MLP Market Update
Commentary on Master Limited Partnerships

Published
Nov 10th, 2011

Category:
MLP Market Post, Stock Analysis

First E&P MLP IPO in 2011: LRR Energy, L.P.

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It has been almost a year since the last E&P MLP IPO, but this afternoon LRR Energy, L.P. ($LRE) priced its initial public offering of 9.4 million units at $19.00, raising $178.8 million in gross proceeds.  Since the last E&P MLP IPO ($QRE) in December of 2010, we’ve had 2 nitrogen MLP IPOs ($UAN and $RNF), a shipping MLP, a propane MLP, 3 midstream MLPs and 1 GP holding company ($KMI, which will soon be a pipeline company again, see here).  That’s 8 IPOs.

LRE’s $19.00 is at the bottom of its range, and represents an even 10% yield.  All of the net IPO proceeds will be going to its GP and financial sponsor, Lime Rock Resources, which is a Houston area private equity firm.  In addition to the equity proceeds, LRE will borrow $155.8 million to make an additional distribution to Lime Rock.

These distributions are a small red flag, but not uncommon.  As a private equity firm, Lime Rock has a responsibility to its L.P.s to generate returns on a finite timeline.  It was probably also confirmed by the bankers that the market would not give LRE full valuation credit for keeping its balance sheet clean, and taking all of this cash out up front reduces the likelihood that the LRE will be held back by equity overhang.   From what I’ve read and heard, people like the management team of LRE and there is some potential for drop-down acquisitions from Lime Rock over time.

QRE, the last MLP IPO, is actually a very good comparable.  Also sponsored by a Houston-based private equity firm, QRE priced at the midpoint of its range, raising $300 million at yield of 8.25%.  QRE’s Sponsor, Quantum, took back all of the net proceeds from the IPO and borrowed $225 million to pay to the sponsor.  It hasn’t hurt QRE, which is actually the second best performing E&P MLP (after EVEP) so far this year, with a total return of 9.1%.

Below is a chart comparing some statistics of the LRE IPO to the other E&P MLPs out there.  I didn’t include $CEP in the chart, because that MLP remains distressed and uninvestable for my clients.

(click to embiggen), Source: SEC filings.

For more details on the IPO and some opinion on valuation, head over to read Philip Trinder’s take on LRE at his MLP blog.

 

Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.  No positions.

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