CAPScall of the Week: QR Energy LP (QRE)

The call
After carefully reviewing the prospects for QR Energy, I’ve decided to make a CAPScall of outperform on the company.

There were three main components that went into my outperform CAPScall. First, QR Energy hedges its oil and natural gas (it does not hedge natural gas liquids) to a greater extent than its peers. Having 95% of QR Energy’s 2013 oil and gas production hedged versus its peers’ average of 94% in 2013 isn’t out of the ordinary; however, by 2017, there’s a marked difference with 60% of its oil and gas hedged compared to the industry average of just 13%. More hedging will lead to more stable cash flow and consistent payouts for investors.

Second, QR Energy’s prime production location is conducive to receiving top-dollar prices for its oil. As I highlighted recently with EOG Resources, Inc. (NYSE:EOG), an oil and gas driller operating out of the Bakken Shale, the allure of spending a bit more to ship its oil by rail past Cushing, Okla., to Louisiana can often result in a significant premium to crude oil sale prices. With 91% of its proved reserves south of Cushing, QR Energy makes for a geographically attractive oil and gas MLP that can easily utilize Louisiana’s terminals.

Finally, the expected length of dividend payments makes QR Energy appear undervalued. Based on the company’s prospectus in 2010 prior to its debut, it projected a reserve to production ratio of 16 years. Even if oil and natural gas prices remain similar to where they are now, QR Energy will produce a yield in the neighborhood of 8%-12% annually and churn out (as my best guess) a cumulative $25-$32 per share in dividends over the next 16 years. And let’s just say that I’m betting on natural gas and oil prices to rise over that same period!

The article CAPScall of the Week: QR Energy originally appeared on Fool.com and is written by Sean Williams.

Fool contributor Sean Williams owns shares of BP Prudhoe Bay Royalty Trust, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Kinder Morgan.

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