QEP Resources Reports Second Quarter 2020 Financial & Operating Results

Source: www.gulfoilandgas.com 7/29/2020, Location: North America

QEP Resources, Inc. reported second quarter 2020 financial and operating results and provided an update to its 2020 plan in response to current market conditions.

Second Quarter 2020 Highlights
- Amended Credit Agreement increasing liquidity by more than $500 million
- Reduced capital expenditures to $36.6 million down from $178.5 million in the first quarter 2020
- Lowered lease operating expense by 37% compared to the second quarter of 2019
- Generated $72.5 million of Net Cash Provided from Operating Activities
- Delivered $95.3 million of Free Cash Flow (a non-GAAP measure)
- Repurchased $57.0 million in principal amount of senior notes at a discount

"Since early 2019, we have been focused on delivering value over volume and have held firm to this principle during the pandemic. We quickly took meaningful steps in response to market conditions to proactively manage cash flow and preserve liquidity by significantly reducing drilling and completion activity and by curtailing uneconomic oil production," commented Tim Cutt, President and CEO of QEP. "We have also benefited from the actions taken over the last two years to streamline our business, which consolidated our acreage footprint and significantly reduced operating and overhead expenses. We continue to improve our outlook for full-year 2020 and now expect to spend approximately $360 million of capital and generate more than $150 million in Free Cash Flow at strip prices.

"During extremely challenging conditions, we continued to lower development costs during the quarter, achieving peer leading metrics in several categories. At the same time, we have continued to deliver outstanding well results as evidenced by the performance of our most recent County Line DSUs. We reduced drilling activity and suspended completion operations in the Permian Basin in March, but with the recent improvement in commodity prices, we plan to pick up a second rig in September and resume completion operations in November. In the Williston Basin, we have completed all operated development activity for the year.

"We were able to take several important steps during the quarter to further strengthen our financial position. We successfully amended the credit facility, increasing liquidity by more than $500 million, which should provide us with the necessary financial flexibility to execute our ongoing business plan. We also increased our 2021 hedge position to more than 8.6 million barrels of oil at an average price of approximately $43.50 per barrel, which is above our expected Free Cash Flow break-even price in 2021.

"As we look forward, we remain focused on the health and safety of our employees, contractors and the communities in which we operate and we are committed to continuing to do our part in these challenging times," concluded Cutt.

OPERATIONS UPDATE
For the second quarter 2020, the Company drilled a total of 12 gross horizontal wells and turned 11 gross operated wells to production in the Permian Basin and drilled six gross horizontal wells in the Williston Basin. The average lateral length for the wells completed in the Permian Basin in the second quarter 2020 was 11,099 feet. The average lateral length for the wells drilled in the Williston Basin was 12,760 feet. The Company also re-completed three gross wells in the Williston Basin during the quarter.

Production in the Permian Basin was 5.5 million barrels of oil equivalent (MMboe) in the second quarter 2020, an increase of 20% over the second quarter 2019. The increase was a result of putting new wells on production, coupled with improved well performance, attributable to changes in well completion design and higher gas capture rates. Total Company oil equivalent production was 8.0 MMboe in the second quarter of 2020, an increase of 6% compared with the second quarter 2019.

Oil and condensate production in the Permian Basin was 3.9 million barrels (MMbbl) in the second quarter 2020, an increase of 18% over the second quarter 2019. Total Company oil and condensate production was 5.5 MMbbl in the second quarter 2020, up 6% compared with the second quarter 2019. The oil and condensate production increase was the result of an increase in volumes in the Permian Basin, partially offset by lower Williston Basin volumes due to reduced activity.

FINANCIAL UPDATE
The Company reported a net loss of $184.4 million in the second quarter 2020, or $0.76 per diluted share, compared with net income of $48.8 million, or $0.20 per diluted share, in the second quarter 2019. The $233.2 million decrease was primarily due to a $273.6 million increase in unrealized derivative losses, partially offset by a $83.3 million increase in income tax benefit.

Net income (loss) includes non-cash gains and losses associated with the change in the fair value of derivative instruments, gains and losses from asset sales, gains and losses from debt extinguishment, asset impairments and certain other items. Excluding these items, the Company's second quarter 2020 Adjusted Net Loss (a non-GAAP measure) was $14.4 million, or $0.06 per diluted share, compared with an Adjusted Net Loss of $7.3 million, or $0.04 per diluted share, for the second quarter 2019.

Adjusted EBITDA for the second quarter 2020 was $157.3 million compared with $166.5 million in the second quarter 2019, a 6% decrease. The decrease was primarily due to a $176.3 million decrease in oil, gas, and NGL sales, partially offset by a $136.4 million increase in realized derivative gains, a $16.9 million reduction in lease operating expenses, and a $14.0 million decrease in production and property taxes.

The definitions and reconciliations of Adjusted Net Income and Adjusted EBITDA is provided under the heading Non-GAAP Measures at the end of this release.

Capital Investment
Capital investment, excluding property acquisitions, was $36.6 million (on an accrual basis) for the second quarter 2020, compared with $169.9 million for the second quarter 2019, of which $31.2 million related to the drilling, completion and equipping of wells and $4.8 million related to midstream infrastructure investment. The decrease in capital expenditures was primarily related to our decision to significantly reduce development in both the Permian and Williston basins in response to the significant reduction in oil price.

Operating Expenses
During the second quarter 2020, lease operating expense (LOE) was $28.8 million, a decrease of 37% compared with the second quarter 2019. The decrease was primarily due to a decrease in workover activity, water disposal costs, maintenance and repair expenses, and power and fuel expenses in the Williston and Permian basins as a result of continuing efforts to reduce operating expenses. Total Company LOE was $3.62 per Boe in the second quarter 2020, including Permian Basin LOE of $2.35 per Boe, which had a 46% decrease compared with the second quarter 2019.

During the second quarter 2020, Transportation and Processing Costs were $12.3 million, an increase of 24% compared with the second quarter 2019. Adjusted Transportation and Processing Costs (a non-GAAP measure) were $27.6 million, an increase of 22% compared with the second quarter 2019. The increase was primarily due to an increase in gathering and processing rates in the Permian and Williston basins and increased production in the Permian Basin. During the second quarter 2020, Transportation and Processing Costs increased by $0.24 per Boe, or 18%, compared with the second quarter 2019, while Adjusted Transportation and Processing Costs increased by $0.47 per Boe, or 16%, compared with the second quarter 2019.

The definition and reconciliation of Adjusted Transportation and Processing Costs is provided under the heading Non-GAAP Measures at the end of this release.

During the second quarter 2020, general and administrative (G&A) expense was $26.3 million, a decrease of 17% compared with the second quarter 2019. The decrease was primarily related to workforce reductions and a reduction in strategic initiative costs, partially offset by an increase in market value on the deferred compensation plan. For the first half of 2020 G&A expense was down 55% compared with 2019, primarily due to the work force reductions, and decreases in expenses associated with strategic initiatives in 2019 and decreased market value on the deferred compensation plan.

Liquidity
Net Cash Provided by Operating Activities for the second quarter 2020 was $72.5 million, compared with $117.4 million for the second quarter 2019.

The Company generated Free Cash Flow of $95.3 million for the second quarter 2020 compared with an outspend of $32.0 million in the second quarter 2019, an improvement of $127.3 million. The improvement was primarily due to a $133.3 million decrease to accrued property, plant and equipment capital expenditures, partially offset by a $9.2 million decrease in Adjusted EBITDA.

Net Cash Provided by Operating Activities for the six months ended June 30, 2020, was $224.4 million, compared with $195.7 million for the six months ended June 30, 2019.

The Company generated Free Cash Flow of $63.7 million during the first six months of 2020, compared with an outspend of $104.1 million during the first six months of 2019, an improvement of $167.8 million. The improvement was primarily due to a $122.0 million decrease in accrued capital investment and a $44.9 million increase in Adjusted EBITDA.

During the second quarter 2020, QEP repurchased, at a discount, $57.0 million in principal amount of its 6.875% Senior Notes due March 2021.

In June 2020, QEP entered into the Eighth Amendment to its Credit Agreement, which, among other things, provides for:
- a reduction in aggregate commitments from $1.25 billion to $850 million;
- the requirement that the Company’s material subsidiaries guarantee the obligations under the Credit Agreement;
- changes to the leverage ratio and present value covenants, such that they only pertain to net priority guaranteed debt;
- the ability to repurchase outstanding senior notes with up to $500 million of credit facility proceeds;
- the ability to issue junior subsidiary guarantees of up to $500 million of unsecured debt;
- the revision of the applicable rate for all borrowings under the Credit Agreement; and
- an unchanged maturity date of September 2022.

As of June 30, 2020, QEP had $3.4 million in cash and cash equivalents, no borrowings under its revolving credit facility, $10.9 million in letters of credit and was in compliance with the covenants under its credit agreement. The Company also has a $165.0 million income tax receivable as of June 30, 2020, primarily attributable to AMT credit refunds, that were accelerated by the Coronavirus Aid, Relief, and Economic Security Act stimulus bill, that it anticipates it will receive during the next twelve months.

The definition and reconciliation of Free Cash Flow is provided under the heading Non-GAAP Measures at the end of this release.

Updated 2020 Guidance
QEP's updated 2020 guidance assumes: (i) a WTI NYMEX an oil price of $40 per barrel and a natural gas price of $2.00 per MMBtu at Henry Hub, adjusted for applicable commodity and location differentials, (ii) that QEP will elect to reject ethane from its produced gas in the Permian Basin where processing economics support it, and (iii) no property acquisitions or divestitures, other than those already disclosed.


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