Current bids too low, will keep marketing

QEP Resources (ticker: QEP) reported second quarter results today, showing a net loss of $336 million, or ($1.42) per share. This loss is due to a $404 million impairment QEP recorded on the sale of its Uinta Basin assets. After adjusting for these and other special items, QEP earned an adjusted $13.8 million in Q2.

Production was up slightly year-over-year, rising from 150.7 MBOEPD to 153.3 MBOEPD. This slight increase masks major changes for QEP, as the company is currently shedding non-core assets to focus on the Permian. Many regions have seen large year-over-year changes in production. The Pinedale, one of QEP’s main assets in 2017, has been sold, while production from the Permian has more than doubled in the intervening period.

As was announced in early March, QEP intends to become a pure-play Permian operator. This will involve selling assets in multiple locations, as QEP is highly diversified. This process is ongoing, and QEP recently announced the sale of its Uinta Basin properties for $155 million. However, just because QEP intends to sell its non-Permian assets does not mean these will be sold for any price. All the bids QEP received during Q2 for its Williston Basin assets were deemed insufficient, and QEP did not accept any bid. QEP intends to continue its sale efforts despite this setback.

Permian advancing ahead of schedule

QEP moved ahead of schedule in the Permian this quarter, bringing online four more wells than expected. The company reports that this accelerated activity was the result of improved drilling and completions efficiencies, QEP has achieved a four-fold increase in the number of frac stages completed per crew per month.

QEP provided an update on its recent high-density pilot test, which evaluated drilling 47 wellbores in a single mile-wide unit, with wells targeting five different zones. These wells achieved an average 24-hour IP of 88 BOEPD per 1,000 feet. While this is well below the 164 BOEPD per 1,000 feet seen in the company’s other recent wells, QEP reports that this result was within expectations. The goal of such high-development is to drill more wells in a given area for a lower price. The overall productivity and return of a given section will be improved by such a design, despite less productive individual wells.

QEP Holds Out for Better Price in Bakken

QEP reports that most of its expected Permian production is covered by Midland/Cushing basis swaps, which should protect the company from the harsh differentials seen in the basin. Less than 10% of production is directly exposed to the Midland spot price.

QEP Holds Out for Better Price in Bakken

Q&A from QEP conference call

Q: Maybe just starting with the strategic initiative process and I guess specifically the Williston, could you maybe just provide a little bit more color on where you stand from a timing perspective? Is it possible to see the Haynesville transact, I guess, before the Williston at this point? And then, if you don’t get properly valued for refracs and undeveloped acreage, is there a chance that you’d just pull the deal entirely and keep the asset for cash flow?

QEP: So, there’re multiple questions in one question. I’ll start by saying that, yes, it is possible that we get to a deal on the Haynesville before we get the one on the Williston Basin assets, but we’ve had inbounds, we’ve provided data, we’ll see whether any of the folks that we’re talking to come to a value that we think is reflective of the value of the underlying assets. And just like the Williston Basin, we’re not going to accept value – an offer from any potential buyer that doesn’t fully reflect what we think is the value of the assets.

We have a view of what we think they’re worth based on our own analysis and DCF of both the existing PDP volumes as well as the significant undeveloped potential of our acreage for new drills and for refracs. And just as a reminder, it’s on the slide in our slide deck, but I just want to remind everybody. In case you forgot, we also own a midstream business that sits on top of a large portion of our Haynesville footprint. So, it too provides a unique value proposition for a potential owner with respect to the total package. So, long answer to the first question, which is yes, it’s possible, Haynesville goes before Williston.

With respect to the Williston process, we’re continuing to talk to some folks that bid during the first round. One of the things that we’ve done is, as you saw in the release and as I mentioned in my prepared remarks, we’ve recently put on line another set of what I would consider to be outstanding refrac wells that have only been on really since the end of July. So, the original bidders didn’t see those, they saw them in progress, but didn’t see the results from them.

We think that the more results we put up on these refracs, the more it de-risks the perception that these are high-risk undertakings. In fact, we’re very comfortable with them because obviously we’ve had great success in the Haynesville and a lot of folks who just looked at the Williston assets are not familiar with the incredible results we’ve been delivering in the Haynesville for over a year. So, part of our job is going to be to go back and make sure that folks understand the value of these refracs, and that they generate returns that are competitive with new drill returns across our acreage and across the Williston in general.

Q: Say, with the deferral of the Williston divesture to a later date, I was just wondering how you think about deploying capital to the region beyond year-end 2018? So, for example, let’s say you have these assets in your hands at year end, would you expect to deploy some capital next year or does it become more of a PDP blow down asset moving forward?

QEP: Kashy, we’re looking at a number of scenarios. In discussion with our board earlier this week, what-ifs, and at this point, it’s what-ifs, what if we own the asset for six months, what if we own it longer, what should we do with respect to additional capital investment, not only in the Williston, but also in the Haynesville.

Obviously, we need to maintain operations, maintain cost structure there. As you correctly pointed out, there is an argument for a blow down, which doesn’t consume the remaining locations in the Williston. It simply allows us to harvest cash out of it. If you think about that, that scenario would require very little additional capital investment, some workovers, no doubt, but not a lot of additional capital investment.

And over a course of four years, at current forward prices, a blow down scenario would throw off over $1 billion of cash, net of operating expense. So that’s one scenario that we have thought about and that we are debating both at the management level and also discussing with our board. We haven’t made a decision yet and some of that is going to be dependent on our ongoing conversations with interested parties and whether or not we’re able to reach an agreement on valuation and consummate a transaction.

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