Nov. 4, 2009 (PR Newswire) -- HOUSTON, Nov. 4 /PRNewswire-FirstCall/ -- Vanguard Natural Resources, LLC (NYSE: VNR) ("Vanguard" or "the Company") today reported financial and operational results for the quarter and nine months ended September 30, 2009.

Mr. Scott W. Smith, President and CEO, commented, "We are very pleased to report record results again this quarter as we once again produced a record level of Adjusted EBITDA and Distributable Cash Flow. But more importantly, as the capital markets reopened, we resumed our growth strategy by acquiring another proven, long-lived property, generating immediate accretion for our unitholders. The acquisition of South Texas properties from Lewis Energy expanded our already-strong portfolio of long-lived producing natural gas and oil assets. In addition, we are very encouraged by the continuing improvement in the capital markets as MLP issuers, both midstream and upstream, have been able to access capital at reasonable valuations. The ability to access the capital markets is the key to growth in our business and with an improving A&D market as we head into next year, we believe we are well positioned to grow our asset base and distributable cash flow for the benefit of our unitholders."

Mr. Richard Robert, Executive Vice President and CFO, added, "The success of our recent equity capital raise associated with the Lewis acquisition strengthened our balance sheet and created renewed financially flexibility to successfully execute our growth plans going forward. We continue to seek out acquisition opportunities that will allow us to expand and diversify our asset base with the objective of generating higher levels of predictable cash flow and raising our level of distribution. With our prudent hedging strategy, we have taken the necessary steps to position the Company to continue to perform well in any commodity price environment."

Third Quarter 2009 Highlights:

--  Adjusted EBITDA (a non-GAAP financial measure defined below) increased
13% to $15.6 million from $13.8 million in the third quarter of 2008 and
rose 17% from the $13.3 million recorded in the second quarter of 2009.
--  Distributable Cash Flow (a non-GAAP financial measure defined below)
increased 130% to $13.0 million from the $5.6 million generated in the
third quarter of 2008 and grew 15% sequentially over the $11.3 million
generated in the second quarter of 2009.
--  We reported net income for the quarter of $0.7 million or $0.05 per unit
compared to reported net income of $71.8 million or $5.90 per unit in
the third quarter of 2008; however, both quarters included special
items.  The recent quarter included $12.8 million of non-cash unrealized
net losses in our commodity and interest rate derivatives contracts and
a $0.8 million non-cash compensation charge for the change in unrealized
fair value of phantom units granted to management, offset by a $5.9
million gain on the acquisition of natural gas and oil properties in the
Lewis transaction.  The 2008 third quarter results included a $65.9
million unrealized net loss in our commodity and interest rate
derivatives contracts.
--  Excluding the net impact of the specific non-cash items mentioned above,
Adjusted Net Income (a non-GAAP financial measure defined below) was
$8.4 million in the third quarter of 2009, or $0.58 per unit, as
compared to Adjusted Net Income of $5.9 million, or $0.48 per unit, in
the third quarter of 2008.

--  Average daily production was 20,396 Mcfe, which included 2,987 Mcfe per
day of incremental production from the Sun TSH reserves acquired from
Lewis Energy. The average daily production for the quarter from the Sun
TSH acquisition consists of only 45 days of production in the quarter.

During the quarter we sold 1,165 MMcf of natural gas, 85,401 Bbls of oil, and 1,391,212 gallons of natural gas liquids (NGLs), compared to the 1,083 MMcf of natural gas, 66,046 Bbls of oil and 549,851 thousand gallons of natural gas liquids produced in the third quarter of 2008. The 20% increase in total production on a Mcfe basis is primarily due to our recent acquisition. Including the positive impact of our hedges in the third quarter of this year, we realized a net price of $11.12 per Mcf on natural gas sales, $77.15 per Bbl on crude oil sales, and $0.82 per gallon on NGL sales, for an average sales price of $11.02 per Mcfe (all excluding amortization of premiums paid and non-cash settlements on derivative contracts).

2009 Nine-Month Highlights:

--  Adjusted EBITDA (a non-GAAP financial measure defined below) increased
15% to $41.5 million from the $36.2 million generated in the first nine
months of 2008.
--  Distributable Cash Flow (a non-GAAP financial measure defined below)
grew 80% to $34.3 million from the $19.0 million generated in the
comparable period of 2008.
--  The reported net loss was $56.0 million or ($4.24) per unit for the
first nine months of 2009 compared to reported net income of $8.9
million in the first nine months of 2008.  The 2009 results included a
$63.8 million non-cash natural gas and oil property impairment charge, a
$16.1 million non-cash unrealized net loss on our commodity and interest
rate derivatives contracts, a $5.9 million gain on the acquisition of
natural gas and oil properties and a $3.0 million non-cash compensation
charge for the unrealized fair value of phantom units granted to
management.  Last year's nine-month results included a non-cash
unrealized loss of $6.5 million on other commodity and interest rate
derivative contracts.

--  Excluding the net impact of these specific non-cash items mentioned
above, Adjusted Net Income (a non-GAAP financial measure defined below)
was $21.0 million in the first nine months of 2009, or $1.59 per unit,
compared to Adjusted Net Income of $15.3 million, or $1.33 per unit, in
the comparable period of 2008.

Hedging Activities

We enter into derivative transactions in the form of hedging arrangements to reduce the impact of natural gas and oil price volatility on our cash flow from operations. As required by our reserve-based credit facility, we have mitigated this volatility through 2011 by implementing a hedging program on a portion of our total anticipated production. At September 30, 2009, the fair value of commodity derivative contracts was approximately $26.0 million, of which $19.5 million settles during the next twelve months. Currently, we use fixed-price swaps and NYMEX collars and put options to hedge natural gas and oil prices.

The following table summarizes commodity derivative contracts in place at September 30, 2009:

October 1-
December 31, 2009   2010       2011
Gas Positions:
Fixed Price Swaps:
Notional Volume
(MMBtu)                864,806    4,731,040  3,328,312
Fixed Price
($/MMBtu)                $9.34        $8.66      $7.83
Puts:
Notional Volume
(MMBtu)                651,446            -          -
Floor Price
($/MMBtu)                $7.85           $-         $-
Collars:
Notional Volume
(MMBtu)                249,999    1,607,500  1,933,500
Floor Price
($/MMBtu)                $7.50        $7.73      $7.34
Ceiling Price
($/MMBtu)                $9.00        $8.92      $8.44
Total:
Notional Volume
(MMBtu)              1,766,251    6,338,540  5,261,812

Oil Positions:
Fixed Price Swaps:
Notional Volume
(Bbls)                  44,000      164,250    151,250
Fixed Price
($/Bbl)                 $87.23       $85.65     $85.50
Collars:
Notional Volume
(Bbls)                   9,200            -          -
Floor Price
($/Bbl)                $100.00           $-         $-
Ceiling Price
($/Bbl)                $127.00           $-         $-
Total:
Notional Volume
(Bbls)                  53,200      164,250    151,250

Selling, General and Administrative Expense

Our selling, general and administrative expense rose 37% to $2.1 million in the third quarter of 2009 from $1.6 million in the same period in 2008, primarily reflecting the recognition of non-cash expenses associated with our unit-based compensation program. The 2009 third quarter charges included a $1.3 million non-cash compensation expense which was related to the grant of phantom units on January 1, 2009 and the amortization of common and Class B units granted to employees and directors under employment agreements and our long-term incentive plan. Last year's third quarter included non-cash compensation charges of $0.8 million.

On January 1, 2009, in accordance with their previously negotiated employment agreements, phantom units were granted to two officers in amounts equal to 1% of our units outstanding at January 1, 2009 and the amount paid in either cash or units will equal the appreciation in value of the units, if any, from the date of the grant until the determination date (December 31, 2009), plus cash distributions paid on the units, less an 8% hurdle rate. The fair value of the phantom units at September 30, 2009 of $3.0 million was determined using a Black Scholes model and will be recalculated at December 31, 2009 at which time the final value will be known.

Recent Events

On August 17, 2009, Vanguard completed its acquisition of certain natural gas and oil properties in South Texas for an adjusted purchase price of $50.5 million, subject to customary post-closing adjustments to be determined, from an affiliate of Lewis Energy Group, L.P. The properties acquired have total estimated proved reserves of 34.9 Bcfe as of September 30, 2009, of which 96% is natural gas and natural gas liquids and 67% is proved developed. Lewis will operate all of the wells acquired in this transaction. Based on the current net daily production of approximately 6,100 Mcfe, the properties have a reserve to production ratio of approximately 16 years. The transaction was funded by a public offering of 3.5 million common units and certain borrowings under its reserve-based credit facility. Subsequently, the underwriters of the public offering of common units purchased an additional 432,800 common units pursuant to a partial exercise of their over-allotment option which was used to reduce borrowings under the reserve-based credit facility.

With the acquisition, Vanguard assumed natural gas puts and swaps based on NYMEX pricing for approximately 61% of the estimated gas production from existing producing wells related to the transaction for the period beginning August of 2009 through 2010. In addition, Vanguard has also added new derivative positions so that approximately 90% of this new production will be hedged through 2011. A schedule of the hedges assumed and added is shown below:

Contract Period           Volume (MMBtu)           Price
Put and Swap Agreements Assumed:
August - December 2009                 765,000             $8.00
January - December 2010                949,000             $7.50
Collars Added:
January - December 2010                693,500         $7.50 - $8.50
January - December 2011              1,569,500         $7.31 - $8.31 (1)

(1) Weighted average pricing.

Cash Distributions

On November 13, 2009, the Company will pay a third-quarter cash distribution of $0.50 per unit to its unitholders of record as of November 6, 2009. This quarterly distribution payment is unchanged from the amount distributed during the second quarter of 2009 and the third quarter of 2008.

Capital Expenditures

Capital expenditures for the drilling, capital workover and recompletion of natural gas and oil properties were approximately $1.1 million in the third quarter of 2009 compared to $6.7 million for the comparable quarter of 2008. For the first nine months of 2009, Vanguard spent $3.0 million for drilling, capital workover and completion work, compared to $13.4 million during the comparable period last year. During the nine months ended September 30, 2009, we did not drill any wells on our operated properties and there was limited drilling on non-operated properties. We elected to reduce our capital spending in a low commodity price environment but we intend to move forward with our development drilling program when market conditions allow for an adequate return on the drilling investment.

Reserve-Based Credit Facility

At the end of the third quarter 2009, Vanguard had indebtedness under its reserve-based credit facility totaling $123.5 million. After consideration of an additional $5.5 million principal paydown subsequent to September 30, 2009, we have $52.0 million available for borrowing under the reserve-based credit facility. This represents an approximate $29.0 million improvement in our liquidity as compared to the end of the second quarter of 2009. Absent accretive acquisitions, to the extent available after unitholder distributions, debt service, and capital expenditures, it is our current intention to utilize our excess cash flow during the remainder of 2009 to reduce our borrowings under our reserve-based credit facility.

On August 31, 2009, Vanguard's existing reserve-based credit facility was amended in conjunction with the acquisition of the natural gas and oil properties from an affiliate of Lewis Energy Group, L.P.