Vanguard Natural Resources Reports Third Quarter 2010 Results

HOUSTON, Nov. 2, 2010 /PRNewswire-FirstCall/ -- Vanguard Natural Resources, LLC (NYSE: VNR) ("Vanguard" or "the Company") today reported financial and operational results for the third quarter ended September 30, 2010.  

Mr. Scott W. Smith, President and CEO, commented, "This quarter marks another milestone for the company as our production mix is now weighted to greater than 50% of oil and natural gas liquids. The contributions from our oil focused acquisitions are in line with our expectations and we are looking forward to continuing to develop additional oil projects during the balance of the year. From an acquisitions perspective we continue to see a very active market and with the liquidity generated from our recent equity offering we are actively seeking opportunities to continue on our growth track."

Mr. Richard Robert, Executive Vice President and CFO, added, "Results for the quarter were in-line with our expectations and positions us to meet or exceed the previously provided financial guidance for the full year of 2010."

Third Quarter 2010 Highlights:

• Adjusted EBITDA (a non-GAAP financial measure defined below) increased 42% to $22.2 million from $15.6 million in the third quarter of 2009 and rose 16% from the $19.1 million recorded in the second quarter of 2010.  
• Distributable Cash Flow (a non-GAAP financial measure defined below) was increased 12% to $14.5 million from the $13.0 million in the third quarter of 2009 and increased 31% sequentially from the $11.1 million generated in the second quarter of 2010.  
• We reported net income for the quarter of $1.9 million or $0.09 per basic unit compared to a reported net income of $0.7 million or $0.05 per basic unit in the third quarter of 2009; however, both quarters included special items.  The recent quarter included $10.7 million of unrealized net losses in our commodity and interest rate derivatives contracts, and a $0.06 million non-cash compensation charge for the unrealized fair value of phantom units granted to management.  The 2009 third quarter results included $12.8 million in unrealized net losses in our commodity and interest rate derivatives contracts and a $0.8 million non-cash compensation charge for the unrealized fair value of phantom units granted to management.
• Excluding the net impact of the specific non-cash items mentioned above, Adjusted Net Income (a non-GAAP financial measure defined below) was $12.7 million in the third quarter of 2010 or $0.57 per basic unit, as compared to Adjusted Net Income of $8.4 million or $0.58 per basic unit, in the third quarter of 2009.
• Reported average production of 30,455 Mcfe per day, up 49% over 20,396 Mcfe per day produced in the third quarter of 2009 and up 11% over second quarter 2010 average volumes.    

During the quarter we sold 1,289 MMcf of natural gas, 200,289 Bbls of oil, and 2,194,231 gallons of natural gas liquids (NGLs), compared to the 1,266 MMcf of natural gas, 154,445 Bbls of oil and 2,113,571 gallons of natural gas liquids produced in the second quarter of 2010.  This 12% increase in total production on a Mcfe basis is primarily due to our recent Parker Creek acquisition.   Including the positive impact of our hedges in the third quarter of this year, we realized a net price of $9.56 per Mcf on natural gas sales, $75.46 per Bbl on crude oil sales, and $.99 per gallon on NGL sales, for an average sales price of $10.56 per Mcfe (all excluding amortization of premiums paid and amortization of value on derivative contracts acquired).  

2010 Nine-Month Highlights:

• Adjusted EBITDA (a non-GAAP financial measure defined below) increased 44% to $59.8 million from the $41.5 million produced in the first nine months of 2009. 
• Distributable Cash Flow (a non-GAAP financial measure defined below) grew 19% to $40.7 million from the $34.3 million generated in the comparable period of 2009. 
• Net income was $27.5 million for the first nine months of 2010 compared to a net loss of $56.0 million for the first nine months of 2009.  The 2010 results included a $5.7 non-cash loss on acquisition of natural gas and oil properties. Last year's results included a $63.8 million non-cash natural gas and oil property impairment charge, a $16.1 million non-cash unrealized net loss on our commodity and interest rate derivatives contracts and a $3.0 million non-cash compensation charge for the unrealized fair value of phantom units granted to management.
• Excluding the net impact of these specific non-cash items mentioned above, Adjusted Net Income (a non-GAAP financial measure defined below) was $34.0 million in the first nine months of 2010, or $1.66 per unit, compared to Adjusted Net Income of $21.0 million, or $1.59 per unit, in the comparable period of 2009.
• Reported average production of 27,994 Mcfe per day, up 50% over 18,623 Mcfe per day produced in the nine month period of 2009.

During the nine-months ended we sold 3,764 MMcf of natural gas, 487,145 Bbls of oil, and 6,705,034 gallons of natural gas liquids (NGLs), compared to the 3,288 MMcf of natural gas, 240,748 Bbls of oil and 2,457,649 gallons of natural gas liquids produced in the nine-months ended of 2009.  While our natural gas production remained relatively flat, this 50% increase in total production on a Mcfe basis is primarily attributed to our oil production increases from our SUN TSH acquisition last year as well as our recent Parker Creek acquisition.   Including the positive impact of our hedges in the nine-months ended of this year, we realized a net price of $9.92 per Mcf on natural gas sales, $76.09 per Bbl on crude oil sales, and $1.06 per gallon on NGL sales, for an average sales price of $10.66 per Mcfe (all excluding amortization of premiums paid and amortization of value on derivative contracts acquired).  

Recent Events

On August 9, 2010, we announced entering into a 12-month equity distribution agreement with Knight Capital Markets, LLC (KCM), a subsidiary of Knight Capital Group Inc.  Under the terms of the agreement, Vanguard retained KCM to act as Vanguard's exclusive distribution agent with respect to the issuance and sale of Vanguard common units up to an aggregate gross sales price of $60.0 million.  Vanguard may from time-to-time propose transactions notices to KCM for the sale of units at an established minimum market price.

During the third quarter 2010, under the equity distribution agreement, we sold 63,826 units at a weighted average price of $25.42 for combined total net proceeds of $1.6 million, after commissions.

In October 2010, we completed an offering of 4.77 million of our common units. The units were offered to the public at a price of $25.40 per unit.  We received net proceeds of $112.5 million from the offering, after deducting underwriting discounts of $5.1 million and redeeming 150,000 common units for $3.7 million from our largest unitholder. We used the net proceeds from the offering to repay indebtedness outstanding under our reserve-based credit facility.

Hedging Activities

We enter into derivative transactions in the form of hedging arrangements to reduce the impact of natural gas and oil price volatility on our cash flow from operations. As required by our reserve-based credit facility, we have mitigated this volatility through 2011 for natural gas and through 2014 for crude oil by implementing a hedging program on a portion of our total anticipated production. At September 30, 2010, the fair value of commodity derivative contracts was approximately $20.7 million, of which $21.3 million settles during the next twelve months. Currently, we use fixed-price swaps and NYMEX collars and put options to hedge natural gas and oil prices.  

The following table summarizes commodity derivative contracts in place at September 30, 2010:

Calls were sold or options were provided to counterparties to extend the swaps into subsequent years as follows:

Selling, General and Administrative Expense

Our selling, general and administrative expense declined 48% to $1.1 million in the third quarter of 2010 from $2.1 million the same period in 2009, primarily reflecting a $1.1 million decline in the amount of non-cash expenses associated with our unit-based compensation program.  The 2009 third quarter charges included a $1.3 million non-cash compensation expense which was related to the grant of phantom units on January 1, 2009 and the amortization of common and Class B units granted to employees and directors under employment agreements and our long-term incentive plan compared to $0.2 million recorded in the current quarter.  

Capital Expenditures

Capital expenditures for the drilling, capital workover and recompletion of natural gas and oil wells were approximately $5.6 million for the third quarter of 2010 compared to $1.1 million for the comparable quarter of 2009 and $6.1 million in the second quarter of 2010.  The expenditures were as expected and indicative of the continued activity during the third quarter.  During the three months ended September 30, 2010, the most significant capital expenditure was the drilling and completion of the Benjamin #8H, a 100% working interest operated horizontal oil well in Third Bone Spring play in Ward County, Texas.  The Benjamin #8H was completed on August 26, 2010 with 7 frac stages and averaged 400 boepd for the first 30 days.  We have five additional proved undeveloped locations to drill in the Third Bone Spring play.   

We anticipate that during the fourth quarter of 2010 our capital expenditures will total approximately $1.5 million which will be primarily spent on the drilling and completing of five vertical oil wells in Appalachia.

Reserve-Based Credit Facility

At September 30, 2010, Vanguard had indebtedness under its reserve-based credit facility totaling $170.9 million with $69.1 million available for borrowing.  However, in October 2010, we completed an equity offering with net proceeds of $112.5 million which were used to pay down outstanding borrowings under our reserve-based credit facility.  On November 1, 2010, outstanding borrowings totaled $54 million with $186 million available for borrowing before consideration of our fall borrowing base redetermination which is still underway.  Our agent bank has made a recommendation to the lenders under the facility that the new borrowing base be set at $225 million.  If this borrowing base level is approved by the other lenders in the facility, our availability under the reserve-based credit facility would be reduced to $171 million.  Other matters being considered by our lenders include waivers for an over hedged position in natural gas for 2010 and an over hedged position in interest rate derivatives as a result of the recent reduction of outstanding borrowings utilizing the net proceeds of the October common unit offering.

Cash Distributions

On November 12, 2010, the Company will pay a third quarter cash distribution of $0.55 per unit to its unitholders of record as of November 5, 2010.  This quarterly distribution payment represents a 10% increase over the third quarter of 2009.

Conference Call Information

Vanguard will host a conference call today to discuss its third quarter results at 11:00 a.m. Eastern Time (10:00 a.m. Central). To access the call, please dial (877) 941-8609 or (480) 629-9818, for international callers and ask for the "Vanguard Natural Resources" call a few minutes prior to the start time. The conference call will also be broadcast live via the Internet and can be accessed through the investor relations section of Vanguard's website, http://www.vnrllc.com.

A telephonic replay of the conference call will be available through December 2, 2010 and may be accessed by calling (303) 590-3030 and using the pass code 4379639#. A webcast archive will be available on the Investor Relations page at www.vnrllc.com shortly after the call and will be accessible for approximately 30 days. For more information, please contact Lisa Godfrey at (832) 327-2234 or email at [email protected]

About Vanguard Natural Resources, LLC

Vanguard Natural Resources, LLC is a publicly traded limited liability company focused on the acquisition, production and development of natural gas and oil properties. The Company's assets consist primarily of producing and non-producing natural gas and oil reserves located in the southern portion of the Appalachian Basin, the Permian Basin, South Texas and Mississippi. More information on the Company can be found at www.vnrllc.com.

Forward-Looking Statements

We make statements in this news release that are considered forward-looking statements within the meaning of the Securities Exchange Act of 1934. These forward-looking statements are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this news release are not guarantees of future performance, and we cannot assure you that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors listed in the "Risk Factors" section in our SEC filings and elsewhere in those filings. All forward-looking statements speak only as of the date of this news release. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

Use of Non-GAAP Measures

Adjusted EBITDA

We present Adjusted EBITDA in addition to our reported net income (loss) in accordance with GAAP.  Adjusted EBITDA is a non-GAAP financial measure that is defined as net income (loss) plus:

• Net interest expense, including write-off of deferred financing fees and realized gains and losses on interest rate derivative contracts;
• Depreciation, depletion and amortization (including accretion of asset retirement obligations);
• Impairment of natural gas and oil properties;
• Amortization of premiums paid on derivative contracts;
• Amortization of value on derivative contracts acquired;
• Unrealized gains and losses on other commodity and interest rate derivative contracts;
• Gains and losses on acquisitions of natural gas and oil properties;
• Deferred taxes, and
• Unit-based compensation expense.

Adjusted EBITDA is used by management as a tool to measure (prior to the establishment of any cash reserves by our board of directors, debt service and capital expenditures) the cash distributions we could pay our unitholders. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. Adjusted EBITDA is also used as a quantitative standard by our management and by external users of our financial statements such as investors, research analysts and others to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; and our operating performance and return on capital as compared to those of other companies in our industry. Adjusted EBITDA is not intended to represent cash flows for the period, nor is it presented as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP.

Distributable Cash Flow

We present Distributable Cash Flow in addition to our reported net income (loss) in accordance with GAAP.  Distributable Cash Flow is a non-GAAP financial measure that is defined as net income (loss) plus:

• Depreciation, depletion and amortization (including accretion of asset retirement obligations);
• Impairment of natural gas and oil properties;
• Amortization of premiums paid on derivative contracts;
• Amortization of value on derivative contracts acquired;
• Unrealized gains and losses on other commodity and interest rate derivative contracts;
• Gains and losses on acquisitions of natural gas and oil properties;
• Deferred taxes, and
• Unit-based compensation expense.

Less:

• Drilling, capital workover and recompletion expenditures.

Distributable Cash Flow is used by management as a tool to measure (prior to the establishment of any cash reserves by our board of directors) the cash distributions we could pay our unitholders. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates.  While Distributable Cash Flow is measured on a quarterly basis for reporting purposes, management must consider the timing and size of its planned capital expenditures in determining the sustainability of its quarterly distribution.  Capital expenditures are typically not spent evenly throughout the year due to a variety of factors including weather, rig availability, and the commodity price environment.  As a result, there will be some volatility in Distributable Cash Flow measured on a quarterly basis.  Distributable Cash Flow is not intended to be a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP.

Adjusted Net Income

We present Adjusted Net Income in addition to our reported net income in accordance with GAAP.  Adjusted Net Income is a non-GAAP financial measure that is defined as net income (loss) plus:

• Unrealized gains and losses on other commodity derivative contracts;
• Unrealized gains and losses on interest rate derivative contracts;
• Unrealized fair value of phantom units granted to management;
• Impairment of natural gas and oil properties; and
• Gains and losses on acquisitions of natural gas and oil properties.

This information is provided because management believes exclusion of the impact of our unrealized derivatives not accounted for as cash flow hedges, non-cash gains and losses on acquisitions of natural gas and oil properties and non-cash natural gas and oil property impairment charge will help investors compare results between periods and identify operating trends that could otherwise be masked by these items and to highlight the impact that commodity price volatility has on our results.  Adjusted Net Income is not intended to represent cash flows for the period, nor is it presented as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP.

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SOURCE Vanguard Natural Resources, LLC

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