QEP Resources Inc. has once again increased its production guidance for the year after posting record oil production for the second quarter in a row, led by strong growth in the Permian Basin despite a drop in the number of rigs and completion crews, the Denver-based company said last week.

Oil volumes reached a record 6.57 million bbl during the second quarter, up 32% from first quarter levels. Permian oil volumes were 3.2 million bbl, up about 1.05 million bbl sequentially, while Williston Basin oil volumes were also 3.2 million bbl, up sequentially by about 555,000 bbl.

Natural gas volumes were 38.3 Bcf, up 3.2 Bcf from the first quarter. Haynesville Shale volumes climbed about 2.8 Bcf sequentially. Natural gas liquids (NGL) volumes were 1.15 million bbl, about 248,000 bbl higher than in the first quarter.

QEP’s total net equivalent production for the quarter was 14,106.1 million boe, up 20% from the first quarter. Of QEP’s total production for the quarter, natural gas comprised 38.3 Bcf, and oil and condensates accounted for 6,567.6 million bbl.

Given the strong quarterly oil growth, QEP revised its guidance for full-year 2018 production such that the midpoint for oil production is 23.5 million bbl, a 1.25 million bbl increase. The midpoint for natural gas production remained unchanged at 140 Bcf, while QEP increased the midpoint of NGL guidance to 4.25 million bbl, a decrease of 250,000 bbl. Overall, the midpoint of the company’s oil equivalent production guidance increased 1 million bbl to 51.1 million boe.

“Our record Permian Basin oil production performance in the second quarter demonstrates the quality of our assets and underscores the continued success of our ‘tank-style’ completions,” said CEO Chuck Stanley.

The increased guidance for the year comes even as the company expects a flatter production profile in the second half of the year. QEP put a total of 67.1 net Permian wells on production during the first half of 2018 and expects to put on an additional 31 net wells during the remainder of the year as its drilling and completion activity shifts to longer laterals into 2019.

“With this level of completion activity, we expect flattening of our production profile in the second half of this year, while setting ourselves up for 20% to 25% Permian Basin oil production growth next year,” Stanley said.

QEP unveiled its plans to become a Permian pure-play operator in February and the addition of more wells than originally forecast has been attributed to operational efficiencies, such as faster drill times and a 33% sequential increase in the number of fracture (frack) stages completed per crew per month. These efficiency gains have enabled QEP to drive down gross completed well costs by more than 5% since 4Q2017, “while bringing a similar number of wells in the basin onto production, operating fewer drilling rigs and utilizing fewer frack crews than originally planned for the year,” Stanley said.

Looking at QEP’s activity on a more granular level, the company put on production a total of 37 gross wells in the basin during the quarter, eight on County Line and the remaining 29 on Mustang Springs. “That’s four more than we originally forecasted. This increased pace of completed well delivery was a direct result of continued productivity gains from the two frack crews that we have working for us in the Permian,” Stanley said.

During the second quarter, the two crews put away more than 388 million pounds of proppant in 1,680 frack stages over a total of 3.8 active crew months for an average of a little over 440 stages per frack crew per active crew month. The efficiency gains on drilling and completion of individual wells was facilitated by QEP’s approach to developing its assets using tank-style development, “which we’re absolutely convinced is the right approach to advance development of our over 44,000 net acre core Midland Basin assets,” Stanley said.

At the end of quarter, QEP had 25 gross operated horizontal wells in the process of being drilled in the Permian, of which 13 only had surface casing set, but had no drilling rig present. Two wells were drilled and cased at total depth, but were under drilling rigs. It also had 12 wells that were out from under the drilling rigs waiting on completion, five wells undergoing completion and eight fully completed wells that were awaiting production that are part of what QEP called “the pressure wall inside of our tank.”

Five of the eight wells put on production on County Line during the second quarter reached peak 24-hour initial production (IP), averaging 164 boe/d per 1,000 feet of lateral. At Mustang Springs, six of the 29 wells put on production during the quarter reached peak 24-hour IPs, averaging 152 boe/d per 1,000 feet of lateral.

In May, QEP completed a high-density half-mile wide drilling spacing unit (DSU) that contained 22 wells designed to test an ultimate well density of 47 wells per mile spread over five producing target horizons. Of these 22 wells, five were drilled in the Middle Spraberry, seven in the Spraberry Shale, one in the Dean, two in the Wolfcamp A and seven in the Wolfcamp B formations.

These wells continued to clean up during the second quarter and achieved an average peak 24-hour IP of 88 boe per 1,000 feet of lateral per well and had an average IP30 of 75 boe per 1,000 feet of lateral per well.

“The performance of these wells met our expectations given that they were drilled and completed on very high density, effectively 47 well bores per half-mile wide unit, and we pumped an amazing amount of frac fluid into these wells, over 5 million barrels of water into that half mile wide DSU,” Stanley said.

The results of this density test not only help QEP optimize the number of wellbores per mile in each target horizon, but also help the company determine the total optimum well density across all horizons inside its tank, Stanley said.

Meanwhile, the company has taken a “multi-faceted” approach to the oil takeaway challenges in the Permian, including a deliberate focus on securing a contiguous acreage footprint that allows it to develop its own infill gathering systems to eliminate tank batteries at individual well sites, and thus the need to truck oil.

At the end of the second quarter, less than 1,500 b/d out of a total of roughly 50,000 b/d of gross oil production was being trucked from well sites, and these volumes were mostly from QEP’s legacy vertical wells that are scattered across its assets, Stanley said.

From gathering systems on its acreage, QEP focuses on flow assurance by moving its oil by pipe to end markets where it receives “excellent value for its high quality Midland Basin crude oil. We do this by aligning ourselves with large creditworthy counter-parties who hold firm capacity to the major market hubs at Cushing and along the Gulf Coast, which not only gives us physical flow assurance, but also gives us pricing exposure to markets outside the Permian Basin,” Stanley said.

Meanwhile, the company also is working with midstream service providers “to ensure delivery of a neat, or unblended, barrel of our crude oil to buyers.” The company also protects its financial margins through the use of derivative transactions that swap local Midland Basin basis against other markets such as Cushing.

Looking for Williston Buyer

As part of its plan to become a pure-play operator in the Permian, QEP earlier this month agreed to sell its Uinta Basin assets for $155 million.

Efforts to sell off Williston Basin assets, however, have not gone as smoothly as “the bids we received for our Williston Basin assets both on a combined and individual basis did not reflect the value of the underlying quality and economics of these assets.

“Given the robust cash flows, strong operational results of both new drilled wells and from our recent refracks, which both by the way generate pre-tax returns at current commodity prices of 55% to 65%, and the significant remaining new drill and refrack inventory on these assets, we simply couldn’t sell them for the offers we received,” Stanley said.

During 1Q2018, Williston assets produced about 8.2 million boe or 32% of total oil equivalent production. The company estimates that in order to keep production “flattish year over year,” it would need to invest $220-240 million annually, and that represents roughly a one-rig program plus approximately 16 to 20 refracks.

Meanwhile, QEP, in response to unsolicited inquiries for its Haynesville assets, has entered into confidentiality agreements and begun providing data to several parties. Haynesville/Cotton Valley net gas equivalent production averaged approximately 52,300 boe/d during the second quarter, a 10% increase compared to last quarter.

“Given the current upstream asset market backdrop, our transition to a pure play Permian Basin oil company may take longer than originally anticipated, but QEP’s board and this management team remain committed to the strategic initiatives that we announced in February,” Stanley said.

QEP reported a net loss of $336 million (minus $1.42/share) for 2Q2018, which included a $403.7 million impairment related to the Uinta sale. That compares with year-ago net income of $45.4 million (19 cents/share).

Total revenue was $532.4 million, a $148.7 million increase from the $383.7 million reported for 2Q2017.

Capital expenditures were $366 million, of which $245 million was directed to the Permian, $70 million to the Williston, and $49 million to the Haynesville. In addition, QEP reported $9 million of acquisitions.