Houston-based Vanguard Natural Resources LLC said it plans to use proceeds from the sale of some assets in the Midcontinent to pay down its debt, while it plans to bump up its capital expenditures (capex) for the remainder of the year to conduct drilling in the Green River Basin’s Pinedale Anticline.

Last March, the master limited partnership agreed to sell its natural gas, oil and natural gas liquids (NGL) assets in Oklahoma’s stacked reservoirs to Titanium Exploration Partners LLC for $280 million (see Shale Daily, March 31). During an earnings call Tuesday to discuss 1Q2016, CEO Scott Smith said the company expects the deal to close by May 18.

“Although this area offers a significant amount of drilling inventory that still makes sense in today’s commodity environment, we believe that Vanguard and all of our stakeholders are better served by monetizing this asset to improve the balance sheet and pay down on our credit facility,” said Smith. “Additionally, these assets are very capital intensive and have a higher decline rate that we believe does not make much sense in our business model.”

The company spent about $20.3 million on drilling, capital workover and recompletion activities in the first quarter and expects to spend $54-58 million in capex for the remainder of the year, for a total of $74-78 million. Last March, Vanguard had said it planned to spend $63 million on capex in 2016. By comparison, it spent $112.6 million in 2015.

Smith said the $10-15 million increase in capex, or about 45% of the remaining budget for the year ($24-26 million), would go toward drilling in the Pinedale Anticline. Meanwhile, about 20% of the remaining capex budget for the year would be devoted, for now, to its Oklahoma stacked reservoirs.

“We are still achieving 20% or more type rates of return [in the Pinedale], and are fortunate that we have a large inventory of repeatable projects for many years to come that are still economic in today’s depressed commodity environment,” Smith said. After Vanguard sells its Oklahoma assets, capital “may be shifted to other areas in our portfolio, specifically as we continue to evaluate drilling vertical wells in our East Haynesville [Shale], where we had success last year.

“The balance of the remaining capex budget is related to recompletion and maintenance activities in our other operating areas.”

According to a 10-K filing with the U.S. Securities and Exchange Commission (SEC) from March, Vanguard held 126,420 gross (35,170 net) leasehold acres in the Green River Basin at the end of 2015. Green River production totaled about 48,394 MMcfe in 2015, of which 86% was natural gas.

Smith said during the first quarter, the MLP participated in drilling 22 gross wells and completing 38 gross wells, with an average working interest (WI) of 12% in all of them. Vanguard’s operating partners, Ultra Petroleum Corp. and QEP Resources Inc., are currently running two rigs and one rig, respectively, and probably would continue to do so through the end of 2016, he said (see Shale Daily, Dec. 30, 2013).

According to Smith, QEP delayed restarting its completion program until June. “Because of this decision on their part, we saw no new wells drilled by QEP come online in the first quarter. But we anticipate that our production will be positively impacted in the third quarter once they begin completing the more than 30 wells that were in inventory at the end of the first quarter.”

Vanguard reported average production of 473.2 MMcfe/d in 1Q2016, a 21% increase from the year-ago quarter (394.317 MMcfe/d), but an 8% decrease from 4Q2015 (511.12 MMcfe/d).

Net losses in 1Q2016 totaled $152 million (minus $1.16/unit), versus a year-ago net loss of $125.5 million (minus $1.49).

Vanguard reported that it has 80% of its gas production for the remainder of 2016 hedged at $4.19/MMBtu, and 63% of 2017 gas production is hedged at $3.75. It also reported that 82% of its remaining crude oil production for 2016 is hedged at $59.59/bbl, and 21% for 2017 is hedged at $84.64. Twenty-two percent of NGL production is hedged at $30.31/bbl for the remainder of 2016; none is hedged for 2017.

Vanguard ended the first quarter with about $113 million of total liquidity. CFO Richard Robert said the company was in the process of navigating its semi-annual borrowing base redetermination. Vanguard expects that with continuing declines in oil and gas prices, the company’s borrowing base will be reset to a level below its outstanding borrowings, resulting in a “small deficiency.”

“Our internal forecast shows that we will generate a substantial amount of excess cash flow over the course of 2016, which we expect will be sufficient to repay the borrowing base deficiency,” Robert said. “In the case of a borrowing base deficiency, our reserve based credit facility requires us to repay the deficiency in equal monthly installments over a six-month period. Our bank meeting is set for later this week, and once the borrowing base has been approved by the bank group and the divestiture [of the Oklahoma assets] is consummated, we will put out new financial and operating forecasts for 2016.

“We understand that simply hoping for a better price environment is not a business strategy and we are actively taking every step we see fit to improve our balance sheet, protect our stakeholders and position Vanguard for a brighter future.”

Production in the Green River Basin is dominated by natural gas and NGLs from tight sands formations, such as the Pinedale Anticline and the Jonah field in Sublette County, WY. In 2009, the U.S. Energy Information Administration reported that the Pinedale was the third-largest natural gas field in the U.S., in terms of proved reserves; the Jonah field was seventh-largest. More information about the basin is available from NGI’s new North American Shale & Resource Plays 2016 Factbook.