Energy Prospectus

VNR Vanguard Natural downgraded based on liquiditiy, leverage concerns at Stifel
As noted earlier, Stifel downgraded Vanguard Natural to Sell from Hold. The firm is more concerned about the company's liquidity and leverage in fiscal 2016, given what it sees as the weaker commodity price outlook. :theflyonthewall.com

From Stifel this morning:

Limited Liquidity

Following the recent acquisitions and the fall credit redetermination, the
partnership has approximately $105 million available under its $1.8 billion credit
facility. We note the partnership has already monetized a portion of its FY18 and
FY19 hedges acquired from LRE and EROC which raised $38 million. Under a
“lower for longer” commodity scenario, we anticipate the partnership’s credit facility
will be reduced at least $100 million in spring 2016 due to both six months of
production no longer in reserves and hedges rolling off.

We note the partnership received the ability to issue $300 million in junior lien debt
as part of the fall redetermination (each dollar raised reduces facility by $0.25). We
would anticipate any capital raise will be used to pay down its credit facility.

Leverage Approaching Covenants
While we would not be surprised to see relief on credit covenants, the partnership
currently has total leverage covenant of 5.25x in FY16. With $2.318 billion of total
debt outstanding, the partnership needs to generate approximately $441 million of
EBITDA in FY16 – which we view as highly significant. However, if the partnership
issues net $150 million of junior lien debt (pays down the revolver $150 million with
the $300 million proceeds), the partnership will need to generate approximately
$470 million of EBITDA. While the partnership has not provided a FY16 forecast,
we currently have modeled $471 million in FY16 EBITDA assuming modest
improvement in realized differentials and average WTI and Henry Hub prices of
$50/bbl and $2.69/MMcf, respectively, in FY16.

Downgrade to Sell
Given the partnership’s elevated credit facility utilization (94%) and leverage
approaching debt covenants in FY16, we are downgrading VNR to Sell. We are
establishing a target price of $3.00 utilizing EV/FY16 EBITDA multiple of 6.5x. We
note, however, we continue to view the partnership managing through the current
commodity environment.

Risks to our target price include: recovery in commodity prices, capital infusion
providing liquidity relief, monetization of non-core assets (i.e. SCOOP/STACK
acreage from EROC transaction), and significant synergies from LRE and EROC
transactions improving cash flows.

I hope VNR does not sell their SCOOP/STACK acreage, but that would definitely be a way for them to raise some quick cash.