QRE has 16.7M convertible shares earning $0.84/share for three years. Then earn same as common and convertible at $21.00/share.
The implication being that the preferred is subsidizing a higher distribution for common shares in the beginning that will have to be provided for after three years which surely has to mean a slowdown in distribution growth.
I have been looking for another E&P. This one is out because the history of entities using convertible preferreds has not been good in the sense that $1.06 per preferred share in essence is being used today to give common a larger dividend than they would be getting if the convertible preferred did not exist and equivalent common shares were outstanding today.
Be careful on this one. The one I am now choosing has similar characteristics except there is no convertible preferred in place to goose the distribution for the common in the beginning.
I am still a long-term holder of QRE, but I do not expect to see the level of increasing distributions that occurred last year. QRE is a well-run company and if they can execute their plan as they hope to, they will be able to cover the distribution adequately by the time that the conversion of the preferred units occurs. I mentioned EVEP as an exception to the problems that other upstream MLP's face, only because they will soon monetize their UTICA holdings, and will be able to substantially increase the distribution if not double it.
That is their plan, but adding accretive properties takes time and the added interest from the new long term debt is already being paid. The DCF should recover by 2014 if QRE executes their acquisition plan well.
"Next quarter will be worse with the added interest cost of the new 9.25% debt."
Isn't the idea that the cash flow from the acquired properties ought to be more than the interest, so the net effect should be accretive to DCF coverage?
Correction: I meant to write convertible preferred. I talked to IR and there is no provision for amortizing the higher payment of the full distribution after the conversion in Jan 2014. They expect to increase the DCF with acquisitions over the next year. They are not that far off though. The first quarter DCF coverage ratio for the fully diluted distribution would have been 1.1 ( it was 1.4 undiluted) if the convertible units had received the same distribution as the common units. This will not be as good this quarter with the lower NGL prices (NGLS are 10% of revenue) and lower oil prices for any unhedged oil. Next quarter will be worse with the added interest cost of the new 9.25% debt. The bottom line is don't expect any large increases in the distribution for a couple of years, but this will be true of all of the upstream MLPs except EVEP.
I have been looking on the financial statements for a line item setting aside cash flow to amortize the deferred payments to the subordinated units. Can you point me to it please. Or is it is more likely that the amortization is in the form of units that management will get after the subordination ends. That would mean more units to pay out distributions to in 2014 and lower distribution coverage, maybe even less than 1.0 unless they add accretive properties before then.
the $.84 yearly distribution is equal to 4% yeild on the par value of the preferreds which is $21. After 3 years of 4% yield the preferreds are convertable for 1 to 1 into common, subject to adjustment.
I see the 4% payout as ballance to the new addition of $227 million in debt also added to pay for the deal. If Quantum would have taken less money up front they could have had the full dist. Looking at the big picture it looks good to me.
Holders may convert the Preferred Units to common units on a one-to-one basis prior to October 3, 2013, 30 consecutive trading days during which the
volume-weighted average price for our common units equals or exceeds $27.30 per common unit. In addition, holders may convert the Preferred Units to
common units on a one-to-one basis anytime on or after October 3, 2013.
If the holders have not converted the Preferred Units to common units by October 3, 2014, we may force conversion on a one-to-one basis, provided that
conversion is in the 30 calendar days following 30 consecutive trading days during which the volume-weighted average price for common units equals or
exceeds (1) $30.03, provided that (a) an effective shelf registration statement covering resales for the converted units is in place or (2) $27.30, provided that
(a) above is satisfied and (b) there exists an arrangement for one or more investment banks to underwrite the converted unit sale following conversion (with
proceeds equal to not less than $27.30 less (i) a standard underwriting discount and (ii) a customary discount not to exceed 5% of $27.30).
We may force conversion on a one-to-one basis after October 3, 2016, provided the conversion is in the 30 calendar days following 30 consecutive
trading days during which the volume-weighted average price for common units equals or exceeds $27.30 and an effective shelf registration statement
covering resales for the converted units is in place.