Seeking Alpha

Vanguard Natural Resources (VNR) -4.9% AH after announcing a public offering of 8M common units....

Vanguard Natural Resources (VNR) -4.9% AH after announcing a public offering of 8M common units. VNR intends to use net proceeds to pay down debt from its senior secured revolving credit facility, which was incurred in part to fund recent acquisitions.
Comments (21)
  • Not a surprise!
    Karlis Ullis
    30 Jan 2013, 04:36 PM Reply Like
  • Its almost like management doesnt want the stock above $30
    30 Jan 2013, 05:31 PM Reply Like
  • You got it----I used to 20M of these shares and took my gains and 3 divvies and ran----I have not looked back on that. and just could not stand the endless dilution ----
    30 Jan 2013, 07:57 PM Reply Like
  • If you are paying off cheap debt with expensive stocks it does not make any sense.
    30 Jan 2013, 06:22 PM Reply Like
  • It might be a good time to enter,provided the monthly divided remains the same.
    30 Jan 2013, 06:51 PM Reply Like
  • It may and it may not but who really knows.....stay small on this one.
    30 Jan 2013, 07:58 PM Reply Like
  • It will, they wouldnt force an offering if it was going to lower the distribution rate, that'd make no sense.
    30 Jan 2013, 10:45 PM Reply Like
  • I personally think the market is a bit lofty at these levels. I would wait for a pullback on the major indexes before I bought. I'm in at an average cost of $25.12. I'll wait for another retreat to that level or below before I buy anymore. It fell to around $24 the day before I bought, in Mid December 2012.
    31 Jan 2013, 02:18 AM Reply Like
  • So what is the offering price?
    30 Jan 2013, 08:03 PM Reply Like
  • $27.85
    31 Jan 2013, 09:13 AM Reply Like
  • The purpose of VNR, per their SEC reports is:


    "Our primary business objective is to generate stable cash flows allowing us to make monthly cash distributions to our unitholders, and over the long-term to increase the amount of our future distributions by executing the following business strategies:"


    The funding of distributions and acquisitions is achieved more through the issuance of debt and equity than through actual earnings. This is the nature of Master Limited Partnerships (MLPs).


    I think the distribution is safe, as long as they can continue to obtain debt financing, issue equity, and grow through acquisitions. Their cash flow will keep increasing by doing so. MLPs are a different animal than regular C Corps. and their funding is totally different, as is their main goal, to provide stable cash flows allowing it to make distributions to unitholders, rather than to generate sufficient earnings to fund the distributions and growth. So, unit appreciation would be secondary to the distribution remaining stable and increasing over time.


    Doesn't appear the offering price has been announced yet, as of 1AM 1-31-13.
    31 Jan 2013, 02:09 AM Reply Like
  • What happens to this one when rates move up?
    31 Jan 2013, 11:45 AM Reply Like
  • "Rising interest rates. As evidenced from the period from 1998 to 1999, MLPs have generally underperformed during periods of rapidly rising interest rates. Thus, during periods when investors fear rapidly rising rates in the future or if rates were to rise faster than expected, this could affect performance." (Page 14 of link below)



    Don't know about VNR, specifically. Have only been in it, and MLPs, for little over two months thus far.


    I hope rates go up. I've been in TBT for some time now, hoping to recover from losses I still have in it.
    31 Jan 2013, 06:52 PM Reply Like
  • Wow...been wanting to enter this one and have seen it move between $25-30, but this offering is scary.


    I think I'll stay on the sidelines for (at least) a while longer.
    31 Jan 2013, 02:42 AM Reply Like
  • Issuing equity like this is common for MLPs it appears to me. I've reviewed Linn Energy LLC (LINE) since it went public in 2006 and it's the same thing, except that it appears that VNR has better real earnings than LINE, and LINE has issued more debt. We'll see at what price they issue the new shares. In Jan of 2012, they issued in excess of 7 million at an offering price of $27.71/unit. In Oct. 2010 they issued 4.8 million at $25.40/unit. See page 61-62 of 2011 10-K. So hopefully these new units will be offered North of $27.71.

    31 Jan 2013, 08:17 AM Reply Like
  • Still up 12% from where I bought it at, after the announcement at $27.85. It was up 20% several days ago. Plus the $20.25 monthly dividend yields 8.8% at the current price of $27.70. (9.7% at my cost) I would anticipate they will be increasing the distribution in the future rather than decreasing. That's how MLPs operate, keep the distribution stable and increasing, predictable, in order to maintain a stable price/unit that rises over the long term.


    Will be looking to add more should it decline to $24 to $25 at some point.
    31 Jan 2013, 10:16 AM Reply Like
  • A while back, I read their 2011 10K. I didn't like what I saw. They developed nothing, acquired everything with debt. To quote (over and over) "........This acquisition was funded with borrowings under financing arrangements existing at that time....."


    Those bullish on this company say, well, that's all right because they're hedging. Hedging, schmedging, debt is debt and continually piling it on is unsustainable.


    The chickens are coming home to roost now as far as I'm concerned
    2 Feb 2013, 12:37 AM Reply Like
  • smurf,


    I understand your concerns and can relate very much to what you are saying. You should see some arguments I had with a few folks when I first began exploring the MLPs, just a few weeks ago. Some of them don't consider depreciation a valid expense, and they poo poo earnings altogether in favor of "distributable cash flow" it seems. So, I get where you are coming from. It bothers me also.


    This type of business structure, funding growth and distributions more with debt and equity issues than earnings, has been going on for a while now. KMP began operations in 1997. However, as Warren Buffett says, "The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts." So, for the MLPs to make sense to me, I view this as another bubble like the era, when attention was taken away from basic fundamentals to other more enticing measurements that didn't pan out as credible. If it will last or how long, I don't know, but I have my doubts because the fundamentals of these companies don't appear sound to me. When the bubble will burst, who knows.


    I invested in VNR and LINE without doing any homework, based on recommendations from Kiplingers and seeing LINE promoted heavily on SA. Now that I have done some homework, I am aware of the weaknesses of the MLPs. I'll stay invested for a while longer.


    But I generally concur with your thinking. Any business whose primary objective is not to create legitimate earnings, but to provide ever increasing distributions and growth from debt and equity is not a sound model, in my view. Nevertheless, the unit prices and distributions keep going higher. It does not make sense to me.


    I haven't looked at VNR very closely yet, but it looks better to me than LINE. It is producing material earnings from its primary core business, while LINE is not. But I am watching them closely for hiccups. I guess I have been seduced by the total return thus far.


    One thing I noticed about LINE which was very scary is that they went public when they needed funds to turn their negative equity into positive equity. Not sure I remember exactly, but around 2005 their equity was negative. Going public turned it positive. I'm also skeptical of why they introduced LNCO in late 2012. It appears they needed more funds with that also, rather than to provide a vehicle for those who didn't want to mess with a K-1 (which is why they said they were creating LNCO.) You still have return of distributions you have to deal with on the 1099, so, I don't see the K-1 argument very credible.
    2 Feb 2013, 06:32 AM Reply Like
  • After reviewing some of my comments, I see you own LINE, Smurf. Care to explain? IT 's not as sound as VNR, from the SEC reports.


    Your comment about the acquisitions being funded through debt is exactly the same with LINE. LINE's debt to equity ratio is 1.92, while VNR's is slightly less than 1, meaning VNR has less debt to equity than LINE. So what gives?


    "Hedging, schmedging, debt is debt and continually piling it on is unsustainable."


    I agree. LINE has done more growth and acquisitions through debt than
    2 Feb 2013, 06:53 AM Reply Like
  • First, thanks for the thoughtful comments, not to mention your attention to my activities!


    I own a small position in LNCO, not LINE. LNCO, of course, is just the stalking horse for LINE, since they have no other business.


    I do like LINE's long term business model better than VNR's. The former does at least develop some of their own properties, while VNR leverages mature ones, pumps them dry and moves on and borrows again. I'm aware of LINE's debt situation, also.


    I agree that LINE is not a SWAN holding, either, and bought LNCO to ride a bit of the crest of the wave with some excess cash and collect the initial dividend. I am watching it carefully, and when the euphoria gets too high, will sell for a gain. I'm not a trader, but will occasionally throw a small ante into that pot.


    Finally, I also concur that the entire MLP sector is the 'flavor of the season' and shouldn't occupy too large a space in anyone's holdings for the long term.
    2 Feb 2013, 10:07 AM Reply Like
  • I do have a question for anyone who thinks they can offer some advice. I've made 12% off of the price appreciation on VNR, not counting distributions, and I think it could go back to 20% in the near future. Also, I've made a 10.5% return on LNCO since I bought it. At what point would you be thinking of scaling back or selling a portion in order to take some profits? Would the price appreciation have to approach 50% or higher before you did? I'm thinking a 20% return would be equal to at least 2 years worth of distributions (about $5/share). You would think selling half at that point might be prudent, then reinvest when and if the price corrects 15% to 20%. It would have 2 years to do so before you would lose out on distributions. Just thinking, pigs get fed, hogs get slaughtered.


    On paper, I had made a 105% return in an oil services mutual fund in 2011, and 50% in a nat gas mutual fund at that point. Then our credit was downgraded and I sold for about half those gains. If I had sold part of that position beforehand I'd have made more.
    2 Feb 2013, 01:44 PM Reply Like
DJIA (DIA) S&P 500 (SPY)