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Vanguard Natural Resources LLC
Vanguard Natural Resources LLC at National Association of Publicly Traded Partnerships MLP Investor
May 22, 2013 9:00 a.m. ET
Richard Robert – EVP, CFO, Secretary
Kevin Smith – Raymond James
Previous Statements by VNR
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» Vanguard Natural Resources' CEO Discusses Q3 2012 Results - Earnings Call Transcript
Thank you, Kevin. Good morning, everyone. Thank you for taking the time to come listen to the Vanguard story.
There are two principal things I’d like – that I hope you get out of this presentation.
The first being that we’re not a typical upstream company. We’re very different than your typical C-Corp resource player. And the second thing – I hope you get out of this presentation – is that a growth-via-acquisition strategy is a viable strategy. And with that, I’ll get started.
We are an upstream MLP. We call ourselves an MLP, but, actually, we are structured as an LLC. The difference, essentially, is that we do not have a General Partner. And, as such, we don't have incentive distribution rights.
And so, that’s a very important concept, when you're considering cost of capital. And down the road, we won't have those cost of capital constraints that a lot of the midstreams you see are having. Ones that have been successful and have raised their distributions, a lot of them are having to buy in their GPs because they can't be competitive anymore.
That’s not the case for us. And we’re also – our governance is also much more like a C-Corp, where our unit holders elect a Board of Directors each year.
When we started back in '07, a little over five years ago, we had an enterprise value of a little over $240 million. Today, we’re about $3.3 billion, so a fair amount of growth over this five-year period.
And I would suggest that that growth, if anything, is going to accelerate. Like a lot of things, the first billion is your hardest billion. Now, that we have access to the high-yield market and sellers are aware of our name, the deal flow has improved and, more importantly, the quality of the deal flow has improved.
We’re having to – we’re participating in a lot less auctions and more in kind of seller direct dialog. They know that we’re in the area; they know that we’re going to pay a fair price. And I think we’ve got a reputation, as being a company that is pretty reasonable in terms of negotiation, so I think we’re becoming a preferred buyer on a lot of these assets.
Something we did recently is go to a monthly distribution. We are the first – and not the only anymore, but we are the first company, MLP, that went to a monthly distribution. We did it as a response to investor comments that they like MLPs, but the cash flow is very – it’s not consistent. Four months out of the year when they get their MLP distributions they felt very wealthy. And the other eight months, they were trying to manage their checkbooks. So, we thought we would take care of that and start providing monthly distributions. And I think the response on the retail investor side has been quite good.
We identified five specific areas that we thought were very important to creating a successful upstream MLP. First and foremost is you have to buy the right assets. You might remember the oil and gas partnerships of the '80s didn't fare very well for two reasons.
One, because of the pricing; everyone remembers what happened from a price perspective; the prices collapsed, and hedging wasn't available at that time, so they took it in the chin.
But they also didn't necessarily buy the right assets. We look for some very specific characteristics, being long-life reserves. We want high R-over-P ratios. We want stable production profiles. We want stable operating costs. And we want a high percentage of producing properties, when we buy these assets. Typically, 60% or more of the properties need to be producing such that it can be accretive on day one.
Second thing is discipline. Know when things fit. Step aside when they don't fit. We evaluate upwards of 150 transactions on an annual basis. We’re introduced to two, three, four new deals every week. But they don't all fit, and we call those out pretty quickly.
If they don't have those characteristics that I just suggested, we typically won't go to the next step. But when we do go to the next step, we do a full evaluation, we use realistic assumptions, and we bid, based on those assumptions.
We lose most of the time. We have to get very used to losing on transactions. We probably bid 50 transactions and we may complete three, four, five transactions in a given year. So, we just have to be very mindful that the assumptions have to be realistic and we have to continue to be disciplined. We all want to grow, but we want to grow wisely.
And I think that one of the things I forget to mention sometimes is we’re very proud of the growth aspect, going from $200 million-plus to $3.3 billion. But what we’re most proud of is over the course of time, we’ve raised our distribution 45%. So, I think that is a testament to making good transactions. Even in volatile commodity markets and in volatile financial markets, we’ve been able to find a way to grow and continue to raise our distribution on a consistent basis.