Adding It All Up: Why Vanguard Natural Resources, LLC (VNR)’ Reserves Matter

I’ve spent a lot of time this year drilling down into several publicly traded upstream MLPs. The business model is fairly straightforward: These companies buy proved reserves, hedge the current production out for several years, and then distribute nearly all of the income to investors. It’s a model that delivers high yields to investors along with slow and steady growth, all while being less risky than a traditional oil and gas company, as both exploration risk and commodity volatility have been mitigated.

That being said, an upstream MLP is only as good as the reserves it has in the ground. That’s why I’ve looked closely at the reserves of Linn Energy LLC (NASDAQ:LINE) while also breaking down those of BreitBurn Energy Partners L.P. (NASDAQ:BBEP). Today, I want to do the same with Vanguard Natural Resources, LLC (NASDAQ:VNR).

Vanguard, which went public in 2007, has now made 18 acquisitions totaling about $2.8 billion. These acquisitions have expanded the company’s geographic and commodity diversity. The deals have also enabled the company to grow its distributions by 45% since its IPO while stabilizing cash flow to the point where it can pay its distribution monthly. Because the company doesn’t expend capital to explore for oil and gas, it depends on the reserves it has purchased to fuel that distribution. With that as a backdrop, let’s take a closer look at those reserves.

Today, about 60% percent of Vanguard Natural Resources, LLC (NASDAQ:VNR)’s reserves are natural gas which is down from 100% at the IPO. However, as you will see, the company has made a significant shift in recent years toward natural gas, which at one time was just 35% of production. Vanguard has been going in the opposite direction of both Linn Energy LLC (NASDAQ:LINE) and BreitBurn Energy Partners L.P. (NASDAQ:BBEP), who have both been active in acquiring oil-rich assets as well as devoting a majority of capex to drill on oil-rich acreage. Only time will tell which strategy will prove to be the best one for investors.

Despite being gas-heavy, Vanguard Natural Resources, LLC (NASDAQ:VNR) has amassed 175 million barrels of oil equivalent reserves. As you can see on the map below, the company has operations that span across several states:

Source: Vanguard Natural Resources Investor Presentation

Arkoma Basin
At 38% of total reserves, the Arkoma Basin dominates the company’s reserves. This gas-heavy asset was acquired in June of last year from Antero Resources and includes gas properties in the Woodford Shale and Fayetteville Shale. The company paid $428.5 million for the assets which produce about 10,600 barrels of oil equivalent per day. What’s important here is that just 55% of the acreage is proved developed, meaning that Vanguard has plenty of room to grow production here to offset declines elsewhere within its portfolio.