Vanishing Point? Vanguard Closes Stack Sale; Braces For Hit From Lenders

Vanguard Natural Resources LLC (NASDAQ: VNR) closed its selloff of its Scoop and Stack acreage for less money than hoped and still expects to see itself overdrawn on its borrowing base.

The net result will be a “small deficiency,” Vanguard Natural Resources CFO Richard A. Robert said in a May investor call. In such an event, the company has six months to pay off the overhang balance.

While its peers—including Ultra Petroleum and Linn Energy—have fallen into bankruptcy, Vanguard has been on an offensive: selling assets in the Permian and Oklahoma, cutting expenses and knocking down its debt. The end result should be net cash flow and EBITDA going up despite lower production.

The company has taken a number of steps to brace itself for the redetermination. The sale of its Oklahoma acreage to Titanium Exploration Partners LLC will allow the company to attack its reserve-based debt head on. The proceeds of $272.2 million will be used to pay down debt “immediately,” Vanguard said.

The sale was supposed to bring in about $280 million when Vanguard announced the deal at the end of March. RBC Richardson Barr acted as exclusive adviser to Vanguard for the transaction.

Tactical

Through sales and sheer cleverness, the MLP has been steadily reducing debt.

However, even with its debt burden lessened, the company has taken impairment charges of more than $340 million since 2015.

As Robert put it, “hoping for a better price environment is not a business strategy.”

As of April 29, Vanguard’s indebtedness under its reserve based credit facility was $1.69 billion on a borrowing base of $1.78 billion. That gave Vanguard about $110 million in liquidity, including $25 million in cash.

The company still faces “one distinct problem: too much of our debt is under our reserve based credit facility,” Robert said.

Vanguard has been working hard ahead of its borrowing base redetermination to get leaner.

The company has also cut back significantly on its capex, lowering spending by $20 million in the first quarter of 2016 and expected reductions of $22 million in the second quarter. Overall, capex is anticipated to fall by an estimated $73 million following the Scoop/Stack sale.

In another maneuver, Vanguard exchanged some of its debt, lowering what it owes by $92 million and saving annual interest expenses of about $8 million.

Despite Vanguard’s loss of the Scoop/Stack acreage and a pared-back borrowing base, the company is poised to make money.

“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.

Kevin Smith, equity research analyst at Raymond James & Associates, estimated that the company’s borrowing base will sink to $1.4 billion.

“While liquidity will remain particularly tight, we continue to foresee Vanguard generating adequate free cash flow and returning to compliance with its banks,” Smith said.

Robert said that Vanguard doesn’t anticipate having to pay its debt overhand in a six-month period should lenders decide to lower the borrowing base and leave the MLP owing more money than it can borrow.

What Vanguard has going for it is good cash flow, cuts to its distribution, efforts to pay down debt faster and reduced capex.

“By doing those things I think they are more apt to work with you than simply burying their heads in the sand and hoping for a better price deck in the future,” Robert said.

Darren Barbee can be reached at dbarbee@hartenergy.com.