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Inside Vanguard Natural’s Deficiency Payment Plan

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Vanguard Natural’s liquidity position

Vanguard Natural Resources’ (VNR) liquidity position deteriorated in the second half of 2016 after it completed its second borrowing base redetermination on November 3, 2016. The borrowing was reduced to $1.1 billion from $1.32 billion.

Before this reduction, VNR saw a borrowing base reduction in May 2016. The partnership had $1.35 billion of outstanding borrowings under its credit facility and $2.9 million in outstanding letters of credit as of September 30, 2016. This resulted in $225 million in deficiency payments.

VNR monetized its certain hedge position to pre-pay $29.3 million of remaining deficiency resulting from borrowing base redetermination in May 2016 and $37.5 million in first monthly payments under the new borrowing base deficiency.

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How VNR is planning to make deficiency payments

The partnership expects that the excess cash flow in 2017 will not be sufficient to repay the remaining deficiency amount of $187.5 million. According to the company’s 3Q16 earnings release, “Refinancing or restructuring our debt, selling assets, reducing or delaying our drilling program or seeking to raise additional capital through non­traditional lending or other private sources of capital will be necessary to satisfy this requirement in order to be back in compliance under the Credit Agreement.”

Notably, Legacy Reserves (LGCY) recently announced a $300 million term loan from GSO Capital Partners to boost its liquidity. (For details, check out the Market Realist series Legacy Reserves Has Announced a $300 Million Term Loan.)

Where the industry stands

The problem of bad financial position is not limited to Vanguard Natural Resources. Peers including Legacy Reserves, Memorial Production Partners (MEMP), and EV Energy Partners (EVEP) are facing a similar or even worse situation.

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