QEP Resources Reports 3rd Quarter 2020 Financial & Operating Results

Source: www.gulfoilandgas.com 10/28/2020, Location: North America

QEP Resources, Inc. reported third quarter 2020 financial and operating results.

Third Quarter 2020 Highlights
- Received a $170.7 million Alternative Minimum Tax (AMT) credit refund, which included $5.6 million of interest income
- Generated $329.6 million of Net Cash Provided from Operating Activities
- Delivered $98.3 million of Free Cash Flow (a non-GAAP measure)
- Redeemed the remaining $275.3 million in principal amount of the 2021 Senior Notes
- Recorded an additional income tax receivable of $81.0 million for AMT credit refunds

"Our third quarter 2020 results exhibit both the strength of our core assets and the success of the financial and operational decisions we have made over the last two years," commented Tim Cutt, President and CEO of QEP. "Our financial outlook for full-year 2020 has continued to improve and we now expect to spend approximately $340 million of capital and generate more than $200 million in Free Cash Flow at strip prices as we continue to prioritize profitability and financial discipline over production growth.

"During the quarter we received our $170.7 million tax refund ahead of our expected timeline, which enabled us to redeem our 2021 Senior Notes five months before their due date. The redemption of the senior notes is another important step toward our corporate goal of strengthening our balance sheet and improving liquidity. Since January of 2019 we have reduced our outstanding debt by more than $900 million through a combination of free cash flow generation, tax refunds and asset divestiture proceeds.

“We currently plan to invest approximately $300 million in 2021 to maintain a relatively flat production profile and expect to deliver free cash flow down to a WTI price of $35 per barrel. We have established one of the lowest operating and development cost structures in the Permian Basin and will continue to manage costs down, while minimizing our impact on the environment, and protecting the health, safety and well-being of our employees, contractors and community partners," concluded Cutt.

OPERATIONS UPDATE
For the third quarter 2020, the Company drilled a total of nine gross horizontal wells in the Permian Basin and completed two gross horizontal wells in the Williston Basin. The average lateral length for the wells drilled in the Permian Basin in the third quarter was 12,548 feet. The average lateral length for the wells completed in the Williston Basin in the third quarter was 12,258 feet. In addition, five non-operated wells were put on production in the Williston Basin late in the third quarter 2020.

Production in the Permian Basin was 4.4 million barrels of oil equivalent (MMboe) in the third quarter 2020, a decrease of 23% compared with the third quarter 2019. The decrease was a result of decreased drilling activity and the suspension of completion activity in the basin during the quarter. Production in the Williston Basin was 2.7 MMboe in the third quarter 2020, a decrease of 2% compared with the third quarter 2019. The decrease was a result of reduced operated drilling and completion activity in the basin, partially offset by an increase in non-operated activity. Total Company oil equivalent production was 7.1 MMboe in the third quarter of 2020, a decrease of 16% compared with the third quarter 2019. As of September 30, 2020, the Company had two operated drilling rigs in the Permian Basin and no operated activity in the Williston Basin.

Oil and condensate production in the Permian Basin was 2.8 million barrels (MMbbl) in the third quarter 2020, a decrease of 29% over the third quarter 2019. Total Company oil and condensate production was 4.4 MMbbl in the third quarter 2020, down 22% compared with the third quarter 2019. The oil and condensate production decrease was primarily the result of a decrease in volumes in the Permian Basin due to reduced drilling activity and the suspension of completion activity in response to market conditions.

FINANCIAL UPDATE
The Company reported a net loss of $49.2 million in the third quarter 2020, or $0.20 per diluted share, compared with net income of $81.0 million, or $0.34 per diluted share, in the third quarter 2019. The $130.2 million decrease was primarily due to a $196.1 million increase in unrealized derivative losses, partially offset by a $81.8 million increase in income tax benefits.

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 third quarter 2020 Adjusted Net Income (a non-GAAP measure) was $31.2 million, or $0.13 per diluted share, compared with an Adjusted Net Income of $11.0 million, or $0.05 per diluted share, for the third quarter 2019.

Adjusted EBITDA for the third quarter 2020 was $160.4 million compared with $193.5 million in the third quarter 2019, a 17% decrease. The decrease was primarily due to a $129.8 million decrease in oil, gas, and NGL sales, which was due to a 29% decrease in average field-level equivalent prices and a 16% decrease in total oil equivalent production volumes, partially offset by a $74.5 million increase in realized derivative gains, a $8.7 million reduction in general and administrative expenses, a $6.0 million decrease in production and property taxes and a $5.6 million reduction in transportation and processing costs.

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

Capital Investment
Capital investment, excluding property acquisitions, was $38.4 million (on an accrual basis) for the third quarter 2020, compared with $128.9 million for the third quarter 2019, of which $35.7 million related to the drilling, completion and equipping of wells. The decrease in capital expenditures was primarily related to our decision to significantly reduce development activity in response to market conditions in both the Permian and Williston basins, and by peer leading drilling and completion costs in the Permian Basin.

Operating Expenses
During the third quarter 2020, lease operating expense (LOE) was $35.5 million, a decrease of 7% compared with the third quarter 2019. The decrease was primarily due to a decrease in workover activity in the Williston Basin, a decrease in water disposal costs in the Williston and Permian basins and continuing efforts to reduce operating expenses. These decreases were partially offset by an increase in workover activity in the Permian Basin. Total Company LOE was $5.03 per Boe in the third quarter 2020, including Permian Basin LOE of $4.02 per Boe.

During the third quarter 2020, transportation and processing costs were $12.4 million, a decrease of 31% compared with the third quarter 2019. Adjusted transportation and processing costs (a non-GAAP measure) were $28.4 million, a decrease of 12% compared with the third quarter 2019. The decrease was primarily due to the recognition of $7.7 million of firm transportation expense in the third quarter of 2019 related to future obligations in an area in which the Company no longer has production operations as well as decreased production in the Permian and Williston basins, partially offset by an increase in gathering and processing rates in the Permian and Williston basins. During the third quarter 2020, transportation and processing costs were $1.77 per Boe, while Adjusted transportation and processing costs were $4.04 per Boe.

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 third quarter 2020, general and administrative (G&A) expense was $20.9 million, a decrease of 29% compared with the third 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 and performance share units. For the first three quarters of 2020, G&A expense decreased 49% compared with the first three quarters 2019, primarily due to the work force reductions, lower expenses associated with strategic initiatives in 2019 and a decrease in expense related to decreased market value on the deferred compensation plan. During the third quarter 2020, total G&A was $2.96 per Boe of which $2.34 per Boe was general and administrative expense excluding share-based and deferred compensation.

Liquidity
Net Cash Provided by Operating Activities for the third quarter 2020 was $329.6 million compared with $146.3 million for the third quarter 2019.

The Company generated Free Cash Flow of $98.3 million for the third quarter 2020 compared with $38.1 million in the third quarter 2019, an improvement of $60.2 million. The improvement was primarily due to a $90.5 million decrease in accrued property, plant and equipment capital expenditures, and a $4.2 million decrease in interest expense, excluding amortization of debt issuance costs and discounts, partially offset by a $33.1 million decrease in Adjusted EBITDA.

Net Cash Provided by Operating Activities for the nine months ended September 30, 2020, was $554.0 million compared with $342.0 million for the nine months ended September 30, 2019.

The Company generated Free Cash Flow of $162.0 million during the first three quarters of 2020 compared with an outspend of $66.0 million during the first three quarters of 2019, an improvement of $228.0 million. The improvement was primarily due to a $212.5 million decrease in accrued property, plant and equipment capital expenditures, driven by reducing drilling and suspending completion activity until the fourth quarter of 2020 and by peer leading drilling and completion costs in the Permian Basin, an $11.8 million increase in Adjusted EBITDA, and a $9.9 million decrease in interest expense, excluding amortization of debt issuance costs and discounts. In the first three quarters of 2020, Adjusted EBITDA increased to $491.6 million compared with $479.8 million in the first three quarters of 2019. The improvement was primarily due to a $259.4 million increase in realized derivative gains, a $61.3 million decrease in general and administrative expenses, a $31.0 million decrease in lease operating costs and a $25.3 million reduction in production and property taxes. These improvements were partially offset by a $359.9 million decrease in oil, gas and NGL sales, primarily due to a 37% decrease in average field-level prices.

During the third quarter 2020, QEP redeemed the remaining $275.3 million in principal amount of its outstanding 6.875% Senior Notes due March 2021.
v As of September 30, 2020, QEP had $9.5 million in cash and cash equivalents, no borrowings under its revolving credit facility, $11.9 million in letters of credit outstanding and was in compliance with the covenants under its credit agreement. The Company also has a $81.0 million income tax receivable as of September 30, 2020, primarily attributable to AMT credit refunds that were accelerated by the Coronavirus Aid, Relief, and Economic Security Act stimulus bill. The Company anticipates it will receive $50.1 million of the AMT credit refunds within the next twelve months.

The definitions and reconciliations of Free Cash Flow and Adjusted EBITDA are provided under the heading Non-GAAP Measures at the end of this release.

Updated 2020 Guidance
QEP's updated 2020 guidance assumes: (i) commodity strip prices as of September 30, 2020, adjusted for applicable commodity and location differentials, (ii) that QEP will elect to recover 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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