QEP Resources, Inc. (QEP)

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QEP Resources (QEP)

Q2 2011 Earnings Call

July 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

Analysts

Brian Singer - Goldman Sachs Group Inc.

Joshua Silverstein

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

Subash Chandra - Jefferies & Company, Inc.

Brian Corales - Howard Weil Incorporated

David Tameron - Wells Fargo Securities, LLC

Hsulin Peng - Robert W. Baird & Co. Incorporated

William Butler - Stephens Inc.

Duane Grubert - Susquehanna Financial Group, LLLP

Unknown Analyst -

Presentation

Operator

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

Richard Doleshek

Well thank you, Joanne, and good morning, everyone. This is Richard Doleshek, QEP Resources Chief Financial Officer. Thank you for joining us for our 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 Operations; Perry Richards, Senior Vice President and Head of our Midstream business; and Scott Gutberlet, Director, Investor Relations.

With the close of the second quarter, we marked one year of operations as being spun off from Questar Corporation on June 30, 2010. If you purchased QEP's shares at the closing price on the first day of standalone trading last summer and held the stock for one year, you've enjoyed a 43% appreciation in the value of your QEP shares.

We are proud of what we have accomplished in our first year of independence and believe that we are well-positioned to continue to deliver profitable growth with capital spending in around cash flow.

In terms of reporting our second quarter results, we issued a combined operations update and earnings release yesterday, in which we reported second quarter and 6 months 2011 financial results, reported second quarter 2011 production of 64.7 Bcfe, 57% of which came from properties in our newly renamed southern region, which we formerly referred to as our Midcontinent region. We updated operating activities in our core areas including announcing the much anticipated start up of our Blacks Fork II gas processing plant, and we increased 2011 EBITDA guidance to be in the range of $1.275 billion to $1.325 billion, increased production guidance to be in the range of 265 to 269 Bcfe and increased our CapEx guidance to be about $1.3 billion.

As a reminder, in conjunction with our spin-off from Questar last year, we distributed Wexpro Company to Questar. Accordingly, we have recast our historic results to treat Wexpro's results as discontinued operations. In addition to have recast QEP Field Services results including revenues and volumes to reflect Questar Gas Company as an affiliate company, therefore, QEP's reported period-to-period results are comparable to each other. We'll be happy to provide additional information about this during 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 and for everyone to our more robust forward-looking statement disclaimer in our earnings release.

Turning to our financial results in comparing the second quarter of 2011 to the first quarter of the year, a story of a stronger performance at QEP Field Services, our Gathering and Processing business, and marginally better performance at QEP Energy, our E&P business. Field Services benefited from the Iron Horse plant having a full quarter of steady state operations and continued robust gas processing margins. QEP Energy reports slightly lower total [indiscernible] production but sequentially higher liquids production and slightly higher net realized equivalent prices. I'll remind everyone that our reported first quarter 2011 production include a positive 1.6 Bcfe at a period adjustment, which when removed results in a second quarter production volumes to be essentially flat with the first quarter.

Our second quarter EBITDA was $336.6 million which was $31 million higher than in the first quarter and up 22% in the second quarter of 2010. QEP Energy contributed $248 million or 74% of our aggregate second quarter EBITDA and QEP Field Services contributed $87 million or about 26% of our EBITDA. QEP Energy's EBITDA was up slightly while Field Services' EBITDA was up about 42% from respective first quarter levels.

For the first 6 months of the year, our EBITDA was $642 million which was almost $100 million higher than a year ago in spite of net realized natural gas prices that were 18% lower than in 2010.

QEP Energy's contribution was $419 million which was $52 million or roughly 12% higher than in the first 6 months of 2010 and QEP Field Services contributed $148 million which was about $46 million or 44% higher in the first 6 months of 2010.

Factors driving our second quarter EBITDA include QEP Energy's production, which was 64.7 Bcfe in the quarter or 2% lower than the 65.9 Bcfe reported in the first quarter of 2011. However the first quarter included a positive 1.6 Bcfe at a period adjustment and when you exclude that adjustment production was essentially flat with the first quarter. The quarter's production was 20% higher than the 53.7 Bcfe produced in the second quarter of 2010. Of note, second quarter oil production was up 14% from first quarter production 2011.

QEP Energy's net realized equivalent price, which includes the settlement of all of our commodity derivatives, averaged $5.05 per Mcfe in the quarter which was 4% higher than the $4.84 per Mcfe realized in the first quarter of 2011, and 6% lower than the $5.35 per Mcfe realized in the second quarter of 2010.

QEP Energy's commodity derivatives portfolio contributed $37 million in EBITDA in the quarter compared to $42 million in the first quarter of 2011 and $68 million in the second quarter 2010. The derivatives portfolio added $0.57 per Mcfe to QEP Energy's net realized price in the second quarter compared to $0.63 per Mcfe in the first quarter of 2011 and $1.28 per Mcfe in the second quarter of 2010.

QEP Energy's combined lease operating impression tax expenses were $60 million in the quarter, up from $56 million in the first quarter of '11 and up from $47 million in the second quarter of 2010. LOE was up 5% and production taxes were up 14% in second quarter compared to the first quarter. Per unit LOE metrics increased to $0.54 per Mcfe in the quarter from $0.51 in the first quarter 2011, but we're essentially flat with the second quarter of 2010.

Finally, QEP Field Services' second quarter of 2011 EBITDA was $87 million which was 42% higher than the first quarter of 2011 and 66% higher than the second quarter of 2010. Gathering margins were up $6.1 million or 13% in the quarter, driven by an increase in revenues associated with a short-term third-party gathering and processing agreement related to the volumes that will be ultimately be processed in the Blacks Fork II facility.

Gathering volumes were flat at about 1.33 trillion BTUs per day, processing margins were up $17 million or 67% in the quarter compared to first quarter of 2011. On 6% higher fee-based processing volumes, 24% higher average processing fees, 31% higher NGL sales volumes and 20% higher average NGL sales prices, offset somewhat by strengthened [ph] expense that was sequentially $1.2 million higher.

Net income from continuing operations for the quarter was $93 million, up 27% from the first quarter of 2011 includes, primarily, by sequential EBITDA growth. Changes to non-cash charges were roughly small between the 2 quarters. DD&A expenses were $4 million lower in the quarter compared to the first quarter of 2011 as a result of lower production volumes from a higher DD&A expense financial [ph] properties. Exploration expenses and [indiscernible] expenses, in aggregate, were flat in the quarter compared to first quarter and our provision for income taxes of $12 million was high in the quarter compared to first quarter due to higher pretax income, although we continue to expect that we will not be a cash income taxpayer in 2011.

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