Upstream Master Limited Partnerships: Investments with a ...web1.amchouston.com/flexshare/002/CFA/013013 - Burgher.pdf · The reader should not place undue reliance on these forward‐looking

Upstream Master Limited Partnerships: Yield Investments with a Tax Advantage

Cedric Burgher, CFO of QR Energy, LPCFA Society HoustonJanuary 30, 2013

NYSE: QRE www.QREnergyLP.com 2

DisclosuresForward‐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‐lookingstatements. QR Energy believes that its expectations and forecasts are based on reasonable assumptions, however, no assurance can be given thatsuch expectations and forecasts will prove to be correct. A number of risks and uncertainties, many of which are beyond our control, could causeactual results to differ materially from the expectations and forecasts, anticipated results and other forward‐looking information expressed in thispresentation, including risks relating to QR Energy’s financial performance and results, availability of sufficient cash flow to execute our businessplan, our level of indebtedness, a significant reduction in the borrowing base under our bank credit facility, our ability to raise capital, prices anddemand for oil and natural gas, our ability to replace reserves and efficiently develop our current reserves, adverse market conditions, competitionand 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 http://ir.qrenergylp.com or on the SEC’s website at www.sec.gov.

The reader should not place undue reliance on these forward‐looking statements, which speak only as of the date of this presentation. Unlesslegally 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‐lookingstatements.

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 thispresentation are based on assumptions with regard to commodity prices that differ from the prices required by the SEC (historical 12 monthaverage) to be used in calculating reserves estimates prepared in accordance with SEC definitions and guidelines. In addition, the estimates ofreserves in this presentation were prepared by our internal reserve engineers and are based on various assumptions, including assumptions relatedto oil and natural gas prices as discussed above, drilling and operating expenses, capital expenditures, taxes and availability of funds. Our internalestimates of proved reserves may not be indicative of or may differ materially from the year‐end estimates of our proved reserves prepared by athird 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 ahydrocarbon reservoir and is not an indication of reserves or the quantity of oil that is likely to be produced. You should not assume that estimatesof OOIP are comparable to proved or probable reserves or representative of estimates of future production from the Jay field. It is not possible tomeasure OOIP in an exact way, and estimating OOIP is inherently uncertain. OOIP has been estimated based on subjective analysis of geological andother relevant data applicable to the Jay field, including assumptions regarding area, thickness, porosity and saturation. Changes in these factors orinaccuracies in our assumptions could materially alter the estimates of OOIP.


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 billion1

• 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, 2013.


MLP C‐Corp

Publicly traded, growth opportunity

GP maintains voting rights

Non‐taxable entity

Tax shield on distributions

Distributes majority of operating cash flow

Valuation basis Yield Multiple

Tax reporting K‐1 1099

► Comparison of typical MLP and a standard C‐Corp (corporate tax paying) structure:

MLP Business Structure

Current Income Vehicle That Is Tax‐Friendly


MLP Performance

► Total Return Performance: MLPs vs. Other Asset Classes (2002‐2012)

Source: Alerian, December 31, 2012.

360%

211%

170%

103% 99%

0%

50%

100%

150%

200%

250%

300%

350%

400%

MLPs REITs Utilities DJIA S&P 500


MLP Sector Initial Public Offerings

Source: Company data and Wells Fargo Securities, LLC, January 8, 2013.

2004 2005 2006 2007 2008 2009 2010 2011 2012 Future

PVGMGG

HPGPEVEP

UCLP

BGH

ATLSAHGPATNBBEP

CEP

RGPTOO

VEH

ETEEROC

LINE

CLMT

NRGPHLND

EPEDPM

TLP

NSPTGP

WPZ

BWP

GLP

KSP

CPNOHEP

USS

OSPNMM

LGCYKGS

SGLP

CPLPCQP

QELPSEP

VNR

EPBENP

NGLS

DEP

WESPSE

WMZ

OXFNKA

RNO

PNGQRE

TRGP

ACMP

OILTNRGM

MEMPMCEP

TLLP

AMID

RNFRRMS

UAN

LREGSJK

NGL

GMLP

SDLPPHD

MPLXLGP

SXE

ALDW

SMLPSUSP

WGP

HCLPEQM

NTI

DKL

FELPCVRR

LINELINE

SXCP

LINELINE

QPPSRLP

USAC

LINELINE

ARPS

LINE

4

10

18

14

3

7

13 1314

Midstream Upstream Other

7

7

Shadow Backlog

Identified Backlog


7.5%

5.9%

4.6% 4.4% 4.3%3.5%

2.2%1.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

MLP YieldMedian

ML U.S. B‐BBHigh Yield

Moody'sInvestmentGrade Index

FTSE NAREITIndex

S&P 500UtilitiesIndex

Moody'sMunicipalBond Index

S&P 500 U.S. 10‐YearTreasury

MLP Yields Vs. Other Yield Securities

Source: Factset, Standard & Poor’s and Wells Fargo Securities, LLC, January 8, 2013.


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 oil1

1 Source: Institute for Energy Research, January 2013.


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.


► 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

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, 2013.

UpstreamMLP Performance

‐50.0%

‐25.0%

0.0%

25.0%

50.0%

75.0%

100.0%

125.0%

150.0%

175.0%

200.0%

225.0%

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

O&G MLPs+174.0%

S&P 500+16.7%

HY Bonds‐14.3%


Upstream MLP Yields and Growth

Source: Company data and Wall Street research as of January 25, 2013.

LRE

PSE

EVEP

MEMP

BBEP

LGCY

QRE

MCEP

LINEVNR

ARP

Peer Average

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

Yield (1/25/2013)

3‐Year Distribution CAGR (2011‐2014)25.0%


Source: Bloomberg data, Robert W. Baird & Co. Research; January 18, 2013.

Cost of Capital Advantage

Structure allows Upstream MLPs to bid competitively due to lower cost of capital

10.3% 10.1%11.1%

8.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Large Cap E&P Mid Cap E&P Small Cap E&P Upstream MLP


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

$8.6

$12.8

$22.8

$26.5

$‐

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

2009 2010 2011 2012Source: RBC Capital Markets, January 22, 2013.

U.S. Onshore Mature Asset Supply ($B)


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


The Quantum Franchise

Quantum Resources Management (“QRM”)

QR Energy, LP(“QRE”)

Quantum Resources Fund

(“QRF”)

• 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

• 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

Quantum Energy Partners

(“QEP”)• 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

Public MLP Sponsor of MLP Affiliate of MLP

Shared Services Agreement

QR Energy, LP


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


QRE SnapshotStable, Conventional, Long Life Assets

Permian Basin42% of Proved Reserves (37.4 MMBoe)48% of Production (6,994 Boed), 72% liquidsReserve Life: 14.7 years

Mid‐Continent8% of Proved Reserves (6.7 MMBoe) 10% of Production (1,451 Boed), 46% liquidsReserve Life: 12.7 years

Ark‐La‐Tex47% of Proved Reserves (41.1 MMBoe)38% of Production (5,625 Boed), 39% liquidsReserve Life: 20.0 years

Gulf Coast2% of Proved Reserves (2.0 MMBoe)3% of Production (468 Boed), 86% liquidsReserve 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 2012. Production is 3Q12 average; excludes December 2012 drop‐down and East Texas acquisitions.

Michigan1% of Proved Reserves (0.7 MMBoe)1% of Production (82 Boed), 100% liquidsReserve Life: 23.4 years

Proved Reserves (MMBoe) 87.9Daily Production (Boed) 14,620Proved Developed 72%Liquids (Reserves) 62%Liquids (Production) 58%Proved Reserve Life (Years) 15.0


Balanced Commodity MixLimited NGL Exposure

Oil 43%

Natural Gas 42%

NGLs 15%

ExcludingHedges

Including Hedges

Oil $88.67 $96.31

Natural Gas $2.60 $5.18

NGLs $29.10 $29.10

3Q12 Realized Prices

Note: 95% of NGLs priced at Mont Belvieu

Oil 71%

Natural Gas 23%

NGLs 6%

3Q12 Production 3Q12 Revenue Including Hedges


• Approximately 2,500 Boed of oil‐weighted 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

• 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

Focus on Accretive AcquisitionsMultiple Paths to Growth

Drop‐Downs from Sponsor Third‐Party Acquisitions

Established Track Record of Growth ‐ $1.2 Billion of Drop‐Downs and Third Party Acquisitions Completed


Focus on Accretive AcquisitionsTripled Reserves & Production Since IPO

$579MM

$804MM

$1.0B

$1.2B

$‐

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

3Q11 2Q12 4Q12 4Q12

Cumulative Ac

quisition

s Since IPO ($

B)


Balanced Capital Structure

52%

18%

16%

14%

$2.1 Billion Enterprise Value

Equity MarketCapitalization$1,080 million

Senior Notes Due 2020

$296 million

Bank Revolver $325 million

Convertible Preferred Units1$369 million

$400 Million of Borrowing Base Availability

1 Convertible preferred units are represented by their book value as of September 30, 2012.Note: Market data as of January 25, 2013. QRE closing price was $18.28.


QRE Hedge Portfolio vs. Peers

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.

88%92%

79%74%

51%

94%88%

50%

31%

13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017

QRE Peer Average

Oil Hedges100% 100%

QRE Has Significantly More Production Hedged Through 2017 Than Peers, Resulting in Greater Cash Flow Stability

84%78%

73%72%

62%56%

38%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017

QRE Peer Average

Natural Gas Hedges


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 CapitalAppreciation Potential

Questions?

Contacts

Taylor B. MieleInvestor Relations Manager713‐452‐2990

Cedric W. BurgherChief Financial Officer713‐452‐2200

Documents

Upstream Master Limited Partnerships: Investments with a ...web1.amchouston.com/flexshare/002/CFA/013013 - Burgher.pdf · The reader should not place undue reliance on these forward‐looking