FBR’s Chad Mabry downgraded the rating on Vanguard Natural Resources, LLC VNR from Outperform to Market Perform, while lowering the price target to $2.
Distribution Suspension
The company announced on March 4 that it was suspending distribution on its common and preferred units. Mabry views this decision as a negative for Vanguard Natural Resources, “which had been viewed as being able to hold the line with more fervor than its peers.”
The analyst also believes that this decision represents a significant setback for the MLP sector, given that the company has been an “outspoken champion” for the structure.
Borrowing Base Redetermination To Blame
“From our perspective, the decision was likely influenced by its upcoming borrowing base redetermination,” Mabry noted, mentioning that “the spring redetermination season is going to be a painful event across the E&P sector.”
Vanguard Natural Resources’ spring redetermination is scheduled for April. Mabry believes that the redetermination has been revised below the company’s outstanding borrowings.
“But the partnership’s 2016 guidance forecasts excess cash flow of $145M (at the midpoint), which can be applied to debt paydown,” according to the FBR report.
Asset Divestiture
The company has also initiated divestiture of its central Oklahoma position, in an attempt to expedite deleveraging. Vanguard Natural Resources owns 20,000 net acres in the region for the SCOOP and 5,000 net acres for the STACK.
“A successful transaction anywhere near this range would make material progress toward debt paydown,” the report added.
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