Stacked Deck: QEP Antes Up $950 Million For Permian, Will Cash In Granite Wash, Woodford

Acquired acreage in Martin and Andrews counties with net production of 6,700 BOE/d.

QEP Resources Inc. (NYSE: QEP) continues to amass crude oil supplies, picking up proved resources of 47 million barrels of oil equivalent (MMBOE) in the the Permian Basin for $950 million, the company said Dec. 9.

The acquisition of Enervest Ltd.’s acreage in Martin and Andrews counties in Texas’ Midland sub-basin adds at least 10 years of drilling opportunities, QEP said. It also puts the company in two of the nation’s best plays, the other being the Williston Basin.

As part of financing the deal, QEP plans to exit “selected non-core assets” such as the Granite Wash and Woodford Cana by the first half of 2014.

Currently, the Permian assets’ net production is 6,700 BOE/d, consisting of 68% crude oil. But total estimated net recoverable resources are up to 300 MMBOE per square mile, QEP said. The development is expected to be self-funding post-2015.

The purchase keeps the company on the path toward rapidly increasing the margin of oil and natural gas liquid it can produce. Crude oil comprised 8% of QEP’s production in 2011 and 12% in 2012.

Combining the acquisition and exploitation of their current asset base, the production mix will shift to nearly 50% oil/liquids production by the end of 2015, said Bill Herbert, managing director, co-head of securities for Simmons & Co.

“This acquisition is part of our continuing strategy to become more focused on crude oil and natural gas liquids,” said Chuck Stanley, chairman, president and CEO of QEP. “Our new ventures team has been actively focused on expanding our footprint in the world-class crude oil provinces of North America, first in the Williston Basin and now in the Permian Basin.”

The company has identified nine potential horizontal development targets over a 3,000-foot vertical section. The purchase gives QEP 26,519 net acres with an average working interest of 94% and a 75% net revenue interest.

The property adds 264 vertical producing wells near horizontal activity by industry peers to QEP. The company could also realize another 200 vertical wells and up to 775 horizontal drilling locations.

The Permian deal follows QEP’s August 2012 oil acquisition in the Williston Basin for about $1.38 billion. At the time, aggregate net production was 10,500 BOE/d.

Stanley said several potential Permian properties were evaluated but until now none had met the company’s criteria.

“This acquisition allows us to leverage our competitive strength of drilling horizontal development wells in multi-pay, stacked reservoirs,” he said.

The acquisition is expected to be initially funded by their revolver and cash on hand and then by asset sales.

“In time, borrowings will be repaid by the monetization of non-core E&P assets in the Midcontinent,” Herbert said. “The acquisition will add 16% to QEP’s total production.”

Herbert said that most importantly, QEP’s developments call for the transaction to be self funding within two years and they “are targeting a 400% increase in total company production to 33 MBOE/d by 2018 from the assets,” he said.

The company expects to focus its capital spending in its two premier oil assets: the Williston and the Permian basins, and its two liquids-rich gas assets: the Pinedale Anticline and the Lower Mesaverde play in the Uinta Basin.

“Along with the planned separation of QEP Field Services Co., the acquisition and the anticipated asset sales will continue the company’s transformation into a liquids-focused, pure-play E&P company with assets located in premier basins across North America,” Stanley said.

Stanley said QEP’s Permian deal and the decision to explore separating its $1.7-$2.3 billion midstream business are unrelated.

“I want to stress this acquisition is a totally discreet decision from our announcement last week to separate our midstream business from QEP,” Stanley said.

QEP paid $16,875 per acre for Enervest’s acreage. That compares to recent acquisitions by Diamondback Energy (NYSE: FANG) in Martin/southern Dawson counties for $165 million or $9,417 per acre.

“This morning’s announcement is a significant positive for SM Energy and FANG, which hold acreage in the offsetting areas,” said Gabriele Sorbara, an analyst for Topeka Capital Markets. “This acreage is located in the core fairway of the play, and upcoming well results in early 2014 should go a long way in garnering an increasing interest in the area.”

The effective date of the transaction is November, and it is expected to close on or before Jan. 31.