NEW YORK (TheStreet) -- Vanguard Natural Resources has struggled to increase the amount of cash it can distribute to its investors, but the natural-gas producer is hoping that two major acquisitions it has announced during the last two months will help mend that problem.
This year, in the first six months of operations, Vanguard's distributable cash flow fell by 2% to $88 million from the same period a year ago, largely because of declining prices for natural-gas liquids, or NGLs. Meanwhile, the company's distribution coverage ratio for the first two quarters of this year has been less than 1, meaning that the company has paid out more cash than it has generated as distributable cash flow.
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Ideally, a company can retain some of its distributable cash flow, which would translate into a coverage ratio of greater than 1 and give investors confidence about the company's ability to pay distributions in the future.
A coverage ratio of less than 1 is usually considered as a sign of unsustainable dividends. Structured as a master limited partnership, Houston-based Vanguard distributes quarterly payments to its unit holders which is derived from its cash flow.
Since Vanguard released its second-quarter results last month, its has announced two acquisitions of natural-gas fields and assets for more than $800 million, big transactions for a company with a market capitalization of $2.4 billion.
In August, the Vanguard said it agreed to buy 23,000 net acres in North Louisiana and East Texas from Dallas-based Hunt Oil for $278 million, and on Tuesday, Vanguard said it agreed to buy 12,000 net acres in Colorado from Bill Barrett Corp. for $525 million.
Vanguard spokeswoman Lisa Godfrey said that these are largely mature natural-gas assets that aren't declining quickly and require little spending for maintenance.
In press releases, Vanguard said the deals will add to its distributable cash flow and could lead to a better coverage ratio.
The purchases come in the backdrop of declining NGL prices. Prices fell 20% during the first half the year, denting Vanguard's cash flow.
Abhi Sinha, an analyst at Wunderlich Securities, said that Vanguard's acquisitions are a bet that natural-gas prices will rise long term. As for NGLs, which are liquid forms of gas such as propane, Sinha believes that prices won't increase until 2016.
With excess supply and soft demand, NGL prices fell 20% during the first half the year, denting Vanguard's cash flow. But Godfrey has said that an increase in exports of some kinds of NGLs as well as new petrochemical plants that can use the NGLs will relieve some of the glut and push prices higher.
The lower NGL prices are reflected in the lackluster performance of Vanguard's stock. The shares, which traded Friday morning at $29.80, down 21 cents, have fallen 1.7% this year, compared with a 10% gain for the Nasdaq Composite Index.
"We continue to have a Hold rating on the stock till we have some visibility towards their strengthening coverage in order for it to justify a premium over its peers," Sinha said.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates VANGUARD NATURAL RESOURCES as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate VANGUARD NATURAL RESOURCES (VNR) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, expanding profit margins and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and generally higher debt management risk."
You can view the full analysis from the report here: VNR Ratings Report