With oil surging again this week, let’s take a look at a small-cap energy company with great prospects that has been a bit overlooked in recent years.
Vanguard Natural Resources (NYSE:VNR) is a Houston-based limited liability corporation set up to develop and acquire oil and natural gas properties in the U.S. It has wells in several basins throughout Texas, New Mexico, Kentucky, Tennessee and Mississippi, and generates half its production from oil, with the rest coming from natural gas and natural gas liquids.
The LLC structure allows the partnership to pay out larger dividends because it doesn’t pay federal income tax. Instead, it distributes cash distributions directly to unit holders, of which a large percentage is tax-deferred.
This structure dates to the early ’80s, when the government intended to provide a tax benefit to owners who took the risk of building out the country’s energy pipeline infrastructure. Now, close to a hundred master limited partnerships trade on U.S. exchanges.
Although Vanguard is setup as a LLC, it operates in a manner very similar to a master limited partnership (MLP) and enjoys all the same tax benefits. The only difference is that it doesn’t have a general partner or incentive distribution rights like most traditional MLPs.
What’s special about Vanguard is the efficiency at which it has been able to operate and grow since its inception. The company’s primary business objective is to generate stable cash flows and over the long term to increase the amount of distributions to unit holders.
It has an aggressive expansion strategy that has resulted in oil and gas reserves and production growth of over 500% since 2007. Additionally, cash distributions have jumped 36% during that period, thanks to deals that are largely immediately accretive to cash flows. That’s a feat none of its peers can claim.
It has 78.8 million barrels of oil equivalents, of which 80% are proven developed, and it recently completed its largest acquisition to date. Vanguard acquired Encore Energy this year, which has become a wholly owned subsidiary of Vanguard. It provided further diversification of Vanguard’s footprint, expanding its exposure to crude oil.
Management decisions are in good hands, thanks to Chief Executive and President Scott Smith, who has been at the helm since inception. He has over 25 years of experience in the energy industry, specifically in business development and M&A, so it’s no wonder Vanguard has been able to enter into a dozen acquisitions worth over $1.4 billion since going public.
Like many exploration and production firms, management has hedged 60% of its oil and just over half of its expected natural gas production in 2013. This typically works to lower any potential volatility cash flows and is a common practice of partnerships like this.
VNR is also in good financial shape, with a $1.5 billion credit facility and a borrowing base of $765 million. Additionally, the company just announced a new $100 million senior secured loan facility. It’s very well capitalized to pursue its expansion strategy, which means cash distributions will continue to rise as the firm adds assets.
The partnership now pays out $2.31 annually per unit, yielding over 8% at current prices, which is obviously a lot. Vanguard is an excellent choice for investors seeking above-average yield along with the potential for more capital appreciation.