Vanguard Natural Resources - A Dying Oil Company

| About: Vanguard Natural (VNR)

Summary

Vanguard Natural Resources has had an incredibly difficult time since the start of the crash, but unfortunately, for shareholders, the worst is not over.

The company has several billion in liabilities. That means the company has $99 million in annual interest expenses when its profit is much lower.

Vanguard Natural Resources hedges are coming offline in the coming quarters. This should result in the company's revenue continuing to decrease; revenue it can't afford to lose.

Vanguard Natural Resources (NASDAQ: VNR) is a company that started the oil crash with a market cap of $4 billion. Since then, the company's market cap has dropped to a mere $0.1 billion. Despite this drop in market cap, Vanguard Natural Resources continues to be crushed under its immense debt load. As we will see, Vanguard Natural Resources is a dying company, soon to go extinct.

Introduction

Vanguard Natural Resources is a publicly traded limited liability company that is focused on the production and development of oil and natural gas properties. The company operates in a variety of shale basins; however, its assets are consistently non-producing assets. That means that the company has a significant amount of debt with minimal earning assets.

Source: Vanguard Natural Resources

Vanguard Natural Resources had had an incredibly difficult time since the start of the market crash as a result of the company's immense debt load. The company's stock price peaked in mid-2014 at just under $33 per share. Since then, the company's stock price has steadily declined to a 2015 low of just over $0.5 per share. Despite the recent price recovery to just under $0.8 per share, as it attempts to pay off its debt, its stock price is still noticeably below its pre-crash highs and should continue to fall.

Vanguard Natural Resources' Earnings Highlights

Now that we have an overview of Vanguard Natural Resources along with a discussion of the company's recent stock price performance, it is now time to begin by discussing its resource highlights.

Vanguard Natural Resources Production and Earnings - Vanguard Natural Resources Investor Presentation

Vanguard Natural Resources reported average production of 423 million cubic feet of equivalents per day for the third quarter of 2016, up 10% compared to the third quarter of 2015. Given present natural gas prices of roughly $2.66 per thousand cubic feet that means that Vanguard Natural Resources is earning roughly $0.3 billion in annual income. At the same time, the company's production has decreased slightly from the second quarter of 2016 hurting its earnings.

And despite this production, Vanguard Natural Resources is not pulling a profit. The company, after deducting distributions to preferred unitholders, had a net loss attributable to shareholders of -$1.92. This is net loss for one quarter of almost 3 times the company's present value. And while the company's EBITDA increased by 14% to $0.1 billion, it still has significant expenses including interest expenses that should continue to hurt its income.

Vanguard Natural Resources Cash Flow and Net Income - Vanguard Natural Resources Investor Presentation

At the same time, Vanguard Natural Resources has managed to admirably increase its distributable cash flow by 76% to $55 million. However, the company has halted its dividend since early-2016 and this cash isn't going to shareholders. At the same time, looking at Vanguard Natural Resources' discussion of its earnings, we can see that it is attempting to highlight strong earnings through non-GAAP measures. Looking at the company's raw earnings, we see how hard of a time the company is having.

Vanguard Natural Resources has decreased to a tiny company. The company has had significant goodwill adjustments and losses from commodity derivative contracts hurting its earnings. The fluctuations in these earnings have the ability to change the company's earnings by more than it's market cap in the given quarter. This shows how little value Vanguard Natural Resources' common equity has to investors at the present time.

Vanguard Natural Resources Financials

We have discussed a detailed overview of Vanguard Natural Resources' earnings highlights. We saw how the company's earnings have stayed incredibly low in the face of a difficult earnings crash, and how taking into account its expenses, its earnings are very negative. The incredibly low value of Vanguard Natural Resources' market cap, $0.1 billion, in the face of a highly negative net loss to shareholders in 3Q 2016 of -$0.3 billion, shows how little value the shareholders feel the company has.

Now let's finish up by discussing the details of the company's financials.

Vanguard Natural Resources Production and Income

Vanguard Natural Resources has seen its production remain high but its earnings decrease. Ignoring the company's depreciation expenses, let's look at them as a long-term thing that will matter after the crash, and looking solely at its net income, we see it is a fairly respectable $0.56 per share.

However, the problem the company is faced with is the short life of natural gas wells. Natural gas wells in shale regions produce large amounts initially but see that amount rapidly decline over the first year of production. As a result, to keep its production up, Vanguard Natural Resources needs to keep drilling.

While the company had $280 million in sales for the first 9 months of 2016, it had $150 million of operating expenses, $36 million in administrative expenses, and $49 million in capital expenditures. That means that the company's net profits were just $45 million. However, as we will see, Vanguard Natural Resources also had several billion dollars of liabilities.

Given the company's $99 million in annual interest expenses, ignoring all its expenses, and just looking at its sales, we can see how Vanguard Natural Resources' earnings are not enough.

Vanguard Natural Resources Hedges - Vanguard Natural Resources Investor Presentation

At the same time, Vanguard Natural Resources' hedges are expiring. An astounding 86% of the company's 2017 oil production is unhedged compared to 28% in 2016. For the company's natural gas operations, its unhedged production decreases from 29% to 50%.

As a result, we can see above how Vanguard Natural Resources is barely keeping the lights on with its present earnings. With the decline in the company's earnings in the coming years, that means that as its earnings decrease so too does the difficulty of its situation. Especially in an oil market that doesn't experience a rapid recovery.

Vanguard Natural Resources Liabilities - Vanguard Natural Resources Investor Presentation

Taking a further look at Vanguard Natural Resources' liability, we can see how the company has total present liabilities of $2.28 billion, down from $2.78 billion a year ago. Given the difficulty of the capital markets for an oil company in such a difficult time, Vanguard Natural Resources' annual interest expenses are roughly $99 million.

Combining this with the decline in the company's future earnings and we can see how Vanguard Natural Resources is well on the way to bankruptcy.

Conclusion

Vanguard Natural Resources has had an incredibly difficult time since the start of the crash with the value of its equity falling by 98%. Despite these difficulties, the company is nowhere near being in a safe spot. The company undertook expansion before the crash by borrowing billions of dollars and is now left with hundreds of millions in annual interest expenses when its revenues are that much. As a result, the company can barely afford to keep the lights on.

Oil prices are recovering. Since the start of 2016, oil prices have almost doubled and Vanguard Natural Resources' stock price has risen a fair amount. Despite this, the crash is nowhere near over and the company's hedges are expiring fast. This should result in the company's income to continue decreasing; income that it can't afford to lose.

As a result of the difficult oil environment and Vanguard Natural Resources' incredibly poor financial position, the company is a bad investment at the present time.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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