Many investment sites have recently referred about the reorganization of Vanguard Natural Resources, LLC (VNRSQ), the oil and natural gas operator. Lex Acker from Seeking Alpha commented positively about the stock in "Vanguard Natural Resources: Reorg's Valuation Methodology Leaves Potentially High Upside". Also, Lenox Ledger, Tuckermantimes.com, thestockobserver.com, among other investment sites, reported the latest announcements. Additionally, the Yahoo Finance Conversations have exploded. As of July 7, 2017, 1,379 comments had been written on this forum. Finally, the iHub Board also included large amount of comments.
Why is there so much interest in the stock?Vanguard Natural Resources filed for Chapter 11 bankruptcy on February 2. Since then, the company has been negotiating with lenders and preparing a restructuring plan. Some market participants believe that the common unit (called share in this case) price was too low. The company seems to have tons of assets and the sale liquidation value per common unit seems to be larger than the common unit price. This is from the article published in Seeking Alpha:"There’s strong evidence that the company has substantial assets and that the orderly, non-fire sale liquidation value is very likely to exceed all liabilities by a substantial amount. With the current plan, it is certain that senior note holders will be over-compensated." SourceIn addition, VNRSQ's assets may interest big oil companies, such as Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. A company expecting the oil price to increase would prefer to buy VNRSQ's assets at a discount instead of building oil assets in house. The Seeking Alpha article continued:
"As mentioned in the Bloomberg article: Big Oil’s Plan to Buy Into the Shale Boom referenced above, Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp are investing heavily in the types of properties that Vanguard owns. I think that to maximize the best interests of all stakeholders would be to invite major oil companies with strong balance sheet to bid on Vanguards assets. " Source
The announcement of the bankruptcy and the negotiations with lenders have made the common unit price move very violently. In this article, we will try to explain what happened including the recent spike on July 14, 2017.
Business - It is all about the oil price
VNRSQ was founded in October 2006. It focuses "on the acquisition and development of mature, long-lived oil and natural gas properties in the United States." According to the last quarterly report, as of March 31, 2017, the total estimated proved reserves were 1,378 Bcfe. "65% were natural gas reserves, 18% were oil reserves and 16% were NGLs reserves". Additionally, the company owns working interests in 12,491 gross (4,364 net) productive wells. The following is the table that the company reported in its annual report showing the production in 2016 as well as the reserves. This was the key information to comprehend what everybody is telling in the street. The company has a significant amount of oil assets.
2016 Net Production
Natural Gas
Oil
NGLs
Total
Net Estimated
Proved Developed Reserves
PV-10 Value
(MMcf)
MBbls
MBbls
(MMcfe)
(MMcfe)
(in millions)
Green River Basin
41,231
381
432
46,111
318,441
$
176.4
Permian Basin
6,509
1,551
633
19,613
188,491
$
167.6
Piceance Basin
20,527
216
1,372
30,053
328,747
$
164.8
Gulf Coast Basin
6,489
734
580
14,371
165,068
$
116.4
Arkoma Basin
16,440
55
162
17,741
188,325
$
82.5
Big Horn Basin
219
830
97
5,776
78,447
$
81.1
Williston Basin
196
398
5
2,614
23,909
$
27.7
Anadarko Basin
6,399
482
406
11,727
36,123
$
25.6
Wind River Basin
3,206
13
29
3,462
22,357
$
9.0
Powder River Basin
6,891
—
—
6,891
13,286
$
2.7
Total
108,107
4,660
3,716
158,359
1,363,194
$
853.8
The most significant to note is the outlook of the oil industry. After OPEC production cuts that commenced in the beginning of 2017 to increase the oil price, the value of VNRSQ's assets have grown significantly.
Source: US Energy Information Administration
The new annual report for the year 2017 was not yet released, thus the market cannot really have an exact idea of what is hidden in the VNRSQ's balance sheet. But, since the oil price has increased, the company's valuation should be higher.Lex Acker compared the company's reserves and production with other competitors in the industry and concluded that VNRSQ was being undervalued by the market. We will not go so deep in our assessment, but it is relevant to note his positive outlook on the company.Recent DevelopmentsThe most remarkable announcement of 2017 was the bankruptcy news. It was released on February 2. It included a restructuring support agreement:"Prior to the filing of the Petitions, on February 1, 2017, the Debtors entered into a restructuring support agreement (the “ Restructuring Support Agreement ”) with (i) certain holders (the “ Consenting 2020 Noteholders”) constituting approximately 52% of the 7.875% Senior Notes due 2020 (the “ Senior Notes due 2020 ”); (ii) certain holders (the “ Consenting 2019 Noteholders and, together with the Consenting 2020 Noteholders, the “Consenting Senior Noteholders ) constituting approximately 10% of the 8 3/8% Senior Notes due 2019 (the “ Senior Notes due 2019 ,” and all claims arising under or in connection with the Senior Notes due 2020 and Senior Notes due 2019, the “ Senior Note Claims ”); and (iii) certain holders (the “ Consenting Second Lien Noteholders ” and, together with the Consenting Senior Noteholders, the “ Restructuring Support Parties ”) constituting approximately 92% of the 7.0% Senior Secured Second Lien Notes due 2023 (the “ Second Lien Notes ,” and all claims and obligations arising under or in connection with the Second Lien Notes, the “ Second Lien Note Claims ”)." SourceFurthermore, many of the lenders had negotiated with the firm and had accepted a deal. The bankruptcy was bad news and the common unit reaction was justified. But, did the market consider this Restructuring Support Agreement? Did the market overreact? The common unit price went from trading at $1.00 to hit the $0.2 level in only a few days. In our opinion, everybody tried to jump off the boat and the assets left behind were not even checked.After this announcement, the company began negotiating a deal with the rest of the lenders. The company did not seem to reach an agreement with all of them. In our opinion, this was good for the company. The share price continued to increase, as the OPEC announced more production cuts, which made oil prices increase. As stated, higher oil price means that the company assets are worth more, thus the bargaining power increased. Finally, on July 14, 2017, VNRSQ put out an agreement with those equity holders who were not supporting the Plan of Reorganization proposed.
"Vanguard Natural Resources, LLC has reached a settlement with the Ad Hoc Equity Committee (the "Equity Committee"). Under the agreement, the Equity Committee agrees to (i) withdraw any and all objections to the Debtors' plan of reorganization and (ii) fully support the Debtors' Second Amended Joint Plan of Reorganization, as amended (the "Modified Plan"). " Source
In the press release, the following was noted about the vote that would take place on July 17, 2017:
"The Equity Committee recommends that holders of the Company's common units who have not voted to vote in favor of the Modified Plan by Monday, July 17, 2017 at noon Central Standard Time. The Equity Committee also recommends that holders of the common units who initially voted to reject the Company's unmodified plan of reorganization to submit new ballots accepting the Modified Plan by the deadline. " Source
The market reaction to this announcement was positive. The common unit price went from $0.03 to $0.07. Have a look:
Has the common unit price touched its highest level? It is difficult to say so. On July 17, 2017, the equity holders will need to vote. In principle, the Plan of Reorganization should be approved by them. But, we cannot be 100% sure. If it is successfully approved, the common unit price may continue to increase in the near future. Insider holdersDirectors of the firm own shares of the company as noted below:
Name (Direct Holders (Forms 3 and 4)SharesDate ReportedROBERT RICHARD A473,158Jan 3, 2017SMITH SCOTT W475,371Jan 3, 2017PENCE BRITT200,690Dec 31, 2016SINGLETARY LOREN47,434Jan 3, 2017ANDERSON W RICHARD43,065Jan 3, 2017MCCULLOUGH BRUCE W.34,199Jan 3, 2017Source
Additionally, the following market participants reported stakes in the company.
HolderSharesDate Reported% OutValueCALPERS (California-Public Employees Retirement System)192,311Mar 30, 20170.15%13,461Wedbush Securities Inc108,110Mar 30, 20170.08%7,567Ifp Advisors, Inc53,075Mar 30, 20170.04%3,715Avenir Corporation/DC41,500Mar 30, 20170.03%2,905Eqis Capital Management, Inc.25,872Mar 30, 20170.02%1,811Janney Montgomery Scott LLC12,024Mar 30, 20170.01%841SourceConclusionThis year, Vanguard Natural Resources, LLC has been negotiating with debt holders and equity holders to approve a reorganization plan to exit bankruptcy. Many of the lenders did so some months ago. Additionally, according to the most recent news, equity holders are about to approve it. This is a good news. Thus, the market pushed up the share price.There are many other investment sites that claimed that the common unit price is undervalued. Furthermore, the increase in the oil price provoked by OPEC production cuts increased the value of the company's assets. Hence, the company's bargaining power increased. It may have helped to close the negotiations. To sum up, more news regarding the closing of the negotiations may be released soon. If the company exits bankruptcy, the common unit could jump. Thus, we need to be alert.We will be updating our subscribers as soon as we know more. For the latest updates on VNRSQ, sign up below!Image courtesy of Porter Green LLC via FlickrDisclosure: We have no position in VNRSQ and have not been compensated for this article.
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