QR Energy - Not Your Typical MLP

May.14.12 | About: QR Energy, (QRE)

QR Energy (NYSE:QRE) is not a pipeline company, as one might first think when hearing "MLP." It is an oil and gas producer, but not your typical oil and gas exploration and production company either. QR Energy has a unique focus on acquiring conventional, mature, domestic assets, targeting long-lasting, stable production rates, which will be accretive to cash distributions to unitholders. The conventional focus means it is not targeting the unconventional, horizontal-drilling and fracturing shale plays that tend to have higher development costs and steeper production declines, instead acquiring already-producing assets with long-life reserves, shallow declines in production, and predictable cash-flows. It further employs a hedging program on a majority of production for the next three years, with the goal of locking in favorable oil and gas prices, stabilizing cash-flows and distributions, and more easily planning for sustained growth.

QR Energy owns assets diversified across four geographies in the Permian Basin, Mid-Continent, Ark-La-Tex, and Gulf Coast areas. The average reserve life on these areas is more than 15 years, and the reserves are a balanced mix of 56% liquids and 44% gas. During 2011, reserves and production both more than doubled. Staying true to its mission statement of making acquisitions that will be accretive to unitholder distributions, QRE has increased distributions by 18% since early 2011. The most recent acquisition, in the first quarter of 2012, was another asset in the Ark-La-Tex area, which was accompanied by a pre-announced distribution increase of 3% for the second quarter of 2012. This will bring the yield up to 11.1% based on the most recent closing price.

Recent Stock Price Performance

QRE had its IPO in December of 2010 with an opening price of $19.90. It reached a high of $23.50 in early 2011, and then fell along with the overall market to a low of $17.13 in the fall of 2011. Soon after, the combination of an accretive acquisition and being named to the Alerian MLP Index took QRE up more than 20% in one week. It returned to $23.50 in March of 2012, but then began a steady slide back under $18 when it announced a large secondary public offering of common stock to fund acquisitions.


The secondary doubled the float, however the distribution coverage ratio remains a healthy 1.4x. The 25% drop in price may be seen as excessive, and the stock was called oversold byForbesthis month. Baird has declared the overhang of the secondary to be in the rear-view mirror, upgrading QRE to outperform with a price target of $24. With a most recent close of $17.55, the stock is near the bottom of the trading range detailed above. The already-announced distribution increase for second quarter brings the yield to an attractive 11.1% at this price, and QRE's mission to grow future distributions through strategic production development and accretive acquisitions leads me to believe that the stock is currently offering a favorable entry price.

Disclosure: I am long QRE.