QEP Resources, Inc. (QEP)

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QEP Resources (QEP)

Q3 2012 Earnings Call

October 31, 2012 11:00 am ET

Executives

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

Charles B. Stanley - Chairman, Chief Executive Officer and President

Analysts

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Brian M. Corales - Howard Weil Incorporated, Research Division

Hsulin Peng - Robert W. Baird & Co. Incorporated, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

William B. D. Butler - Stephens Inc., Research Division

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Andrew Coleman - Raymond James & Associates, Inc., Research Division

James Spicer - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good morning. My name is Keisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the QEP Resources Third Quarter Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Richard Doleshek, Executive Vice President and Chief Financial Officer. Sir, you may begin your conference.

Richard J. Doleshek

Thank you, Keisha, and good morning, everyone. Thank you for joining us for our third quarter 2012 results conference call today. With me are Chuck Stanley, Chairman, 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 Greg Bensen, Director of Investor Relations.

In today's conference call, we'll use a non-GAAP measure EBITDA, which is referred to as adjusted EBITDA in our earnings release and SEC filings. It was reconciled to net income in the earnings release and the SEC filings. In addition, we'll be making numerous forward-looking statements.

We remind everyone that our actual results could differ materially from our forward-looking statements for a variety of reasons, many of which are beyond our control. We refer everyone to our more robust forward-looking statement disclaimer and discussion of the risks facing our business in our earnings release and our SEC filings.

We were quite busy in the third quarter with our North Dakota acquisition and related financing. And although our balance sheet reflects the transaction, because we closed the purchase at the end of September, the acquisition had no impact on our third quarter income statement or operating results.

In terms of reporting our results, we filed our Form 10-Q with the SEC yesterday and we should have combined operations update in earnings release in which we reported third quarter and 9 months 2012 operating and financial results. We updated operating activities in our core areas. We updated our guidance for 2012 and we offered initial guidance for 2013. And Chuck will give you more color on our guidance in his prepared remarks.

In terms of reporting our financial results, recall that in the first quarter of 2012, we elected to discontinue hedge accounting. As a result, the entire change in the mark-to-market value of our derivatives portfolio runs through our income statement instead of through other comprehensive income. In addition, the impact of settled derivative contracts is no longer included in the revenue section of the income statement but is now reported below the operating income line. We also rebucketed our revenue streams such that we now report the NGL revenues from our Midstream business together with the NGL revenues from our E&P business. And finally, recall that in the fourth quarter of 2011, we changed the presentation of transportation expenses. Historically, we had netted transportation expenses against revenues. We are now reporting these expenses in a separate line item in the operating section of the income statement and have recast historical revenue and product price data to reflect this change in presentation. We'll be happy to provide additional information about the changes in how we report our financial results during Q&A.

Turning to our financial results and comparing the third quarter of 2012 to the second quarter of 2012, historically, there was marginally weaker financial performance at both QEP Energy, our E&P business; and at QEP Field Services, our gathering and processing business.

QEP Energy reported record equivalent production of 81.5 Bcfe, up 2 Bcfe from the second quarter of this year, and net equivalent price realizations that were essentially flat with the second quarter, the aggregate impact of which was offset by higher expenses.

Field services reported -- field services third quarter results were lower than in the previous quarter primarily due to lower NGL volumes and prices.

Our third quarter EBITDA was $328.7 million, which was $10 million or 3% lower than in the second quarter of 2012 and down $25 million from the third quarter of 2011. QEP Energy contributed $263 million or 80% of our aggregate third quarter EBITDA, and field services contributed $68 million or about 20%. QEP Energy's EBITDA was down about $3 million while field services EBITDA was down about $3.5 million from the second quarter of 2012.

Factors driving our third quarter EBITDA included QEP Energy's production, which is 81.5 Bcfe in the quarter, 2 Bcf higher than the 79.6 Bcfe reported in the second quarter of 2012. The quarter's production was 15% higher than the 70.7 Bcfe produced in the third quarter of 2011. Of note, oil and NGL volumes account for 21% of our equivalent production. Oil volumes were 1.44 million barrels, up 10% from the second quarter. NGL volumes were 1.39 million barrels, up 7% from the second quarter of 2012. Combined oil and NGL volumes were 2.8 million barrels in the quarter, up 56% from the 1.8 million barrels of combined volumes in the third quarter of 2011.

The Northern Region production was up 16% in the second quarter of 2012, driven by gas and NGL volume growth at Pinedale in the Uinta Basin and oil production increases in the Williston Basin. Southern Region production was down 9% from the second quarter to the third quarter driven by a 10% decline in our Haynesville production and a 15% decline in NGL production in our Midcontinent region. As a result, for the first time since the spin, our Southern Region contributed less than half of our equivalent production.

QEP Energy's net realized equivalent price, which includes a settlement of all of our commodity derivatives, averaged $5.14 per Mcfe in the quarter. It was $0.01 higher than the $5.13 per Mcfe realized in the second quarter of 2012 and $0.44 lower than the $5.58 per Mcfe realized in the third quarter of 2011. The lower equivalent price reflects [indiscernible] level prices that were $2.64 per Mcf or 22% higher than in the second quarter of 2012, but NGL prices that were $27.83 a barrel or 21% lower than the second quarter.

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