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QEP Doubles Permian Position Using Proceeds From Pinedale Exit

On the heels of its exit from Wyoming's Pinedale Anticline earlier this week, QEP Resources Inc. on Thursday announced plans to acquire 13,800 net acres in the Permian's Midland sub-basin for $732 million, further signaling its intentions to grow liquids in its portfolio.

The Denver-based exploration and production (E&P) operator said the Permian acquisition carries 730 potential horizontal drilling locations targeting the Middle Spraberry, Spraberry Shale and Wolfcamp A and B intervals, with the footprint allowing for 10,000 foot-plus laterals at nearly 60% of those locations. The acquired assets currently produce 635 boe/d from 99 vertical wells, 71% weighted to oil.

QEP estimated that the acquired acreage -- nearly all of it held by production -- contains 44 million boe in proved reserves and 295 million boe in total net recoverable resources. The seller was not disclosed.

The move comes just days after QEP announced agreements to sell assets in Wyoming -- including all of its Pinedale assets -- for $777.5 million. QEP had been eyeing the move since earlier in the year, as its focus has shifted to the Permian and to North Dakota's Williston Basin.

"Earlier this week, we announced agreements to sell all of our Pinedale assets and other southwest Wyoming gas assets...which combined with today's announced agreement to acquire approximately 13,800 net acres in the core of the northern Midland Basin, continues our pivot towards a more oil-focused portfolio," CEO Chuck Stanley said. "We expect to fund the Permian Basin acquisition with proceeds from our Pinedale asset sale and with cash on hand.

"...The acquisition will significantly expand our Permian Basin net acreage by almost 50% and our potential drilling inventory by over 60% to nearly 1,900 potential horizontal drilling locations, in the core of the northern Midland Basin," he continued. "We believe the acquisition of this high-quality acreage, which is adjacent and contiguous to our current operations, will considerably enhance our ability to increase our crude oil production in the Permian Basin, improve our operating efficiencies and leverage our solid operational execution."

Following the announcement, investors did not embrace the Permian acquisition. Analysts at Tudor, Pickering, Holt & Co. (TPH) pointed to the "expensive price tag." By lunchtime, QEP's stock had lost about 15% of its value on the day, trading down around $1.50/share.

"The market's No. 1 concern has been around QEP potentially paying up for another Permian deal, and the company did just that," TPH analysts wrote. They calculated based on QEP's disclosed numbers that the sticker price for the acquisition is around $51,000/acre, which they argued "leaves almost no room for upside."

During a 2Q2017 conference call with analysts Thursday, Stanley defended the price tag for the Permian deal.

"We don't think that we're paying a dissimilar value per de-risked zone per mineral acre to that of any of the other transactions that have been put out over the past year or two," he said. The company ran a detailed internal assessment before making an offer, "and the answer comes out to $12,000-13,000 per acre per de-risked zone.

“If you look at other transactions, which in many instances don't have four de-risked zones on them, the math is about the same. So I think it's unfair to say we paid more than everybody else has paid in the basin. We're buying in an area that has four de-risked zones.

"The other thing I would say on the valuation issue is I think about it in terms of full-cycle economics," Stanley continued. "The acquisition cost is roughly $2.50/boe for this asset. The development cost is another $10-12/boe. So all-in youre talking about $14/boe cost to develop this asset. If we had been able to buy this particular asset for $25,000/net acre, we would have only reduced our acquisition cost by $1.25/boe. So I think we get focused so much on the dollar per acre number, and we lose sight of the fact that the acquisition cost pales in comparison with the full-cycle development cost. Worrying about $1.00/boe difference in acquisition cost from one deal to the next is really probably not the right way to think about this."

The acquisition, expected to close by October, would grow QEP's portfolio to 43,000 net acres in the Permian, where the E&P focused most of its drilling activity during the second quarter.

QEP reported a company-record 21,200 boe/d net from the Permian during the quarter. The E&P completed 16 wells at its County Line acreage, with seven drilled at the end of the quarter. In its Mustang Springs acreage, QEP completed six wellsr, with seven awaiting completion and 19 being drilled at the end of the quarter.

In the Haynesville Shale, QEP said the refracturing program yielded an 83% year/year increase in production, which totaled 184.1 MMcfe/d during the quarter.

QEP revised up its 2017 capital expenditure (capex) budget to $1.05-1.1 billion, up from the $970 million to $1.01 billion capex guided for earlier this year.

Production for the quarter totaled 13.86 million boe, including 4.87 million bbl of oil, 45.8 Bcf of natural gas and 1.35 million bbl of natural gas liquids (NGL). That compares to 13.88 million boe in the year-ago quarter, including 5.21 million bbl oil, 42.9 Bcf gas and 1.52 million bbl NGLs.

Production from its northern assets, including the Pinedale, Uinta Basin and the Williston, fell during the quarter, totaling 9.12 million boe, down from 10.76 million boe in the year-ago quarter. Meanwhile, production out of its southern region assets, including the Permian and the Haynesville, grew to 4.74 million boe in the quarter, a 51% year/year increase.

QEP realized an average net equivalent price for the quarter of $27.37/boe, up 6% from $25.82/boe in the year-ago quarter. By commodity, the E&P saw a net realized price of $46.72/bbl for oil, $2.82/Mcf for gas and $16.86/bbl for NGLs, compared with year-ago realized prices of $43.69/bbl, $2.51/Mcf and $14.97/bbl, respectively.

QEP reported net income for the second quarter of $45.4 million (19 cents/share), compared with a net loss of $197 million (minus 90 cents) in the year-ago period. Revenues totaled $383.7 million, up from $333.7 million in the year-ago quarter.

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