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QEP Midstream MLP Not Enough, Says Shareholder

Activist shareholder Jana Partners LLC this week urged QEP Resources Inc. to break up, claiming that "numerous partners" are interested in a transaction that would create a standalone midstream business.

In a letter to the board, Jana managing partner Barry Rosenstein requested that directors form an independent committee to evaluate spinning off the midstream operations from the exploration and production (E&P) business to attract more opportunities. If the board doesn't establish a committee, "it will be held personally responsible by shareholders for its failure to put a check on a clearly conflicted CEO and management team, who appear intent on depriving shareholders of QEP's full value potential."

Potential investors are hesitant to deal with CEO Chuck Stanley, "given his apparent reluctance to pursue a full separation," said Rosenstein.

Stanley, who also is chairman of the board, has said he doesn't want to separate the midstream business but keep it instead as a money-making master limited partnership (MLP). Earlier this month he called the initial public offering (IPO) in August of QEP Midstream Partners LP (QEPM) as an MLP "an important corporate objective...

"This is one of the fastest transactions to market in terms of the time between when the original S-1 was filed and when we priced the offering in just 91 days," Stanley said during a conference call to discuss 3Q2013 earnings. "The offering was extremely well received. It was oversubscribed multiple times, had 70% institutional ownership and it was anchored by some of the most well-regarded institutional investors in space.

"The IPO price is at the high end of the range, $21/unit," which Stanley said had resulted in an evaluation that reflected a 14 times multiple of forecasted gross earnings, "and a yield to investors of 4.76% based on the minimum quarterly distribution. Our only disappointment was the reaction, or lack thereof, of QEP's stock prices in the transaction."

QEP was trading at midday Thursday above $33.40/share, while QEPM was priced at $22.71. QEP itself was spun off by Questar Corp. in 2010 (see Daily GPI, May 19, 2010). The independent natural gas and crude oil E&P company is focused primarily in the Rockies and the Williston Basin and in Oklahoma, Louisiana and the Texas Panhandle.

Jana asked for better clarity for the midstream business, which QEP is doing, Stanley said.

Jana, he told analysts, had called on QEP to "add midstream expertise to our board and management team, to align management incentives more closely to midstream performance, to consider other structural changes at QEP Field Services and to return capital to shareholders...We maintained an ongoing dialogue with all of our shareholders, including Jana, and we are intensely focused on developing strategies and taking near-term actions that we believe will create long-term value for all of our investors.

"We have had constructive conversations with Jana for nearly a year now. They've made a number of suggestions during that time, some of which we'd already been considering, and other suggestions which would constitute new initiatives. We've taken all of their suggestions seriously and we reviewed all of them with our board."

The midstream IPO is a "major structural change to our company" and an initiative that Jana "strongly supported," said the CEO.

"As we discussed with Jana prior to the receipt of their letter, our board and management team are actively reviewing the proposals they outlined with our financial and legal advisers. As part of this evaluation, we also intend to solicit the views of our other shareholders in the days and weeks ahead, consistent with our fiduciary duty to develop strategies and take actions that benefit all of our investors before we make any final decisions.

"Beyond that, we won't comment any further on the letter or our discussions with shareholders..."

QEPM's board will be independent of QEP to consider midstream dropdowns, said the CEO. "This management team anticipated the likelihood that we will do our first drop before the 365-day anniversary of the IPO."

Jana, a hedge fund, has encouraged other energy operators to realign operations to match shareholder interests. In 2011, it urged El Paso Corp. to spin off its E&P unit (see Daily GPI, May 25, 2011).

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