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Vanguard Natural Resources, LLC (VNR)
Citi North American Credit Conference Call
November 14, 2012 2:00 pm ET
Richard A. Robert – Executive Vice President, Chief Financial Officer
Richard A. Robert
Previous Statements by VNR
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So let me start by just giving you kind of an overview of where we started, who we are? We are an oil and gas production company, we are commonly referred to as an MLP, although we are structured as an LLC, which makes us a little bit different than your typical MLP, we don’t have a general partner, we don’t have incentive distribution rights, our governance is more like a SEACOR, where we have a Board of Directors that is elected every year, so I would like to thank our structures a little bit more investor friendly than you would typically find in the typical MLP universe.
We started back in 2006. At the end of 2006, went public in October of 2007. Over that and relatively smaller that time, more employees and got $240 million enterprise value. We’ve grown a little bit since then about $2.4 billion of acquisitions and what we are very excited about is that, we think we’ve done, we’ve had that growth we’ve done that growth at very profitable way. That is obviously shown, our distribution growth get 41% since going public, and we’ve done it without a lot of leverage, we’ve done it kind of in a consistent manner over the years and you will see that growth has been relatively consistent. Exponential here in the last couple of years but and obviously something that we think is prelude the things to come.
From an asset mix standpoint, we are relatively balanced on a reserve basis. If you include the Barrett transaction that’s been announced, but not closed, we are at about 40% liquid, 61% gas on a reserve basis, our production is obviously shown to have increased considerably. Not including the Barrett transaction, since we haven’t closed it, we are anticipating production at about 24,000 barrels a day of equivalent. The Barrett transaction has changed that profile quite a bit, something that we are very excited about for next year, because we do anticipate closing that transaction at the end of the year.
We are diversified. When we went public, we were all gas, all Appalachia, one basin, one commodity. Today we operate out of seven basins, I think it is now with the Barrett transaction it will be about nine basins, again split in a variety of different areas, while gas will become a bigger component of our reserve mix and production mix. It’s still with current pricing it’s still fairly small amount of our revenue, we are anticipating some of the neighborhood of 60% of our production to be gas, but it only accounts for probably 25% to 30% of our revenue.
Coal is the still the driver in terms of revenue growth. The way we spend company makes, the way we spend capital makes us different than your typical SEACOR resource player. Typical resource players, we’re drilling the big shale well spent a lot of capital. And they typically outspend their cash flow year in and year out that’s where we come in. We have still that gap for them.
They are awarded for just having production. They are expected to increase production. So having a stable production profile isn’t what they are looking for, so selling material assets allow them to generate the capital to go out and find that new resource play. We on the other hand, spend a fairly small amount of our capital growing new wells.
We do have an inventory per locations that we use to maintain our cash flow year in and year out. Our growth is through acquisition, it is not through the drill bed.
And so we’re typical resource player might outspend their cash flow by a significant margin. We only spend historically 15% to 20% of our cash flow. That is less than their typical upstream MLP, we actually spend less than a number of our peers, which we think is an advantage in that, we don’t have to spend as much capital because we have nice good rates of returns on oil prospects and don’t have to spend quite as much money to generate good rates of return.
As I mentioned, our strategy is growth through acquisitions. Is that a viable strategy and I say emphatically, yes. There is a tremendous amount of assets out there that fit the MLP structure that are stable production, long reserve lives, low decline properties. There is just an incredible number of those out there in fact people have estimated theirs as much as $1.5 trillion of those types of assets out there and with only 10 upstream MLPs right now that is plenty to go around. So we need to penetrate a very small amount of that market to be very successful.
And we have been successful. If you look at our track record, as a smaller company, we started small. We are focused on smaller transactions because that is where we could, that is what we could finance at that time. But even despite the financial crisis, class and commodity prices, we were still able to consistently grow every year. Now what you’ll see in this graph is that we kind of had a shift in and what we thought was important in terms of the commodity mix. When we started as I said we were Gas Company focused in one area. We decided that after a couple of more gas transactions, gas was trading in the $8 to $9 range oil was trading in at a much lower level I can’t remember exactly what it was at that time probably 60/50.