It has been almost a year since the last E&P MLP IPO, but this afternoon LRR Energy, L.P. ($LRE) priced its initial public offering of 9.4 million units at $19.00, raising $178.8 million in gross proceeds. Since the last E&P MLP IPO ($QRE) in December of 2010, we’ve had 2 nitrogen MLP IPOs ($UAN and $RNF), a shipping MLP, a propane MLP, 3 midstream MLPs and 1 GP holding company ($KMI, which will soon be a pipeline company again, see here). That’s 8 IPOs.
LRE’s $19.00 is at the bottom of its range, and represents an even 10% yield. All of the net IPO proceeds will be going to its GP and financial sponsor, Lime Rock Resources, which is a Houston area private equity firm. In addition to the equity proceeds, LRE will borrow $155.8 million to make an additional distribution to Lime Rock.
These distributions are a small red flag, but not uncommon. As a private equity firm, Lime Rock has a responsibility to its L.P.s to generate returns on a finite timeline. It was probably also confirmed by the bankers that the market would not give LRE full valuation credit for keeping its balance sheet clean, and taking all of this cash out up front reduces the likelihood that the LRE will be held back by equity overhang. From what I’ve read and heard, people like the management team of LRE and there is some potential for drop-down acquisitions from Lime Rock over time.
QRE, the last MLP IPO, is actually a very good comparable. Also sponsored by a Houston-based private equity firm, QRE priced at the midpoint of its range, raising $300 million at yield of 8.25%. QRE’s Sponsor, Quantum, took back all of the net proceeds from the IPO and borrowed $225 million to pay to the sponsor. It hasn’t hurt QRE, which is actually the second best performing E&P MLP (after EVEP) so far this year, with a total return of 9.1%...
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