Forget Vanguard Natural Resources, LLC: These 3 Stocks Are Better Buys

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

Continue Reading Below

Vanguard Natural Resources (NASDAQ: VNR) is in over its head right now. As of the end of September, the company had borrowed $1.325 billion under its bank credit facility. That is a grave concern because its banks cut the borrowing base on that facility to $1.1 billion in October. This decision means the company needs to repay the deficiency in six equal monthly payments or it may have no choice but to declare bankruptcy. Unfortunately, that latter option is looking more likely with each passing day given its declining cash flow and other financial issues.

Because of the company's precarious financial situation, investors should forget about investing in Vanguard Natural Resources right now. Instead, those looking for an oil and gas stock with a similar focus or business model should consider Antero Resources (NYSE: AR), Parsley Energy (NYSE: PE), or Enterprise Products Partners (NYSE: EPD) instead. Here's why.

Natural gas-driven growth

One thing that had drawn investors to Vanguard Natural Resources in the past was its focus on natural gas over oil. Thanks to a string of acquisitions, Vanguard built a substantial natural gas asset base totaling 4.4 trillion cubic feet equivalent (Tcfe) of proved reserves -- about three-quarters of which is gas -- giving it tremendous optionality and upside to rising gas prices. That said, because of the company's higher costs and elevated debt level, it cannot get the most out of this resource base.

Contrast this with Antero Resources, which is one of the fastest-growing gas companies in the country. The company currently controls the largest acreage position in the core of the Marcellus shale as well as an expansive position in the Utica. These areas hold more than 13 Tcfe of proved gas reserves and an estimated 60 Tcfe of resource potential. Meanwhile, thanks to its relatively low leverage and the high-return nature of these wells, Antero Resources believes it can grow production by 20% to 25% next year, with significant growth potential in future years. Suffice it to say, investors looking for gas-driven growth need to look past Vanguard and consider Antero Resources instead.

Continue Reading Below

Making acquisitions the right way

Another draw of Vanguard's business model was its acquisition-driven growth strategy. Since going public in 2007, the company has spent $5 billion to complete 25 strategic acquisitions. That said, it funded the bulk of that growth with debt and, worse yet, used its credit facility as a primary funding source for deal-making. That decision now has the company near the brink of bankruptcy.

Contrast this with Parsley Energy, which primarily uses equity to fund acquisitions. This year alone, the company has completed four transactions, which have added 42,000 net acres to its portfolio, boosting its position by nearly 50%. However, each time it announced a deal, the company immediately launched a stock offering. Because of that, Parsley Energy has just $750 million of net debt, which is a tiny amount for the more than $8 billion company. Furthermore, Parley Energy has not touched its $600 million credit facility and currently has $200 million in cash, which gives it ample liquidity for future deals or to drill more wells. Suffice it to say, Parsley Energy knows the right way to do mergers and acquisitions in the oil patch.

Image source: Getty Images.

Get your distributions here

The third draw to Vanguard in the past was its generous distributions. At its peak, the company was sending unitholders a lucrative cash payment every month. However, the significant slump in commodity prices, when combined with the company's balance sheet issues, forced it to cut the payout last year before stopping it altogether in 2016.

Contrast this with Enterprise Products Partners, which has paid unitholders a distribution every quarter since going public in 1998, having increased the payout 58 times, including for the past 49 straight quarters. Driving the consistency of Enterprise Products Partners' distribution increases is its strong investment grade-rated balance sheet, a conservative payout ratio, and the fact that the bulk of its cash flow comes from stable fee-based assets. Furthermore, with several fee-based expansion projects currently under construction, Enterprise Products Partners has clear visibility to keep its distribution growth streak alive. Meanwhile, it will be a miracle for Vanguard to get back into the position where it can start paying its investors distributions ever again.

Investor takeaway

Investors might think Vanguard Natural Resources' low unit price is an attractive opportunity to pick up a natural gas-focused company potentially poised for a turnaround. While it is possible that the company might fix its balance sheet woes before time runs out, there's a real risk it could fail. Investors are better off avoiding that risk, which is why they should forget about Vanguard and consider investing in Antero, Parsley, or Enterprise instead.

10 stocks we like better than Enterprise Products Partners
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Enterprise Products Partners wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of Nov. 7, 2016

Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.