinking to resume fracing operations on that well. They got nine stages off of a 36 stage frac. So what I understand they are mobilizing ops to get that frac done we are hopeful (inaudible).

John Ragozzino - RBC Capital Markets

Okay. Thanks. And Richard, moving to balance sheet like with all the capital markets activity late you got $375 million or so on liquidity on the revolver like what degree are you guys comfortable leaning on the revolver to and of kind of ramping a short-term leverage levels, just kind of give the equity markets a bit of a breather as you see acquisitions come up?

Richard Robert

Yeah, as you indicated we have to give the equity markets a period of time and as in the case in our past we will levered to do some transactions and with $375 million available today and then when you add the incremental broad base you are going to get from the new acquisition. I think we have quite a bit driver power before we have to access the equity markets together.

Scott Smith

Never mind if on deal that is any?

Richard Robert

Yeah and clearly I mean that’s the idea would be few lines of revolver initially and then we would go back to the foreign market to do an add-on type offer.

John Ragozzino - RBC Capital Markets

Okay, thanks. Just one more, what your thoughts on coverage, I mean I know you guys have guidance out there, but you adjust for the acreage divestitures that still like 1.25 times pretty robust. I think in historically you have seen anyone run that kind of coverage level for too long kind of get it also being over conservative, your thoughts on that.

Scott Smith

Well, yeah, in fact and probably when you consider the $5.4 million of leasehold that we sold, we are probably closer to 1.3 type level. It gives us a lot of comfort to have that kind of coverage and certainly it allow us to continue to judiciously raise our distribution quarter-to-quarter as you have seen us do over the last six quarters. I don’t think that will stop frankly.

John Ragozzino - RBC Capital Markets

Plan to continue selling acreage?

Scott Smith

I’m sorry.

John Ragozzino - RBC Capital Markets

Will you do any more acreage (inaudible)?

Scott Smith

John, those opportunities we really search the math all the people come to us fore those opportunities and we are always listening I will put it that way. We don’t do anything that’s current -- if someone comes that with compelling opportunity I promise you we are going to look to it.

John Ragozzino - RBC Capital Markets

All right. Thanks very much for your time, guys. I appreciate it.

Scott Smith

Thank you.

Operator

Thank you. The next question comes from Ethan Bellamy of Baird. Please go ahead with your question.

Ethan Bellamy – Baird

Hey guys, few for you. What are your type of expectations on the (inaudible) in triangle wells?

Scott Smith

Rich is going to answer that we got our budget year fund.

Richard Robert

Yeah, we are anticipating the initial rate of 900 barrels of oil per day. There is acres is drilled some wells in area that have [IP] that over 1000 barrels and so we are maybe a little conservative on that, but as you know these Bakken (inaudible) drop off at a pretty sharp rate initially and then they break over, but as far as on the reserve side we are looking at something in excess of about 650,000 barrels of EUR.

Ethan Bellamy – Baird

Okay and that’s helpful. And just to be clear that 24 hour or 30-day rate?

Scott Smith

On the 900 barrel a day, what I like look at things more like a 30-day rate than an IP. I mean IP is can be a little misleading sometimes. Like you see some Bakken wells like over 2000 barrels a day. A lot of times the partial day exactly the 24 hours and I think that’s a little misleading, but (inaudible) we had some 24 hour rates in excess of 1000 barrels a day I hear so. That somehow close to 1500 that are offsetting the well that we are currently drilling over there so. I think the 900 barrel a day, 30 day rate should be a good present.

Ethan Bellamy – Baird

Okay, that’s helpful. Richard with respect to capital going to those wells is that a organic or should be same part of that going to be our case maintenance and then would you mind updating us on expectation for the whole capital budget for the year and maybe one portion of that maintenance.

Richard Robert

Well, as you’ve seen we added a line item under capital expenditures in our BCF calculation includes those sale proceeds because essentially they go to reducing our capital investment for those wells as Scott mentioned. So, we currently really don’t provide a growth capital number because our top process is to do enough drillings to maintain our cash flow. So, what it done is actually from odd perspective is braced our distribution coverage a little bit.

Ethan Bellamy – Baird

Okay. Any onetime expenses or extra G&A from uncalculated deal with respect to the second quarter?

Richard Robert

I certainly hope not.

Ethan Bellamy – Baird

Okay, that’s good. Any cost for above market hedges that we should expect in the queue what some of your peers do, Richard?

Richard Robert

No, I don’t believe so.

Ethan Bellamy – Baird

Okay. Thanks that covered mine. Thanks very much gentlemen.

Richard Robert

Thank you.

Operator

Thank you. The next question comes from Harry Chernoff from Pathfinder Capital Advisors. Please go ahead with your question.

Harry Chernoff – Pathfinder Capital Advisors

Could you comment on the prospectivity of the Eagle Ford acreage in La Salle and Web counties whether its oil, light gas, dry gas and with the operator those fields plans to do?

Scott Smith

That we happy to, but I just want to point out we don’t have any, preferred rights in those properties, our ownership there is limited to the Olmos and Escondido formation, but I can tell that the operator's well is all around us and they're not going I guess the stuff La Salle county in particular is liquids rich, good for gas.

Harry Chernoff – Pathfinder Capital Advisors

Right. But you don’t have rights to any of that?

Scott Smith

Sure have.

Harry Chernoff – Pathfinder Capital Advisors

Okay. In the Permian do you have rights to the Wolfcamp or the Spraberry or any of the other horizontal zones that are going on?

Scott Smith

I shouldn't say exactly I mean we are structure for all property based. We don't have any what we call large concentrated lease positions in any of the plays, we do have rates in some cases to all of that, other cases its limited Beacon Step, our deepest producing horizon. But again we are not currently prosecuting any sort of horizontal activity. We have been approached and have planned to develop a couple of wells in a shallower play and again that they basically walked right to our door step, I'm willing to drill a couple of 100%, well based on the number of wells that are drill off-setting are like 75 barrel a day type wells, but that’s one isolated change. But that take as more of these place develop over time, we will be involved in other opportunities where people come to us to stay look you got this HPP position we would like to see if we can do some kind of joint operation.

Unidentified Company Speaker

The current horizontal activity we have is in the Ballsprings and we are counting.

Scott Smith

And we do that 100%.

Harry Chernoff – Pathfinder Capital Advisors

What I am getting is along the lines of you have, you bought lot of acreage for PDP and little bit of put prices and all across the Permian and the question is did you then find out later on that unbeknownst to you were sitting on larger amounts of acreage zones in acreage that hadn't been tested for things like horizontal Wolfberry, Wolfcamp or the Spraberry all that of stuff that just came as bonus, or did you did not have the rights or just not perspective or that sort of thing?

Scott Smith

The most of the time, it is that we have not been prospective. The areas that we buy, we have try that lucky card yet rolled somebody said by that way we think your acreage position is great and lets start looking at, you know like some of our peers they have do this underground wash and things like that. It is our asset base that lends itself so we don’t have very large acreage positions. We are talking about 640 acres, 320 acres, 1200 here and nothing that would generate any time large scale developments, so but began I think if so many of these plays continue to expand some of them are still in the early stages especially its declined in some of those areas. We have some acreage of up at Terry County and Gains County . That I think we will see some these opportunities but I don't think it is not going to be some thing where there will be a some large impact like force.

Operator

(Operator Instructions) Presently we have no further questions, oh sorry we have a question from Justin [Slipher] from RBC Capital Market. Please go ahead with your question.

Justin Slipher - RBC Capital Markets

Can you just talk little bit more about valuations and this thing in the backend and recent transactions like implied values about 1500 acres or any other color you guys have there?

Scott Smith

I am sorry Justin, can you reasking about what term, acreage cost?

Justin Slipher - RBC Capital Markets

Yeah, just what you are seeing the valuation perspective in the Balkan?

Scott Smith

We have to really look at things on a total basis; we are looking at things on per barrel base. There's been some transaction. To be honest, we have spent a lot of time looking it Bakken deals is just nature of some of the production. We've looked at several conventional transactions in the area and you seen things go in the $100,000 per flow in barrel seems to be a ballpark what some people are willing to pay, but again it all depends on the type of production and the ROE and the operating cost. You have (inaudible) and the differential so we think that it might come down little bit, but obviously there is -- the Bakken players are still consolidating to two degree. We've seen that Continental continue to buy acreages and there's been other parties doing different things that we are not look to make an entry up on a strictly Bakken deal yet, but we know there is more opportunities coming and we continue to evaluate them.

Operator

Thank you. We have no further questions at this time, I would now like to hand the call to Scott Smith, CEO, for closing remarks. Please go ahead, sir.

Scott Smith

Thank you everyone for joining us this morning. If anybody has any questions again please feel free reach us to Richard or myself and we will look forward to listening with you again in August.

Operator

Thank you, ladies and gentleman, that completes today's Vanguard Natural Resources Q1 earnings conference call. Thank you for your participation, you may now disconnect.

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