Oct 21, 2013: Bought 180 units of VNR at $28.17 per unit.
Vanguard Natural Resources (VNR) is a publicly traded limited liability company, or LLC. Formed in October 2006, VNR focuses on the acquisition and development of oil and natural gas properties in the United States. Through operating subsidiaries, VNR owns properties in the southern portion of the Appalachian Basin, in the Permian Basin, and in south Texas. VNR completed its initial public offering in October, 2007.
LLCs pay out most of their cash flow in cash distributions, just like master limited partnerships (MLPs). They also have similar tax advantages and disadvantages. Because MLPs require special treatment at tax time, I require a premium yield of at least 6.75%. In my view, the extra work involved with MLP (and LLC) ownership at tax time is only worth my effort if I can earn a great yield. With a starting Yield on Cost of 8.84%, VNR certainly qualifies!
In September 2012, VNR changed from quarterly to monthly distributions. It currently pays 20.75c per unit per month. With my purchase of 180 units, I'll be earning $37.50 every month!
VNR's price has increased by 48% since October 25, 2007, more than triple the 15% increase of the S&P 500 over the same period. Since mid-2011, however, VNR has trailed the performance of the S&P 500.
Analysis of VNR
Fair value estimates for VNR range from $28.80 to about $30.00. Compared with the median of $29.40, VNR is discounted by 4.5%, not quite the 10% discount I prefer. VNR's forward P/E ratio is 18.9, which is a bit higher than I like. (However, VNR's EV/EBITDA ratio is 9.17 for the next 12 months).
The following table provides some key statistics for VNR, with highlighted values relating directly to my MLP selection criteria.
VNR has raised its distribution every year since going public in 2007. Currently, it pays out a solid 8.86% yield. The distribution has grown at an average annualized rate of about 7% per year. And management intends to continue raising VNR's cash distributions over the next several years.
For the years 2010-2012, VNR distributed about 73% of its distributable cash flow to unit holders. That's a distribution coverage ratio of about 1.4. With VNR targeting distributable cash flow coverage of 1.2 times its distribution, it more than adequately covers its distributions.
VNR's prospects for future growth look excellent. Since going public in October 2007, VNR has made 18 acquisitions worth more than $2.5 billion, increasing its reserves 1,777% in the process. It plans to continue growing the company through conservatively financed acquisitions.
VNR's Debt to Capital ratio is 24.4%, well below the 67% I require.
VNR has an excellent track record of generating positive net cash flow from operations, having done so every quarter since the beginning of 2008. Also, it reduces commodity price risk by engaging in hedging contracts – since 2007, VNR has locked in profit margins on every acquisition it has made.
Return on equity (ROE) measures the profitability of a business. VNR's latest quarter ROE is 24.4%, while its 10-year ROE ranges from -191% to +87%. Its ROE is ranked higher than 58% of companies in the Oil & Gas Industry.
VNR passes 8/10 of my MLP selection criteria and earns 6 stars: (*******)
Other ratings for VNR
VNR is attractive because it offers a spectacular distribution yield and a reasonable distribution growth rate. It has strong growth potential, a conservative acquisition and cash flow distribution policy, and a hedging strategy that ensures profitability.
180 shares of VNR adds $448.20 of expected distribution income, increasing DivGro's projected annual dividend income to $2,414.96.
VNR is the 18th stock purchase for DivGro.
Full Disclosure: Long VNR