SOURCE: QR Energy

QR Energy

May 07, 2014 07:00 ET

QR Energy Announces First Quarter 2014 Results, Increases 2014 Capital Program, and Provides Updated Outlook

HOUSTON, TX--(Marketwired - May 7, 2014) - QR Energy, LP ("QRE" or "QR Energy") (NYSE: QRE) announced today its operating and financial results for the first quarter of 2014 and provided second quarter 2014 and full-year guidance.

Highlights for the First Quarter 2014

  • Revenue was $122.6 million, Adjusted EBITDA was $64.8 million, and Distributable Cash Flow was $30.9 million for the first quarter of 2014

  • Average production of 18,900 Boe per day, comprised of approximately 72% crude oil and natural gas liquids, in-line with stated guidance, and up 2% from the fourth quarter of 2013, despite downtime related primarily to weather in East Texas and the Permian Basin of 655 barrels of oil equivalent per day during the quarter

  • The 2014 capital program was increased by $82 million to $182 million in response to continued operational success experienced with organic projects in our core operating areas and the completion of certain field studies in our core fields. Maintenance capital remained unchanged at $72 million

Note: Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio are non-GAAP measures. Please see the definitions of these measures and the reconciliation to the most comparable measures calculated in accordance with GAAP in the "Non-GAAP Reconciliation" section of this press release.

Chief Executive Officer Alan L. Smith commented, "We began 2014 operating on all cylinders operationally and successfully integrated our bolt-on acquisitions in East Texas. We achieved production within our stated guidance despite experiencing winter weather related downtime during the first quarter. Our operational teams have done a great job of identifying a significant number of additional low-risk projects and when coupled with our recent drilling and workover program success, we made the decision to increase the capital program in 2014. This incremental growth capital will target oil-weighted projects with excellent operating margins in our core operating areas. We are fully capable of executing this capital program with our existing liquidity and current operational resources."

Results for the First Quarter 2014

  • Realized prices excluding commodity derivatives were $95.75 per barrel of oil, $4.87 per Mcf of natural gas and $35.58 per barrel of NGLs; Realized prices including commodity derivatives were $93.23 per barrel of oil and $6.18 per Mcf of natural gas

  • Oil and natural gas production was 82% hedged with average prices of $96.36 per barrel of oil and $6.11 per mmbtu of natural gas; NGLs are not currently hedged

  • Lease operating expenses were $22.40 per Boe and in-line with stated guidance range of $21.00 to $23.00 per Boe

  • Cash general and administrative expenses were $8.4 million, below the stated guidance range of $9.0 to $10.0 million

  • Total capital expenditures were $33.0 million

Capital Program

In April 2014, the Board of Directors approved increasing the 2014 capital program to $182 million, an increase of 80%, from the original capital program of $101 million. The incremental growth capital will be invested on high margin, long-life, oil-weighted projects focused primarily across the Ark-La-Tex, Jay Field and Permian Basin regions. The capital will be allocated toward projects consisting of approximately 51% drilling and completion, 33% workover and recompletions, and 16% facilities and equipment upgrades.

The capital program was increased upon evaluation of organic projects completed over the last eighteen months and the operational success experienced from invested growth capital during that period. QR Energy's technical team has assembled and identified a multi-year inventory of oil-weighted properties containing repeatable, low-risk projects that offer superior operating margins. The increased capital program will be funded with internally generated cash flow and borrowings under the revolving credit facility.

Borrowing Base Redetermination

On May 1, 2014, the Company completed its semi-annual borrowing base redetermination process. During this process the borrowing base was reduced from $950 million to $900 million, resulting primarily from the expiration of higher priced oil and natural gas hedges and the compression of LLS-WTI differentials. Despite the redetermination, QR Energy remains well-positioned to execute the 2014 capital program and pursue growth opportunities. As of March 31, 2014, outstanding debt under the revolving credit facility was $678 million. This resulted in total liquidity of $222 million after including $23 million of cash and cash equivalents and the impact of the borrowing base redetermination. The next borrowing base redetermination is scheduled for November 1, 2014.

Second Quarter and Full-Year Guidance

Based upon current estimates, QR Energy expects the following operating results for the second quarter and full year of 2014:

         
         
         
    2Q 2014   Full Year 2014
Average net daily production (Boed)   19,200 - 19,800   19,900 - 20,500
LOE and workover expense (per Boe)   $21.00 - $23.00   $21.00 - $23.00
Estimated maintenance capital expenditures ($ millions)   $18   $72
Estimated total capital expenditures
($ millions)
  $33 - $37   $182
Cash and general administrative expenses ($ millions)   $8 - $9   $32 - $35
         
         

Commodity Derivatives

As of May 6, 2014, the notional volumes and prices of QR Energy's commodity derivative contracts were as follows:

                 
                 
                 
                 
 Crude Oil  
      Average   Floor Ceiling WTS/WTI Avg. Discount
    Swaps Price Collars Price Price Basis Swaps to NYMEX-WTI
Term Index Bbls/d ($/Bbl) Bbls/d ($/Bbl) ($/Bbl) Bbl/d ($/Bbl)
2014 WTI 6,711 $95.30 425 $90.00 $106.50 2,400 ($2.10)
2014 LLS 3,000 $99.62 - - - - -
2015 WTI 7,356 $93.74 1,025 $90.00 $110.00 - -
2016 WTI 6,293 $90.03 1,500 $80.00 $102.00 - -
2017 WTI 5,547 $86.23 - - - - -
                 

Note: "WTI" is West Texas Intermediate crude oil; "LLS" is Louisiana Light Sweet crude oil; "WTS" is West Texas Sour crude oil.

                     
                     
                     
  Natural Gas
      Average   Floor Ceiling   Average Basis Avg. Discount
to NYMEX -
    Swaps Price Collars Price Price Puts Price Swaps  HHub
Term Index MMBtu/d ($/MMBtu) MMBtu/d ($/MMBtu) ($/MMBtu) MMBtu/d ($/MMBtu) MMBtu/d ($/MMBtu)
2014 Henry Hub 26,466 $6.12 4,955 $5.74 $7.51 - - 17,055 ($0.19)
2015 Henry Hub 7,191 $5.34 18,000 $5.00 $7.48 420 $4.00 14,400 ($0.19)
2016 Henry Hub 11,350 $4.27 630 $4.00 $5.55 11,350 $4.00 - -
2017 Henry Hub 10,445 $4.47 595 $4.00 $6.15 10,445 $4.00 - -
                     
                     
                     
                     
                     
                     

Selected Operating Data

     
     
     
  Three months ended Three months ended
  March 31, 2014 December 31, 2013
Production data:    
  Oil (MBbls) 1,008 1,046
  Natural gas (MMcf) 2,844 2,721
  NGLs (MBbls) 219 204
Total production (MBoe) 1,701 1,704
Production by area (Boed):    
  Permian Basin 5,689 5,651
  Ark-La-Tex 8,164 7,526
  Mid-Continent 1,145 1,274
  Gulf Coast 3,831 3,989
  Michigan 71 82
Average daily production (Boed) 18,900 18,522
Prices:    
  Average NYMEX:    
  Crude oil (per Bbl) $98.65 $97.56
  Natural gas (per Mcf) $5.16 $3.84
  Average realized including commodity derivatives:    
  Crude Oil (per Bbl) $93.23 $95.46
  Natural gas (per Mcf) $6.18 $6.29
  NGLs (per Bbl) $35.58 $40.50
  Average realized excluding commodity derivatives:    
  Crude oil (per Bbl) $95.75 $94.57
  Natural gas (per Mcf) $4.87 $3.59
  NGLs (per Bbl) $35.58 $40.50
       
       
       

Please see the financial statements and related footnotes in QR Energy's 10-Q, as filed with the SEC.

Consolidated Statements of Operations

             
             
             
    Three months
ended
    Three months
ended
 
    March 31, 2014     December 31, 2013  
Revenues:   (In thousands)  
    Oil sales   $ 96,516     $ 98,919  
    Natural gas sales     13,840       8,336  
    NGLs sales     7,791       8,262  
    Disposal, processing and other     4,476       3,789  
  Total Revenue     122,623       119,306  
Operating Expenses:                
  Lease operating expenses     38,100       36,973  
  Production and other taxes     7,655       6,731  
  Processing and transportation     870       729  
    Total production expenses     46,625       44,433  
  Disposal and related expenses     3,994       3,772  
  Depreciation, depletion and amortization     29,836       29,688  
  Accretion of asset retirement obligations     2,134       2,045  
  General and administrative and other     10,155       10,503  
  Acquisition and transaction costs     3,655       432  
    Total operating expenses     96,399       90,873  
    Operating income     26,224       28,433  
Other income (expense):                
  Gain (loss) on commodity derivative contracts, net     (23,165 )     10,643  
  Loss on Deferred Class B unit obligation     (5,240 )     -  
  Interest expense, net     (12,220 )     (12,053 )
  Other income (expense), net     100       216  
Total other income (loss), net     (40,525 )     (1,194 )
Income (loss) before income taxes     (14,301 )     27,239  
Income tax benefit (expense)     (95 )     446  
Net income (loss)   $ (14,396 )   $ 27,685  
Less: Net income attributable to noncontrolling interest   $ 214     $ 441  
Net income (loss) attributable to QR Energy, LP   $ (14,610 )   $ 27,244  
Net income (loss) per common unit   $ (2.86 )   $ 0.25  
Adjusted EBITDA   $ 64,801     $ 71,955  
Distributable Cash Flow   $ 30,913     $ 37,443  

Note: Please see the financial statements and related footnotes in QR Energy's 10-Q, as filed with the SEC. Adjusted EBITDA and Distributable Cash Flow are non-GAAP measures. Please see the definitions of these measures and the reconciliation to the most comparable measures calculated in accordance with GAAP in the "Non-GAAP Reconciliation" section of this press release.

Consolidated Balance Sheet 

     
     
     
   
     
     
    March 31, 2014
    (In thousands)
ASSETS
Current assets:    
  Total current assets   $ 105,557
Noncurrent assets:      
  Total property and equipment, net     1,644,857
  Derivative instruments     48,785
  Other assets     40,292
    Total noncurrent assets     1,733,934
    Total assets   $ 1,839,491
       
       
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:      
  Total current liabilities   $ 97,301
Noncurrent liabilities:      
  Long-term debt     974,723
  Deferred Class B units obligation     147,017
  Derivative instruments     5,757
  Asset retirement obligations     153,809
  Other liabilities     12,462
  Deferred taxes     2,214
    Total noncurrent liabilities     1,295,982
Partners' capital:      
  Total QR Energy, LP partners' capital     437,439
Noncontrolling interest     8,769
  Total liabilities and partners' capital   $ 1,839,491

Note: Please see the financial statements and related footnotes in QR Energy's 10-Q, as filed with the SEC.

Non-GAAP Reconciliation

QR Energy defines Adjusted EBITDA as net income from which it adds or subtracts net interest expense (including gains and losses on interest rate derivative contracts), depreciation, depletion and amortization, accretion of asset retirement obligations, gains or losses due to effects of change in prices on natural gas imbalances, net gains or losses on commodity derivative contracts, net cash received or paid on the settlement of commodity derivative contracts, income tax expense or benefit, other income or expense, interest expense, impairments, non-cash general and administrative expense and acquisition and transaction costs, non-cash pension and postretirement expense or credit, and beginning with the third quarter 2013, noncontrolling interest amounts attributable to each of these items, which revert the calculation back to the Adjusted EBITDA attributable to QR Energy. Prior period results have been revised to conform to the current presentation.

QR Energy defines Distributable Cash Flow as Adjusted EBITDA less cash interest expense (including cash received or paid on interest rate derivative contracts), distributions on its preferred units, payments to its general partner in respect of its management incentive fee, or cash distributions made, to the general partner prior to the consummation of the GP Buyout Transaction, unless such payments relate to management incentive fees earned in prior periods, and estimated maintenance capital expenditures, which is calculated based on our estimate of the capital required to maintain QR Energy's current production for five years, on average. This estimate is made at least annually and whenever an event occurs that is likely to result in a material adjustment to the amount of our maintenance capital expenditures, such as a major acquisition or the introduction of new governmental regulations that will impact our business.

QR Energy defines the Distribution Coverage Ratio for a given quarter as the ratio of Distributable Cash Flow per outstanding unit (including general partner units and Class B units and excluding preferred units) to the actual cash distribution payable per outstanding unit (including general partner units and Class B units and excluding preferred units). Holders of the preferred units may elect to convert the preferred units into common units at any time after October 3, 2013, or sooner upon QR Energy's achievement of certain trading price criteria. Please see QR Energy's 10-K for a more fulsome description of the terms of the preferred units.

Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio are used by management of QR Energy to provide additional information related to the performance of QR Energy's business. Adjusted EBITDA provides information about the cash flow generated by our assets, without regard to financing methods or historical cost basis and the ability of our assets to generate sufficient cash to pay interest costs and support our indebtedness. Distributable Cash Flow and the Distribution Coverage Ratio provide information comparing cash flows generated by us to cash distributions we expect to pay to our unitholders and indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. In addition, Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio are quantitative standards used by external users of our financial statements such as investors, research analysts and others to assess QR Energy's performance and liquidity without regard to capital structure. Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio are not presentations made in accordance with GAAP. Because Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio exclude some, but not all, items that affect net income and are defined differently by different companies in our industry, our definitions may not be comparable to similarly titled measures of other companies. Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio have important limitations as analytical tools, and you should not consider them in isolation, or as a substitute for net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP.

             
             
Reconciliation            
             
             
    Three months ended     Three months ended  
    March 31, 2014     December 31, 2013  
Reconciliation of net income to Adjusted EBITDA,   (In thousands, except ratios)  
  Distributable Cash Flow and Distribution Coverage Ratio:            
Net income   $ (14,396 )   $ 27,685  
  Plus:                
Loss (gain) on commodity derivative contracts, net     23,165       (10,643 )
Cash received (paid) to settle commodity derivative contracts, net     1,206       8,260  
Loss on Deferred Class B unit obligation     5,240       -  
Loss (gain) on effect of change in prices on gas imbalances     250       1,438  
Depletion, depreciation and amortization     29,836       29,688  
Accretion of asset retirement obligations     2,134       2,045  
Interest expense     12,220       12,053  
Other income     (100 )     (216 )
Income tax expense (benefit)     95       (446 )
Non-cash general and administrative expense and                
acquisition and transaction costs     5,398       2,192  
Noncontrolling interest     (247 )     (101 )
Adjusted EBITDA   $ 64,801     $ 71,955  
                 
  Less:                
Cash interest expense     (12,388 )     (12,169 )
Estimated maintenance capital expenditures (1)     (18,000 )     (17,500 )
Distributions to preferred unitholders     (3,500 )     (3,500 )
Management incentive fee(2)     -       (1,343 )
Distributable Cash Flow(3)   $ 30,913     $ 37,443  
                 
Distributions to unitholders (other than holders of preferred units)(2)   $ 31,911     $ 31,846  
Distribution Coverage Ratio     1.0x       1.2x  
                 
(1) Maintenance capital expenditures are those needed on average to maintain production over a five-year period.
 
(2) On March 2, 2014, we completed a transaction (the "GP Buyout Transaction") related to our general partner interest by and among the Partnership, the general partner, QR Holdings (QRE), LLC and QR Energy Holdings, LLC (together, the "QR Parties"), the former owners of our general partner, whereby (i) the general partner reclassified its 0.1% general partner interest in the Partnership, formerly represented by 51,036 general partner units, in exchange for a non-economic general partner interest, (ii) the QR Parties contributed 100% of the limited liability company interests of the general partner to the Partnership, and (iii) the partnership agreement was amended, to, among other things, (a) terminate the management incentive fee and provide for the future issuance of up to 11.6 million Class B units, subject to certain tests, to the QR Parties in in up to four equal installments during the next six calendar years starting with this year.
 
(3) Prior to any retained cash reserves established by QR Energy's general partner's board of directors.
 

Note: Please see the financial statements and related footnotes in QR Energy's 10-Q, as filed with the SEC.

Quarterly Report on Form 10-Q

QR Energy's financial statements and related footnotes will be available in the 10-Q for the quarter ended March 31, 2014, which QR Energy will file with the SEC today. The 10-Q will be available on QR Energy's Investor Relations website at http://ir.qrenergylp.com or on the SEC website at www.sec.gov.

Webcast and Conference Call

QR Energy will host a webcast and conference call today at 9:00 a.m. central time to discuss these results.

Interested parties may join the webcast by visiting QR Energy's Investor Relations website at http://ir.qrenergylp.com and clicking on the webcast link or the conference call by dialing (877) 861-4516 or (706) 679-6295 five minutes before the call begins and providing the conference ID 29029776.

The webcast will be available on QR Energy's Investor Relations website at http://ir.qrenergylp.com for 14 days following the call and a telephonic replay will be available for 7 days following the call by dialing (855) 859-2056 or (404) 537-3406 and providing the conference ID 29029776.

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of federal securities laws. 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 factors could cause actual results to differ materially from the expectations and forecasts, anticipated results or other forward-looking information expressed in this press release, including risks and uncertainties regarding future results, capital expenditures, liquidity and financial market conditions, sufficiency of cash from operations, adverse market conditions and governmental regulations. For a more complete list of these risk factors, please read QR Energy's filings with the SEC, which are available on QR Energy's Investor Relations website at http://ir.qrenergylp.com or on the SEC website at www.sec.gov.

Guidance

The guidance set forth is subject to all cautionary statements and limitations described below and under the "Forward-Looking Statements" section of this press release. In addition, estimates for QR Energy's future production volumes are based on, among other things, assumptions of capital expenditure levels and the assumption that market demand and prices for oil and natural gas will continue at levels that allow for economic production of these products. The production, transportation and marketing of oil and natural gas are extremely complex and are subject to disruption due to transportation and processing availability, mechanical failure, human error, weather and numerous other factors. Estimates are based on certain other assumptions, such as well performance, which may vary significantly from QR Energy's assumptions. Operating costs, which include major maintenance costs, vary in response to changes in prices of services and materials used in the operation of properties and the amount of maintenance required. Operating costs, including taxes, utilities and service company costs, move directionally with increases and decreases in commodity prices and QR Energy cannot fully predict such future commodity prices or operating costs. Capital expenditures are based on current expectations as to the level of capital expenditures that will be justified based upon the other assumptions set forth below as well as expectations about other operating and economic factors not set forth below. The guidance set forth below does not constitute any form of guarantee, assurance or promise that the matters indicated will actually be achieved. Rather, the guidance simply sets forth QR Energy's best estimate today for these matters. Estimates are based upon current expectations about the future and based upon both stated and unstated assumptions. Actual conditions and assumptions may change over the course of the year.

About QR Energy, LP

QR Energy, LP is a publicly traded partnership engaged in the acquisition, production and development of onshore crude oil and natural gas properties in the United States. QR Energy is headquartered in Houston, Texas. For more information, visit QR Energy's website at www.qrenergylp.com.

Contact Information

  • Investor Contacts:

    Josh Wannarka
    Director of Investor Relations
    (713) 452-2990

    Cedric W. Burgher
    Chief Financial Officer
    (713) 452-2200