4Q15 Results Unlikely to End Vanguard Natural’s Ongoing Troubles
Vanguard Natural’s market performance
Most of the upstream MLPs, including Vanguard Natural Resources (VNR), have been heavily affected by the decline in energy commodity prices. VNR is currently trading close to its all-time lows, and the partnership has lost 88.6% of its market value during the past year. VNR has lost 32.8% since the beginning of 2016 due to the huge drop in crude oil prices in 2016.
Among Vanguard Natural Resources’ peers, Linn Energy (LINE), Breitburn Energy Partners (BBEP), and EV Energy Partners (EVEP) have lost 96.1%, 92.6%, and 88.5%, respectively, during the past year. At the same time, the upstream energy company–heavy SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has fallen by 53.7%.
Upstream MLPs’ underperformance relative to XOP can be attributed to their high leverage and distribution cuts or suspensions.
Vanguard Natural’s monthly distributions
Based on Vanguard Natural Resources’ (VNR) recent decision to cut its distribution by 75%, in a February 18 press release the company declared a monthly distribution of $0.03 per unit for January 2016, or $0.36 per unit on an annual basis. The partnership is currently trading at a distribution yield of 17.6%.
If the low price situation doesn’t improve or worsen in the coming months, VNR might be forced to suspend its distributions. A few upstream MLPs such as Linn Energy have already suspended their distributions.
Vanguard Natural’s debt exchange
One of the major problems with upstream producers, particularly upstream MLPs, is their rising leverage. They are finding difficult to service debt or interest payments in the current low price environment.
These companies are opting for measures such as debt restructuring, reduction in capex, and distribution cuts or suspension to reduce the burden on the balance sheet. Vanguard Natural Resources (VNR) recently announced the results of a debt exchange offer in which 7.875% senior notes due in 2020 were exchanged for new 7.0% senior secured second lien notes due in 2023. This measure should help VNR in lowering its overall interest expense and shifting the average debt maturity.
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