Can an energy company come back from the near-dead? An analyst team at Stifel thinks it's possible.
Last week, the investment bank raised its rating on Vanguard Natural Resources (VNR) to Hold from Sell just after the Texas-based oil and gas master limited partnership announced the results of its Spring credit redetermination.
A ratings action after a company announcement isn't particularly unusual. However, given the results of Vanguard Natural Resource's redetermination, the positive rating change is somewhat curious. Most notably, Vanguard's borrowing base was reduced by 26% to $1.3 billion, which means the MLP is now overdrawn on its credit facility by $63.5 million, excluding $40 million the company has in cash on hand.
The review doesn't initially appear particularly favorable, but Stifel analysts apparently expected the outcome to be much worse. With that behind VNR, and taken alongside the partnership's recently announced $275 million sale of its SCOOP/STACK assets in Oklahoma, the "near-term risks for the partnership [are] removed," according to Brian Brundgardt of Stifel.
"Following the successful non-core asset sale and results of the spring redetermination, we view the potential liquidity and leverage risks have been removed for FY16," Brundgardt wrote in a note last week. "That being said, we continue to view the leverage component a risk in FY17."
Representatives for VNR did not immediately respond to requests for comment.
Vanguard Natural Resources, at first glance, looks much like other troubled MLPs -- which were once a place for income-hungry investors to park their money. Its stock trades below $2, its credit was downgraded four notches deeper into "junk territory" in January by Standard & Poor's -- to CC from B- -- and its leverage ratio, as estimated by Stifel, is 5x.
Unlike its peers -- such as Linn Energy (LINE) and Breitburn Energy Partners (BBEP), which have both recently filed for Chapter 11 bankruptcy protection -- Vanguard Natural Resources appears to be getting another chance, at least until its Fall redetermination.
Under the terms of its Spring review, in addition to the reduced borrowing base, Vanguard must make six monthly payments of $17.3 million to cover the overdrawn amount on its credit facility and provide documentation proof on 95% of its mortgages, which is up from 80%.
The partnership is also prohibited from making payments on its senior notes or second-lien debt after Sept. 15, if such payments would reduce the firm's liquidity below $50 million. (Such a payment would suggest that the partnership is no longer able to pay down the amount of the overage under its credit facility.)
The terms are tough, but they were expected to be much worse, and it gives the company more time to address its balance-sheet worries -- specifically, its $2.1 billion debt load. Asset sales, such as the SCOOP/STACK deal, may help, as could the exchange offering the partnership completed in February, which lowered its debt by $92 million. Still, there is more work to be done.
"This is not the first down cycle we've been through, and as history has shown, it certainly will not be the last," CEO Scott Smith said on a call with analysts last month. "I want to reassure everyone that we are fully committed to taking the necessary steps to overcome the challenges our industry is currently facing."