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CAPScall of the Week: QR Energy LP (QRE)

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called “Better Know a District,” which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That’s why I’ve made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week’s round of “Better Know a Stock,” I’m going to take a closer look at QR Energy LP (NYSE:QRE).

What QR Energy does
QR Energy is an upstream master limited partnership that has interests in thousands of oil, natural gas liquids, and natural gas wells in eight U.S. states. According to QR Energy’s operations website, the majority of its proved reserves and production come from the Permian Basin, which is primarily in Texas, and Ark-La-Tex, which, unsurprisingly, is located in Arkansas, Louisiana, and Texas. These two geographic regions account for 89% of proved reserves and 86% of production.

Occidental Petroleum Corporation (NYSE:OXY)QR Energy’s most recent earnings report came in early November when it recorded a 1% increase in barrels of oil equivalent produced per day (14,620) and reported a 16% decrease in distributable cash flow due to higher cash interest expense and management incentive fees. It ended the third quarter with a production mix of 43% oil, 42% natural gas, and 15% natural gas liquids.

Whom it competes against
As you might imagine, the onshore oil and gas exploration and production space is very crowded. When acquiring working interests in wells, QR Energy is forced to go up against industry titans. Occidental Petroleum Corporation (NYSE:OXY), for instance, owns twice as much acreage as its closest competitor in the Permian Basin and produced nearly three times as much oil-equivalent barrels as Kinder Morgan Energy Partners LP (NYSE:KMP), the No. 2 in the region, in 2012. Good luck finding additional working interests there, right?

QR Energy is also forced to overcome negative industry sentiment surrounding the tax status of MLP’s and the dividends they pay out. MLP’s struggled for most of 2012 under the presumption that the fiscal cliff would necessitate a boost in the way their payouts were treated. Although the fiscal cliff is now a distant memory, the threat of tax hikes on dividends always remains a concern.

The longevity and sustainability of QR Energy’s dividend payments is another factor that will greatly influence its price. With natural gas accounting for 42% of total production in the third quarter, stable or rising prices are needed to sustain its distributable cash flow. Investors also need to feel confident that the amount of dividends yet to be received is higher than the current stock price. Given the “newness” of QR Energy (debuting in 2010) I’d say this is quite feasible. This wasn’t the case for San Juan Basin Royalty Trust (NYSE:SJT) or BP Prudhoe Bay Royalty Trust (NYSE:BPT) which were both heavily criticized for being overvalued relative to the remaining life of their dividend payouts. Unless oil prices rise significantly, both San Juan and BP Prudhoe Bay could see production and payouts dip to a point where it’s unprofitable for shareholders to purchase these royalty trusts.