Vanguard Natural Resources, LLC (VNR), Linn Energy LLC (LINE): 1 Hidden Opportunity From the Shale Revolution

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One of the most surprising discoveries of the past decade has been the amount of oil and gas we have in the United States. The shale revolution has not only turned the Bakken and Eagle Ford into black-gold mines, but it has really changed the way that U.S.-based oil and gas companies operate. As we drill into the incredible numbers we’ll uncover a hidden opportunity could have investors cashing in for years to come.

Vanguard Natural Resources, LLC (NASDAQ:VNR)

It wasn’t that long ago that we thought we were about to run out of gas, quite literally. At the start of the decade it was estimated that we had enough natural gas left from conventional gas wells to last us about 12 years. This belief had several companies, including Dominion Energy, building natural gas import terminals. Today, Dominion is working to convert its Cove Point LNG terminal into an export facility because we have more than enough gas to meet our needs. As the following chart shows, the impact of the shales is significant:

Source: Vanguard Natural ResourcesInvestor Presentation (link opens a PDF).

Not only are our shale gas reserves significant, but we have tremendous potential liquid reserves as well:

Source: Vanguard Natural Resources Investor Presentation.

The problem is that those reserves will cost a substantial amount of money to develop over the next few decades. It’s estimated that oil and gas companies will need to spend an average of $70 billion a year over the next 30 years to develop these plays. The total price tag is estimated to be more than $1.8 trillion. The next chart breaks down the capital requirements per play:

Source: Vanguard Natural Resources Investor Presentation.

Because of the vast amounts of capital required to develop our shale plays, many E&P companies are struggling to find ways to pay to develop the acreage they have amassed. Investors will only tolerate so much equity dilation, and using debt can have serious consequences. One look at either Chesapeake Energy Corporation (NYSE:CHK) or SandRidge Energy Inc. (NYSE:SD) , and you’ll see what I mean. Chesapeake Energy Corporation (NYSE:CHK) has seen shares outstanding rise by about 30% over the past five years, while SandRidge Energy Inc. (NYSE:SD)’s share count has jumped by more than 200% over that same timeframe. In addition, both companies have taken on copious amounts of debt, all in an effort to fund production growth. Unfortunately, this hasn’t worked out very well, as investors have been killed by poor recent investment returns.

The only other option to fund these capital needs is to form foreign joint ventures, which could jeopardize our dream of energy independence, or simply unload mature oil and gas assets. That last option has opened up a hidden opportunity for upstream oil and gas MLPs such as Linn Energy LLC (NASDAQ:LINE) and Vanguard Natural Resources, LLC (NYSE:VNR) to consolidate these mature producing properties.

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