Encore Energy Shareholders Welcome New Manager Vanguard Natural Resources

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Includes: DNR, ENP, VNR
by: Kurt Wulff

Enjoying the highest distribution yield at 9.8%, unitholders of Encore Energy Partners LP (NYSE:ENP) may welcome prospective General Partner Vanguard Natural Resources, LLC (NYSE:VNR) as better suited to the partnerships’ interests than interim GP Denbury Resources Inc. (NYSE:DNR). In a deal expected to close by the end of 2010, VNR would pay $380 million for DNR’s 46% of ENP including the GP responsibility. The master limited partnership structure of ENP fits well with the limited liability company structure of VNR, which we add to our research coverage today. In contrast, DNR is a non-income paying corporation reinvesting its cash flow in enhanced oil recovery projects using carbon dioxide.

At the proposed purchase price, VNR is acquiring ENP at $18 a unit, which is a McDep Ratio of 1.10. Ultimately an exchange of ENP units for VNR units would be logical, though for now VNR is concentrating on completing the transfer of responsibility for ENP from DNR.

Our detailed estimates for ENP are unchanged as a result of the deal. In our initial analysis of VNR we add 46% of ENP’s oil and gas reserves, cash flow and production beginning in 2011. VNR’s 9 thousand barrels oil equivalent daily (mboed) in early 2011 is more than 4 times the company’s volume of 2 mboed at the time of its initial public offering in 2007. Chief executive Scott Smith and financial officer Richard Robert have guided VNR’s rapid growth by acquisition.

VNR joins our Bottom Line Cash Payer group where its distribution yield of 8.5% is second highest after ENP. The financial risk of high debt is tempered by hedges near current oil price for several years. McDep Ratio above 1.0 may imply some valuation risk. Yet, we may underestimate the present value of oil considering that our long-term price of $75 a barrel is less than the futures price for the next six years of $86.

Originally published on November 19, 2010.