AAII Annual Conference Las Vegas, Nevada November 12, 2011

Transcription

1 AAII Annual Conference Las Vegas, Nevada November 12, 2011

2 Forward-Looking Statements Statements made by representatives of Vanguard Natural Resources, LLC during the course of this presentation that are not historical facts are forward looking statements, including (but not limited to) statements about the acquisition (including its benefits, results and effects), the related financing plans, whether and when the acquisition will be consummated, the operating results of Encore Energy Partners LP following the acquisition and statements with respect to future distributions. These statements are based on certain assumptions and expectations made by the Company which reflect management s experience, estimates and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or anticipated in the forward looking statements. These include risks relating to the satisfaction of the conditions to closing of the acquisition, uncertainties as to timing, financial performance and results, our indebtedness under our revolving credit facility, availability of sufficient cash to pay our distributions and execute our business plan, prices and demand for oil, natural gas and natural gas liquids, our ability to replace reserves and efficiently develop our reserves, our ability to make acquisitions on economically acceptable terms and other important factors that could cause actual results to differ materially from those anticipated or implied in the forward looking statements. See Risk Factors in the Company s 10-K Annual Report for 2010, Form 10-Q dated March 31, 2011 and any other public filings and press releases. Vanguard Natural Resources, LLC undertakes no obligation to publicly update any forward looking statements, whether as a result of new information or future events. This presentation has been prepared as of November 7,

3 3 MLP OVERVIEW

4 Natural Gas Gatherers and Processors Natural Gas Transportation Natural Gas Storage Crude Oil Transportation Refined Products Pipelines and Terminals Coal Propane Upstream Shipping and Transportation Pure-Play General Partnerships Diversified General Partnerships Distressed MLPs MLP Subsector Descriptions These MLPs gather and process natural gas in the field and process it by removing and separating natural gas liquids (NGLs) to make the gas acceptable to transport on gas transmission lines. Contracts range from fee based (no commodity exposure) to keep whole, which has exposure to the spread between NGLs and natural gas. Natural gas transportation pipelines are generally larger diameter interstate pipelines used for long-distance transportation. With stable revenues (contracts are largely take or pay ), natural gas transportation pipelines receive natural gas from gathering systems and other pipelines and deliver it to industrial end users, utility companies, or storage facilities. Natural gas storage MLPs own, operate and manage natural gas storage facilities and provide interconnectivity to transportation pipelines. They primarily lease storage capacity to customers under long term contracts (3-5 years) and have minimal exposure to commodity prices. Crude oil MLPs are engaged in the transportation, storage, blending, terminalling and marketing of crude oil and crude oil derivative products. They transport crude for a fee from the wellhead (supply regions) to refineries or other end users of crude oil (demand region) without taking title to the product limiting their commodity exposure. Refined products pipelines are common carrier transporters of refined petroleum products, such as gasoline, diesel fuel and jet fuel. Primary pipeline customers are refiners and marketers of the product being shipped. End-user destinations include airports, rail yards, and terminals/truck racks, for further distribution to retail outlets. The universe of coal MLPs consist of three coal producers and two coal royalty businesses that own, lease, and manage coal reserves. The royalty-oriented partnerships enter into long-term leases that provide the coal operators the right to mine coal reserves on the partnerships properties in exchange for royalty payments. Propane MLPs distribute propane via truck to residential, commercial, industrial, and agricultural customers. Upstream MLPs are focused on the exploitation, development and acquisition of oil and natural gas producing properties. These partnerships produce oil and natural gas at the wellhead for sale to various third parties. Typically, upstream MLPs do not partake in exploratory drilling, but rather own and operate assets in mature basins that exhibit low decline rates and long reserve lives. Shipping MLPs transport energy products primarily via tankers or barges. Products shipped typically include refined petroleum products and by-products such as gasoline, heating oil, diesel fuel, jet fuel, lubricants, asphalt, fuel oil, sulfur, petrochemical and commodity specialty products, liquefied natural gas, and crude oil. General partnerships own and operate the assets of an underlying MLP. Generally, GPs will own a 2% general partner interest with incentive distribution rights. GPs vary on number of common units owned, levels of debt, tax structure and other considerations. Diversified general partnerships are similar to the pure play general partnerships described above, except that they are generally structured as C-Corps and are involved in other business operations that are separate from those of the underlying MLP (e.g. WMB, OKE, etc). Distressed MLPs are classified as MLPs that are not currently paying a distribution. The underlying business may fall into one of the above categories. 4

5 Key MLP Investor Benefits 4 Specific Investor Benefits High Current Income 6.4% average current yield for the AMZ MLP Index (1) Growth Potential 106.6% total return for the AMZ MLP Index over 10 year period (2) Tax Advantaged Distributions Largely a Return of Capital Inflation Protection Distribution Growth historically exceeds CPI/PPI Source: Alerian MLP Index database. Market data as of November 4, (1) Represents the weighted average yield of the Alerian MLP Index (AMZ). (2) Represents total return from 11/04/01 to 11/04/11, all distributions reinvested. 5

6 Where Are MLPs Today? MLPs remain attractive for three key reasons 1) Attractive valuations Still within historical average yields and yield spreads Still within historical averages EV/EBITDA and Price/DCF multiples Attractive to other yield alternatives: REITs, Utilities and Corporate Bonds 2) Earnings Strength / Stability MLP earnings are largely derived from fixed fee contracts or have the ability to hedge away a large portion of commodity risk 3) High and Growing Dividends (Defense and Offense) High dividends provide protection in an uncertain market Growing dividends encourage upside pricing movement while providing a powerful inflation hedge 6

7 Relative Performance Since 1/01/ % 200% 175% % 150% 125% 100% 75% 50% 25% 0% -25% -50% % +87.3% +30.4% +27.6% -5.1% -18.0% -27.4% -75% -100% 1/01/01 12/17/01 12/02/02 11/17/03 11/01/04 10/17/05 10/02/06 9/17/07 9/01/08 8/17/09 8/02/10 7/18/11 Barclays HY Index Alerian MLP S&P 500 Utilities S&P Small Cap 600 Dow Jones-UBS Commodity Index (1) MSCI World Index S&P 500 MSCI US REIT Index Source: Bloomberg database. Market data as of November 8, (1) MSCI World Index excludes the United States. 7

8 Comparative Returns Across Asset Types MLP asset class performance has been better than other asset types over the long term 8

9 MLP Yield Spreads Still at Attractive Levels AMZ MLP Index Spread Over 10-Year Treasury AMZ MLP Index Spread to S&P REIT Index 1,400 1,200 Current Spread 227bps (Spread in Basis Points) 1, MLPs currently at 120bps above historical average Historical Average: 316bps (Spread in Basis Points) Historical Average: 163bps AMZ MLP Index Spread to BBB Bond Index (1) Current Spread 205bps Historical Average: 120bps 0 1/2/2001 1/2/2003 1/2/2005 1/2/2007 1/2/2009 1/2/ /2/01 1/2/02 1/2/03 1/2/04 1/2/05 1/2/06 1/2/07 1/2/08 1/2/09 1/2/10 1/2/11 (100) Source: Alerian MLP Index and FactSet databases. Market data as of November 8, (1) Bank of America / Merrill Lynch BBB Bond Index per Bloomberg database. (200) 9

10 MLP Competitive Landscape - Participants There are a variety of structures available to satisfy the needs of different investors Publicly Traded Index-linked Separately Managed Open-end Mutual Funds Closed Funds ETNs ETFs Accounts Hedge Funds MLPs Direct The Cushing MLP Premier Fund (CSHAX, -CX, ZX) The Cushing MLP Total Return Fund (SRV) Credit Suisse/ Cushing 30 MLP Index (MPLN) Alerian MLPI The Cushing SMA Platform The Cushing Hedge Fund Strategies ~ 100 MLPs across 10 sectors Steelpath (Alerian) Kayne Anderson JP Morgan (Alerian) Kayne Anderson Others Tortoise UBS E-TRACS (Alerian, WF) Tortoise FAMCO FAMCO Legg Mason (Clearbridge) Others Others 10

11 MLP Structure Comparison Investor Suitability Liquidity Corporate Level Tax Drag Taxation of Dividends Tax Reporting UBTI Separately Managed Accounts Closed-End Public Fund All Daily No Largely return of capital All Daily Yes Largely return of capital Multiple K-1s Does not block UBTI 1099 Blocks UBTI Public Open-End Mutual Fund All Daily Yes Largely return of capital 1099 Blocks UBTI ETN All Daily No Ordinary Income 1099 Blocks UBTI Private Long Only Trust Accredited Investor Quarterly No Largely Return of Capital Consolidated K-1 Does not block UBTI Hedge Fund Accredited Investor Quarterly No Largely Return of Capital Consolidated K-1 Does not block UBTI 11

12 Advantages of Vanguard s LLC Structure Characteristics VNR Typical MLP Non-Taxable Entity Tax Shields on Distributions/ Dividends Distribution Distribution Typical Corporation No Taxable Dividend Tax Reporting Schedule K-1 Schedule K-1 Form 1099 General Partner No No Incentive Distribution Rights (IDRs) No Up to 50% No Attractive Estate Planning Tool No 12

13 Current Yields Across MLP Segments Current Yields 14.0% 12.0% 10.0% 8.4% 9.2% 8.4% 11.1% 9.8% 10.3% 11.8% 10.0% 8.0% 6.0% 4.0% 6.8% 4.9% 6.6% 5.2% 6.8% 6.9% 5.6% 4.7% 7.4% 6.3% 8.1% 8.4% 5.4% 4.3% 8.2% 2.0% 2.8% 0.0% General Partner Large Cap Pipeline Small & Mid Cap Pipeline Gathering & Processing Propane Upstream Coal Gas Storage 13 Source: Capital IQ, as of 9/26/2011. (1) Includes: AHGP, XTXI, ETE, KMI, NSH, TRGP. (2) Includes: BWP, BPL, EPB, EEP, ETP, EPD, KMP, MMP, NS, OKS, PAA, WPZ. (3) Includes: GEL, HEP, SEP, SXL, TCLP, TLP. (4) Includes: AMID, APL, CHKM, CPNO, CMLP, XTEX, DPM, EROC, MWE, RGNC, NGLS, WES. (5) Includes: APU, FGP, NRGY, NGL, SPH. (6) Includes: BBEP, EVEP, LGCY, LINE, PSE, QRE, VNR. (7) Includes: ARLP, NRP, RNO, PVG, OXF. (8) Includes: NKA, PNG.

14 The GP / LP Relationship MLPs are partnerships with a general partner and limited partners General partner manages the assets and operations of the MLP Typically the GP is controlled by the sponsor or parent entity (in this case, Unit Corporation would own the general partner) Limited partners provide capital, but have no management role The principal business objective for MLPs is to increase the quarterly distributions to unitholders over time while ensuring the ongoing stability of the business In order to incentivize the GP to raise distributions to LPs, the GP will be entitled to increase its percentage of cash flow received through the IDR structure as it raises the distribution level and reaches certain distribution thresholds The distribution paid to the GP becomes a larger portion of the overall distribution, as certain target levels are met Example of Relatively Standard % Allocations of Available Cash Annual Amount Limited Partner's General Partner's Target Distribution Per Unit Percentage Percentage Minimum Annual Distribution $ % 2% 1st Target Distribution up to $ % 2% 2nd Target Distribution > $2.20 up to $ % 15% 3rd Target Distribution > $2.50 up to $ % 25% Thereafter > $ % 50% 14

15 Rather Have a Slice or the Whole Pie? Assuming the IDR Structure as outlined in the previous slide, the below depicts the growing cashflow attributed to the GP at different quarterly distribution levels Target 1 - $0.55/unit Target 2 - $0.625/unit Target 3 - $0.75/unit Thereafter- $0.80/unit $102 $112 $245 $661 $5,000 $5,500 LP $6,250 GP $7,500 IDRs become a burden on the MLP s cost of capital advantage, especially as higher IDR targets are reached Cumulative Allocation Summary Quarterly Distribution Implied Unit Price (@ 8% Yield) Level LP GP Total IDRs No IDRs IDRs No IDRs Variance MQD 98.0% 2.0% 100.0% $0.50 $0.50 $25.00 $ % Target % 2.0% 100.0% $0.55 $0.55 $27.50 $ % Target % 3.8% 100.0% $0.63 $0.64 $31.25 $ % Target % 8.1% 100.0% $0.75 $0.80 $37.50 $ % Thereafter 87.3% 12.7% 100.0% $0.80 $0.90 $40.00 $ % 15 Note: Distribution cash flow assumes 10.0 MM units with a minimum quarterly distribution of $0.50/unit and assumes current quarterly distribution of $0.80 /unit.

16 MLP Relative Price Performance Since 1/1/2009 Relative Price Performance 200.0% GP MLP Index Alerian MLP Index S&P 500 Index 150.0% 100.0% 50.0% 0.0% (50.0%) 1/1/09 5/5/09 9/7/09 1/10/10 5/15/10 9/16/10 1/19/11 5/24/11 9/26/11 16 Source: Capital IQ. (1) Includes: AHGP, ETE, KMI, NSH and TRGP.

17 MLP / GP Distribution Growth History Compound Annual Growth Rate (Since 6/30/08, unless otherwise noted) 70.0% 60.0% 60.9% MLP General Partner 50.0% 40.0% 33.2% 30.0% 26.8% 20.0% 10.0% 0.0% 18.2% 14.5% 11.8% 11.2% 9.2% 8.4% 3.6% 3.6% 0.0% ARLP / AHGP XTEX / XTXI ETP / ETE KMP / KMI NS / NSH NGLS / TRGP 17 (1) Represents three quarters of distribution/dividend growth, annualized. XTEX/XTXI reinstated distributions/dividends in October 2010 following two quarters of suspended payments. (2) Represents one quarter of distribution growth, annualized. KMI s IPO occurred on February 10, (3) Represents two quarters of distribution growth, annualized. TRGP s IPO occurred on December 6, 2010.

18 Current Market Challenges The IDR structure has been very successful in incentivizing GPs but eventually increases the cost of capital for the underlying MLP and makes distribution growth harder to achieve In response, MLPs have adopted various approaches: 1. Eliminating the 50% IDR tier and capping IDRs at 25% Enterprise Products and NuStar have utilized this approach 2. Temporary give up of IDR payments related to a specific acquisition Plains All-American used the approach to facilitate the acquisition of Pacific Energy Partners and this approach has become common 3. No IDR structure at IPO Introduced by Copano and used by Duncan Energy Partners (and many of the E&P MLPs) 4. Reset mechanism Introduced by DCP Midstream and now a standard feature of new MLPs 5. Acquisition of General Partner interest and/or IDRs MarkWest, Magellan, Buckeye, Inergy, Enterprise, Penn Virginia, Natural Resource Partners and Genesis Energy 18

19 MLP IDR Structure Overview MLP IDR Structures by Segment Structured with IDRs Structured without IDRs IDRs Eliminated 100.0% 85.7% 40.0% 40.0% 16.7% 25.0% 12.5% 90.0% 80.0% 70.0% 8.3% 75.0% 75.0% 87.5% 60.0% 60.0% 60.0% 50.0% 40.0% 30.0% 20.0% 14.3% 10.0% 0.0% Upstream Propane Coal Gathering & Processing Large-Cap Pipeline Small-Cap Pipeline 19 Source: Partnership filings (1) Includes: BBEP, EVEP, LGCY, LINE, PSE, QRE, VNR. (2) Includes: APU, FGP, NRGY, NGL, SPH. (3) Includes: ARLP, NRP, OXF, PVR, RNO. (4) Includes: AMID, APL, CHKM, CPNO, CMLP, DPM, EROC, MWE, RGP, NGLS, WES, XTEX. (5) Includes: BWP, BPL, EPB, EEP, ETP, EPD, KMP, MMP, NS, OKS, PAA, WPZ. (6) Includes: GEL, HEP, MMLP, SEP, SXL, TCLP, TLLP, TLP.

20 E&P MLPs and IDRs E&P MLPs without IDRs (filed) LLC Structure Partnership Structure E&P MLPs with IDRs E&P MLPs with Other Incentive (filed) EVEP s general partner holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 25%, of the cash distributed from operating surplus in excess of $0.46 per unit per quarter LRE s general partner holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 23.1%, of the cash distributed from operating surplus in excess of second target distribution Management Incentive Fee GP Administrative Fee 20

21 The Building Blocks to a Successful E&P MLP Building Blocks Mature Reserve Base Diverse portfolio of mature, long life oil and gas properties Primarily proved developed producing reserves with a long reserve life Exploitation vs. Exploration Low drilling risk and low development costs Development of well-known and well understood assets No exploratory drilling of high risk or high declining assets Active Hedging Strategy Conservative Balance Sheet and High Distribution Coverage Ratio Strong Management Team Hedging is utilized to mitigate commodity price exposure with a significant percentage of expected production hedged (>50%) Acquisitions hedged upon signing a PSA to lock-in margin for three to five years Hedges help set distributions at a long-term sustainable level Target financing acquisitions with 60% equity and 40% debt to de-lever over time Strive to maintain a healthy distribution coverage ratio of at least 1.20x Active and disciplined management team with extensive experience in the O&G Industry Never cut or suspend distributions 21

22 Overview of Vanguard Natural Resources Upstream oil & gas LLC, headquartered in Houston, Texas Initial Public Offering VNR - October 2007 (Total Enterprise Value of ~$240 MM) Ten strategic acquisitions totaling ~$900 MM expanded geographic profile and commodity diversity (including Encore s recent acquisitions) Positive Cash Distribution Coverage Quarterly distribution of $ per unit ($2.31 annualized) yields approximately 8.1% at current price; ENP s current quarterly distribution is $0.47 per unit Increased distributions ~36% since IPO Diverse portfolio of mature, long life gas and oil properties, combined with a multi-year hedging program provide stable cash flow and support distribution growth *~78.8 MMboe total proved reserves 80% proved developed and ~15 year R/P 64% liquids / 36% gas on a consolidated basis Company Profile ($ MM) VNR ENP UNITS OUTSTANDING 30.3 MM 45.5 MM (1) EQUITY MARKET CAP (2) $858.7 $951.5 TOTAL DEBT $389.0 $346.0 LESS CASH $4.5 $4.5 ENTERPRISE VALUE $1,243.2 $1, *Proved reserves as of 12/31/10 based on reserve report prepared by our independent reserve engineers, DeGolyer & MacNaughton (D&M) and 12-month average spot prices; Amounts illustrated reflect ENP s and VNR s proved reserves on a consolidated basis and include 2011 YTD acquisitions (1) VNR owns 20,924,055 ENP common units (2) Market pricing as of November 4, 2011; VNR includes 420m Class B units

23 How VNR Fit in the Upstream Cycle Oil & Gas Company (C-Corp) Discovers new reserves via exploratory drilling (Shale and Resource) Oil & Gas Company Redeploys capital received from VNR Oil & Gas Company Develops reserves, captures higher IP rates and cash flow (and higher declines) Oil & Gas Company sells the mature reserves to VNR Production rates have declined to a more manageable and stable level (typically less than 10%) VNR distributes predictable cash flow to unitholders from proved developed producing reserves 23

24 Quarterly Adjusted EBITDA Growth Among E&P MLPs, Vanguard is ranked 2 nd in Adjusted EBITDA growth $300 13% $250 $200 (S in Millions) $150 $100 $50 18% 13% 9% 15% 2% NM $0 Q1 '06 Q3 '11 Q4 '06 Q2 '11 Q4 '06 Q2 '11 Q1 '07 IPO Dates 1/06 9/06 10/06 1/07 Q3 '11 Q4 '07 Q3 '11 VNR 10/07 Q3 '08 Q3 '11 Q1 '11 Q2 '11 5/08 12/10 24 *Vanguard s Adjusted EBITDA includes 100% interest in Encore.

25 Non-Cash Items Distort Income Due to large non-cash items such as impairments and unrealized hedge gains and losses due to fluctuations in commodity prices, Vanguard often experiences large swings in Net Income/(Loss) that distort it s ability to pay distributions Adjusted EBITDA eliminates these items to arrive at true cash flow $150 ($ in Millions) $100 $50 $0 -$50 $30.4 $48.8 $56.2 $80.4 -$100 -$150 FY '07 FY '08 FY'09 FY '10 Net Income/(Loss) Non-Cash Items Adjusted EBITDA 25 *Non-Cash Items include depletion, depreciation and amortization, impairment, (gain) / loss on acquisitions, unrealized (gain) loss on commodity and interest rate derivatives and unit-based compensation expense.

26 Hedging Philosophy Hedge commodity prices on estimated production from acquisitions for three to five years upon signing the Purchase and Sale Agreement to protect rate of return from price fluctuations Opportunistic hedging program to extend hedge positions as existing hedges roll off Reduce cash flow volatility and protect distribution levels Primary use of swaps and costless collars, with the addition of three-way collars to provide more upside Interest rate risk also mitigated through hedging 26

27 Locking in Acquisition Margins Through the use of hedging, Vanguard is able to lock in significant acquisition margins for the foreseeable future, helping to insure distribution stability $ $92.82 $90.00 $80.00 $80.28 $78.85 $84.87 $81.72 $70.00 $67.41 $60.00 $60.42 $60.48 $56.12 $68.44 $51.62 $50.00 $40.00 $30.00 $43.74 $44.46 $44.51 $63.10 $48.66 $63.99 $70.50 $44.87 $59.05 $20.00 $10.00 $0.00 $16.68 $16.02 Apache (12/21/07) Dos Hermanos (7/21/08) $11.61 SUN TSH (7/21/09) $17.19 Ward County (11/30/09) $24.38 Parker Creek (5/3/10) $18.75 Encore (11/17/10) $14.85 $14.37 EnerVest (6/22/11) ENP Deal: Permian (8/15/11) $6.75 ENP Deal: Wyoming (9/1/11) $22.67 ENP Deal: Gulf coast (8/31/11) "NYMEX 5 Year WAVG Forward Strip Price on a Boe Basis" Acquisiton Cost per Boe 27

28 Hedged Cash Flow=Stable Distribution Coverage 2011 Natural Gas Prices ($/MMBtu) $2.00 $3.00 $4.00 $5.00 $ Crude Oil Prices WTI ($/Barrel) $ x 1.14x 1.15x 1.16x 1.17x $ x 1.26x 1.27x 1.28x 1.29x $ x 1.39x 1.40x 1.41x 1.42x $ x 1.50x 1.51x 1.52x 1.53x $ x 1.58x 1.59x 1.60x 1.61x Existing oil and gas hedges support the distributions in a period of volatile commodity prices ABOVE 1.10x coverage in almost any price environment 28

29 Comparable Company Distribution Increases VNR Leads Peer Group in Overall Distribution Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% 2% 9% 10% 21% 27% 36% VNR Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 VNR Calculations include all quarterly distributions from 2008 through November

30 Consistent Distribution Growth VNR has raised its distribution +36% since IPO equating to ~$8.11 in cumulative distributions 2007* *Q distribution of $0.425 is pro rata for October 29, 2007-December 31,

31 MLP/LLC Tax Shield Advantages Because MLPs are partnerships or LLCs and not corporations, they do NOT pay taxes and instead the unitholders are required to pay tax on their allocated share of net income Typically, the distributions received, far exceed the taxes owed on allocated net income, and often deductions such as depletion, depreciation and amortization offset a majority of the allocated income An Investor s tax basis is adjusted downward by distributions and allocation of deductions and losses, and upward by the allocation of income The difference between distributions and allocated taxable income creates a tax deferral 31

32 MLP/LLC Tax Shield Advantages Example At higher levels of deductions (higher tax shields), a unitholder has less of a tax burden in the current year but will have a higher tax burden when the units are sold 80% Tax Deferred 40% Tax Deferred Year 1: 1,000 units $ Basis is: $30,000 $30,000 Investor receives total cash distributions of $2.50/unit ($2,500) ($2,500) Assume taxable income of $2.00 per unit $2,000 $2,000 Deductions calculated as a % of distributions tax deferred ($1,500) ($500) Investor pays tax on net taxable income (Year 1) $500 $1,500 Tax Shield (net taxable income / distributions received) 80% 40% Adjusted Basis (beginning - distributions + net taxable income) $28,000 $29,000 Year 2: All units $32.00 $32,000 $32,000 Gain per unit $4,000 $3,000 Depreciation recapture-taxed at ordinary income rates $1,500 $500 Taxed at capital gain rates $2,500 $2,500 32

33 Price Performance Since 2009 The results have been good. VNR has outperformed US Royalty Trusts, C-Corps and other E&P MLPs. The strategy works. 800% 700% VNR Total Return: 563% 600% 500% VNR: 381% 400% 300% E&P MLPs: 229% 200% 100% Alerian Index: 110% WTI Crude: 74% S&P 500: 39% US Royalty Trust: 28% 0% 01/01/09 07/27/09 02/19/10 09/15/10 04/10/11 11/04/11 (1) US Royalty Trust (2) E&P MLPs S&P 500 Alerian Index VNR (3) WTI Crude VNR Total Return 33 Note: Market data as of 11/4/11. (1) US Royalty Trust Index includes: CRT, HGT, MTR, PBT, SBR and SJT. (2) E&P MLP Index includes: BBEP, CEP, EVEP, LGCY, LINE and VNR. (3) 12 month strip pricing.

34 Comparable Company Distribution Yields CURRENT DISTRIBUTION YIELDS OF PEER GROUP 10% 6.5% 6.6% 6.6% 7.2% 7.3% 7.5% 8.0% 8.3% 9.1% 9.8% 5% 4.1% $3.05 $2.18 $2.76 $2.04 $1.65 $2.31 $1.88 $1.74 0% *Pipe *G&P *USRT EVEP PSE LGCY LINE QRE VNR ENP BBEP *G&P Average Yield of Gathering & Processing Companies (APL, DPM, CPNO, EROC, MWE, NGLS, RGP, WES, WPZ, XTEX) *Pipe Average Yield of Large Pipeline Companies (BWP, EEP, EPB, EPD, ETP, OKS, SEP, TCLP) *USRT Average Yield of U.S. Royalty Trusts (CRT, HGT, MTR, PBT, SBR and SJT) Yield calculated using the closing unit price on 11/7/11. 34

35 Key Investor Considerations Management and unitholders are well aligned High quality, long lived reserves Asset base generates stable cash flow Multi-year hedge program mitigates commodity risk Geographic and commodity diversity Structure is unitholder friendly (ie IDRs) Attractive distribution yield Profitably grow company and increase distribution 35