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  • Roger S. Conrad

A Robust Pipeline of Potential Acquisitions

By Elliott H. Gue on Jan. 28, 2014

Vanguard Natural Resources’ recent $581 million acquisition of 14,000 net acres in southwestern Wyoming from a unit of Anadarko Petroleum, for example, suggests that deal flow has normalized and that the industry isn’t worried about the SEC handing down accounting changes.

This asset purchase also marks a shift in strategy for Vanguard Natural Resources, which has completed 19 asset acquisitions since its initial public offering in October 2007. Unlike previous deals that focused on producing assets, this latest acquisition includes 2,000 wells and 970 low-risk drilling sites, providing an opportunity for organic growth.

Vanguard Natural Resources and its partners plan to run about eight drilling rigs on this acreage; each of these units will be able to sink two wells each month, which equates to 24 wells each year. Assuming the MLP maintains this development program, the firm would exhaust its inventory of 970 potential drilling locations in about five years.

Although the undeveloped acreage included in this deal increases the potential for execution risks, Vanguard Natural Resources’ experienced partners–QEP Resources (NYSE: QEP) and Ultra Petroleum Corp (NYSE: UPL)–will conduct the drilling. The MLP’s average drilling interest in these wells will hover around 10 percent.

Moreover, Vanguard Natural Resources plans to hedge the bulk of the anticipated natural-gas production from the acquired acreage through 2017.

Prior to the deal, the MLP had hedged about 75 percent of its expected oil production through 2015 and 85 percent of its anticipated natural-gas output through the first half of 2017; expect the publicly traded partnership to hedge a similar proportion of its newly added hydrocarbon output.

Vanguard Natural Resources purchased these reserves for about $0.69 per million cubic feet, assuring the outfit a solid profit margin with futures contracts ranging from $4.00 to $4.50 per million cubic feet.

Linn Energy and Vanguard Natural Resources aren’t Ponzi schemes that acquire marginal assets to maintain their distributions.

Both companies have purchased oil- and gas-producing assets from leading integrated oil companies and large independent exploration and production outfits.

The two MLPs have also partnered with leading players in the US onshore market to develop their acreage.

And Linn Energy’s innovative acquisition of Berry Petroleum provides a playbook for other upstream MLPs to follow, creating wider array of potential opportunities for its peer group.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor