QEP Resources' Fourth Quarter 2013 Weak During Shift To Oil

QEP Resources Inc. (NYSE: QEP) is shifting direction, closing its Permian Basin deal Feb. 25 while it attempts to jettison its gassier and midstream assets.

But the company turned in a weak fourth quarter for 2013, missing analyst expectations and reporting a net $52 million loss. Its outlook for the year is underwhelming, analysts said.

QEP also announced Feb. 25 that it closed the deal to acquire Permian Basin acreage for $950 million, subject to customary purchase-price adjustments. The company said the acreage provides QEP with a 10-year crude-oil-directed drilling inventory.

“Right now we believe the QEP story is one of transformation, and stepping back,” said David Tameron, senior analyst for Wells Fargo Securities LLC. “We think QEP is heading in the right direction -- oil production is growing by 40-ish% in 2014, cash costs are expected to remain in check.”

QEP also owns a diverse portfolio of core assets in the Pinedale, Uinta and Haynesville and is ramping up positions in the Granite Wash and Bakken, as well as exposure to emerging plays such as Niobrara and Cana-Woodford.

“With production growth that can be funded at or near cash flow, shares look inexpensive relative to peers,” Tameron said.

QEP made several large-scale changes in 2013, including the initial public offering (IPO) of QEP Midstream Partners LP (NYSE: QEPM) ("QEPM") with net proceeds of $449.6 million. It also announced plans to separate QEP Field Services Co.

QEP Field Services’ gathering margin in the fourth quarter of 2013 increased 23% compared to 2012 levels, due primarily to an increase in “other gathering revenues” related to deficiency payments from certain gathering customers who failed to fulfill minimum volume commitments.

In February, QEP Energy Co., a subsidiary of QEP Resources, offered Western Anadarko Basin assets primarily located in the Texas Panhandle and Western Oklahoma.

The company wants to sell the properties in a single cash transaction, although it will consider offers on two packages. The Cana-Woodford/Stack, with a proved developed producing (PDP) net PV-10 value of $386.7 million, and the Granite Wash, with a PDP net PV-10 value of $133.7 million, are up for sale.

Net production for the properties is 103 million cubic feet equivalent per day (MMcfe/d), of which 39% is liquids. Net monthly cash flow was $14 million, based on January estimates.

Mike Kelly, senior analyst for Global Hunter Securities LLC, said QEP is testing the market with the hopes that the success of Continental Resources Inc. (NYSE: CLR) and Newfield Exploration Co. (NYSE: NFX) in the SCOOP may drive up the price for the package.

QEP turned down offers last year as unacceptable, Kelly said in a Feb. 19 report.

“Supposedly Devon Energy (NYSE: DVN) commended to laying down rigs in the area, which may counteract to some degree the attractive results that CLR and NFX have posted,” he said.

For 2014, guidance looks weak, Tameron said. The company said it would produce 283-307 billion cubic feet equivalent (Bcfe), compared to Wall Street's consensus of 337 Bcfe.

Tim Rezvan, Sterne Agee analyst, also said that fourth quarter expenses were unusual.

General and administrative (G&A) expenses were $5.5 million higher than the previous quarter because of legal and related fees from strategic review initiatives and overtime due to weather. Lease operating expenses were $5.4 million higher sequentially because of field expenses related to weather.

For 2013, QEP reported net income of $159.4 million, compared with $128.3 million in 2012.

Chuck Stanley, chairman, president and CEO, said 2013 marked substantial progress toward a more balanced crude oil and natural gas production stream.

“We have developed an E&P asset portfolio that will perform well in a variety of market conditions and generate superior shareholder returns over the long term,” he said. “QEP Energy’s capital investment program resulted in a 62% increase in crude oil production over last year driven by a 133% increase in production from the Williston Basin.”

Crude oil volumes represented 20% of QEP Energy's production in 2013, a substantial increase from 12% in 2012 and 8% in 2011.

“With the recent closing of our previously announced Permian Basin acquisition, which will provide substantial crude oil drilling inventory in a world-class basin, we are now well positioned to continue our sharpened focus on high-return crude oil production in 2014,” Stanley said.