Here's Why Shares of Vanguard Natural Resources Are Plunging Today

By Tyler

What: Shares of Vanguard Natural Resources were down more than 10%, and stayed there, within of a couple hours of trading on Monday on the news that management has decided to cut its monthly distribution by 75%.

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So What: After a year when other high yield upstream master limited partnerships cut their distributions multiple times, it shouldn't come as much of a surprise that Vanguard decided to cut its monthly distribution to $0.03 per share ($0.36 on an annualized basis). As part of the announcement, Vanguard Natural Resources CEO Scott Smith said that the cash freed up by this move will be redeployed to pay down debt. Even at today's oil and gas prices, management anticipates that this new payout rate will be more than enough to adequately cover distribution payments for 2016 and 2017.

Also, prior to the distribution cut announcement, shares of Vanguard were trading with a distribution yield of more than 50%. At that sort of rate, it was pretty much impossible to raise equity to fund acquisitions or other growth. For a company that makes many large acquisitions, the company needs to have the ability to use equity issuance from time to time to fund growth. So this announcement will likely make it easier for the company to execute a transaction in the future.

Now What: In reality, the market was pricing in a distribution cut for a long time now. No investor in their right mind should expect a company to be able to sustain a cash payment to shareholders that yielded more than 50% annually.

Over the longer term, this will help a lot as the company needs to deal with a hedging portfolio that is starting to roll off in 2016 and no clear signs that it will be able to secure new contracts at lucrative prices. That is especially important if the current payout can be sustained all the way through 2017 at current oil and gas prices.

Those investors looking for long term income should be pretty happy about the news. Unlike some of its peers that have completely eliminated their distributions, Vanguard Natural Resources is keeping a payout in place that sill represents a 12% yield at today's prices. If it can be sustained through 2016 and 2017, then Monday's sell-off seems a bit overdone.

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