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Vanguard Nearly Doubles Reserves Base with Pinedale, Jonah Deal

Vanguard Natural Resources LLC is laying down $581 million for natural gas-weighted properties in southwestern Wyoming, marking a change in strategy to compete for more mature production and proven undeveloped acreage.

Included in the transaction are an estimated 14,000 net (87,000 gross) acres in the Pinedale Anticline and Jonah fields, with 2,000 producing wells and 970 wells still to be developed.

The Houston-based operator’s reserves under the transaction would increase by 80%, with daily production jumping 55%, said CEO Scott W. Smith. Vanguard's partners, Ultra Petroleum Corp. and QEP Resources Inc. -- both big natural gas producers in the region -- are to operate the wells.

"Acquiring an interest in one of the country's most prolific natural gas fields, operated by companies with an unparalleled history of successful development, is a milestone event for Vanguard," said Smith. "This property will be an excellent addition to our portfolio of long-life, mature assets and represents a great start to our 2014 acquisition program."

Vanguard kept the seller a secret, but Wells Fargo analysts speculated that it could be Anadarko Petroleum Corp., which “makes sense” because as the operator manages/high grades its portfolio “the Pinedale could be viewed as a noncore, non-op gas asset for the company.” The divestiture “would not move the needle” on Anadarko’s production “and the sale price only amounts to $1.15/share.”

Once the assets are in hand, Vanguard is planning an eight-rig program in 2014 with an eye on drilling two wells a month. The assets now produce 113.4 MMcfe/d, 80% weighted to natural gas, 16% to natural gas liquids (NGL) and 4% to oil.

Most of the production today is from the Pinedale (88.7 MMcf/d), with 2 MMcf/d from Jonah. Total Pinedale output of around 110,900 MMcfe/d includes 3,000 b/d of NGLs and 700 b/d of oil. Jonah's total output is about 2,500 MMcfe/d, with 100 b/d of NGLs and no oil. About 5,200 locations haven't been booked on the expectation they won't be drilled within a five-year period, as required under Securities and Exchange Commission rules. The reserve life of the assets is estimated at 20 years based on internally estimated proved reserves of 847 Bcfe.

CFO Richard Robert said the transaction marks "an important change" in strategy.

"For the first time in its history, Vanguard will be allocating capital to drilling wells on these acquired properties, which is expected to not only maintain cash flow but grow cash flow," said Robert. "Based on the numerous proved undeveloped drilling locations and the current number of drilling rigs in use by the operators, this combined maintenance and growth capital program will be sustainable for over 10 years.

"Furthermore, this strategy change will allow Vanguard to more effectively compete for new acquisitions that contain both mature stable production and a significant inventory of proven undeveloped drilling locations."

The Pinedale/Jonah purchase should be accretive to distributable cash flow at closing, management said. Vanguard plans to fund the acquisition with its credit facility. The acquisition is set to close by the end of January with an effective date of October 2013.

Earlier this year Smith said Vanguard's transactions focused on margin and how properties might fit into its structure (see Shale Daily, March 5). "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. As more transactions come its way, Vanguard was expecting "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..."

In February Vanguard picked up assets in the Permian Basin (see Shale Daily, Feb. 28). In June 2012 the company bought Antero Resources' gas-weighted Arkoma Basin assets,  giving it a new operating area (see Shale Daily, June 5, 2012).

Vanguard's current assets consist primarily of reserves in the Permian Basin in West Texas and New Mexico; the Big Horn Basin in Wyoming and Montana; the Arkoma Basin in Arkansas and Oklahoma; the Piceance Basin in Colorado; the Powder River and Wind River Basin in Wyoming, the Williston Basin in North Dakota; and in Montana, Mississippi and South Texas.

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