The 3 Critical Numbers From Vanguard Natural Resources LLC's Earnings

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With a razor-thin margin for error, Vanguard Natural Resources (NASDAQ: VNR) needed to show tangible progress on several issues in its second-quarter report. It did just that, especially in three critical numbers. However, even with those steps forward, the company still has much work to do before it's back on solid ground.

1. Distributable cash flow was up 65%

With oil and gas prices remaining weak, Vanguard Natural Resources is working hard to mute this impact by cutting costs. According to CEO Scott Smith, this resulted in "significant savings in lease operating expenses and general administrative expenses over the first half of the year" after stripping out the impact of the mergers with LRR Energy and Eagle Rock Energy.

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    The impact of spending reductions was most noticeable in the company's distributable cash flow, which jumped 65% year over year to $58.7 million. Further, it was up 40% from just the prior quarter.

    2. Liquidity "improved" to -$18.5 million

    That excess cash flow is coming in handy right now because the company's banks recently cut the borrowing base under its revolving credit facility from $1.8 billion all the way down to $1.325 billion. That was a problem because it had borrowed $1.424 billion on that facility, leaving it with a deficiency of $103.5 million as of the end of May, though it did have $40 million in cash. As a result, the company was required to pay six equal monthly installments of $17.3 million to satisfy this deficiency.

    However, after generating nearly $60 million in excess cash flow during the quarter and making two deficiency payments, the company now owes its banks $68.5 million. Further, its cash balance has risen to $50 million, which improved its liquidity to negative $18.5 million. While that's still a concern, it's a much better situation than before.

    3. Hedges head higher

    A big reason the company is generating excess cash flow is due to its prior decision to hedge a substantial portion of its production. That decision paid off last quarter by adding another $16.46 per barrel of oil and $1.72 per Mcf of gas, boosting its price realizations by 42% and 147%, respectively.

    That was a common occurrence in the sector last quarter. For example, natural gas producer Range Resources (NYSE: RRC) would have only realized $1.50 per Mcf of natural gas last quarter if it was not for its hedges, which boosted its price realization by another $1.05 per Mcf.

    That said, the concern with Vanguard's hedges is that they would not last forever, which could cause a problem if oil and gas price tumble. The company took steps to address those concerns by adding additional hedges during the quarter to lock in more of its cash flow:

    As of 5/13

    As of 7/26

    % Hedged

    Average Price

    % Hedged

    Average Price

    2016 Natural Gas





    2017 Natural Gas





    2016 Oil





    2017 Oil





    Data source: Vanguard Natural Resources.

    As that chart shows, the company added a meaningful amount of oil and gas hedges through the end of next year to lock in a larger portion of its production well above the current market price. That was a common theme during the quarter as producers took advantage of the recentrun-upin oil and gas prices to lock in production. Range Resources, for example, boosted its hedge portfolio and now has 80% of its natural gas production hedged in 2016 at a floor price of $3.22 per Mcf.

    Investor takeaway

    While Vanguard Natural Resources' finances remain very strained, the company is making progress to improve. Its decision to bolster its oil and gas hedges during the quarter as prices rallied could be what keeps the company afloat if prices take another tumble later this year. That said, it's not back on solid ground just yet. It needs to find other ways to chip away at that credit facility to get its outstanding borrowings well below borrowing capacity so it can have a little more breathing room.

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