QEP Resources Inc. will pursue a separation of its midstream business, QEP Field Services Co., including the company's majority interest in QEP Midstream Partners LP, the company said in early December.

The board and management team have concluded that the separation of QEP's Field Services business from QEP creates several significant advantages expected to maximize shareholder value, according to the company.

Analysts said the move kowtows to activist shareholder Jana Partners. David Tameron, senior analyst, Wells Fargo Securities, thinks other factors are at work as well. “We believe the process was sped up somewhat due to pressure from activist shareholders,” Tameron said. “The big question we have been getting is in a potential split, is this just a one-time financial engineering event or does this have the potential to structurally change the company?”

In October, Jana Partners filed regulatory documents saying it held a 13.5-million-share position in QEP, or 7.5% of shares outstanding. Jana had proposed a three-step plan to improve QEP share performance, including adding QEP board members with midstream experience, separating QEP Field Services from QEP and returning capital to shareholders through share repurchases.

Tim Rezvan, an analyst for Sterne Agee, estimated the value of QEP's midstream assets and interest as $2.268 billion. Tudor, Pickering, Holt and Co. said a tax-free spinoff could unlock $1.7- to $2 billion worth of value.

“We expect shares to rally on this news, given the value of midstream assets—we estimate $12.60 per share to QEP—that is not fully reflected in QEP's share price,” Rezvan said. QEP was trading at about $32 in early December.

The move would allow for separate valuation of QEP's midstream business. The company said the value of the midstream business is not fully recognized in the QEP share price and a separation is expected to unlock shareholder value.

In the event of a split, QEP and its midstream creation could independently deploy resources and allocate capital according to their strategic initiatives and growth strategies.

The companies would also be able to compete more effectively in their respective markets, QEP said.

The board has directed management to begin the necessary work of establishing QEP Field Services as a separate entity from QEP, including engaging a search firm to assist in recruitment of additional senior management with experience running a standalone midstream business. The management will also work with the company's financial and legal advisers to evaluate the shareholder value impact of various separation alternatives.

The company expects to update shareholders on the progress of the separation during the first quarter of 2014.

The tax implications of the split are unknown, making it difficult to calculate the potential proceeds. However, the deal has the potential to create value and, “apart from the obvious monetary value, a separation of QEP and Field Services would allow the E&P management team to focus on upstream operations, which was one of the rationales supporting a split in recent activist letters,” Tameron said.

During the review, QEP will continue to operate its business in the normal course and will fully support ongoing activities.

The Field Services assets are concentrated in QEP producing areas, including Wyoming, Utah and Colorado. Field Services also owns and operates a 21-mile, 20-inch-diameter FERC-regulated pipeline between the Blacks Fork gas-processing plants and the Muddy Creek compressor station owned by Kern River Gas Transmission Co.

For third-quarter 2013, QEP Field Services' processing margin was $37.4 million, resulting in an 8% increase compared to the $34.7 million generated in third-quarter 2012. The gathering margin was $37.3 million in the third quarter of 2013 compared to $42.9 million in third-quarter 2012, a 13% decrease due primarily to a 10% decline in gathering volumes resulting from a 46% reduction in northwest Louisiana Haynesville gathering volumes between the two periods. About 85% of QEP Field Services' third-quarter 2013 net operating revenue was derived from fee-based gathering and processing activities compared to 80% a year earlier.

QEP recently finished construction on the rail loading facility related to a 10,000-barrel-per-day expansion of its NGL fractionator at Blacks Fork.

QEP Midstream has a market capitalization of $1.23 billion.

Deutsche Bank Securities Inc. and Goldman Sachs & Co. are financial advisors to QEP and Latham & Watkins LLP and Wachtell, Lipton, Rosen and Katz are legal advisors.

—Darren Barbee

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