VNR

Vanguard Natural Resources LLC (VNR)

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Exchange: NASDAQ
Industry: Energy
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Vanguard Natural Resources, LLC (VNR)

Q3 2012 Earnings Call

November 1, 2012 11:00 AM ET

Executives

Lisa Godfrey – Director, IR

Scott Smith – President and CEO

Rich Robert – EVP, CFO and Secretary

Analysts

John Ragozzino – RBC

Ethan Bellamy – Baird

Ipsit Mohanty – Bank of America Merrill Lynch

Michael Peterson – MLV

Praneeth Satish – Wells Fargo

Jeff Robertson – Barclays

Adam Leight – RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Vanguard Natural Resources Q3 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Thursday November 1, 2012 at 10:00 AM Central Time.

I would now like to turn the conference over to Ms. Lisa Godfrey, Director of -Investor Relations. Please go ahead.

Lisa Godfrey

Good morning everyone, and welcome to the Vanguard Natural Resources LLC third quarter 2012 earnings conference call. We appreciate you joining us today. On the call this morning are Scott Smith, our President and Chief Executive Officer, Richard Robert, our Executive Vice-President and Chief Financial Officer and Britt Pence, our senior Vice President of Operations.

If you would like to listen to a replay of today’s call, it will be available through December 1, 2012, and may be accessed by calling 303-590-3030 and using the pass code 45719045. A webcast archive will also be available on the Investor Relations page of the company’s website at www.vnrllc.com and will be accessible online for approximately 30 days.

For more information, or if you would like to be on our email distribution list to receive future news releases, please contact me at 832-327-2234 or via email at lgodfrey@vnrllc.com. This information was also provided in this morning’s earnings release. Please note, the information reported on this call speaks only as of today, November 1, 2012, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay.

Before we get started, please note that some of the comments today could be considered forward-looking statements and are based on certain assumptions and expectations of management. For a detailed list of all the risk factors associated with our business, please refer to our 10-Q that will be filed later this week, and available on our website under the Investor Relations tab, as well as on EDGAR. Also on the Investor Relations tab, on our website, under Presentation, you can find the Q3 earnings results supplemental presentation.

In addition as a reminder the next record date for our monthly cash distribution is today November 1, with the November 14 payable date. Unit holders of record will receive $0.20 for each unit held or $2.40 on an annualized basis. In addition, I’d like to point out, we have our direct Unit Purchase Plan and a Direct Program through our transfer agent American Stock Transfer. To enrollment plan, you can visit www.amstock.com and under the shareholders tab, go to invest online and direct purchases and link to the Vanguard Natural Resources to purchase directly online.

Now, I would like to turn the call over to Scott Smith, President and CEO of Vanguard Natural Resources LLC.

Scott Smith

Thanks, Lisa. And welcome everyone, and thanks for joining us on our third quarter of 2012 conference call. This morning, I’ll start with what I believe to be the most important topic at hand. Our execution as the purchase of the sale agreement with the Bill Barrett Corporation for $335 million acquisition of primarily natural gas, and natural gas liquids properties in Wyoming, Colorado.

With this purchase, we will have increased our operating footprint in two of the largest producing basins in Wyoming and also added a high quality non-operated position along side of lean development company in the Piceance basin in Colorado.

Highlights of this transaction are we acquired approximately 300 Bcfe of total reserves using strip pricing, which consist of 240 Bcf of proved developed reserves and 60 Bcf of proved undeveloped reserves.

On a product basis, the assets are 78% natural gas, 15% natural gas liquids, and 7% oil and con say. One of the challenges we face from negotiating this transaction was structure the acquisition in such a matter – manner as to the gauge the near-term decline of the production in order to maintain the cash flow, which is obviously a key part of our business plan.

We’re in the various team to solve this issue by structuring the acquisition of Piceance assets, which include a gradually increasing working interest overtime. Initially our working interest is that at 18%, but the interest gradually increases through 2015 until it is capped at 26% as of January 1, 2016.

By implementing the structure along with our hedging strategy, we anticipate having relatively flat cash flows each year through 2016, after any significant capital expenditures. This is important, because we haven’t modeled any PUD development drilling on the acquired properties until 2016.

The current net production attributable to the assets is approximately 65 million cubic feet equivalent per day, which translates to an ROP ratio of 13 years on a proved basis. We project an average decline of approximately 12% from current levels to the end of 2013 and then about approximately 8% annually thereafter. These decline rates do not reflect the impact of any PUD development, but are inclusive of the increased working interest structure that we’ve designed in Piceance basin. On an operating metric basis these assets are low averaged LOE per Mcf of just over $1 and production taxes are approximately 8.5%.

As is our strategy, we intend to significantly hedge this acquisition through 2016 for a combination of swaps, basis swaps and basis swaps for the natural gas production and swaps and three-way collars for the oil production.

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