QEP Resources, Inc. (NYSE:QEP) (QEP or the Company) today reported second quarter 2017 financial and operating results. The Company also announced that its wholly owned subsidiary, QEP Energy Company, has entered into a definitive agreement to acquire crude oil and natural gas properties in the Permian Basin for an aggregate purchase price of $732 million, subject to customary purchase price adjustments (the “Acquisition”).
2017 PERMIAN BASIN ACQUISITION HIGHLIGHTS
- Adds approximately 13,800 net acres in Martin County, TX, proximate to QEP’s existing Midland Basinacreage
– Over 730 potential horizontal drilling locations over four de-risked horizons
– Adjusted for current production, acquisition cost of less than $1 million per location or approximately $12,800 per net mineral acre per horizon
– Approximately 60% of the identified potential locations can be developed with 10,000 foot or longer laterals
– Nearly all of the acreage is held by production to the Wolfcamp Formation or deeper
– Company estimated net proved reserves of approximately 44 MMBoe and total net recoverable resources of approximately 295 MMBoe
- Creates meaningful scale, on a pro forma basis, within the core of the northern Midland Basin
– Approximately 43,000 net acres
– Approximately 1,900 potential horizontal drilling locations, based on current well density assumptions, with further upside from additional horizons and increased well density
“During the second quarter 2017 we made significant progress in the Permian Basin, by increasing drilling activity on our Mustang Springs asset and aggressively developing our County Line asset, resulting in record net equivalent production in the Permian Basin of 21.2 Mboed,” commented Chuck Stanley, Chairman, President and CEO of QEP. “Our Haynesville refrac program continues to exceed expectations, with eight new refracs delivering an average gross production rate increase of 16.0 MMcfed per well. Since the inception of the refrac program one year ago, we have increased gross Haynesville production by approximately 146 MMcfed, reaching a peak of nearly 200 MMcfed, its highest level in four years.”
“Earlier this week, we announced agreements to sell all of our Pinedale assets and other southwest Wyoming gas assets for a total of $777.5 million, which combined with today’s announced agreement to acquire approximately 13,800 additional net acres in the core of the northern Midland Basin, continues our pivot towards a more oil-focused portfolio. We expect to fund the Permian Basin Acquisition with proceeds from our Pinedale asset sale and with cash on hand. The Pinedale asset sale and the Permian Basin Acquisition will be structured as a like-kind-exchange, and we expect to be able to defer income taxes incurred on the gain on sale.”
“The acquisition will significantly expand our Permian Basin net acreage by almost 50% and our potential drilling inventory by over 60% to nearly 1,900 potential horizontal drilling locations, in the core of the northern Midland Basin. We believe the acquisition of this high-quality acreage, which is adjacent and contiguous to our current operations, will considerably enhance our ability to increase our crude oil production in the Permian Basin, improve our operating efficiencies and leverage our solid operational execution.”
2017 Permian Basin Acquisition
The Company’s wholly owned subsidiary, QEP Energy Company, entered into a definitive agreement on July 26, 2017, to acquire crude oil and natural gas properties in the Permian Basin for an aggregate purchase price of $732 million, subject to customary purchase price adjustments. The Company expects to structure the Acquisition as a like-kind-exchange and to fund the Acquisition with the proceeds from the Pinedale Divestiture (discussed below) and cash on hand. The Acquisition is expected to close before the end of October 2017.
The Acquisition properties, located in the core of the northern Midland Basin, consist of approximately 13,800 net acres in Martin County, TX. The Company has identified over 730 potential horizontal drilling locations on the acreage over four horizons – Middle Spraberry, Spraberry Shale, Wolfcamp A and Wolfcamp B – with further upside potential from additional locations in emerging prospective zones and increased well density. The acreage footprint allows for nearly 60% of the identified potential horizontal drilling locations to be developed with 10,000 foot or longer laterals and its proximity to the Company’s existing acreage provides opportunities to further optimize lateral length and share existing infrastructure. Nearly all of the Acquisition acreage is held by production to the Wolfcamp Formation or deeper, and the average working interest is 88%, subject to a 25% royalty burden. Current net production from the assets is approximately 635 Boed from 99 vertical wells, of which approximately 71% is crude oil. The Company estimates net proved reserves of approximately 44 MMBoe and total net recoverable resources of approximately 295 MMBoe on the Acquisition properties.
On a pro forma basis, assuming the closing of the acquisition, the Company’s Permian Basin position will include approximately 43,000 net acres and approximately 1,900 potential horizontal drilling locations, all located within the core of the northern Midland Basin (excluding acreage in the southern Midland Basin and acreage on the Central Basin Platform).
The 2017 Permian Basin Acquisition presentation provides maps and further details on the Acquisition.
Southwest Wyoming Natural Gas Asset Sales
On July 24, 2017, the Company announced that its wholly owned subsidiary, QEP Energy Company, had entered into two definitive agreements to sell natural gas assets in southwest Wyoming for combined proceeds of $777.5 million, subject to customary purchase price adjustments.
The first agreement provides for the sale of all of QEP’s assets in the Pinedale Anticline field in Sublette County, Wyoming, for a purchase price of $740.0 million (“Pinedale Divestiture”) to Pinedale Energy Partners, LLC, an affiliate of Oak Ridge Natural Resources, LLC. The Pinedale Divestiture includes an estimated 964 Bcfe of proved reserves as of December 31, 2016, and net production in the second quarter 2017 was 218.7 MMcfed, of which approximately 11% was liquids. As part of the Pinedale Divestiture, QEP has agreed to reimburse the buyer for certain deficiency charges it incurs related to gas processing and NGL transportation and fractionation contracts, if any, between the effective date of the sale and December 31, 2019, in an aggregate amount not to exceed $45.0 million. The transaction is subject to closing conditions, including regulatory approval, and is expected to close by September 30, 2017.
In a separate transaction, the Company closed the sale of certain non-core natural gas assets in southern Wyoming on June 30, 2017. The purchase price was $37.5 million. The divestiture includes an estimated 15.2 Bcfe of proved reserves as of December 31, 2016, and net production in the second quarter 2017 was approximately 4.3 MMcfed, of which approximately 2% was liquids.