Shale Gas Fields Change Hands (VNR, CHK)

Natural gas producer Vanguard Natural Resources LLC (NYSE: VNR) announced this morning that it has agreed to purchase natural gas and liquids assets from privately held Antero Resources for about $445 million. The company expects the deal to close by the end of June.

Among the benefits that Vanguard lists for the purchase are that it is immediately accretive to distributable cash flow, that proved reserves total around 420 billion cubic feet equivalent, and total acreage of 66,000 net acres in the Woodford shale play and 5,300 net acres in the Fayetteville shale play. Here are two more from the list:

Approximately 180 proved drilling locations with an average 22.5% working interest that are expected to generate superior returns even in a low gas price environment. We have also identified an additional 1,100 future proved drilling locations on acreage that is held by production that can be developed should natural gas prices return to the $4-$5 range.

Existing natural gas hedge book valued at approximately $100 million which at closing we intend to restructure to cover 100% of expected proved production through 2017 at prices significantly higher than current market.

In other words, most of the acreage is only going to be produced if natural gas prices rise. And the company appears to be planning to make the same kind of hedging gamble that Chesapeake Energy Corp. (NYSE: CHK) took and lost late last year. Chesapeake closed out its hedges in order to raise cash in late 2011, so the company watched as natural gas prices fell and took its unhedged production with it.

Vanguard also appears to be saying that it will hedge 100% of its production for the next several years but at prices well above the current natural gas price of around $2.60/thousand cubic feet. That seems like a reasonable risk given plans by Chesapeake and others to export natural gas. But if prices don’t rise, will Vanguard, with a market cap of $1.2 billion, be able withstand the pressure as well as the much larger Chesapeake?

Vanguard stock has been inactive in the pre-market. The stock’s closing price on Friday was $23.29 in a 52-week range of $21.86-$31.75.

Paul Ausick