Design and consolidation driving returns
EQT Corporation (ticker: EQT) and QEP Resources (ticker: QEP) each released first quarter earnings today, giving a snapshot of U.S. shale in 2017.
EQT reported net earnings of $164 million, or $0.95 per diluted share, up from earnings of $5.6 million in Q1 2016. QEP reported net income of $76.9 million, $0.32 per diluted share, which vastly exceeds the $863.8 million loss the company reported this time last year.
Completion design continues to improve
Both companies, heavyweights in their respective basins, report recent fracture and well design improvements are boosting returns.
Marcellus driller EQT recently increased its EUR estimate in the core Marcellus by 14% to 2.4 Bcfe/1,000’. The company reports that this is the result of frac design enhancements, which increased sand and water per foot of pay.
Permian/Williston driller QEP is currently testing several different density designs that may allow more wells per section. One potential design is the “tank-style” completion. This involves separating the potential wells in a section into two “tanks,” one tank consists of all wells in the Middle Spraberry and Spraberry Shale, the other consists of wells in the Wolfcamp A and B.
Under this completion design, every well in one tank is drilled and completed before any of these wells is put on production. Additionally, wells closest to offset producing wells are completed first. QEP believes that this process of completing wells creates less interference and shorter shut-in times for offset producing wells. Additionally, results from the newly drilled wells are improved due to a larger stimulated rock volume.
Source: QEP
Consolidation driving long-term improvements
EQT is looking to other improvements for long-term advantages, however. While improvements to drilling and completing processes certainly lower the per-unit price of gas produced, they do not confer sustained advantages. Steven Schlotterbeck, EQT CEO, commented on this dynamic, saying “these improved techniques are easily transferred between producers, and the advantages gained are short-lived as other producers adopt the same best practices. So while our development operating costs have improved dramatically, the economic value added has not increased in concert, as the supply of gas increased, pushing gas prices down.”
With this in mind EQT is looking to consolidate acreage, thus giving the company several advantages. “This consolidation will drive longer laterals,” Schlotterbeck said, “more wells per pad, improved water and operating logistics and more efficient gathering and transmission pipelines. These advantages will be more difficult to replicate and the consolidators will hold a competitive advantage that will yield higher returns for their shareholders. I think further consolidation within the Marcellus core is the best path to creating a sustained competitive advantage, increasing shareholder value.”
Source: EQT
QEP reports similar activities in its core Permian assets. According to Charles Stanley, QEP Chairman, President and CEO, the company is continuing to “optimize our acres position in the Permian Basin through the first quarter. We acquired additional acreage during the quarter and we continue to swap acreage with offset operators with a focus on maximizing the number of long laterals that we can drill on both blocks. Our A&D team continues to evaluate asset packages in and around our core Midland Basin and our Williston Basin assets as we look to increase our footprint in both of these prolific oil basins.”
Source: QEP
Analyst Commentary
QEP
From Capital One:
• Positive overall. 1Q numbers were mixed but the implication of strong initial well results across multiple horizons in the Midland Basin should more than offset the quarter. Lighter gas production in 1Q led to an equivalent production miss vs our estimate but oil production was in line at 52 Mbbl/d. EBITDA of $171MM missed Street/COS expectations by 3%. CFPS missed Street/COS estimates but EPS beat both.
• QEP generated promising 24-hr IPs from the five County Line Spraberry high-density wells drilled at spacing of 16 wells per section. Average 24-hr IPs of 1,803 boe/d were better than company expectations with 88% oil contribution for the 9,900' lateral average. The 4 Mustang Springs parent wells are also off to a good start with 3 posting an avg 24-hr IP of 1,384 boe/d (188 boe/d per 1,000 ft) at 85% oil. The 4th well was still cleaning up at quarter's end. In South Antelope a 9-well pad generated an avg 24-hr IP of 2,817 boe/d at 73% oil. Full impact of these wells should hit 2Q17 volumes and the average March oil rate of 55.5 Mbbls/d is already ahead of our 2Q estimate of 55 Mbbls/d.
• No changes to FY17 production, CAPEX, or expense guidance in the update.
• Finally, QEP is officially listing the Pinedale assets with the engagement of a strategic advisor.
From KLR Group:
QEP ($11.86, B, $22, Nicholson) – 1Q/17 Quick Look: Slight Production Miss, EPS Beat, Permian Ops Update, Commences Pinedale Divestiture Process (Negligible Value Impact) – QEP reported recurring 1Q/17 EPS of ($0.14), above our ($0.22) estimate due to higher liquids price realizations and lower G&A/DD&A partly offset by higher LOE and slightly lower production. Production in 1Q/17 of ~13.1 Mmboe (~54% gas, ~36% oil, ~10% NGLs) was ~1% below our ~13.2 Mmboe (~54% gas, ~36% oil, ~10% NGLs) estimate. Consensus was expecting recurring EPS of ($0.20) and production of ~13.5 Mmboe. Oil production in March averaged ~55.5 Mbopd. Preliminarily, we anticipate 2Q/17 production of ~14.4 Mmboe (oil volumes of ~58.8 Mbopd) and ’17 production of ~57.9 Mmboe versus guidance of 57-60 Mmboe. In County Line, five Spraberry wells (~9,900’ laterals) utilizing “tank-style” completion testing 16-well density spacing had an average 24-hour IP of ~1,803 Boepd. In Mustang Springs, the company completed four initial parent wells to provide a baseline well performance to compare against density pilots. Peak 24-hour IPs for the wells were ~1,102 Boepd (~86% oil) for the Spraberry Shale well (~7,370’ lateral), ~1,343 Boepd (~84% oil) for the Wolfcamp A well (~7,240’ lateral) and ~1,707 Boepd (~85% oil) for the Wolfcamp B well (~7,420’ lateral). The Middle Spraberry well (~7,370’ lateral) was still cleaning up at the end of 1Q/17. Nine South Antelope wells (five Bakken, two TFS first bench, one TFS second bench, one TFS third bench, ~9,580’ laterals) had an average 24-hour IP of ~2,817 Boepd (~73% oil). The company has formally commenced the process to divest its Pinedale assets. Williston Basin net production decreased fractionally q/q to ~53.7 Mboepd, Midland Basin net production increased ~11% q/q to ~15.4 Mboepd, Pinedale net production decreased ~6% q/q to ~39.1 Mboepd, Haynesville/Cotton Valley net production decreased ~5% q/q to ~22.7 Mboepd and Uinta Basin net production increased ~2% q/q to ~10.8 Mboepd. This announcement should have a negligible value impact.
EQT
From KLR Group:
EQT ($63.89, B, $91, Gerdes) – 1Q/17 Quick Look: EPS Beat On Higher Price Realizations, Production Miss, Reaffirms ’17 Production Guidance (Negligible Value Impact) – EQT reported recurring 1Q/17 EPS of $0.43 vs. our $0.22 estimate due to higher price realizations partly offset by lower production and a weaker midstream margin. Production in 1Q/17 of ~189.9 Bcfe (~13% liquids) was ~5% below our ~201 Bcfe (~12% liquids) estimate and ~4% below consensus (~197 Bcfe). The production miss was attributable to lower gas volumes partly offset by higher liquids output. EQT anticipates 2Q/17 production of 190-195 Bcfe and reiterated ’17 production of 835-855 Bcfe. Preliminarily, we expect to be above 2Q/17 guidance and toward the low end of ’17 guide. The first quarter update should have a negligible value impact as higher liquids price realizations are offset by a weaker midstream margin.
