Upstream Master Limited Partnerships: Yield Investments with a Tax Advantage

Transcription

1 Upstream Master Limited Partnerships: Yield Investments with a Tax Advantage Cedric Burgher, CFO of QR Energy, LP CFA Society Houston January 30, 2013

2 Disclosures Forward Looking Statements and Reserves Disclosures This presentation contains forward looking statements relating to QR Energy's operations that are based on management's current expectations, estimates and projections about its operations. Words and phrases such as expect, "estimates," guidance, opportunities, potential, may, believe and target, references to future years, and variations of such words and similar expressions are intended to identify forward looking statements. QR Energy believes that its expectations and forecasts are based on reasonable assumptions, however, no assurance can be given that such expectations and forecasts will prove to be correct. A number of risks and uncertainties, many of which are beyond our control, could cause actual results to differ materially from the expectations and forecasts, anticipated results and other forward looking information expressed in this presentation, including risks relating to QR Energy s financial performance and results, availability of sufficient cash flow to execute our business plan, our level of indebtedness, a significant reduction in the borrowing base under our bank credit facility, our ability to raise capital, prices and demand for oil and natural gas, our ability to replace reserves and efficiently develop our current reserves, adverse market conditions, competition and governmental regulations. For a more complete list of these risks, please read QR Energy s filings with the Securities and Exchange Commission (the SEC ), which are available on QR Energy s Investor Relations website at or on the SEC s website at The reader should not place undue reliance on these forward looking statements, which speak only as of the date of this presentation. Unless legally required, QR Energy undertakes no obligation to update publicly any forward looking statements, whether as a result of new information, future events or otherwise. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward looking statements. The SEC permits oil and gas companies, in their filings with the SEC, to disclose only "reserves" as defined by SEC rules. Estimates of reserves in this presentation are based on assumptions with regard to commodity prices that differ from the prices required by the SEC (historical 12 month average) to be used in calculating reserves estimates prepared in accordance with SEC definitions and guidelines. In addition, the estimates of reserves in this presentation were prepared by our internal reserve engineers and are based on various assumptions, including assumptions related to oil and natural gas prices as discussed above, drilling and operating expenses, capital expenditures, taxes and availability of funds. Our internal estimates of proved reserves may not be indicative of or may differ materially from the year end estimates of our proved reserves prepared by a third party as a result of the SEC pricing and other assumptions employed by an independent reserve engineering firm. This presentation contains estimates of original oil in place ( OOIP ) attributable to the Jay field. OOIP is merely an indication of the size of a hydrocarbon reservoir and is not an indication of reserves or the quantity of oil that is likely to be produced. You should not assume that estimates of OOIP are comparable to proved or probable reserves or representative of estimates of future production from the Jay field. It is not possible to measure OOIP in an exact way, and estimating OOIP is inherently uncertain. OOIP has been estimated based on subjective analysis of geological and other relevant data applicable to the Jay field, including assumptions regarding area, thickness, porosity and saturation. Changes in these factors or inaccuracies in our assumptions could materially alter the estimates of OOIP. NYSE: QRE 2

3 What Are Master Limited Partnerships? Own and operate long lived assets in North America with stable, predictable income streams Structured as a limited partnership, not a corporation Publicly traded; owned by retail investors (average ~75% retail) Pay no U.S. corporate level taxes, pass through entity Currently 116 MLPs with market value of approximately $430 billion 1 95 Energy related 17 Real Estate and Finance related 11 Upstream MLPs (4 IPOs since November 2011) 1 Source: National Association of Publicly Traded Partnerships and Thomson, January 18, NYSE: QRE 3

4 MLP Business Structure Comparison of typical MLP and a standard C Corp (corporate tax paying) structure: Publicly traded, growth opportunity GP maintains voting rights Non taxable entity Tax shield on distributions Distributes majority of operating cash flow MLP C Corp Valuation basis Yield Multiple Tax reporting K Current Income Vehicle That Is Tax Friendly NYSE: QRE 4

5 MLP Performance Total Return Performance: MLPs vs. Other Asset Classes ( ) 400% 350% 360% 300% 250% 200% 150% 100% 50% 211% 170% 103% 99% 0% MLPs REITs Utilities DJIA S&P 500 Source: Alerian, December 31, NYSE: QRE 5

6 MLP Sector Initial Public Offerings 4 CPNO HEP KSP USS 10 BWP DPM EPE GLP HLND NRGP NSP TGP TLP WPZ 18 ATLS AHGP ATN BBEP BGH CEP CLMT EROC ETE EVEP HPGP LINE MGG PVG RGP TOO UCLP VEH 14 CPLP CQP DEP ENP EPB KGS LGCY NGLS NMM OSP QELP SEP SGLP VNR Future Midstream Upstream Other Source: Company data and Wells Fargo Securities, LLC, January 8, PSE WES WMZ 7 ACMP NKA OXF PNG QRE RNO TRGP AMID GMLP ALDW DKL GSJK LRE EQM HCLP MCEP MEMP LGP MPLX NGL NTI NRGM PHD OILT SDLP RNF RRMS TLLP SMLP SUSP SXE UAN WGP 14 LINE LINE LINE LINE LINE LINE LINE ARPS CVRR FELP QPP SRLP SXCP USAC NYSE: QRE Shadow Backlog 7 Identified Backlog

7 MLP Yields Vs. Other Yield Securities 8.0% 7.0% 6.0% 7.5% 5.9% 5.0% 4.6% 4.4% 4.3% 4.0% 3.5% 3.0% 2.0% 2.2% 1.7% 1.0% 0.0% MLP Yield Median ML U.S. B BB High Yield Moody's FTSE NAREIT Investment Index Grade Index S&P 500 Utilities Index Moody's Municipal Bond Index S&P 500 U.S. 10 Year Treasury Source: Factset, Standard & Poor s and Wells Fargo Securities, LLC, January 8, NYSE: QRE 7

8 Why Invest In An Upstream MLP? Hard asset underpinning mature, conventional oil and gas reserves Hedging allows for energy investment with reduced commodity price risk Risk profile typically between stocks and bonds due to high distribution yield Combines current income with capital appreciation potential Significant tax advantage no corporate federal income tax and most distributions are tax deferred Healthy growth outlook U.S. has 198 billion barrels of recoverable conventional oil 1 1 Source: Institute for Energy Research, January NYSE: QRE 8

9 A New Generation of Upstream MLPs 1980s Today Drilling Exploration Wells Exploitation Wells Decline Rate High Lower Hedging None Significant Balance Sheet High Leverage Modest Leverage Return on Capital Low High Source: J.P. Morgan Investment Banking. NYSE: QRE 9

10 Upstream MLP Performance 225.0% Since upstream MLPs returned to the public market with Linn Energy s IPO in January 2006, they have significantly outperformed the S&P 500 and upstream corporate bonds 200.0% 175.0% O&G MLPs % 150.0% 125.0% 100.0% 75.0% 50.0% 25.0% 0.0% 25.0% S&P % HY Bonds 14.3% 50.0% Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Upstream MLP Index High Yield Oil & Gas Bond Index S&P 500 Note: Upstream MLP Index is a weighted average return of 11 Upstream MLPs, assuming distribution reinvestment. High Yield Oil & Gas Bond Index is a weighted average return (yield to worst) of publicly traded upstream C corp bonds. Source: Wells Fargo Capital Markets, January 18, NYSE: QRE 10

11 Upstream MLP Yields and Growth Yield (1/25/2013) 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% LRE PSE MEMP QRE MCEP BBEP VNR LGCY Peer Average LINE ARP EVEP 4.0% 0.0% 2.0% 4.0% 6.0% 8.0% 25.0% 10.0% 3 Year Distribution CAGR ( ) Source: Company data and Wall Street research as of January 25, NYSE: QRE 11

12 Cost of Capital Advantage 12.0% 10.0% 8.0% 10.3% 10.1% 11.1% 8.2% 6.0% 4.0% 2.0% 0.0% Large Cap E&P Mid Cap E&P Small Cap E&P Upstream MLP Structure allows Upstream MLPs to bid competitively due to lower cost of capital Source: Bloomberg data, Robert W. Baird & Co. Research; January 18, NYSE: QRE 12

13 Acquisition Market Current Trends Public companies continue to sell conventional assets to raise capital for unconventional development E&P spin offs may lead to asset sales (ConocoPhillips, Marathon and Kinder Morgan/El Paso) Adequate deal supply; competitive environment Capital markets open U.S. Onshore Mature Asset Supply ($B) $30.0 $26.5 $25.0 $22.8 $20.0 $15.0 $12.8 $10.0 $8.6 $5.0 $ Source: RBC Capital Markets, January 22, NYSE: QRE 13

14 Why Create An Upstream MLP? Increasing pipeline of assets that fit the MLP strategy Lower decline, lower maintenance capex Mature, long life assets Deal flow coming from unconventional focused and capital constrained independents Increasing demand for yield, tax efficient investments by investors Becoming an established MLP sub class tested and proven through the capital market turbulence of 2008 Increased ability to compete through access to low cost of equity capital Complementary to sponsor s direct investment funds and ability to retain quality assets NYSE: QRE 14

15 The Quantum Franchise Public MLP Sponsor of MLP Affiliate of MLP Quantum Quantum QR Energy, LP Resources Fund Energy Partners ( QRE ) ( QRF ) ( QEP ) Successful IPO in 12/2010 Largest E&P MLP IPO to date Completed $724 million of drop down acquisitions from sponsor QRF Acquired $440 million of third party properties Distribution +18% since IPO Current enterprise value of approximately $2.1 billion Independent Board members to manage conflicts Quantum Resources Management ( QRM ) Shared Services Agreement Formed in 2006 $1.2 billion direct investment private equity fund Assets located in Mid Continent and Ark La Tex areas (2,500 Boed, oil) CEO and President/COO also manage QRE; sit on Board of QRE and QRF Currently owns ~$430MM of QRE equity 140 Houston Employees 300 Total Employees Formed in 1998 $6.5 billion energy private equity fund, including affiliates ~20 portfolio companies Investments include upstream, midstream, OFS and power Founders sit on Board of QRE and QRF NYSE: QRE 15

16 QR Energy, LP

17 QR Energy Core Objectives Deliver Superior Operating and Financial Performance Operational excellence execution, accountability and value creation Year to date results have met or exceeded guidance Execute Capital Program to Maximize Recovery and Cash Flow Year to date uplift of 1,500 Boed from low risk development projects Emphasis on oil weighted projects with higher margins Pursue Strategic, Accretive Acquisition Opportunities Completed $1.2 billion of acquisitions from sponsor and third parties since December 2010 IPO More than $400 million of available liquidity to pursue additional growth NYSE: QRE 17

18 QRE Snapshot Stable, Conventional, Long Life Assets Proved Reserves (MMBoe) 87.9 Daily Production (Boed) 14,620 Proved Developed 72% Liquids (Reserves) 62% Liquids (Production) 58% Proved Reserve Life (Years) 15.0 Mid Continent 8% of Proved Reserves (6.7 MMBoe) 10% of Production (1,451 Boed), 46% liquids Reserve Life: 12.7 years Permian Basin 42% of Proved Reserves (37.4 MMBoe) 48% of Production (6,994 Boed), 72% liquids Reserve Life: 14.7 years Michigan 1% of Proved Reserves (0.7 MMBoe) 1% of Production (82 Boed), 100% liquids Reserve Life: 23.4 years Ark La Tex 47% of Proved Reserves (41.1 MMBoe) 38% of Production (5,625 Boed), 39% liquids Reserve Life: 20.0 years Gulf Coast 2% of Proved Reserves (2.0 MMBoe) 3% of Production (468 Boed), 86% liquids Reserve Life: 11.7 years Note: Reserves are December 31, 2011 SEC per Miller & Lents Ltd. and December 31, 2011 SEC internal estimates for assets acquired in April Production is 3Q12 average; excludes December 2012 drop down and East Texas acquisitions. NYSE: QRE 18

19 Balanced Commodity Mix Limited NGL Exposure 3Q12 Production 3Q12 Revenue Including Hedges NGLs 15% Natural Gas 42% Oil 43% Natural Gas 23% NGLs 6% Oil 71% 3Q12 Realized Prices Excluding Hedges Including Hedges Oil $88.67 $96.31 Natural Gas $2.60 $5.18 NGLs $29.10 $29.10 Note: 95% of NGLs priced at Mont Belvieu NYSE: QRE 19

20 Focus on Accretive Acquisitions Multiple Paths to Growth Drop Downs from Sponsor Approximately 2,500 Boed of oilweighted production remains Expect remaining assets to be dropped down in the future Assets located in existing core areas Knowledge of the assets reduces acquisition and integration risk Third Party Acquisitions Reputation as mature, conventional asset buyer Established track record of transacting in smaller processes Focus in defined core areas Differentiate through technical expertise Ability to JV with Sponsor Established Track Record of Growth $1.2 Billion of Drop Downs and Third Party Acquisitions Completed NYSE: QRE 20

21 Focus on Accretive Acquisitions Tripled Reserves & Production Since IPO $1.4 Cumulative Acquisitions Since IPO ($B) $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $579MM $804MM $1.0B $1.2B $ 3Q11 2Q12 4Q12 4Q12 NYSE: QRE 21

22 Balanced Capital Structure $2.1 Billion Enterprise Value Senior Notes Due 2020 $296 million Bank Revolver $325 million 16% 14% 52% Equity Market Capitalization $1,080 million 18% Convertible Preferred Units 1 $369 million $400 Million of Borrowing Base Availability 1 Convertible preferred units are represented by their book value as of September 30, Note: Market data as of January 25, QRE closing price was $ NYSE: QRE 22

23 QRE Hedge Portfolio vs. Peers 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 94% 88% Oil Hedges 92% 88% 79% 50% 74% 31% 51% QRE Peer Average 13% 100% 100% 100% QRE Has Significantly More Production Hedged Through 2017 Than Peers, Resulting in Greater Cash Flow Stability 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Natural Gas Hedges 72% 62% 84% 56% 78% 38% 73% QRE Peer Average 19% Peers include ARP, BBEP, EVEP, LGCY, LINE, LRE, MCEP, MEMP, PSE and VNR. Source: Company results as of 9/30/2012; 3Q12 production (pro forma for acquisitions) held flat through 2017 for QRE and peers. NYSE: QRE 23

24 QR Energy Investment Considerations Established Track Record of Operational and Financial Performance Demonstrated Accretive Growth Through Drop Downs and Third Party Acquisitions Tripled production and reserves since December 2010 IPO 18% distribution growth in same period Hedging Portfolio Compares Favorably to Peer Group; Enhances Distributable Cash Flow Stability Attractive Yield Provides Robust Income While Offering Capital Appreciation Potential NYSE: QRE 24

25 Questions?

26 Contacts Taylor B. Miele Investor Relations Manager Cedric W. Burgher Chief Financial Officer