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Vanguard Natural Resources Can’t Make It, Files for Bankruptcy

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Why bankruptcy?

Vanguard Natural Resources (VNR), an upstream MLP, has been suffering from a liquidity crisis and high leverage. On February 2, 2017, it filed a petition for relief under Chapter 11 of the United States Bankruptcy Code.

Vanguard is the fourth upstream MLP to file for bankruptcy since the rout in energy prices. Memorial Production Partners (MEMP) recently announced restructuring under bankruptcy protection. Before that, in the first half of 2016, Linn Energy and Breitburn Energy Partners also declared bankruptcy.

Vanguard has entered into a restructuring support agreement with its senior secured note holders. Under the agreement, VNR expects to eliminate $708.0 million of debt from its balance sheet after restructuring.

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Market reaction

Vanguard Natural Resources stock took a sharp fall of 62.5% on February 2 after the bankruptcy announcement. Its peer Legacy Reserves (LGCY) fell 2.1%, and EV Energy Partners (EVEP) rose 1.5% that same day. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks US upstream companies, closed 0.80% higher that day.

Vanguard’s bankruptcy is probably not a surprise for its investors. The company has been battling a weak liquidity position for quite some time.

Management’s commentary

On Vanguard’s restructuring, CEO (chief executive officer) Scott W. Smith said, “The depressed commodity price cycle which has persisted over the past two years, combined with a tightened regulatory environment for senior debt providers, has resulted in a situation where, despite reducing our total debt by over $500 million in 2016, we find ourselves unable to meet the obligations of our current credit facility.”

Smith added, “With a successful restructuring of our balance sheet, Vanguard will be better positioned to weather this new lower for longer commodity price environment, while also improving our long-term financial security and better position us for long-term success.”

VNR has arranged a $50.0 million DIP (debtor-in-possession) financing for business operations during the Chapter 11 period. The financing is subject to court approval.

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