VNR’s commodity price exposure
The correlation between Vanguard Natural Resources’ (VNR) stock price and crude oil (USO) resulted in a correlation coefficient of 0.41 over the past year, while natural gas (UNG) and VNR have a correlation coefficient of 0.14 for the same period. A correlation coefficient close to 1.0 might indicate a strong relationship between the two variables.
Notably, VNR’s correlation with crude oil and natural gas might increase, considering the decline in its hedge position following monetization.
Natural gas price environment
Natural gas prices are trading close to two-year highs, driven by the current cold weather in the US. More than half of US homes use natural gas for heating homes. This is expected to drive VNR’s natural gas production and realized prices in the fourth quarter of 2016.
According to a recent STEO (short-term energy outlook) report published by the EIA (US Energy Information Administration), natural gas prices are expected to end at $2.57 per MMBtu by the end of 2016. However, this seems unlikely, given current levels. (For more details, check out Market Realist’s “US Natural Gas Prices Hit a 2016 High: What’s Next?“)
Crude oil price environment
Crude oil has climbed over $50 per barrel for the second time in 2016. The recent rally in WTI (West Texas Intermediate) crude oil reflects the decision by OPEC (Organization of Petroleum Exporting Countries) to cut output. However, these factors might not support another rise in crude oil prices—at least, not in 2016—considering the existing inventory build. Net withdrawals or crude oil demand should increase as well to support higher prices.
The EIA (US Energy Information Administration) expects crude oil prices to be $43.1 per barrel by the end of 2016. At this price level, VNR might continue as a going concern in 2016. However, if prices follow the pessimistic estimates, VNR and other upstream producers might find it tough to service their debt and interest payment, pushing them toward bankruptcy.
Continue to the next part for a closer look at VNR’s currency hedge position.