NOTE 9 - PARTNERS' CAPITAL

Initial Public Offering

On December 22, 2010, we completed our IPO of 15,000,000 common units representing limited partner interests in us at $20.00 per common unit, or $18.70 per unit after payment of the underwriting discount. In connection with the IPO, the Fund contributed to us certain fields in the Permian Basin and the Ark-La-Tex, Mid-Continent and Gulf Coast areas. In exchange, the Fund received, either directly or through our assumption of its indebtedness, all of the net proceeds of the IPO. Upon completion of the IPO, we had 26,297,737 common units, 7,145,866 subordinated units and 35,729 general partner units outstanding. Our common units are traded on the NYSE under the symbol “QRE.”

All of the subordinated units and 11,297,737 common units are owned by the Fund and all of the general partner units are owned by affiliates of the Fund.

Units Outstanding

As of December 31, 2011, our outstanding partnership interests consisted of 16,666,667 Class C Preferred Units, 28,590,016 outstanding common units and 7,145,866 outstanding subordinated units, representing a 99.9% limited partnership interest in us, and a 0.1% general partnership interest represented by 35,729 general partner units.

As of December 31, 2010, our outstanding partnership interests consisted of 26,297,737 outstanding common units and 7,145,866 outstanding subordinated units, representing a 99.9% limited partnership interest in us, and a 0.1% general partnership interest comprising 35,729 general partner units.

The table below details the outstanding units for the period from December 22, 2010 to December 31, 2010 and the year ended December 31, 2011.

					Limited Partners
			General					Affiliated
	Preferred Units		Partner		Public Common			Common		Subordinated
Balance - December 22, 2010		-		-		-			-		-
Units issued to the Predecessor in exchange for IPO Assets		-		-		-			11,297,737		7,145,866
Initial public offering		-		-		15,000,000			-		-
Units issued to the general partner		-		35,729		-			-		-
Balance - December 31, 2010		-		35,729		15,000,000			11,297,737		7,145,866
Underwriters' exercise of over-allotment		-		-		2,250,000			-		-
Units awarded under our Long Term Incentive
Performance Plan		-		-		52,798			-		-
Reduction in units to cover individuals'tax witholdings		-		-		(10,519	)		-		-
Preferred Units issued to Predecessor in exchange for Transferred Properties		16,666,667		-		-			-		-
Balance - December 31, 2011		16,666,667		35,729		17,292,279			11,297,737		7,145,866

Class C Preferred Units

On October 3, 2011 (the “Issue Date”) we amended our First Amended and Restated Agreement of Limited Partnership to designate and create the Preferred Units and set forth rights, preferences and privileges of such units including distribution rights held by the Preferred Units and us. For the period beginning on the Issue Date and ending on the December 31, 2014, we will distribute $0.21 per unit on a quarterly basis. Beginning on January 1, 2015, distributions on Preferred Units will be the greater of $0.475 per unit or the distribution payable on Common Units with respect to such quarter. The Preferred Units are only redeemable for cash in a complete liquidation. The Preferred Units are convertible into common units under specific circumstances at the option of either the holder or the Partnership. The Preferred Units have the same voting rights as common units. As of December 31, 2011 we have accrued a fourth quarter distributions payable of $3.4 million to Preferred Unit holders to be paid on February 10, 2012.

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.

Registration Rights Agreement

In connection with the acquisition of the Transferred Properties, on October 3, 2011, we entered into a Registration Rights Agreement with the Fund (the “Registration Rights Agreement”), which granted certain registration rights to the Fund, including rights to (a) cause the Partnership to file with the SEC up to five shelf registration statements under the Securities Act for the resales of the common units to be issued upon conversion of the Preferred Units, and in certain circumstances, the resales of the Preferred Units, and (b) participate in future underwritten public offerings of the our common units.

The Fund may exercise its right to request that a shelf registration statement be filed any time after June 1, 2012. In addition, we agreed to use commercially reasonable efforts (a) to prepare and file a shelf registration statement within 60 days of receiving a request from the Fund and (b) to cause the shelf registration statement to be declared effective by the SEC no later than 180 days after its filing. The Registration Rights Agreement contains customary representations, warranties and covenants, and customary provisions regarding rights of indemnification between the parties with respect to certain applicable securities law liabilities.

These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration and our right to delay or withdraw a registration statement under certain circumstances. We will generally pay all registration expenses in connection with our obligations under the registration rights agreement, regardless of whether a registration statement is filed or becomes effective.

Common Units

The common units have limited voting rights as set forth in our partnership agreement.

Pursuant to our partnership agreement, if at any time QRE GP and its affiliates own more than 80% of the outstanding common units, QRE GP has the right, but not the obligation, to purchase all of the remaining common units at a purchase price not less than the then-current market price of the common units, as calculated pursuant to the terms of our partnership agreement. QRE GP may assign this call right to any of its affiliates or to us.

Subordinated Units

The principal difference between our common and subordinated units is that, in any quarter during the subordination period, the subordinated units are entitled to receive the minimum quarterly distribution of $0.4125 per unit ($1.65 per unit on an annualized basis) only after the common units have received their minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Accordingly, holders of subordinated units may receive a smaller distribution than holders of common units or no distribution at all. Subordinated units will not accrue arrearages.

The subordination period will end on the earlier of:

the later to occur of (i) the second anniversary of the closing of our IPO and (ii) such date as all arrearages, if any, of distributions of the minimum quarterly distribution on the common units have been eliminated; and

the removal of QRE GP other than for cause, provided that no subordinated units or common units held by the holders of the subordinated units or their affiliates are voted in favor of such removal.

QRE GP Interest

QRE GP owns a 0.1% interest in us. This interest entitles QRE GP to receive distributions of available cash from operating surplus as discussed further below under Cash Distributions. Our partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the common unitholders, subordinated unitholders and QRE GP will receive.

QRE GP has sole responsibility for conducting our business and managing our operations. QRE GP's board of directors and executive officers will make decisions on our behalf.

Allocations of Net Income

Net income is allocated to the preferred unitholders to the extent distributions are made to them during the period with the remaining income being allocated between QRE GP and the common and subordinated unitholders in proportion to their pro rata ownership during the period.

Cash Distributions

We intend to continue to make regular cash distributions to unitholders on a quarterly basis, although there is no assurance as to the future cash distributions since they are dependent upon future earnings, cash flows, capital requirements, financial condition and other factors. Our credit facility prohibits us from making cash distributions if any potential default or event of default, as defined in our credit facility, occurs or would result from the cash distribution.

Our partnership agreement requires us to distribute all of our available cash on a quarterly basis. Our available cash is our cash on hand at the end of a quarter after the payment of our expenses and the establishment of reserves for future capital expenditures and operational needs, including cash from working capital borrowings. We intend to fund a portion of our capital expenditures with additional borrowings or issuances of additional units. We may also borrow to make distributions to unitholders, for example, in circumstances where we believe that the distribution level is sustainable over the long term, but short-term factors have caused available cash from operations to be insufficient to pay the distribution at the current level. Our cash distribution policy reflects a basic judgment that our unitholders will be better served by us distributing our available cash, after expenses and reserves, rather than retaining it.

QRE GP owns a 0.1% general partner interest in us, represented by 35,729 general partner units. QRE GP has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. QRE GP's initial 0.1% interest in these distributions will be reduced if we issue additional units in the future and QRE GP does not contribute a proportionate share of capital to us to maintain its 0.1% general partnership interest.

Our partnership agreement, as amended, requires that within 45 days after the end of each quarter, we distribute all of our available cash to preferred unitholders, in arrears, and common unitholders of record on the applicable record date, as determined by QRE GP.

Available Cash, for any quarter prior to liquidation, consists of all cash on hand at the end of the quarter:

less the amount of cash reserves established by QRE GP to:

(i)

provide for the proper conduct of our business,

(ii)

comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation, and

(iii)

provide funds for distribution to our unitholders and to QRE GP for any one or more of the next four quarters.

less, the aggregate Preferred Unit distribution accrued and payable for the quarter

plus, if QRE GP so determines, all or a portion of cash on hand on the date of determination of available cash for the quarter.

During Subordination Period. Our partnership agreement, as amended, requires that we make distributions of available cash from operating surplus for any quarter in the following manner during the subordination period:

first, to QRE GP and common unitholders in accordance with their percentage interest until there has been distributed in respect of each Common Unit then outstanding an amount equal to the minimum quarterly distribution of $0.4125 per unit per whole quarter (or $1.65 per year);

second, to QRE GP and common unitholders in accordance with their percentage interest until there has been distributed in respect of each Common Unit then outstanding an amount equal to the cumulative common unit arrearage existing with respect to such Quarter;

third, to QRE GP in accordance with its percentage interest and to the unitholders holding subordinated units, pro rata, a percentage equal to 100% less QRE GP's percentage interest, until there has been distributed in respect of each subordinated unit then outstanding an amount equal to the minimum quarterly distribution for such Quarter; and

thereafter, to QRE GP and all unitholders (other than preferred unitholders), pro rata;

After Subordination Period. Our partnership agreement requires that after the subordination period, we make distributions of available cash from operating surplus for any quarter to QRE GP and all unitholders in accordance with their percentage interest (other than preferred unitholders), pro rata

The following table shows the amount of cash distributions we have paid to date:

	For the	Distributions to		Distributions per		General		Public		Affiliated				Total Distributions to		Distributions
Date Paid	period ended	Preferred Unitholders		Preferred Unit (1)		Partner		Common		Common		Subordinated		Other Unitholders (2) (3)		per other units (2) (3)
(In thousands, except per unit amounts)
February 11, 2011	December 31, 2010	$	-	$	-	$	2	$	779	$	506	$	320	$	1,607	$	0.0448
May 13, 2011	March 31, 2011		-		-		15		7,186		4,660		2,948		14,809		0.4125
August 12, 2011	June 30, 2011		-		-		15		7,184		4,660		2,948		14,807		0.4125
November 11, 2011	September 30, 2011		-		-		15		7,180		4,660		2,948		14,803		0.4125
February 10, 2012	December 31, 2011		3,424		0.2054		16		8,344		5,368		3,393		17,121		0.4750

(1)

Preferred Units were prorated a quarterly distribution for the portion of the fourth quarter beginning on October 3, 2011 through December 31, 2011 in accordance with the Partnership Agreement.

(2)

The first quarter 2011 minimum quarterly distribution was prorated for the 10 day period from December 22, 2010 to December 31, 2010 in accordance with the Partnership Agreement.

(3)

An increase in the quarterly distribution to $0.475 was declared by the board of directors on October 3, 2011 and accrued in the fourth quarter 2011.