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Vanguard Natural Resources’ 2016 Capex to Decline by 45%: Why?

Kurt Gallon

Can Vanguard Natural Resources Pull Itself out of the Trenches?

(Continued from Prior Part)

Vanguard Natural’s distributable cash flows

Vanguard Natural Resources’ (VNR) distributable cash flow fell to $164.3 million in 2015 from $214.8 million in 2014, a decline of 23.5%. In the current environment, a decline in Vanguard Natural Resources’ distributable cash flows severely impacts its ability to reduce borrowings.

Vanguard Natural’s distributions

VNR’s 4Q15 distribution stood at $0.18 per unit, based on its monthly distribution of $0.03 per unit. VNR decided to cut its distribution by 75% in the second quarter of 2015. Currently, the partnership is trading at a distribution yield of 5.9%. Peers Linn Energy (LINE) and Breitburn Energy Partners (BBEP) have suspended their quarterly distributions.

Among midstream companies (AMLP) considered to be shielded by long-term fixed-fee contracts, Kinder Morgan (KMI), Teekay LNG Partners (TGP), and Boardwalk Pipeline Partners (BWP) have cut their dividends and distributions.

Vanguard Natural’s capital expenditure

Vanguard Natural Resources has estimated that its 2016 capital expenditure will be $63 million, entirely spent on maintenance. This is 45% less than what it spent in 2015.

According to Scott Smith, VNR’s CEO, “As we put together our 2016 capital plan, we spent a significant amount of time high-grading the capital program and have deferred numerous projects until commodity pricing improves to more historical levels. We view it as more important to focus on generating excess cash flow and improving the balance sheet than focusing on growth or even maintaining production at today’s prices.” He continued, “other than the $2.4 million we have budgeted for 12 operated recompletions in East Haynesville Field, we will be deferring spending operating capital dollars until we see commodity prices improve. Because of this, we do expect to see our total production to decline over the year by approximately 10% to 15% from our fourth-quarter levels.”

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