QR Energy, LP (NYSE:QRE) Management Interview

QR Energy horizontal logo with tickerHeadshot Cedric Burgher

QR Energy, LP
CFO: Cedric Burgher


About: QR Energy is an upstream MLP focused on delivering stable cash flow from U.S. oil and natural gas production and growing through accretive acquisitions of mature, conventional properties.


WSA:  Good day from Wall Street, this is Juan Costello with the Wall Street analyst.  Joining us today is Cedric Burgher the Chief Financial officer for QR Energy, LP.  The company trades on the New York Stock Exchange and their ticker symbol is QRE. Thanks for joining us today Cedric.

Cedric Burgher:  Thank you Juan.  Good to be here.

WSA:  Great.  Now starting off give us a brief history and overview of the company for some of our listeners that are new to your story.

Cedric Burgher:  Sure, QR Energy is an upstream Master Limited Partnership or MLP with operations focused in the Permian basin, Ark-La-Tex area, the Mid-Continent and Gulf Coast regions.  Currently we produce over 18,000 barrels of oil equivalent per day which approximately 70% are liquids.  And as of the end of last year we had approximately 100 million barrels equivalent of crude reserves, equating to a reserve life of over 15 years.  Currently we pay an annualized distribution of $1.95 per unit, which gives a current yield of just over 11%.  QR Energy went public in December of 2010 for $345 million dollar initial offering, which still remains the largest EMP, MLP IPO today.  We are acquisition driven and in that time period we’ve completed $1.3 billion worth of deals, two from our sponsor as drop downs and three from third parties.  So in our brief history, we’ve increased distributions 18%, increased crude reserves 234%, and we’ve increased production by 250%.

WSA: Great.  And so what were some of the drivers and some of the highlights there of your recent Q3 results?

Cedric Burgher:  Right, earlier this week as you know we announced our third quarter results.  So quarter over quarter we increased revenue 20% to $126 million.  We increased our adjust EBITDA 13% to $69 million and then we increased our distributable cash flow by 26% to $35 million.  These strong results were driven by increased production, a continued focus on improving oil production in particular and improvements in our cash operating margins.  The result of these efforts is evident in our distribution coverage ratio, which increased to 1.09 times for the quarter.  Additionally, we announced an increase in our borrowing base to $950 million as we received credit from our lender group for the East Texas acquisition we closed in August and gave us as well as positive performance revisions that we achieved on our base assets during the first half of the year.

WSA: Excellent and what are some of the current trends that you are seeing right now in your sector and how are you positioning the company to capitalize?

Cedric Burgher:  Yeah, you know probably one of the biggest trends that we are seeing which it really isn’t that new, but is the pricing disconnect between oil and natural gas.  You know traditionally the ratio has been 6:1, which is the energy equivalent, but now in terms of pricing the number is well over 20:1.  So, what does that mean?  It means that oil projects tend to have far better economics than natural gas projects today and so as a result QR Energy has focused our capital dollars toward oil weighted projects that are currently delivering a much higher rate of return.  I’m proud to say that as of the third quarter we had the second highest liquids production mix in the upstream MLP space.

WSA: Great and what are some of the other factors that you feel Cedric make QR Energy unique from some of the other players in your sector?

Cedric Burgher:  There are about a dozen upstream MLPs in our peer group.  There are lots of other public oil and gas companies as well with a slightly – with a corporate structure.  But as an MLP, QR Energy has worked very hard to assemble what we believe are the right kind of assets for an upstream MLP.  We believe we are unique in a few ways, number one, our investment approach starts with assembling the right kind of assets.  When we evaluate an acquisition we want the assets to be accretive to our low base decline rates of about 10%.  We have assets that are 75% proved and developed.  They have reasonable maintenance CAPEX requirements, and we can control our timing and cost because we operate most of what we own.  And we believe we have assembled the right kind of assets.

Secondly, we have an industry leading hedging program.  This allows the company to mitigate fluctuations in the commodity market offering stable and predictable cash flows.  Third, we have operating margins that are some of the highest in the industry.  We have assembled a highly technical staff with expertise in the field to optimize production and manage our costs on the assets.  Fourthly, we take a conservative approach to maintenance capital.  Since our IPO we have consistently viewed this calculation as the capital needed to maintain production over a five year period and we have the right kind of assets with a low base decline that allows us to do that more easily.  So our capital requirements are much less onerous for maintaining production with this kind of an asset base.  This past quarter for example, maintenance capital was just 25% of our adjusted EBITDA.

And then lastly, I will tell you that we have an engineering centric and operationally focused management team that has extensive experience operating conventional reservoirs and assets like the ones we own.

WSA: And perhaps you can walk us through your background and experience Cedric and talk a little bit about the key management team at QR.

Cedric Burgher:  Sure.  I began my career in banking before shifting to the operating side of the business.  I have held senior management positions in Halliburton, EOG and Baker Hughes and prior to joining QR Energy I was in private equity with Quantum Energy Partners.  This equates to about 30 years of experience in energy finance.  Similarly, our other key members of the management team have extensive experience in the industry, particularly, operating on mature long life conventional reservoirs like the kinds that QR Energy focuses on today.

WSA: Sure and what are some of the goals and milestones that you and the team are hoping to accomplish over the course of the next year?

Cedric Burgher:  Well the company is currently well positioned we believe to execute our game plan of increasing production organically while continuing to pursue accretive acquisitions.  Our goal will be to continue to increase our distributable cash flow accomplished by continuing our work over in recompletion programs in the field.  We would also like to be active in the acquisition markets to continue to grow the asset base.  We currently have approximately $350 million of liquidity that allows the company a lot of flexibility in pursuing these efforts.

WSA: Good and so in terms of investors and the financial community, Cedric as you presented earlier this week at the City Credit Conference and it will be at the RBC-MLP conference later in the month.  So, as you speak with investors and the financial community, do you believe that the company story and your message and upside are completely understood and appreciated by them and if not, what do you wish investors better understood about the company?

Cedric Burgher:  Good question.  Across the peer group if you look at our peers QR Energy yield we believe does not properly reflect our quality of mature low risk long life assets in our experienced management team’s ability to run those assets well.  And so, we think it’s possibly attributed to a couple of things, number one, two years ago we issued convertible preferred securities to our sponsor.  And we did it at a time when the equity markets were not very robust.  So, well at the time this was viewed as a creative way to strengthen our capital structure, the eventual conversion of these preferred units has caused some angst among our investors.  So now while we can’t predict you know when that will happen we always like to reassure our investor base that the sponsor’s interest are aligned with the unit holders, but there is no doubt that that has caused some confusion and perhaps a little bit of a discount in our unit price.

Secondly, we have a unique management and centerpiece structure, it’s different than the typical IDR structure, which many of our peers use and we designed it to use as a motivation to grow our asset base.  It’s worked very well, we’ve achieved two drop downs in particular that have helped us achieve the growth we’ve had today and it’s based off of a calculation of PD10.  It’s an asset under management concept, so it’s given us help in assembling the right kind of assets and it’s helped us you know lead to distribution growth which since our IPO we’ve increased 18%, as I mentioned earlier, but it is unique and therefore has caused some investor confusion as well.

WSA: And so once again joining us today is Cedric Burgher the Chief Financial Officer for QR Energy, the company trades on the New York Stock Exchange.  Their ticker symbol is QRE, currently trading at 17.07 a share market cap north at 1.1 billion and before we conclude here Cedric to briefly recap some of your key points.  Why do you believe investors should consider the company as a good investment opportunity today?

Cedric Burgher:  Well, QR Energy offers an attractive yield today and contains the right kind of assets for an upstream MLP.  We’ve been focused on assembling an asset base with mature long life cash flow producing assets with a first class operational team.  We are at the top of our peer group in the commodity hedging, operating margins and oil and natural gas liquids weighted production.  We have a conservative balance sheet with good liquidity, which positions us well for future growth and which enables us to reward our investors and grow our business over time.

WSA: Well we certainly look forward to continuing to track the company’s growth and report on your upcoming progress and we’d like to thank you for taking the time to join us today, Cedric and update our investor audience on QR Energy, good to have you on.

Cedric Burgher:  Thank you Juan, enjoyed being with you.


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