QR Energy LP (QRE)

Q3 2012 Results Earnings Call

November 8, 2012 11:00 AM ET

Executives

Taylor Miele - Investor Relations Manager

Alan Smith - Chief Executive Officer

John Campbell - President and COO

Cedric Burgher - Chief Financial Officer

Analysts

Ethan Bellamy - Robert W. Baird & Co.

Kevin Smith - Raymond James

Michael Peterson - MLV & Co.

John Ragozzino - RBC Capital Markets

Brett Reilly - Credit Suisse

Praneeth Satish - Wells Fargo Securities

Presentation

Operator

Good morning and welcome to the QR Energy Third Quarter 2012 Results and Outlook Conference Call. My name is Rebecca and I will be your operator for today. On the line, we have Chief Executive Officer, Alan Smith; President and Chief Operating Officer, John Campbell; Chief Financial Officer, Cedric Burgher; and Investor Relations Manager, Taylor Miele.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to Mr. Taylor Miele. You may began your conference.

Taylor Miele

Thank you, Rebecca, and good morning, everyone. Welcome to QR third quarter 2012 earnings call. We issued a press release this morning containing the results and guidance that will be discussed on the call today. I would like to remind all listeners that we will use forward-looking statements as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Our results may differ materially from those conveyed in our forward-looking statements.

For a more complete list of these risk factors, please read QR Energy’s 10-Q which we filed with the Securities and Exchange Commission this morning. It is available on our website at qrenergylp.com on the Investor Relations tab or on the Securities and Exchange Commission website at sec.gov.

Additionally, during the course of today’s discussion, management will refer to adjusted EBITDA, distributable cash flow and the distribution coverage ratio as important metrics for evaluating QR Energy’s performance. Please note these are non-GAAP financial measures. They are reconciled to their most directly comparable GAAP measures on the last page of this morning’s press release.

Now, I will turn the call over to our Chief Executive Officer, Alan Smith.

Alan Smith

Well, thanks, Taylor, and good morning, everyone. We appreciate everyone taking the time to join us this morning for our third quarter earnings call. As we’ve told this since the beginning we’re a very engineering-centric leadership team, that remains focused on the execution and accountability of our business. Due to this focus over the past year, we have delivered operating results that have met or exceeded our guidance. This quarter is no different as we have had a very good operational quarter.

We also told you in the beginning that our growth will come through multiple paths by accessing accretive acquisitions most likely located in our core areas of operation. We have successfully demonstrated this growth by closing on a third party transaction and expect to close on a recently announced third party transaction by mid December. And we have grown by completing a significant drop down from our sponsor and we expect to complete an additional drop down in early 2013 or sooner. These highly accretive acquisitions have enabled us to nearly quadruple the production and triple the reserve of QR Energy since our IPO.

We are excited about the conventional acquisition market and believe that it will continue to be $15 billion to $20 billion annual market for years to come, which allows us to remain optimistic about our opportunities for growth and our ability to source acquisitions that are accretive to our distributable cash flow.

I would now like to switch gears and bring your attention to announcement on G&A in this morning press release. We have finalized our G&A allocation methodology were by Quantum Resources Management will allocate G&A to QR energy beginning in the first quarter of next year.

In our press release this morning, we provided quantitative cash G&A guidance for the fourth quarter and full year 2013. Cedric will give you more details in his section in a few moments and I know, many of you have anxiously awaited this information so that you can utilize it in your models accordingly.

Also one recent news we announced a $215 million East Texas field acquisition last week. This properties have low decline low life oil production with an abundance of low-risk development opportunities. We expect the cash flow of these assets alongside the commodity hedges put in place at the time of the signing of definitive agreement to extend our horizon of stable cash flow.

We also mentioned last week that a drop down from our sponsor of approximately 2,500 BOEs per day of oil production from the Jay field in Florida is still on process. We expect to be able to announce this transaction early next year or possibly sooner. The combination of these two accretive acquisitions discussed today and the additional clarity provided regarding our G&A cost significantly enhances the long-term outlook for our business. We believe we now have clear visibility to achieving our goal of a long-term distribution coverage ratio of 1.2 times.

Now let’s turn to our results for the third quarter. our production of 14,620 BOEs per day was right in the middle of our guidance range and it continues to benefit from the successful implementation of our capital program and our focus on oil projects. We decreased LOE 7% on a per BOEs basis to $14.28 near the low end of guidance.

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