Transcript VNR_Richard Robert Presentation 11.10.12

Houston Investor
Association
Presented by:
Richard Robert, EVP & CFO
5847 San Felipe, Suite 3000
Houston, Texas 77057
FAX: 832-327-2260
Mobile: 281-831-9680
Email: [email protected]
November 10, 2012
NYSE: VNR
Forward-Looking Statements
Statements made by representatives of Vanguard Natural Resources, LLC during the course
of this presentation that are not historical facts are forward looking statements, including (but
not limited to) statements about the acquisition (including its benefits, results and effects), the
related financing plans, whether and when the acquisition will be consummated, the operating
results of Encore Energy Partners LP following the acquisition and statements with respect to
future distributions. These statements are based on certain assumptions and expectations
made by the Company which reflect management’s experience, estimates and perception of
historical trends, current conditions, anticipated future developments and other factors believed
to be appropriate. Such statements are subject to a number of assumptions, risks and
uncertainties, many of which are beyond the control of the Company, which may cause actual
results to differ materially from those implied or anticipated in the forward looking statements.
These include risks relating to the satisfaction of the conditions to closing of the acquisition,
uncertainties as to timing, financial performance and results, our indebtedness under our
revolving credit facility, availability of sufficient cash to pay our distributions and execute our
business plan, prices and demand for oil, natural gas and natural gas liquids, our ability to
replace reserves and efficiently develop our reserves, our ability to make acquisitions on
economically acceptable terms and other important factors that could cause actual results to
differ materially from those anticipated or implied in the forward looking statements. See “Risk
Factors” in our most recent annual report on Form 10-K and Item 1A. of Part II “Risk Factors”
in our subsequent quarterly reports on Form 10-Q and any other public filings and press
releases. Vanguard Natural Resources, LLC undertakes no obligation to publicly update any
forward looking statements, whether as a result of new information or future events.
This presentation has been prepared as of November 8, 2012.
2
Key MLP Investor Benefits
4 Specific Investor Benefits
High Current Income
6.2% average current yield for the AMZ MLP Index(1)
Growth Potential
398.3% total return for the AMZ MLP Index since 2002 (2)
Tax Advantaged Distributions
Largely a Return of Capital
Inflation Protection
Distribution Growth historically exceeds CPI/PPI
Source: Alerian MLP Index database. Market data as of 11/08/2012.
(1) Represents the weighted average yield of the Alerian MLP Index (AMZ).
(2) Represents Alerian MLP Total Return Index (AMZX) from 10/30/2002 to 11/02/2012.
3
Where Are MLPs Today?
MLPs remain attractive for three key reasons
1)
Attractive valuations
Still within historical average yields and yield spreads
Still within historical averages EV/EBITDA and Price/DCF multiples
Attractive to other yield alternatives: REITs, Utilities and Corporate Bonds
2)
Earnings Strength / Stability
MLP earnings are largely derived from fixed fee contracts or have the ability to
hedge away a large portion of commodity risk
3)
High and Growing Dividends (Defense and Offense)
High dividends provide protection in an uncertain market
Growing dividends encourage upside pricing movement while providing a powerful
inflation hedge
4
Relative Performance Since 1/01/2001
225%
+202.3%
200%
175%
150%
+138.9%
125%
+103.8%
100%
75%
50%
+36.1%
25%
+23.5%
0%
+4.3%
-18.2%
-25%
-23.9%
-50%
-75%
-100%
Jan-01
Dec-01
Dec-02
Dec-04
Dec-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
BAML HY Index
Alerian MLP
S&P 500 Utilities
S&P Small Cap 600
Dow Jones-UBS Commodity Index
MSCI World Index (1)
S&P 500
MSCI US REIT Index
Source: Bloomberg database. Market data as of 11/08/2012.
(1) MSCI World Index excludes the United States.
5
Dec-03
Nov-11
(1)
Oct-12
MLP Yield Spreads Still at Attractive Levels
AMZ MLP Index Spread Over 10-Year Treasury
AMZ MLP Index Spread to MSCI REIT Index
1,400
Current Spread
357bps
1,200
Historical Average: 146bps
MLPs currently at
127bps above
historical average
800
AMZ MLP Index Spread to BBB Bond Index
600
500
400
Current Spread
290bps
400
Historical Average: 326bps
200
0
Jan-01
300
200
Historical Average: 126bps
100
0
(100)
May-03
Sep-05
Jan-08
Source: Alerian MLP Index and FactSet databases. Market data as of 11/01/2012.
(1) Bank of America / Merrill Lynch BBB Bond Index.
6
(1)
600
(Spread in Basis Points)
(Spread in Basis Points)
1,000
May-10
Sep-12
Jan-01
(200)
May-03
Sep-05
Jan-08
May-10
Sep-12
Current Yields Across MLP Segments
Current Yields
15.0%
13.3%
12.6%
12.0%
11.0%
9.6%
11.3%
10.0%
10.0%
9.0%
12.2%
7.5%
9.1%
7.0%
7.1%
6.3%
7.4%
6.0%
7.1%
6.0%
4.1%
4.8%
4.0%
3.0%
3.7%
2.9%
0.0%
7
Public GP Entities
Small-cap
Large-cap
(1)
Midstream /
Midstream /
Pipeline (2)
Pipeline (3)
Upstream (4)
Propane (5)
Gas Storage (6)
Source: FactSet, as of 11/08/2012.
(1)
Includes: AHGP, XTXI, ETE, KMI, NSH, TRGP.
(2)
Includes: AMID, APL, BKEP, CQP, CHKM, CPNO, CMLP, XTEX, EROC, GEL, GLP, HEP, NRGM, MWE, MMLP, OILT, RGP, RRMS, SXL, NGLS, TLLP, TCLP, TLP, WES.
(3)
Includes: BWP, BPL, EPB, EEP, ETP, EPD, KMP, MMP, NS, OKS, PAA, SEP, WPZ.
(4)
Includes: ARP, BBEP, EVEP, LGCY, LRE, LINE, MEMP, MCEP, PSE, VNR, QRE.
(5)
Includes: NKA, PNG.
(6)
Includes: ARLP, NRP, PVR, OXF, RNO.
(7)
Includes: APU, FGP, NRGY, NGL, SPH.
Coal (7)
Advantages of Vanguard’s LLC Structure
Characteristics
VNR
Typical
MLP
Typical
Corporation
Non-Taxable Entity
No
Tax Shields on
Distributions/
Dividends
Tax Reporting
Distribution
Schedule
K-1
Schedule
K-1
Form 1099
General Partner
No
No
Incentive
Distribution Rights
(IDRs)
No
No
Attractive Estate
Planning Tool
8
Distribution
Taxable
Dividend
Up to 50%
No
Our Successful Execution of the E&P MLP Strategy
High Quality, Low
Risk Asset
Portfolio
Disciplined
Acquisition
Strategy
Active Hedging
Program
Strong Credit
Profile
Proven
Management Team
with Extensive
Experience
9
Geographically diverse portfolio of long life assets, well positioned in most of the mature US Basins
136.2 MMBoe total proved reserves, 72% proved developed and 15 year Proved R/P
Balanced commodity portfolio – transitioned portfolio from 100% gas at IPO to approximately 46% liquids
Low capital requirements to maintain cash flow going forward
$47 million capital expenditure program for 2012 which is approximately 20% of 2012E Adjusted EBITDA
15 strategic acquisitions since the IPO, including the recent acquisition of ENP and the Woodford/Fayetteville
acquisition
Average acquisition price of ~$10.45/Boe and captured margins of ~$47.70/Boe
Acquisitions have supported 41% distribution growth since 2008 while improving overall coverage and credit
position
We review between 125-150 and evaluate approximately 50 acquisition candidates each year
Approximately 85% of expected oil production hedged through 2014 at FLOOR PRICE of $91.50 per barrel
Approximately 85% of expected natural gas production hedged through 1H 2017 at $5.11 per MMBtu
Acquisition strategy incorporates active hedging component to “lock in” anticipated margins
Well capitalized balance sheet with sufficient liquidity and spending coverage
VNR is not outspending cash flow like many resource play focused peers
Management commitment to maintaining long-term leverage of less than 3.0x Debt / EBITDA
No General Partner or incentive distribution rights (IDRs)
Extensive experience in acquisition integration, development and operation of oil and gas assets –
demonstrated at Vanguard and previous companies
Continuing to build team and infrastructure to support VNR’s growing company and platform
Overview of Vanguard Natural Resources
Upstream oil & gas LLC, headquartered in Houston, Texas
Initial Public Offering – “VNR” – October 2007 (Total Enterprise Value of ~$240mm)
Fifteen strategic acquisitions totaling ~$2.1bn expanded geographic profile and
commodity diversity (including merger with Encore Energy Partners LP and Arkoma
Basin acquisition)
Instituted a monthly distribution beginning with the July 2012 distribution
Monthly distribution of $0.20 per unit ($2.40 annualized) yields approximately 8.6%
at current price; Increased distributions ~41% since IPO
Diverse portfolio of mature, long life oil and gas properties, combined with a
multi-year hedging program provide stable cash flow and support distribution
growth
No General Partner or incentive distribution rights (IDRs)
Reduces cost of capital
($ in millions)
~136 MMBoe total proved reserves
Pre-Arkoma Q2 2012 Production: ~12.3 MBoe/d
Current Daily Production: 24.6 MBoe/d
2012E Production: 18.8 MBoe/d
2013E Production: 23.2 MBoe/d
~72% proved developed
~15 year Proved R/P
~46% liquids / 54% gas
* Proved reserves as of 6/30/2012 based on internal reserve report.
(1) Market data as of 11/8/2012 includes 420,000 Class B units.
(2) Debt figure as adjusted for September 2012 VNR equity follow-on.
10
Company Profile
VNR
(1)
59.083
EQUITY MARKET CAP (1)
$1,653.1
UNITS OUTSTANDING
TOTAL DEBT(2)
ENTERPRISE VALUE
901.7
$2,554.8
Recent Investor Friendly Events
Initiated monthly distribution policy
Commenced with July 2012 distribution
and paid on September 14, 2012
Previously paid quarterly distributions
Established a Direct Reinvestment Plan
(DRIP)
Established Direct Common Unit
Purchase Plan (PLAN)
The Plan is administered through
American Stock Transfer (AST)
Online registration is available at
www.amstock.com or 866-673-8052
11
The Power of the DRIP
The below example looks at two identical investments over a 20 year period….one with
a DRIP and the other not
Initial Unit Price
Units Bought
Initial Monthly Distribution
Yield
Distribution Annual Increase
Unit Price Annual Increase
Beginning Investment
Cumulative Distributions (Reinvested)
Ending Investment
Total Return
$3,000
$28.50
1,000
$0.20
8.4%
5.0%
5.0%
$28,500.00
$232,275.35
$385,771.69
1,253.6%
$2,688
Beginning Investment
Cumulative Distributions
Ending Investment
Total Return
$28.50
1,000
$0.20
8.4%
5.0%
5.0%
$28,500.00
$79,358.29
$151,376.37
431.1%
$3,000
$2,500
$2,500
$2,000
$2,000
$1,500
$1,500
$1,000
$1,000
$500
$505
$200
$0
$500
$200
$0
First Monthly Distribution Last Monthly Distribution
12
Initial Unit Price
Units Bought
Initial Monthly Distribution
Yield
Distribution Annual Increase
Unit Price Annual Increase
First Monthly Distribution Last Monthly Distribution
Geographically Diversified Reserve Base
Overview
Core Areas
Big Horn Basin
• Proved Reserves: 24.0 MMBoe
• 85% oil and 96% Proved
Developed
• 3.9 MBoe/d net production
• 93% operated
Williston Basin
• Proved Reserves: 5.8 MMBoe
• 93% oil and 95% Proved
Developed
• 0.9 MBoe/d net production
• 70% operated
•
•
•
•
136.2 MMBoe proved reserves
54% gas and 72% proved developed
Proved R/P of ~15 years
Operate ~75% of cash flow
Proved Reserves by Area
WILLISTON BASIN
BIG HORN BASIN
136 MMBoe
•
•
•
•
Permian
21%
Permian Basin
Proved Reserves: 28.5 MMBoe
51% oil and 85% Proved
Developed
5.1 MBoe/d net production
85% operated
ARKOMA BASIN
Arkoma
50%
MISSISSIPPI
VNR Major Producing Fields
PERMIAN BASIN
South Texas
Proved Reserves: 7.6 MMBoe
• 59% gas and 63% Proved
Developed
• 1.1 MBoe/d net production
• 0% operated
S. Texas
Mississippi Williston 5%
2%
4%
SOUTH TEXAS
Arkoma Basin
• Proved Reserves: 67.6 MMBoe
• 82% gas and 57% Proved
Developed
• 13.0 MBoe/d net production (1)
• 43% operated
Mississippi – Parker Creek
• Proved Reserves: 2.7 MMBoe
• 95% oil and 76% Proved
Developed
• 0.6 MBoe/d net production
• 90% operated
Note: Proved reserves as of 6/30/2012 based on internal reserve report. Production represents 2011 average daily net production. Pro forma for
exchange of Appalachian assets and recent Arkoma Basin acquisition. Percent operated statistics are computed based on cash flow.
(1) Includes ~12.7 Mboe/d of current production from the Woodford/Fayetteville Shale acquisition.
13
Big Horn
18%
How We Spend Capital
Disciplined approach to capital spending – focus on maintaining cash flow from mature, long lived fields
By contrast, resource players invest in growth to support equity valuation
The nature of our capital program is inherently less risky due to the lengthy production histories in the fields we
operate
We grow production primarily through accretive acquisitions of low-risk producing properties, rather than
through the drillbit
VNR
15%
(1)
Our capital spending as a percent of 2011A EBITDA is best-in-class
E&P MLPs
49%
2012E capital budget of $47 million – approximately 20% of 2012E Adjusted EBITDA
Resource Players
172%
Capital Spending vs. Cash Flow
Resource Players
E&P MLPs
$1,600
$1,396
2011 Capex(2)
2011 Adjusted EBITDA
$1,148
$1,200
$800
$707
$654
$550
$545
$620
$639
$541
$396
$389
$400
$235
$225
$225
$34
$212
$202
$76
$72
$84
$0
EBITDA /
Capex
14
BRY
SFY
SD
LPI
OAS
VNR
BBEP
LGCY
EVEP
LINE
1.0x
0.7x
0.5x
0.6x
0.4x
6.6x
3.0x
2.8x
2.5x
1.8x
Source: Company filings.
Note: VNR adjusted EBITDA includes the non-controlling interest of ENP.
(1) Excludes VNR.
(2) Represents development and exploration expenses, excluding acquisitions.
Our Acquisition Strategy
The U.S. has a large inventory of mature oil and natural gas basins which provide
significant opportunity for future growth and consolidation
Current E&P opportunity set is comprised of an estimated $1.5 trillion of mature properties,
which is substantially more than the U.S. midstream sector
Approximately $40 billion of E&P assets transacted each year since 2007
Vanguard’s Acquisition Strategy is to:
Acquire mature oil and gas properties with the following characteristics:
Stable, long life production with a shallow decline
High percentage of proved developed producing reserves
Long reserve life
Step-out development opportunities for additional growth
Efficiently manage the oil and gas assets with focus on maintaining cash flow levels
Reduce commodity price and interest rate risk through hedging
Return cash flow through distribution payments to unitholders
15
Our Successful Acquisition Track Record
$1,200
$1020.5
$1,000
$782.5
liquids
$800
gas
$600
$494.3
$400
$200
$126.8
$105.8
$2008
2009
2010
2011
* 2012 includes the recently announced natural gas and liquids acquisitions in Colorado in Wyoming for
$335 million with an anticipated close date on or before December 31, 2012.
16
2012*
Our Successful Acquisition Track Record
We review between 125-150 and evaluate approximately 50 acquisition candidates each year
Region
Adj.
Purchase
Price
($ mm)
Proved Reserves/
PDP(1)
Key Features
Jan 2008
Permian
$73.4
4.4 MMBoe / 90% PDP
83% oil
Dos Hermanos
Jul 2008
South Texas
$53.4
20 Bcfe / 65% PDP
98% natural gas
SUN TSH
Jul 2009
South Texas
$50.8
27 Bcfe / 74% PDP
55% natural gas
Ward County
Oct 2009
Permian
$55.0
3.2 MMBoe / 65% PDP
83% oil
Parker Creek
May 2010
Mississippi,
TX & NM
$114.3
4.7 MMBoe / 61% PDP
96% oil
Encore ― Acquisition
Dec 2010
$380.0
43.4 MMBoe / 91% PDP
67% oil & NGLs
*Encore ― Merger
*Dec 2011
Permian, Williston,
Arkoma & Big Horn
Basins
Miscellaneous
Q1 2011
Permian
$13.0
0.67 MMBoe / 100% PDP
100% oil
Permian
May 2011
Permian
$81.4
5.5 MMBoe / 100% PDP
70% oil & NGLs
Permian
May 2011
Permian
$14.8
1.3 MMBoe / 51% PDP
87% oil & NGLs
Wyoming
June 2011
Big Horn
$27.7
25 Bcfe / 90% PDP
65% natural gas
TX, LA
Aug 2011
Gulf Coast
$47.6
2.1 MMBoe / 100% PDP
83% oil & NGLs
Montana, N. Dakota
Sept 2011
Williston
$7.6
0.53 MMBoe / 100% PDP
97% oil
Parker Creek
Dec 2011
Mississippi
$14.4
0.46 MMBoe / 85% PDP
100% oil
Wyoming
Mar 2012
Big Horn
$13.5
0.848 MMBoe / 91% PDP
100% oil
Oklahoma
April 2012
Arkoma Basin
$434
402 Bcfe / 57% PDP
82% natural gas
Colorado and Wyoming(2)
Oct 2012
Piceance, Powder River
& Wind River Basins
$335
300.4 Bcfe / 80% PDP
86% natural gas
Acquisition
Effectiv
e Date
Apache
*$814.0
additional
* Purchase price adjusted downward for distributions received on ENP units and includes debt as of 11/30/2011.
(1) Proved reserves and proved developed producing (PDP) numbers are calculated as of the acquisition closing date based on internal estimates.
(2) Colorado and Wyoming recently announced acquisition is anticipated to close on or before December 31, 2012.
17
Barrett Acquisition in Colorado and Wyoming
Wind River & Powder River, WY
Piceance Basin, CO
Assets located in the Piceance Basin in Colorado and the Powder River and Wind River Basins in Wyoming
Total proved reserves of ~300 Bcfe (80% PDP)
Current net production of ~65 MMcfe/d
Reserve to production ratio of 13 years
~184,000 net acres in the Wind River Basin (12% held by production); ~67,000 net acres in the Powder River
Basin (93% held by production); and ~15,000 net acres in the Piceance Basin (95% held by production);
Vanguard intends to significantly hedge the expected natural gas and oil production through 2016 and the
expected natural gas liquids production in 2013
Immediately accretive to cash flow
18
Arkoma Basin Acquisition
Woodford Shale
Fayetteville Shale
Operated Acreage
Non-operated Acreage
Assets located in the Woodford Shale and Fayetteville Shale plays
Total proved reserves of ~402 Bcfe (57% PDP)
Current net production of ~71 MMcfe/d (includes ~650 Bbl/d of NGLs)
Reserve to production ratio of 15 years
~71,300 net acres (89% held by production)
~180 drilling locations with an average 22.5% working interest (modeled with ~$22 million in capital expenditures
per year)
Restructured acquired hedges to cover ~100% of expected proved production for the next five years at
$5.04/MMBtu beginning in August 2012
Immediately accretive to cash flow
19
Pro Forma Reserve Summary
Total Proved Reserves of ~136.2 MMBoe (~817 Bcfe)
PDP reserves of ~95 MMBoe (~570 Bcfe) is ~69% of total Proved Reserves
Oil
(MMBl)
PDP
PDNP
PUD
Total Proved
NGL
(MMBl)
37
2
5
43
9
0
10
20
By Reserve Mix
Standalone
Pro Forma for Arkoma
PDNP
3%
PDNP
5%
PDP
82%
PUD
13%
Gas
(Bcf)
Total
(MMBoe)
291
11
138
439
By Commodity Mix
Standalone
Pro Forma for Arkoma
Oil
62%
PDP
69%
Gas
27%
PUD
28%
Note: Proved reserves as of 6/30/2012 based on internal reserve report. Sum of categories may not add to total due to rounding.
NGLs
14%
Gas
54%
Oil
32%
NGLs
11%
20
95
4
38
136
Experienced Management Team
Title
Scott W. Smith
President and CEO
• Ensource Energy
• The Wiser Oil Company
• San Juan Partners
>32
Richard A. Robert
EVP and CFO
• Enbridge USA
• Midcoast Energy Resources
• Various energy-related entrepreneurial ventures
>20
Britt Pence
Senior Vice President
of Operations
• Anadarko Petroleum
• Greenhill Petroleum
• Mobil
>28
Mark Carnes
Director of Acquisitions
• Synergy Oil & Gas
• Petromark
• Torch Energy Advisors
>35
Chris Raper
Land Manager
• Synergy Oil & Gas
• Amoco Production
>33
Marketing Manager
•
•
•
•
•
>32
Rod Banks
21
Prior Affiliations
Years of
Experience
Name
Apache Corporation
Mariner Energy
Producers Energy Marketing
Coastal Gas Marketing
ORYX Energy Company
Financial Overview
Summary Operating Performance
Proved Reserves (MMBoe)(1)
150
Average Annual Production (Boe/d)
25,000
136
125
15,000
73
69
75
11
18
24
5,000
0
(2)
(3)
2007 2008 2009 2010 2011 2012
$300
$225
$245
$1.50
$30
$80
23
(4)
$1.70
$1.89
$2.03
$2.19
$2.39
$2.31 $2.40
$1.00
$0.50
(5)
(4)
(4)
2007 2008 2009 2010 2011 2012E 2013E
(1)
(2)
(3)
(4)
(5)
(6)
(2)
$2.50
$150
$56
4,721
$3.00
$2.00
$49
3,335
(4)
2007 2008 2009 2010 2011 2012E 2013E
$200
$100
2,701
Distribution Growth ($ / unit)
$278
$250
1,935
0
Adjusted EBITDA ($mm)
$0
11,946
10,000
50
$50
18,767
20,000
100
25
23,242
$0.00
(6)
2007
2008
Proved reserves as of 6/30/2012 based on internal reserve report.
Amounts illustrated reflect ENP and VNR proved reserves and production on a consolidated basis. Pro forma for exchange of Appalachian assets.
Pro forma for the recent Arkoma Basin acquisition.
Based on updated 2012E and 2013E guidance announced on 8/2/2012.
Adjusted EBITDA pro forma for ENP acquisition but does not reflect adjustments for Arkoma acquisition.
Annualized quarterly distribution.
2009
2010
2011
2012
Disciplined Financial Strategy
Maintain conservative capital structure and sufficient liquidity
Availability under Revolver as of 10/8/2012 of ~$580 million, pro forma for September follow-on offering
and October senior notes add-on offering
Target Debt / EBITDA of less than 3.0x
Active management of debt levels by periodic access to the equity markets as needed
Utilize excess cash flow to reduce revolving debt levels
Prudent management of commodity price risk through multi-year hedging program
Approximately 85% of expected oil production hedged through 2014 at a FLOOR PRICE of $91.50 per
barrel
Approximately 85% of expected natural gas production hedged through the 1H 2017 at $5.11 per
MMBtu
Acquisition strategy incorporates active hedging component to “lock-in” anticipated margins
Prudently seek acquisitions utilizing our low cost of capital
Accretive acquisitions of long life oil and gas assets
Maintain a prudent coverage ratio to provide distribution stability and “comfortable” growth
Maintain strong relationships with a diversified bank syndicate
Currently have 21 banks in the Revolver
24
Acquisition Financing Strategy
Vanguard’s long-term strategy is to fund its acquisition program with approximately
60% equity and 40% debt, de-levering the company over time via equity issuances
and utilizing excess cash flow to pay down debt
To date, Vanguard has issued ~49mm units for a total of approximately $1.2bn in net
proceeds, including ~$487mm for the second step of the Encore merger
~58% of the total acquisition value for transactions has been financed with equity
(including $182.4 million in equity raised in September 2012)
$900
$750
$882
$900
Total of
~$2.1bn
$750
$600
$600
$494
$450
$300
$300
$127
$488
$448
$450
$150
Total of
~$1.2bn
$106
$322
$274
$96
$150
$21
$0
Cum.:
$0
2008
2009
$127
$233
2010
$727
(1)
2011
2012
$1,609
$2,057
Cum.:
2008
2009
2010
2011
2012
$21
$117
$391
$879
$1,201
(1) Encore merger purchase price adjusted downward for distributions received on ENP units and includes debt as of 11/30/2011.
25
Hedging Philosophy
Hedge commodity prices on estimated production from acquisitions
for three to five years upon signing the Purchase and Sale Agreement
to protect rate of return from price fluctuations
Opportunistic hedging program to extend hedge positions as existing
hedges roll off
Reduce cash flow volatility and protect distribution levels
Primary use of swaps and costless collars, with the addition of threeway collars to provide higher floor pricing
Interest rate risk also mitigated through hedging
26
Locking in Margins Provides Stability
Through the use of hedging, Vanguard is able to lock in significant acquisition
margins for the foreseeable future, helping to insure distribution stability
$98.49
$100.00
$92.82
$92.27
$90.00
$93.42
$84.87
$81.72
$80.28
$78.85
$80.00
$67.41
$70.00
$60.42
$60.48
$62.21
$56.12
$60.00
$68.50
$50.00
$40.00
$43.74
$44.46
$51.62
$59.05
$63.10
$82.57
$48.66
$63.99
$77.93
$70.50
$35.14
$44.83
$44.99
$30.00
$31.21
$24.32
$20.00
$16.68
$10.00
$18.75
$17.19
$16.02
$14.85
$14.37
$14.34
$15.92
$11.29
$6.63
$0.00
Apache
Dos
SUN TSH
(12/21/07) Hermanos (7/21/09)
(7/21/08)
Ward
County
(11/30/09)
Parker
Creek
(5/3/10)
Encore
(11/17/10)
Permian
(6/22/11)
Permian
(8/15/11)
* Arkoma Basin acquisition adjusted for value of the hedges acquired.
$5.09
Wyoming Gulf coast Montana / Mississippi Wyoming Arkoma
(9/1/11)
(8/31/11) N. Dakota (12/22/11) (3/31/12) (6/29/12) *
(12/1/11)
NYMEX 5 Year WAVG Forward Strip Price on a Boe Basis
27
$30.05
$22.67
Acquisiton Cost per Boe
Hedges Mitigate Commodity Price Risk
More than 85% of expected crude oil proved production hedged thru 2014 at a
weighted average FLOOR price of $91.50 per barrel
Use a combination of swaps, collars and three-way collars
3,500
3,000
$89.50
5%
$92.45
29%
30%
14%
3%
$92.81
9%
28%
2,500
MBbls
$100.00
2,000
19%
83%
1,500
1,000
58%
52%
53%
500
10%
7%
0
2012
Swaps
28
2013
Collars
2014
Three Way Collars
Put Spreads
Note: Hedge prices reflect a weighted average of swap prices, floor prices on collars and puts and long put prices on three way collars. Excludes NGL
production. In 2013, Vanguard sold puts on 378,400 Bbls at a weighted average price of $60.47. In addition, Encore sold puts on 250 bbl/d for 2012-2013 at
$65.00. Weighted average floor price includes a $3.00 / Bbl premium on a 1,000 Bbl/day in 2013-2014 only if the monthly oil price settles between $70.00 $110.00.
2015
Unhedged
Hedges Mitigate Commodity Price Risk
Approximately 85% of expected natural gas proved production hedged thru the
first half of 2017 at a weighted average floor price of $5.11 per MMBtu
Primarily use NYMEX and basis swaps
30,000
$5.09
$5.04
$5.07
25,000
$5.04
14%
20,000
24%
$5.34
25%
MMcfe
12%
15,000
2%
100%
86%
10,000
76%
86%
75%
5,000
$5.04
23%
77%
0
2012
2013
2014
Swaps
2015
Puts
2016
Unhedged
Note: Hedge prices reflect a weighted average of swap prices, floor prices on collars and puts and long put prices on three way collars. Excludes
production associated with the exchanged Appalachia properties. Excludes NGL production.
29
1H 2017
Non-Cash Items Distort Income
Due to large non-cash items such as impairments and unrealized hedge gains
and losses due to fluctuations in commodity prices, Vanguard often
experiences large swings in Net Income/(Loss) that distort it’s “ability” to pay
distributions
Adjusted EBITDA eliminates these items to arrive at “true” cash flow
$150
($ in Millions)
$100
$50
$80.4
$30.4
$48.8
$56.2
$0
-$50
-$100
-$150
FY '07
Net Income/(Loss)
FY '08
Non-Cash Items
FY'09
FY '10
Adjusted EBITDA
*Non-Cash Items include depletion, depreciation and amortization, impairment, (gain) / loss on acquisitions,
unrealized (gain) loss on commodity and interest rate derivatives and unit-based compensation expense.
30
Price Performance Since 2009
The results have been great. VNR has outperformed US Royalty
Trusts, C-Corps and other E&P MLPs. The strategy works.
500%
400%
Price Performance (%)
374.2%
300%
200%
173.4%
124.7%
100%
90.8%
52.5%
0%
(11.9%)
-100%
Jan-09
Oct-09
VNR
Jul-10
E&P MLP
(1)
WTI
Note: Market data as of 11/08/2012.
(1) E&P MLP Index includes: BBEP, EVEP, LGCY, LINE, PSE, QRE, MCEP, MEMP, PSE, ARP, LRE.
(2) US Royalty Trust Index includes: CRT, HGT, MTR, PBT, SBR and SJT.
31
Apr-11
AMZ
Jan-12
S&P 500
Nov-12
Royalty Trusts
(2)
Vanguard’s Value Proposition
Vanguard has the highest distribution growth rate since its IPO in October 2007
However, Vanguard is still trading at a higher yield than many of its peers
50%
45%
Typically, MLPs with a
track record of
distribution growth are
valued at a
premium….not
currently?
8.6%
41%
40%
35%
4.8%
28%
30%
9.0%
24%
25%
10.8%
18%
20%
15%
9.9%
15%
7.3%
15%
10%
8.6%
5%
4%
0%
2011 Coverage:(1)
VNR
EVEP
LGCY
QRE
BBEP
LINE
PSE
1.4x
1.1x
1.1x
1.2x
1.3x
1.2x
1.4x
Current Yields in Yellow
Note: Does not include recent IPOs of MCEP, LRE and MEMP. Market Data based on November 8, 2012 pricing.
(1) 2011 distribution coverage taken from company press releases and market research.
32
Key Investment Highlights
High quality, long-lived reserve base with low production decline rates and low
capital reinvestment requirements
Geographically diverse asset base comprised predominantly of oil properties
Active hedging program which has locked in attractive margins through 2014 for
crude oil and 1H 2017 for natural gas
Significant inventory of low-risk development opportunities
Well-capitalized balance sheet with sufficient liquidity and financial flexibility
Experienced management team with a track record of successful operations,
acquisitions, and integrations
33