Quarterly / Earnings Reports | Second Quarter (2Q) Update

QEP Resources Reports Q2 Results, Strategic Alternatives Outcome

Share Print Bookmark    |    Wednesday,August 07,2019

QEP Resources, Inc. reported second quarter 2019 financial and operating results and announced the outcome of its strategic alternatives review process.

Highlights:

• QEP’s Board of Directors concluded formal strategic alternatives review process
• Go forward strategy focuses on free cash flow, reducing leverage and returning capital to shareholders
• Announced reinstatement of quarterly dividend of $0.02 per share
• Increased full-year production guidance for crude oil, natural gas and NGL
• Lowered mid-point of capital expenditure guidance by $50 million, or 8%, reflecting lower drilling and completion costs
• Lowered quarterly general and administrative expense to $32 million, a 50% decrease compared with first quarter 2019
• Poised to deliver Free Cash Flow in second half of 2019 and in 2020 at $50 oil while growing oil production 6% year over year
• Announced plans to add two new independent directors and form an Operations Committee of the Board

"QEP delivered solid performance in the second quarter, demonstrating significant progress on a number of fronts. The Company has completed its formal strategic review process and accelerated its transition to a high-performance, low-cost operator focused on free cash flow generation and returning capital to shareholders. We have increased annual production guidance for crude oil, natural gas and NGL, lowered CAPEX guidance by $50 million and reduced G&A expense by 50% - over $30 million - compared with the first quarter," commented Tim Cutt, President and CEO of QEP.

"Following a comprehensive review of strategic alternatives that began in February of this year, our Board has determined that the best path to create superior value for our shareholders is to move forward as an independent company. By continuing to improve operations and reduce costs, we will have the ability to generate meaningful free cash flow, which we will deploy to strengthen our balance sheet and return capital to shareholders, beginning with our reinstated quarterly dividend. The Board remains open to shareholder input and committed to all steps to maximize shareholder value, and has decided to add two new independent directors and form an Operations Committee to build on the progress we have made to-date, and continue to improve operational performance."

Permian Basin

Permian Basin net oil equivalent production averaged approximately 50.0 Mboed (86% liquids) during the second quarter 2019, a 10% increase compared with the first quarter 2019 primarily due to a greater number of wells being put on production during the quarter, and a 13% increase compared with the second quarter 2018. A portion of the quarter-over-quarter and year-over-year increase is driven by higher gas capture rates compared with prior quarters, primarily as a result of completion of midstream infrastructure. Oil and condensate production in the Permian Basin was 3.3 MMbbl in the second quarter 2019, a 2% increase compared with the second quarter of 2018.

In the second quarter 2019, the Company put on production 23 gross-operated horizontal wells, all on Mustang Springs (average working interest 100%).

At the end of the second quarter 2019, of the 23 wells put on production during the quarter, six wells had reached peak production rates and 17 wells were still in the process of cleaning up. The wells put on production during the second quarter 2019 have an average lateral length of 10,459 feet.

At the end of the second quarter 2019, the Company had five gross-operated horizontal wells in process of being drilled (of which all had surface casing set, but had no drilling rig present) (average working interest 100%), six horizontal wells at total depth under drilling rigs, 22 horizontal wells waiting to be completed (average working interest 100%), four horizontal wells undergoing completion (average working interest 100%), and 12 fully completed horizontal wells awaiting first production, which were part of a tank "pressure wall" (average working interest 100%).

At the end of the second quarter 2019, the Company had two operated rigs in the Permian Basin.

Williston Basin

Williston Basin net oil equivalent production averaged approximately 32.6 Mboed (81% liquids) during the second quarter 2019, a 13% decrease compared with the first quarter 2019 and a 33% decrease compared with the second quarter 2018, primarily due to the lack of new well completions partially offset by higher gas capture rates.

During the second quarter 2019 the Company commenced drilling on a seven well (gross) pad on South Antelope. As of the end of quarter, five of the seven wells were waiting on completion. These wells are expected to be completed during the fourth quarter 2019.

At the end of the second quarter 2019, the Company had one drilling rig in the Williston Basin.

Financial Results

The Company reported net income of $48.8 million for the second quarter 2019, or $0.20 per diluted share, compared with a net loss of $336.0 million, or $1.42 per diluted share, for the second quarter 2018. The Company generated more income in the second quarter 2019 than in 2018 primarily due to a $403.7 million impairment expense in the second quarter 2018. See below for additional discussions on our production and operating expenses.

Net income or loss includes non-cash gains and losses associated with the change in the fair value of derivative instruments, gains and losses from asset sales, asset impairments and certain other items. Excluding these items, the Company’s second quarter 2019 Adjusted Net Loss (a non-GAAP measure) was $7.3 million, or $0.04 per diluted share, compared with an Adjusted Net Income of $13.8 million, or $0.06per diluted share, for the second quarter 2018.

Adjusted EBITDA (a non-GAAP measure) for the second quarter 2019 was $166.5 million compared with $282.6 million for the second quarter 2018, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures, lower production in the Williston Basin and an 11% decrease in average field-level oil prices, partially offset by a 13% increase in production in the Permian, a $29.5 million decrease in realized derivative losses and a $24.3 million decrease in general and administrative expenses.

The definitions and reconciliations of Adjusted Net Income (Loss) to Net Income (Loss) and Adjusted EBITDA are provided under the heading Non-GAAP measures at the end of this release.

Production

Oil and condensate production in the Permian Basin was 3.3 million barrels (MMbbl) in the second quarter 2019, an increase of 2% compared with the second quarter of 2018. The production increase was offset by lower volumes in the Williston Basin due to the lack of new well completions in 2019 and a loss of volumes as a result of the Uinta Basin divestiture.

Oil equivalent production was 7.5 million barrels of oil equivalent (MMboe) in the second quarter 2019, a decrease of 47% compared with the second quarter 2018. The decrease in oil equivalent production was primarily the result of the loss of 5.6 MMboe of equivalent production associated with the assets sold in the Haynesville/Cotton Valley and Uinta Basin divestitures.

Operating Expenses

During the second quarter 2019, lease operating expense (LOE) was $45.7 million, a decrease of 31% compared with the second quarter 2018. The decrease is primarily due to the Haynesville/Cotton Valleyand Uinta Basin divestitures. Excluding those divestitures, LOE decreased $5.8 million, driven by a decrease in maintenance and repair expenses, labor and water disposal in the Williston Basin.

During the second quarter of 2019, LOE was $6.06 per Boe, an increase of 29% compared to the second quarter of 2018, but was flat excluding the loss of lower LOE production due to the Haynesville/Cotton Valley and Uinta Basin divestitures. The flat per BOE rate was related to lower cost production from the recent horizontal well completions in the Permian Basin offset by decreased production in the Williston Basin.

During the second quarter 2019, Transportation and Processing (T&P) Costs were $9.9 million, a decrease of 68% compared with the second quarter 2018. Adjusted T&P Costs (a non-GAAP measure) were $22.6 million, a decrease of 48% of T&P costs compared with the second quarter 2018, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures. Excluding those divestitures, Adjusted T&P Costs decreased $1.7 million, primarily due to decreased production in the Williston Basin, partially offset by increased production in the Permian Basin.

During the second quarter of 2019, T&P Costs decreased by $0.90 per Boe, or 41%, compared with the second quarter 2018. Adjusted T&P costs decreased $0.09 per Boe, or 3%, during the second quarter of 2019 compared to the second quarter of 2018. The decrease was primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures, which had higher Adjusted T&P Costs per Boe. Excluding the Haynesville/Cotton Valley and Uinta Basin divestitures, Adjusted T&P Costs per Boe were up 5% due to increased gas and NGL production, which has higher T&P Costs per Boe.

The definition and reconciliation of Adjusted Transportation and Processing Costs is provided under the heading Non-GAAP Measures at the end of this release.

During the second quarter 2019, general and administrative (G&A) expense was $31.5 million, a decrease of 44% compared to the second quarter 2018. During the second quarter of 2019 and 2018, QEP incurred $7.2 million and $13.0 million, respectively, in costs associated with the implementation of our strategic initiatives, of which $6.0 million and $9.5 million, respectively, related to restructuring costs. Excluding these costs, G&A expense decreased by $18.7 million, primarily due to $19.1 million lower labor, benefits and other associated costs due to the reduction in our workforce, partially offset by a $2.3 million decrease in overhead recoveries, primarily associated with our Haynesville/Cotton Valley and Uinta Basindivestitures.

During the second quarter 2019, production and property taxes were $23.6 million, a decrease of 37% compared to the second quarter 2018. The decrease in production and property taxes was primarily due to decreased revenues in the Williston Basin as well as the Haynesville/Cotton Valley and Uinta Basindivestitures.

During the second quarter of 2019, production and property taxes were $3.13 per Boe, an increase of 18% compared to the second quarter of 2018, but decreased 16% excluding the Haynesville/Cotton Valley and Uinta Basin divestitures. The 16% decrease was due to a decrease in average field-level equivalent prices in the Permian and Williston basins, partially offset by higher ad valorem charges per Boe in the Permian Basin.

Capital Investment

Capital investment, excluding property acquisitions, was $169.9 million (on an accrual basis) for the second quarter 2019, compared with $365.7 million for the second quarter 2018, of which $155.1 million related to the drilling, completion and equipping of wells and $14.8 million was related to midstream infrastructure investment. The decrease in capital expenditures was primarily related to decreased drilling and completion activity in the Permian Basin and limited activity in the Williston Basin.

Asset Divestitures

QEP closed on the sale of several assets during the second quarter 2019 for total net cash proceeds of approximately $37.6 million.

Liquidity

Net Cash Provided by Operating Activities for the second quarter 2019 was $117.4 million, compared with $216.5 million for the second quarter 2018. Free Cash Flow (a non-GAAP measure) was negative $15.5 million for the second quarter 2019, compared with negative $150.3 million for the second quarter 2018. Free Cash Flow was negative $84.4 million for the first half of 2019 compared with negative $402.1 million for the first half of 2018. Although we had negative Free Cash Flow during the first half of 2019, it was offset by our $666.7 million of proceeds from the disposition of assets. We expect to generate Free Cash Flow during the second half of 2019 and for the full year 2020.

The definition and reconciliation of Free Cash Flow is provided under the heading Non-GAAP Measures at the end of this release.

As of June 30, 2019, the Company had $97.1 million in cash and cash equivalents, no borrowings under its revolving credit facility and $2.9 million in letters of credit outstanding. The Company estimates that as of June 30, 2019, it could incur additional indebtedness of approximately $551.1 million and be in compliance with the covenants contained in its revolving credit facility.

2019 Updated Guidance

QEP's third quarter and full year 2019 guidance assumes: (1) an oil price of $55 per barrel and a natural gas price of $2.50 per MMBtu, (2) that QEP will elect to recover ethane from its produced gas in the Permian Basin where processing economics support it, (3) no property acquisitions or divestitures, other than the Haynesville / Cotton Valley Divestiture (4) includes approximately 10 days of production activity in the Haynesville / Cotton Valley and (5) includes the impact of lower flare volume and higher gas and NGL capture in the Permian Basin.

Rig Count:

• Permian Basin: average of three rigs for first half of 2019 and two rigs for the second half of 2019
• Williston Basin: one rig arrived in the first quarter 2019 to drill seven gross operated wells

Wells Put on Production:

• Permian Basin: approximately 59 net operated wells
• Williston Basin: approximately six net operated wells