QEP Resources, Inc. (NYSE:QEP) is a leading independent natural gas and crude oil exploration and production company focused in two major regions: the Northern Region (primarily the Rockies and the Williston Basin) and the Southern Region (primarily Oklahoma, the Texas Panhandle, and Louisiana) of the United States.
In a company update on January 30, 2014, QEP Resources announced the continuation of spinning off its midstream companies, the nomination of two new board members and a share repurchase program of $500 million. QEP is also pursuing the sale of non-core assets in the Midcontinent and expects the process to begin during the first half of 2014.
QEP Resources is scheduled to discuss its Q4’13 results in a conference call on February 26, 2014. The company will release its 2014 guidance along with the results, and attributes the later-than-usual timing to its recent numerous initiatives.
Midstream Separation
Since its spinoff from the regulated utility Questar Corporation in 2010, QEP Resources develops, gathers, compresses, treats, processes and stores natural gas. The company is the majority owner of QEP Midstream Partners, LP (NYSE: QEPM), which recently went public this year, and owns 100% of the partnership’s general partner.
QEP announced the intention to sell its ownership in QEP Midstream Partners, L.P. (ticker: QEPM) on December 2, 2013. The company also plans on separating from QEP Field Services, a gas processing and gathering company located in the Rockies and Louisiana. Management said the spin-off will allow each company to compete more effectively in its respective markets. The proper SEC filing is currently being prepared and its placement will make the separation official.
QEP is in the process of recruiting executives to serve on the management team of its new standalone company.
Source: QEP December 2013 Presentation
QEP Strengthens Assets… In the Board Room
QEP announced the appointment of Robert F. Heinemann and Thomas C. O’Connor to its Board, effective immediately. Keith Rattie, a board member since 2010, is retiring from his position.
Heinemann will seek election for a three-year term at the company’s 2014 Annual Meeting. He previously served as the President and Chief Executive Officer of Berry Petroleum (ticker: BRY) for nine years. BRY was purchased by Linn Energy (ticker: LINE) in February 2013 for $4.3 billion. Its enterprise value was $375 million when Heinemann first assumed his role.
O’Connor served as Chairman and CEO of DCP Midstream, LLC (ticker: DPM) for six years. The company committed $5 billion to construction and development projects as its growth plan under his direction. He will seek election for a three-year term at the company’s 2015 Annual Meeting. OAG 360 notes that due to the timing of his potential election, O’Connor may be serving on the Board of one of QEP’s spin-offs, depending on its progression.
Switching Gears to Oil, Building Value through Sales and Stock Repurchases
Source: QEP December 2013 Presentation
QEP secured more than 26,500 net acres in the Permian Basin on December 9, 2013, for $950 million. An additional $1.4 billion was spent to obtain 27,600 net acres in the Williston Basin in April 2012. Total assets acquired from the two sales equaled net production of 17.2 MBOEPD and an estimated 5.2 MMBOE of net ultimate recovery. Management said the transactions have reflected the company’s new emphasis on crude oil and natural gas liquids production. In a conference on December 11, 2013, management said crude oil consisted of roughly 8% of 2011 production. Pro forma for the acquisitions, QEP expects oil and natural gas liquids to account for 30% of production. QEP predicts the liquids makeup to represent 50% of production by 2015.
OAG 360 covered the Permian acquisition in depth in a recent feature article.
QEP will also place non-core properties on the market in mid-February 2014. The company expects to complete the sales of the Granite Wash and “Cana” Woodford by July 2014, and information will be available in its 2014 guidance. The company currently serves as a non-operator in the play (23% average working interest) and holds approximately 73,000 net acres.
A stock repurchase program of up to $500 million of common shares has also been authorized. A definitive timetable of the buyback commencement has not been released, but the QEP Board said the program is dependent its financial position in addition to market conditions.
[sam_ad id=”32″ codes=”true”]
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. A member of EnerCom has a long position in QEP Resources.
Analyst Commentary
Barclays Note – (1.30.14)
We are cautiously optimistic that the restructuring update provided by QEP today will be received well by the market. The company previously discussed the spin of the midstream business and the sale of E&P assets. It has gone one step further with an announced share buyback and it has provided further guidance related to E&P asset sales. Our $36 target price reflects a $1.60/share discount for the midstream business as compared to a fully distributed, stand-alone value.
The company plans to implement the separation of QEP Field Services Company and to create a standalone public company. The company has retained Korn/Ferry International to assist in recruiting a management team. We have valued the stand-alone public company at an enterprise value of ~$3.4 billion (including the minority interest in QEPM and debt) – our valuation of QEP shares reflects about a 10% discount to that stand-alone $3.4 billion midstream value estimate (worth ~$1.60/QEP share). The 10% discount could be understated if there were to be significant tax leakage and/or the parent company was to retain a significant stake in the new company. We have historically observed that parent company shares frequently fail to reflect a full sum of the parts valuation.
E&P asset sales are planned. QEP has commenced the sale process of non-core Midcontinent upstream assets. The Granite Wash and “Cana” Woodford assets will be marketed beginning in mid-February and a closing is anticipated by July.
2014 guidance is expected on the Q4 call on February 25th. Guidance will reflect planned sales as well as previously announced corporate initiatives, including the recent Permian Basin acquisition.
QEP announced a $500 million share buyback. The timing and amount of the share repurchase are uncertain at this time.
E&P Asset quality remains a concern. Our $36 target price reflects a modest target multiple of 4.9x 2015E cash flow from the E&P business plus $3.1 billion for the midstream assets. A more typical multiple of ~ 6x E&P cash flow would represent an incremental ~$10 per share. While the market is impressed by returns in the South Antelope area in the Bakken, it has taken a wait and see attitude regarding the recently acquired Wolfcamp assets until we see some horizontal drilling results, and is less than enthused about the remainder of QEP's portfolio.
Baird Energy Daily Dirt – (1.30.14)
QEP announces updated on strategic initiatives and share repurchase program (Peng). QEP Resources announced update on a series of strategic initiatives this morning. Robert Heinemann, former President and CEO of Berry Petroleum, and Thomas O’Connor, former Chairman and CEO of DCP Midstream, have been appointed to the QEP board of directors, and Keith Rattie will retire from the board. The new appointments are intended to bring additional upstream and midstream management expertise to the QEP board. As expected, QEP announced that it is preparing filings for the definitive separation of QEPFS into a standalone public entity, including the company’s interest in QEPM. While preparing these filing, QEP will entertain and evaluate proposals for alternative methods to separate the midstream business. Additionally, QEP announced an update on previously announced plans to divest the first two packages of non-core MidCon assets. QEP’s Granite Wash and Cana Woodford packages will be marketed beginning in mid-February. Finally, QEP announced that the board has authorized a share repurchase plan of $500MM. We view this announcement as a positive for QEP on the share repurchase program and the midstream expertise that is being added to the board. Maintain Outperform rating driven by near-term catalysts from midstream separation, activist shareholder activities, Permian activities, and anticipated MidCont asset sales. Execution is key for QEP.
Wells Fargo Securities Note – (1.30.14)
QEP Updates Strategic Alternatives -- Positive. Thursday morning (1/30/14), QEP provided an update on its strategic alternatives which involve its midstream assets and pruning of its E&P assets. There were a few incremental items in today's release, which we took as positives and are in-line with proposals put forth by JANA Partners:
1) QEP plans to go the public-company route for the separation of Field Services and QEP's ownership in QEPM. The company is still looking into alternative transactions for separating the midstream assets, but we believe a tax-free spinoff makes the most sense and is likely expected by the Street.
2) The E&P divestiture will likely be closed by July, and will come in two separate transactions -- one for the Granite Wash, one for the Cana Woodford. Timing makes sense given the option to use a 1031 exchange in conjunction with the Permian acquisition, and the two separate packages will likely garner higher valuations than one package containing both assets.
3) Bob Heinemann and Thomas O'Connor were named to QEP's board -- both positive adds, in our view, with Mr. Heinemann bringing leadership experience from nine years as BRY's CEO while Mr. O'Connor has extensive midstream experience from his tenure as DCP's Chairman and CEO.
4) $500MM stock repurchase program equates to 9% of the current QEP market cap. The midstream separation is in part aimed at 'unlocking value', and QEP is returning some of this directly to shareholders.
So in all, QEP is making positive steps towards executing its strategic goals. In conjunction with the E&P divestiture, 2014 guidance is expected alongside Q4 results on 2/25/14.
Capital One Morning Energy Summary – (1.30.14)
QEP has appointed 2 new members to its board of directors and announced the retirement of existing board member Keith Rattie. In addition to the board membership update, this morning's release restated the company's intent to separate its midstream business from its E&P business. SEC filings are in the process of being prepared and potential methods of separating the businesses are being evaluated. We model $1.9B worth of midstream value in our QEP NAV with $1.2B going to Field Services and another $700MM in QEPM ownership. The company's Mid-Con properties had previously been announced as divestiture candidates and the process is now formally underway. The Granite Wash and Cana Woodford properties will be marketed starting at the end of February with an expected close by July. We model these two assets together at $1.1B worth of value. Combined proceeds of these two monetizations could be around $3B or more and would easily take care of the newly authorized $500MM share buyback with the excess taking debt/EBITDA below 1.0x in our model. However, we expect some portion of the proceeds to fuel development and growth on the new Permian position. The midstream separation and the Mid-Con sales are not new, and it seems that they could be completed by mid-year. Perhaps the trickiest piece of QEP's strategic plans for this year will be minimizing tax leakage. The company expects to release 2014 guidance along with its 4Q13 results on February 25th.
