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QEP Ups Crude Production; Credits Permian, Bakken Ops

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QEP Ups Crude Production; Credits Permian, Bakken Ops

QEP Resources, Inc. reported second quarter 2014 financial and operating results. The Company reported a net loss during the second quarter 2014 of $92.3 million, or $0.51 per diluted share, compared to net income of $178.4 million, or $0.99 per diluted share, in the second quarter 2013.

Highlights:

  • Delivered record Adjusted EBITDA.
  • Reported record total equivalent production of 83.9 Bcfe during the quarter, an increase of 8% compared to the second quarter 2013.
  • Increased daily crude oil production by 67% over the second quarter 2013 to 43.7 Mbod driven by Williston Basin oil production growth of nearly 80% and the first full quarter of production from properties in the Permian Basin.
  • Increased daily production from Permian Basin properties by 16% from the first quarter 2014 to approximately 7.7 Mboed.
  • Increased crude oil to 27% of total equivalent production from 18% in the second quarter 2013.
  • Completed the first company-operated horizontal well in the Permian Basin in the Wolfcamp B zone with production results in line with pre-drill expectations.
  • Closed on the sale of multiple non-core E&P assets for aggregate proceeds of $702 million before post-closing adjustments.
  • Entered into a definitive agreement to sell a 40% interest in QEP's affiliate Green River Processing, LLC to QEP Midstream Partners, LP for an aggregate price of $230.0 million, which was subsequently closed on July 1, 2014.

Chuck Stanley, Chairman, President and CEO of QEP Resources, commented: "We continue to make solid progress on our strategy of positioning QEP to have a more focused asset portfolio with significant positions in high-return, high-margin plays. After successfully closing the acquisition of Permian Basin properties in first quarter of this year, we completed the sale of several non-core properties in the second quarter, continuing our shift toward a more focused upstream portfolio that is also more balanced between crude oil and natural gas exposure. Excluding realized gains and losses on commodity derivatives, QEP Energy’s EBITDA per Mcfe has expanded by 25% over the prior year period, direct confirmation that our strategic shift to higher margin crude oil properties is working.

"Also, we continue to make progress on the previously-announced separation of our midstream business to unlock additional value for shareholders. We are pursuing multiple avenues to achieve the midstream separation, ranging from an outright sale of the business to a straight spin-off of the business to QEP shareholders. To prepare for the possibility of a straight spin-off or various spin-merge transaction structures, we filed a Form-10 with the SEC in the second quarter. In parallel with the Form-10 filing, we are also in the second and final round of evaluating strong offers from interested parties and we expect to reach a final decision on a path forward to separation in the third quarter. Our ultimate objective is the maximization of shareholder value and the continuation of profitable midstream operations as part of a viable, competitive midstream entity.

"Operationally, our asset managers delivered a solid quarter of execution. In the crude oil-rich Williston and Permian basins, average daily production increased 15% and 16%, respectively, from the prior quarter. In the Lower Mesaverde formation in theUinta Basin, our three horizontal wells completed to date -- utilizing a new and innovative drilling and completion technique -- have an average maximum daily rate of over 9 MMcfed. We believe this new technique will dramatically improve the economics of developing the multiple Tcfe of proved and probable reserves across our acreage.

"We also remain focused on maintaining financial strength and flexibility. In the second quarter, we completed the sale of multiple non-core E&P properties and completed a midstream dropdown, offsetting the cost of our Permian Basin acquisition and dramatically decreasing our net debt while streamlining our portfolio and improving our organic growth potential.

"Overall, we continue to maintain our relentless focus on shareholder value creation through: growing oil production from ourWilliston Basin assets, integrating and accelerating development of our newly acquired Permian Basin assets, redesigning ourUinta Basin development plan, divesting non-core E&P assets, and completing the separation of our midstream business."

QEP Energy

  • Net natural gas equivalent production increased by 8% to 83.9 Bcfe in the second quarter 2014 compared to 77.9 Bcfe in the second quarter 2013, due primarily to increased crude oil and NGL production in the Williston Basin and the addition of Permian Basin acquisition production offset by decreased gas production in the Haynesville and Midcontinent areas. Crude oil and NGL production increased 67% and 69%, respectively, while natural gas production decreased 15%, in the second quarter 2014, compared to 2013.
  • Adjusted EBITDA increased 12% compared to the second quarter 2013, driven by increases in crude oil and NGL production volumes. This increase was partially offset by decreases of 7% and 17%, respectively, in the net realized prices of crude oil and NGL.
  • Crude oil and NGL revenues increased 66% compared to the second quarter 2013, and represented approximately 66% of field-level production revenues.
  • QEP Energy's capital investment (on an accrual basis) for the first half of 2014 was $762.6 million excluding $942.1 million related to the Permian Basin acquisition.

QEP Field Services

  • QEP Field Services’ Adjusted EBITDA decreased $29.3 million during during the second quarter 2014 compared to the prior-year period. The decrease in second quarter 2014 Adjusted EBITDA was driven primarily by increased general and administrative (G&A) expense related to outside professional services associated with current transactions and the costs associated with QEPM operating as a public company. Gathering margin decreased by $7.2 million compared to the second quarter 2013 due primarily to a decline in other gathering revenue. Processing margin decreased by $4.9 million due primarily to decreased NGL sales volumes and an increase in transportation expense.
  • QEP Field Services’ capital investment (on an accrual basis) for the first half of 2014 totaled $37.6 million.

QEP Resources

  • During the second quarter of 2014, G&A expense increased $23.3 million compared to the second quarter of 2013. The increase in G&A in 2014 was primarily due to the following: a $5.5 million increase in professional services and related compensation costs mainly related to the Enterprise Resource Planning system implementation; costs associated with QEPM operating as a public company and current transactions, including the QEP Field Services separation and QEPM’s Green River Processing acquisition; a $5.2 million increase in labor and benefits costs associated with an increase in the number of employees; a $4.6 million increase in the mark-to-market value of the compensation plans due to the recent increase in QEP’s stock price; $4.4 million related to an increase in the allowance for uncollectible accounts; and a $2.5 million increase for retention bonuses related to the QEP Field Services separation.

Operations Summary

QEP has reported updates on its E&P operations, which can be accessed below:

QEP Improves Bakken Results at South Antelope, Ft. Berthold

QEP Targeting Ethane Recovery at Pinedale, Uinta Projects

QEP Eyes the Permian Atokaberry, Wolfcamp Formations in 2Q

QEP Field Services

QEP Field Services' processing margin (total processing plant revenues less shrink, transportation, fractionation, and operating expenses) was $24.9 million during the second quarter 2014, a 16% decrease compared to the $29.8 milliongenerated in the second quarter 2013. This decline was driven by a 37% decrease in the keep-whole margin (NGL sales revenue less shrink, transportation and fractionation expenses), which was $9.2 million in the second quarter of 2014 and$14.5 million a year earlier, and a 2% decrease in fee-based processing revenues. The decline in keep-whole margin was due to lower NGL prices, higher transportation expense, increased shrinkage cost as a result of increased natural gas prices, and lower NGL volumes as a result of accounting for an adjustment in NGL transportation line fill volumes.

Gathering margin declined 17% during the second quarter of 2014 compared to the second quarter of 2013, due primarily to lower deficiency fee revenue in the period compared to the second quarter of 2013, as well as an 8% decrease in gathering system throughput. The decrease in gathering system throughput was due primarily to the ongoing suspension of drilling in Haynesville by QEP Energy, which resulted in a 40% decline in Haynesville volumes. Gathering volumes were also lower on the Uinta gathering system and QEPM's Vermillion gathering system. Approximately 84% and 79% of QEP Field Services' combined gathering and processing margin was derived from fee-based gathering and processing agreements in the second quarter 2014 and 2013, respectively.

As a result of the initial public offering of QEPM in the third quarter of 2013, QEP Field Services saw an increase in net income attributable to noncontrolling interest. For the second quarter 2014, this change resulted in negative impacts on QEP's net income and Adjusted EBITDA of $4.1 million and $7.5 million, respectively.

Financial Results

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, and impairment charges. Excluding these items, the Company’s Adjusted Net Income (a non-GAAP measure) was $67.9 million, or $0.38 per diluted share, for the second quarter 2014, compared to Adjusted Net Income of $62.9 million, or $0.35 per diluted share, for the comparable 2013 period. The increase in Adjusted Net Income was due primarily to higher oil and NGL production partially offset by higher lease operating expenses and production taxes and a realized loss on derivative instruments of $34.1 million in the second quarter 2014 compared to a realized gain of $30.8 millionin the comparable 2013 period.

Adjusted EBITDA (a non-GAAP measure) was a record $400.8 million for the second quarter 2014, compared to $389.5 millionin the second quarter 2013, a 3% increase.