Vanguard Natural Resources, LLC (VNR-NYSE)
September 25, 2009 Issue
The Most Powerful Name In Corporate News and Information
Vanguard Natural Resources Is Focused On Providing Cash Flow To Investors As They Maintain Production Through The Drill Bit And Grow The Company Through Acquiring New Oil And Gas Properties Throughout The Domestic United States
Vanguard Natural Resources, LLC is a publicly
traded limited liability company focused on the acquisition, production and
development of natural gas and oil properties. Our primary business
objective is to generate stable cash flows to be distributed to our
unitholders on a quarterly basis. The Company's assets consist primarily of
producing and non-producing natural gas and oil reserves located in the
southern portion of the Appalachian Basin, the Permian Basin, and south
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published - September 25, 2009
Mr. Robert: “The vision is to provide stable cash flow to our investors and over time to increase those cash flows as we grow the company.”
CEOCFO: How are you doing that?
Mr. Robert: “Principally we are doing that through acquisitions, and that is our goal. We try to maintain our production through the drill bit and then we try to grow the company through acquiring new oil and gas properties throughout the domestic United States.”
CEOCFO: What do you look for in a property?
Mr. Robert: “We have very specific requirements. We look for long life reserves and we look for a stable production profile. Mature assets typically have a stable production profile and we look for relatively predictable operating costs. In addition we look for properties where the commodity price can be hedged effectively including the basis differential.”
CEOCFO: Please tell us about the main properties that you have now.
Mr. Robert: “When we completed our IPO in October of 2007, our assets were exclusively in the Appalachian area in Kentucky and Tennessee. Since then we acquired assets from Apache Corporation in the Permian Basin as well as from the Lewis Energy Group in south Texas. In addition, we recently announced another acquisition of properties in south Texas from Lewis.”
CEOCFO: What has changes in the past year given the economic climate?
Mr. Robert: “We put a hold on our drilling. We are fortunate in that our leases are held by production, so we are not required to drill on them in order to hold those leases. We are in an enviable position that we can wait until our economic returns are sufficient to justify additional drilling. We are also fortunate in that our reserve characteristics allow our production to remain relatively stable despite our not having drilled any new wells in the past nine months to a year now.”
CEOCFO: Do you find there are more properties available now for acquisition given the economic situation?
Mr. Robert: “There are a number of properties available, but that is typical. There are a lot of properties that change hands all the time, so there always seems to be a willing seller and a willing buyer. That has not changed, but perhaps what has changed is the number of distressed sellers in the market. Typically, in this commodity price environment, the only people selling natural gas properties are those that are being forced to for whatever reason.”
CEOCFO: Do you prefer certain geographic areas?
Mr. Robert: “Not particularly. It is more a function of specific reserve characteristics that we are looking for. Mature basins that are characterized by low production declines and predictable operating costs are what we like to focus on. Some geographic basins that have pipeline delivery constraints or have volatile price basis differentials which can not be hedged effectively are the areas we avoid.”
CEOCFO: Are there newer technologies or techniques?
Mr. Robert: “Certainly horizontal drilling has changed the landscape in the natural gas business. We have employed some horizontal drilling in the Appalachian area with reasonable results, but based on current price levels do not warrant the investment. Horizontal drilling techniques are also being developed in the Olmos trend in south Texas. We are waiting to see the results of that drilling. Our strategy is to be conservative. We are more apt to let the exploration companies develop and perfect these techniques and then participate when it has been proven to be economical.”
CEOCFO: What is the financial picture like for Vanguard?
Mr. Robert: “It is very good, in fact we just completed a public equity offering last night, which helps us in many ways and in particular the short-term. The equity offering will allow us to repay borrowings under our credit facility that in turn will allow us to borrow the funds necessary to close our recently announced south Texas acquisition mentioned earlier. The equity raise and the new acquisition have a number of positive impacts to our financial picture. Namely, our cash flow will increase, more of our production will be hedged in 2010 and 2011, our liquidity will be improved when the new assets are pledged under the credit facility, and our public float should be enhanced with the new units trading. Finally, with our improved financial picture, enticing banks to participate in our amended credit facility should be easier.”
CEOCFO: Would you give your two-minute take on the energy situation?
Mr. Robert: “There are certainly some near-term issues with respect to natural gas supply and therefore the price of natural gas. I have been curious to see the rig count go down as much as it has without a noticeable impact to supply. I knew it would take some time before you would see some effect from a rig count decline, but I am surprised more of an impact has not been seen to date. That being said, ultimately, I believe that we will see a decrease in natural gas supply as a result of the decline in drilling and that in combination with an improvement in the economy, particularly the industrial sector which accounts for a large part of the natural gas usage in this country, supply and demand will come into balance and natural gas prices will improve. Near-term storage issues will depress natural gas prices but long-term I see natural gas prices improving as the economy improves.”
CEOCFO: What is special about Vanguard, and what does Vanguard know about running a business and about the industry, that has you stand out from the crowd?
Mr. Robert: “We have a good mix of assets, a great hedge book which ensures stable cash flows for a number of years regardless of the commodity price environment, a good management team, a good set of employees, and we are quite entrepreneurial. We have been in this business for a number of years. The president, our VP of engineering, and I each have twenty to thirty years of experience in the business. In particular, we have experience in growing companies through acquisition, which is a very important part of our strategy. So I think that we have a team in place that knows how to grow companies and grow them not just for the sake of growth, but also do it in a disciplined, patient manner that will reap rewards for our investors long-term.”
CEOCFO: Does the investment community recognize your expertise?
Mr. Robert: “We haven’t been in the picture very long as we only went public less than two years ago. However, I like to believe that people are beginning to recognize Vanguard’s name and getting more confident with our ability to do what we say we are going to do. Now with three acquisitions under our belt we are converting some people to believers. I think that is evidenced in the improvement in our stock price over the course of this year and hopefully we will continue to see as we continue to grow.”
CEOCFO: In closing, why should potential investors be interested in Vanguard Natural Resources?
“Vanguard is an investment opportunity for people who like the cash flow
typical of a bond but want to reap the added benefit of potential capital
appreciation from owning a stock. Someone who believes that a current 14%
tax deferred yield is attractive should consider Vanguard. Another
important differentiating factor between our yield and that of a typical
bond, other than the tax deferral, is that our goal is to increase our
distribution over time. Since our IPO, we have increased our distribution by
18% so what is a 14% yield today can grow as we prosper.”
“When we completed our IPO in October of 2007, our assets were exclusively in the Appalachian area in Kentucky and Tennessee. Since then we acquired assets from Apache Corporation in the Permian Basin as well as from the Lewis Energy Group in south Texas. In addition, we recently announced another acquisition of properties in south Texas from Lewis.” - Richard A. Robert, CPA
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