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Vanguard Is Oil/Gas 'Agnostic,' Focused on Margin

Unlike many producers today, Vanguard Natural Resources LLC is not necessarily focused on oil and natural gas liquids (NGL)-rich acquisitions. The company has done recent deals for both liquids and dry gas assets, instead focusing on margin and how the properties fit into its structure, CEO Scott Smith said Monday.

"We're looking for margin. If it comes in barrels of oil, NGLs or Mcf, we're kind of agnostic to it," Smith said during an earnings conference call. "...[A]s we see transactions coming to us, we will see a balanced portfolio over the year. But there isn't a conscious decision to say we should get more liquids-focused or get more gas-focused. It's much more a factor of the type of acquisition, the accretion and the fit into our structure..."

Last week Houston-based Vanguard said it would acquire gas, oil and NGL assets in the Permian Basin for $275 million from Range Resources Corp. (see Shale Daily, Feb. 28). The properties are producing 17 MMcfe/d with 41% being natural gas and 59% oil and NGLs, Vanguard said. Last June the company bought Antero Resources' mostly natural gas Arkoma Basin assets for $445 million, giving it a new operating area (see Shale Daily, June 5, 2012).

CFO Richard Robert said Monday that while "many people hear 'natural gas acquisition' and instantly have a negative view," Vanguard has a different philosophy. Gas is cheap today, and the forward curve gives the company the opportunity to hedge and lock in returns down the road.

"...[I]f you buy gas at today's prices and hedge at these levels, you lock in the margin that you valued the assets at. Or in other words, we paid a price based on the prevailing strip pricing and hedged accordingly to capture the expected return on that investment," he said. "That's what the MLP [master limited partnership] model is all about, capturing margin."

And with natural gas, it's also possible to hedge basis differentials, something that doesn't work these days in oil basins such as the Bighorn, Williston and Permian, which have seen a lot of basis volatility of late, Robert said. "Not only have we diversified our cash flow, but we have locked in that diversification and margin through basis hedges.

"Lastly with natural gas, there is a significant amount of upside potential due to the PUD [proved undeveloped] inventory that we didn't pay for because many of the PUD drilling locations are not economical to drill at current prices," he said. "Should prices increase in the future, we are not only able to sell our production at higher prices, but additional drilling locations that we didn't pay for become economic."

For 2012 Vanguard reported adjusted net income of $64.1 million ($1.18/unit) compared to $74 million ($2.33/unit) in 2011. However, that and more was erased by impairments. The company reported a net loss of $168.8 million (minus $3.11/unit) compared to net income of $62.1 million ($1.95/unit) in 2011. The 2012 results include net non-cash expenses of $232.9 million, the largest item of which is a $247.7 million impairment charge on oil and gas properties. The 2011 results include non-cash expenses of $3.6 million and material transaction costs incurred on acquisitions and mergers of $2 million.

During the conference call, Robert stressed that the impairment charge was anticipated and that there likely would be more to come. "Due to SEC pricing, we along with virtually every other natural gas-oriented company, recorded an impairment in the fourth quarter," he said. "It is an item that I continue to expect to see as long as we are acquiring significant natural gas assets in an upward natural gas price curve environment."

Excluding the recent Permian acquisition from Range and any future deals, the company said its capital budget for 2013 would be about $55 million. "Our capital budget will largely include drilling in the Arkoma Basin, Williston Basin and Bighorn Basin along with other maintenance-related projects," Vanguard said.

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