QEP Resources aims to become a Permian pure player and tighten its focus on its Midland Basin assets by marketing roughly a half-million acres in the Williston and Uinta basins and the Haynesville Shale. (Image: Hart Energy)
QEP Resources Inc. (NYSE: QEP) plans to clean house by demolition, setting up a potential multibillion divestiture of nearly all assets to regroup as a Permian pure player—at roughly a sixth of its present size.
QEP said late February it will sell one of its powerhouse cores—the Williston Basin—and divest its Uinta Basin and Haynesville/Cotton Valley assets, effectively jettisoning 85% of its acreage.
Analysts speculated that the sales across four states could generate between $2 billion and $3 billion in proceeds. The company said it will use the proceeds for debt, capital expenses and share repurchases.
Brian T. Velie, an analyst at Capital One Securities, said the company’s strategy is to “sell off every asset in the portfolio not called Midland Basin.”
Velie said QEP’s catalysts for much of this year will be dominated by sales. Capital One estimated the assets up for sale have a net asset value of $3.35 billion. “However, based on early feedback, it seems to us that if total proceeds approach $3 billion then the liquidation will be viewed as a success,” he said.
Other analysts had less rosy expectations for the sale. Tim Rezvan, an analyst at Mizuho Securities USA, set his conservative estimate at $2.1 billion in proceeds.
Rezvan has previously written that QEP would likely sell its Haynesville gathering assets for $400 million. That “proved an understatement,” he said, adding that the news should “support QEP shares … as we await news on specific sales.”
Rezvan estimates that a standalone Permian position would generate $450 million in EBITDA. In order to get leverage of 2x EBITDA, the company would need to reduce at least $1 billion of debt.
QEP’s management explained the move as a means to erase the “significant discount” between what the company thinks its assets are worth and what the price its stock trades. But the rationale comes during background noise from activist investor Paul Singer’s Elliot Management Corp., which owns a position in the company.
In late February, QEP and Elliot entered into an agreement that allows shareholders to approve a plan that would remove the current board of directors by 2019.
QEP President and CEO Charles Stanley said on a March 1 earnings call that the company’s strategic incentives respond to “feedback from a number of shareholders.”
The company engaged financial advisers to assist in the Williston and Uinta divestitures, which it will sell first. Data rooms are expected to open in late March or early April.
Stanley said the Williston assets are really two discreet areas.
“Obviously there’s the South Antelope asset and the Fort Berthold asset,” he said. “We'll present those as two separate packages, but obviously we'll allow bidders to make offers on [both].”
In the second half of 2018, the company will market its Haynesville and Cotton Valley upstream assets and its “homegrown gathering system,” Stanley said.
“We would likely package it separately from the upstream asset, but again, offer a potential buyer the opportunity to acquire both the upstream and midstream assets,” he said.
QEP made its definitive entry into the Midland Basin in October 2016, followed by two other disclosed deals—spending a cumulative $1.34 billion. The company’s deal drew attention because they paid acreage prices well above similar transactions. In two large deals, acreage prices topped out at a minimum of $51,000 per acre.
Some concerns about QEP’s Permian position persist.
During the earnings call, Rezvan asked QEP management about “concerns that some people have that you will need to buy more inventory” within the next two years.
Stanley responded that QEP has a “44,000-net-acre position in the core of the Permian, the northern part of the Midland Basin.”
“We think we’ve got more than adequate running room currently to prosecute a multiyear development program on those assets to drive peer-leading production growth and peer-leading returns,” he said, adding that the best acquisition opportunities he sees are buying back QEP’s stock and becoming a pure-play operator.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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