3 Things Vanguard Natural Resources LLC's Management Team Wants You to Know

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The downturn in the energy market is putting a lot of pressure on Vanguard Natural Resources (NASDAQ: VNR). Weak oil and gas prices are weighing on its cash flow, which is making it harder for Vanguard to maintain its enormous debt load. That said, it is making progress to address the situation. However, while its management team detailed the recent improvements on its second-quarter conference call, it also warned that challenges remain.

1. An improving balance sheet

The most pressing issue for Vanguard Natural Resources right now is its balance sheet. Not only does it have too much debt for the current market, but it does not have any liquidity at the moment. That said, CFO Richard Robert wanted investors to know that its goal continues to be "improving liquidity and reducing leverage." Furthermore, Robert stated that the company "will continue to be proactive in this pursuit through the course of the year."

One evidence of the progress Vanguard Natural Resources made is in its liquidity. When its banks cut the borrowing base on its credit facility to $1.325 billion in May, it created a deficiency of $103 million because Vanguard's outstanding borrowings totaled $1.428 billion. However, it generated enough cash flow during the second quarter to make two of its six $17.3 million monthly deficiency payments and still had $50 million in cash left in the bank. Also, it projects to generate enough cash flow over the next four months to cover the $69 million in remaining payments with cash to spare.

2. One daunting problem

Unfortunately, despite that progress, the company "continue[s] to have one distinct problem," according to Robert, who attributed the problem to the following:

As Roberts makes clear, the company's reliance on its credit facility as a funding source put it in abind now that commodity prices are much lower. The credit capacity of that facility is at the mercy of its bank group, which might choose to cut its available credit again in the fall even if commodity prices rebound. Because of that uncertainty, the company must do something to solve this problem. Regrettably, it does not have many choices.

3. Don't expect another major asset sale

One option it already used in the past was a large asset sale, with the sale of its SCOOP/STACK assets bringing in $272.5 million in cash. However, the company does not anticipate another large-scale asset sale in the future. Instead, CEO Scott Smith said:

This is a common approach in the industry right now. Fellow balance sheet stressed peer Denbury Resources (NYSE: DNR), for example, recently sold its remaining non-core assets in the Williston Basin for $58 million and used that cash to pay down borrowings under its credit facility. Like Vanguard, Denbury Resources needed to reduce its borrowings because its credit facility's borrowing base was cut 30% by its banks this spring to $1.05 billion. At the time, Denbury Resources had only borrowed $310 million, which left it with plenty of liquidity. That is not a luxury Vanguard has right now. Instead, it needs to pursue all options to pay down debt before its banks meet again in the fall.

Investor takeaway

While Vanguard Natural Resources is making progress to repair its balance sheet, it still has a huge problem to address. While pursuing small asset sales to chip away at its outstanding credit balance is part of the solution, the company will need to do much more. Because of that, Vanguard's credit picture remains the No. 1 issue investors need to keep an eye on right now.

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Matt DiLallo owns shares of Denbury Resources. The Motley Fool owns shares of Denbury Resources. 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.