QEP Resources, Inc. (QEP)

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QEP Resources (QEP)

Q1 2011 Earnings Call

April 27, 2011 11:00 am ET

Executives

Richard Doleshek - Chief Financial Officer, Executive Vice President and Treasurer

Charles Stanley - Chief Executive Officer, President and Director

Jay Neese - Executive Vice President

Analysts

Brian Singer - Goldman Sachs Group Inc.

Joshua Silverstein

David Tameron - Wells Fargo Securities, LLC

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Hsulin Peng - Robert W. Baird & Co. Incorporated

William Butler - Stephens Inc.

Joseph Allman - JP Morgan Chase & Co

Andrew Coleman - Madison Williams and Company LLC

Presentation

Operator

Good afternoon. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the QEP Resources First Quarter Earnings Release and Operations Update Conference Call. [Operator Instructions] Thank you. Mr. Richard Doleshek, you may begin your conference.

Richard Doleshek

Thank you, Jackie, and good morning, everyone. This is Richard Doleshek, QEP Resources' Chief Financial Officer. Thank you for joining us today for QEP Resources' First Quarter 2011 Results Conference Call. With me today are Chuck Stanley, President and Chief Executive Officer; Jay Neese, Executive Vice President and Head of our E&P business; Perry Richards, Senior Vice President and Head of our Midstream business; and Scott Gutberlet, Director, Investor Relations.

As you all know, this is our third quarter as a standalone company, having being spun off from Questar Corporation on June 30, 2010. I believe we continue to deliver very good operating and financial results.

In terms of our first quarter results, we provided an operations update on Monday, we issued our earnings release yesterday.

In our operations update, we reported first quarter 2011 production of 65.9 Bcfe, 59% of which came from Midcontinent operations. We updated our operating activities in the core areas, and we increased 2011 production guidance to be in the range of 263 Bcfe to 267 Bcfe.

Yesterday in our earnings release, we reported first quarter 2011 results and updated 2011 guidance. Just to remind everyone, in conjunction with our spin-off from Questar last year, we distributed Wexpro Company to Questar. Accordingly, we have recast our historical results to treat Wexpro's results as discontinued operations.

In addition, we have recast QEP Field Services results, including revenues and volumes, to reflect Questar Gas Company as an unaffiliated company.

Therefore, QEP's reported period-to-period results are comparable to each other. We will be happy to provide answers you might have in our Q&A.

In today's conference call, we're using non-GAAP measure, EBITDA, which is defined and reconciled to net income in our earnings release. In addition, we'll be making numerous forward-looking statements and we remind everyone that our actual results could differ from our estimates for a variety of reasons, many of which are beyond our control.

Turning to our financial results, and comparing the first quarter of 2011 to the fourth quarter of 2010, the story was higher production, offset by lower net realized equivalent prices at QEP Energy, our E&P business, and stronger performance for QEP Field Services, our Gathering Processing business, as a result of the Iron Horse plant coming online and higher gas processing margins.

Our first quarter EBITDA was $305.8 million, which was $7 million higher than the fourth quarter of 2010, and up 14% from the first quarter of 2010. QEP Energy contributed $242 million or 79% of our aggregate first quarter EBITDA, and QEP Field Services contributed $61 million or about 20% of our total EBITDA. QEP Energy's EBITDA was flat, while Field Services' EBITDA was up about 17% in their respective fourth quarter 2010 levels.

Factors driving our EBITDA include QEP Energy's production, which was 659 -- 65.9 Bcfe in the quarter, and included a positive 1.6 Bcfe out-of-period adjustment. The quarter's production was 6% higher than the 62.1 Bcfe produced in the fourth quarter, and 28% higher than the 51.5 Bcfe produced in the first quarter 2010.

QEP Energy's net realized equivalent price, which includes the settlement of all of our commodity derivatives, averaged $4.08 per Mcfe in the quarter, which was 6% lower than the $5.13 per Mcfe realized in the first quarter of 2010, and 12% lower than the $5.51 per Mcfe realized in the first quarter of 2010.

QEP Energy's commodity derivatives portfolio contributed $42 million of EBITDA in the quarter, compared to $78 million in the fourth quarter of 2010, and $9 million in the first quarter of 2010.

The derivatives portfolio added $0.63 per Mcfe to QEP Energy's net realized price in the first quarter, compared to $1.25 per Mcfe in the fourth quarter, and $0.17 per Mcfe in the first quarter.

As a point of reference, the average swap price of the 2011 gas derivatives portfolio is about $0.35 per Mcfe lower than the 2010 gas derivatives portfolio average swap price.

QEP Energy's combined lease operating and production tax expenses were $60 -- were $56 million in the quarter, essentially flat with the fourth quarter of 2010 and up 10% from $51 million in the first quarter of 2010. LOE was down 7% and production taxes were up 13% in the first quarter of '11, compared to the fourth quarter of 2010.

With the higher production volumes in the quarter, per unit LOE metrics declined to $0.51 per Mcfe in the quarter, from $0.58 per Mcfe in the first -- fourth quarter and $0.57 per Mcfe in the first quarter of 2010.

And finally, QEP Field Services' first quarter EBITDA was $61 million, which was 17% higher than the fourth quarter of 2010, and 22% higher than in the first quarter of 2010.

Gathering margins were up $5.5 million or 14% in the quarter, compared to the fourth quarter driven by increased revenues associated a short-term third-party gathering and processing agreement related to volume that will ultimately be processed in the Blacks Forks II facility.

Gathering volumes were flat at about 1.3 trillion BTUs (sic) [million MMBtu] [ph] per day. Processing margins were up $2.3 million or 10% in the quarter, compared to the fourth quarter of 2010 on flat fee-based processing volumes. Higher processing fees and higher NGL sales volumes offset somewhat by shrinkage expense that was sequentially $3.5 million higher.

Net income from continuing operations for the quarter is $73 million, up 13% from the fourth quarter of 2010 influenced primarily by non-cash charges.

DD&A expenses were $17 million higher in the quarter, compared to the fourth quarter of 2010 as a result of increased production volumes from our higher DD&A expense Haynesville fields.

Exploration, impairment and abandonment expenses, in aggregate, were $23 million lower in the quarter, compared to the fourth quarter of 2010 as we had the expense associated with our unsuccessful Borie prospect test in the fourth quarter, and "normal" expense in the current quarter. Our provision for income taxes was $6 million higher in the quarter, compared to the fourth quarter of 2010 due to higher pre-tax income, although we do not expect to be a cash income taxpayer in 2011.

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