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QR Energy LP (NYSE:QRE): A $300 million IPO with a market cap of $726 million at the price range mid-point of $20. The IPO is scheduled for Thursday, December 16, 2010. Nine others are scheduled for the week of December 13 totaling $2.26 billion

SUMMARY

The expected payout difference is a matter of risk versus return. For example, Targa Resources (NYSE:TRGP) has room to increase its payout rate. QRE does not.

ORE’s expected payout of 8.3% (at the price range mid-point) is twice that of TRGP’s 4%. TRGP priced its IPO December 7 at $22 and was up 16% as of Friday, December 10, 2010.

On a proforma basis, QRE revealed payout shortfalls of -$11 million and -$8 million respectively for the year ended December 2009 and the twelve months ended September 2010. TRGP showed excesses of $70 million and $65 million for the same time periods.

QRE Valuation Metrics

Compared to some other oil/gas LLPs, QRE has a high payout rate, but it's more risky beyond the short term: for example, Atlas Pipeline Partners (NYSE:APL) 5.8%; DCP Midstream Partnrs (NYSE:DPM) 7%; Copano Energy LLC (NASDAQ:CPNO) 7.6%

RISK

QRE’s estimated oil and natural gas reserves will naturally decline over time, and it is unlikely that QRE will be able to sustain distributions at the level of the minimum quarterly distribution without making accretive acquisitions or substantial capital expenditures that maintain the asset base.

BUSINESS

QRE recently formed an oil/gas partnership designed to aggregate legacy properties.

DIVIDEND POLICY

$0.4125 per unit per quarter.

USE OF IPO PROCEEDS

$275 million plus borrowings of $225 million:

  • $300 million for distribution to the property originating fund
  • $200mm repayment of debt assumed from the property originating fund

THE ORIGINATING FUND

The Fund is a collection of limited partnerships formed by the founders of Quantum Energy Partners and Don Wolf, the Chairman of the Board of the general partner, for the purpose of acquiring mature, legacy producing oil and natural gas properties with similar characteristics to the Partnership Properties.

Quantum Energy Partners is a private equity firm founded in 1998 to make investments in the energy sector. Quantum Energy Partners currently has more than $5.7 billion in assets under management, including the assets of and remaining capital commitments to the Fund.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.