Vanguard
Energy Resources is focused on the acquisition and development of acquired oil
and natural gas fields to increase the return of cash flow to unit holders. The
company acquires oil and natural gas fields that are mature with a long
production life and that when fully developed can sustain long-term
productivity. Over the past few years, the company gradually moved towards the
gas-producing field and increased its total reserves, which include 60% natural
gas and 40% liquids. Vanguard’s acquisition activity gave the company a proven
reserve of 175 million barrels of oil equivalent (mboe), and an average
production of 34,957 barrels of oil equivalent per day (boepd), during the nine
months ended September, 2013.
Because
of continuing low natural gas prices, major oil companies such as Devon Energy
(DVN) and Pioneer Natural Resources (PXD) sold their natural gas acreages to
fund their profitable oil-producing acreages. However, Vanguard focused more on
natural gas-matured properties and continued to increase its natural gas
reserves for stable future production. As a result, 64% of Vanguard’s total
production came from natural gas last quarter. The company expects stable
production from these fields in 2014, as its acquired properties in Arkoma
Basin, Wind River, and Powder River have natural gas reserves of 80%, 92%, and
100%, respectively.
Vanguard
had 66,000 net acres in the Woodford shale, Arkoma Basin, which accounted for
36% of its total proven reserves. To strengthen its Arkoma Basin production, it
entered into a joint development agreement venture with Jones Energy (JONE).
With this, Vanguard added an opportunity to cover 360 sections in this play.
Together, Vanguard and Jones Energy will drill five gross wells, with
completion expected in December. Vanguard will strengthen its Arkoma Basin
production with this joint development venture in coming quarters. Jones Energy
accounted for a daily net production of 3,956 boepd in the third quarter and is
expected to increase its total production with additional wells in Woodford.
Woodford is considered a major hydrocarbon reservoir with a substantial amount
of natural gas. The shale has a total estimated natural gas reserve of 830
trillion cubic feet (tcf).
Moreover,
natural gas should be in high demand in the future as a source of domestic
electric power generation. Currently, natural gas accounts for 30% of
electricity generation in the U.S. and natural gas is expected to account for
35% of the total generation by 2040.
Apart
from the growing demand, the price of natural gas is also expected to increase
next year as the chart above shows. Hence, with the expected growing demand and
price of the natural gas in the U.S., it is expected that Vanguard’s large
reserve base of natural gas and stable production will enable the company to
meet the demand and strengthen its cash flow.
Acquisition
that leads to steady monthly cash distribution and less capital expenditure
The
company’s strategy to acquire matured properties has enabled it to achieve its
projected future cash distribution. Vanguard has shown a steady distribution of
cash between the common and class B unit holders since its IPO, and it
increased by more than 46% from then until July 2013. Since July 2012, the
company initiated a monthly distribution of cash flow. To continue with its
monthly cash distribution, it has offered a stable distribution of $0.2075 per
unit holder as of Dec. 15, 2013.
As
most of the fields are matured, Vanguard spent $12.8 million in capital
expenditures during the third quarter, less than the second quarter spending of
$14.8 million. The company anticipates a current capital budget of $19 million
to $21 million through the fourth quarter. Its stable production from the
matured fields enables it to sustain its cash distribution with reduced capital
expenditure.
Similarly,
another master limited partnership, BreitBurn Energy Resources (BBEP), has
increased its cash distribution by 1.5% from $0.48 to $0.4875 per unit in the
third quarter. Along with the cash distribution, it also announced equity
offerings to offset its long-term debt to strengthen its cash flow. BreitBurn
also announced that it will start its monthly cash distribution to unit holders
at the beginning of next year. BreitBurn focused on matured and long-life oil
and natural gas fields to gain stable production. Recently it closed an
acquisition in the Permian Basin, and to strengthen its base, the company is
planning another acquisition from CrownRock L.P.
Vanguard
is not planning any near-term acquisition and continued its stable debt
repayment. It paid $87 million as debt repayment during the last quarter and
strengthened its free cash flow by $68 million in the third quarter. With less
capital expenditure and long-life matured field production, Vanguard is
expected to continue its monthly cash distribution in coming years.
Conclusion
With
its stable monthly distribution and conservative acquisition of mature oil and
natural gas fields, Vanguard is becoming a must to consider in a portfolio.
Moreover, its shifted focus towards natural gas reserves will allow the company
to strengthen its free cash flow structure, as the demand for natural gas grows
rapidly in the U.S.
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