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.
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.
Decision to Separate
On December 2, 2013, QEP Resources announced it will pursue a separation of its midstream business, QEP Field Services Company, including its interest in QEP Midstream Partners, LP (ticker: QEPM). The board of directors has authorized the recruitment of additional senior management for the standalone midstream business and an update on the separation is expected in Q1’14.
The separation of the businesses will allow each company to compete more effectively in their respective markets and allocate resources and capital accordingly. QEP believes the value of its midstream business is not fully recognized in its share price and the separation is expected to unlock shareholder value by creating a pure play midstream business.
It bears mentioning that JANA Partners, LLC, a 7.5% majority stockholder of QEP, wrote a public letter to the board of directors in October 2013 encouraging the tax-free spin-off of QEPM. Many believe activist investors played a role in expediting the separation of the midstream business.
As mentioned previously, QEPM closed its initial public offering (IPO) just months ago on August 14, 2013. The IPO raised approximately $451 million in net cash from the sale of approximately 23 million shares available at $21.00 per unit. The company has interests in QEP’s four gathering systems and two pipelines that gather and transport hydrocarbons across Colorado, Wyoming, Utah and North Dakota.
Until the separation is complete, the companies will continue to operate business on a normal basis. In its Q3’13 conference call, QEP said its EBITDA was up $12 million (4%) over the previous sequential quarter of Q2’13 while the EBITDA for the Field Services Company dropped $6.7 million (11.5%) for the same quarter last year. Neither company made any comments regarding the potential separation of midstream assets during their respective calls.
QEPM currently has $60 million cash on hand and no debt drawn on its $500 million revolving credit facility. QEPM says its primary business strategy will be the pursuit of drop down opportunities made available by QEP. An update on future strategies has not been released at this time of writing.
QEP Resources is scheduled to present at the Capital One Securities, Inc. 8th Annual Energy Conference on December 11, 2013.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on QEP Resources following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Wells Fargo Securities Note – (12.2.13)
QEP: Positive — Announces Intent to Separate Midstream Business.
Monday (12/2) afternoon, QEP announced the company’s Board has decided to pursue a separation of its midstream business, which would include QEP’s interest in QEPM. While the release stated this decision stemmed from a ”continuous review of strategic alternatives to maximize shareholder value,” we believe the process was sped up somewhat due to pressure from activist shareholders. It is unclear at this point if the separation would be a tax-free spin-off or a sale. And thus, we are not sure of the ultimate proceeds or potential use of those proceeds. If there are proceeds and it’s not a tax-free spin, proceeds could be used for additional acquisitions to bolster E&P portfolio, debt paydown, or even a one-time distribution to shareholders. The big question we have been getting is in a potential split, is this just a one-time financial engineering event, or does this have the potential to structurally change the company? At this point, that’s still unanswered – ultimate structure of the split would go a long way in answering that.
First pass and all back-of-the-envelope math, we currently use a 8.5x EBITDA multiple to value QEP Field Services, as our NAV captures some of the synergetic effects realized between QEP and QEP Field Services in our proved reserve valuation. Using $200MM for the EBITDA not attributable to QEPM in 2014E, this equates to $1,700MM. Valuing this $200MM of EBITDA at QEPM’s current EV/EBITDA multiple of 12x results in $2,40MM, or a $3.91/shr, or 10% uplift to our current $38/share NAV estimate. Apart from the obvious monetary value, a separation of QEP and Field Services would allow the E&P management team to focus on upstream operations, which was one of the rationales supporting a split in recent activist letters.
Management is currently working to establish QEP Field Services as a separate entity, including an experienced midstream leadership team. Next update expected during Q1 2014.
Barclays Note – (12.2.13)
Raising PT, but midstream separation may raise E&P asset quality concerns
We are raising our target to reflect the plan to separate the midstream business, QEP Field Services. We caution the separation may lead investors to question the quality of its E&P assets. Our $39 target provides 21% upside, vs. a peer group average of 10%. QEP conducted an IPO of QEPM in August and has been subject to investor pressure to take additional steps to highlight the value of the midstream business.
We are raising our value for the midstream (to QEP holders) from $2.0 to $2.6bn. We feel the midstream business will trade at a higher value as a standalone entity vs. the values that were embedded in QEP shares. This includes the market value of the QEPM units that QEP owns, an allowance for the GP units, and $2.0bn for other midstream assets.
A separation may lead investors to focus on the short-lived inventory, especially in the Bakken. While we believe QEP has done a good job pivoting from an oil to a gas focus, investors have noted that QEP’s running room in the Bakken – the recipient of >50% of 2013 E&P capital – is quite short. With the current drilling schedule, we expect QEP to fully develop its South Antelope (Bakken) field by the end of 2015 with peak production in late 2014. The Ft. Berthold acreage provides significant additional drilling opportunities, but has far lower returns than South Antelope. QEP projected a 10% pretax return at $43/bbl in South Antelope and at $73.50/bbl in Ft. Berthold.
Our price target discounts our estimated value of the midstream by ~10% ($1.50/share) vs. estimated standalone trading multiples for the assets. We have valued the E&P business using a target of 5.5x 2014E pre-interest cash flows (PICF). This target multiple compares to current trading multiples for the broad peer group that range from 4.9x-13.4x with an average of 6.3x.
Timing is uncertain at this point. The work to establish QEP Field Services as a separate entity is about to begin – this includes engaging a search firm to assist in recruitment of additional senior management. QEP expects to update shareholders on the progress of the separation during the first quarter of 2014.
Capital One Morning Energy Summary – (12.3.13)
QEP announced yesterday after the close that it intends to separate its midstream business and its interest in QEPM (QEP midstream partners) in an effort to maximize shareholder value. The move is not a surprise as the company has been under pressure from shareholder JANA Partners over the past few months to do just that. We value the portions of QEP to be spun out at $1.9B, which is comprised of about $700MM for the market value of the shares of QEPM and about $1.2B for the Field Services business using a 7x EBITDA multiple. If the move to separate the businesses is successful we would see it as a positive for the company for two reasons. First, our $1.9B valuation for the midstream assets is not priced into the stock, in our estimation. Second, we think that a move to make QEP a pure E&P company would help investors make valuation comparisons on a like-for-like basis. An update on the progress of the separation effort is expected in 1Q14. We consider UPL, WPX, and SWN as QEP’s most direct peers in our coverage group and would expect a separation to have QEP trading in a similar 2014 EV/EBITDA range of about 5x – 7x vs. the 4.4x that we estimate today.
Baird Energy Daily Dirt – (12.3.13)
JANA gets its way; QEP to separate midstream business. QEP has announced the decision to pursue a full separation of its midstream business. QEP announced that it will pursue a full separation of QEPFS, its midstream business, including company’s interest in QEPM. Recall activist shareholder JANA Partners has been pushing for QEP to separate its midstream business. The timing and structure of the separation have not been finalized, and QEP expects to update investors on the progress of the separation in 1Q14. We view this announcement as a positive for QEP shares as we do not think the midstream business is getting full value from E&P investors under its current structure. There are several separation alternatives such as: (1) a tax-free spin-off of QEPFS, (2) a midstream merger similar to that of DVN/Crosstex, or (3) a straight midstream asset sale (with associated tax implications), that would allow QEPFS to better pursue growth opportunities to maximize the full value of its midstream business, in our view.
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