QEP Resources Inc. is calling 2013 a “pivotal year” as it steps up efforts to change from an independent producer dominated by natural gas to one that’s more balanced and focused on boosting more desirable oil and natural gas liquids production and reserves.
For starters, the Denver, Colo.-based company is planning to spend more than half of this year’s capital budget on North Dakota’s oil-rich Bakken petroleum system, where QEP holds about 117,000 net acres.
Overall, QEP anticipates that 2013 oil production likely will grow about 70 percent over 2012 levels and that NGL volumes should climb by more than 30 percent, while dry gas output is expected to decline by around 10 percent.
Actually, QEP has been working on its dry-gas dependence problem for several years, but made its first big stride toward the company’s ultimate liquids goal in 2012, investing $1.4 billion in last year’s third quarter to vastly expand its position in the Bakken play with the acquisition of its South Antelope properties.
QEP to alter gas-liquids mixQEP also intends to dramatically alter its natural gas-liquids mix in 2013, with oil and NGL making up 32 percent of total production, compared to 22 percent in 2012, 14 percent in 2011, and 11 percent in 2010.
Still, QEP continues to struggle with downward pressure on earnings, posting substantially lower net income for the fourth quarter and year-end 2012, compared to the same periods in 2011, in large part because of the weak economics surrounding its nearly 80 percent reliance on natural gas.
Even before adjusting the numbers downward to reflect property impairments and other “extraordinary” items, QEP’s net income for the 2012 fourth quarter was just $59.8 million versus $104.6 million for the same quarter the prior year. Profit for full-year 2012 was $227.9 million compared to $316.2 million for 2011.
QEP attributed the lower adjusted net income primarily to lower natural gas and NGL prices, lower midstream NGL sales volumes and prices, and other expenses.
$23.1 million Q4 lossHowever, when plugging in the extraordinary items, including non-cash charges, litigation and losses and gains on property sales, QEP actually lost $23.1 million in the fourth quarter, compared to “no earnings” for the quarter a year earlier. For the full year 2012, QEP reported net income of $128.3 million versus $267.2 million for the previous year.
“In spite of headwinds with regards to natural gas and NGL prices, for the full year 2012, we posted record results in a number of important areas,” Richard J. Doleshek, QEP’s chief financial officer, told analysts during the company’s Feb. 20 earnings call.
That’s largely because the company’s exploration and production arm, QEP Energy, financially outperformed the company’s gathering and processing arm, QEP Field Services.
Overall production jumps 16 percentQEP Energy grew overall production 16 percent in 2012 to a record 319.2 billion cubic feet of gas equivalent, or an average of 872 million cubic feet per day, “driven by good results across our entire operation,” said Chuck Stanley, QEP Resources’ chairman, president and chief executive officer.
Fourth-quarter production, also a record, jumped 14 percent to 83.9 bcfe, compared to 73.9 bcfe for the same period in 2011. Of particular note, oil production rocketed nearly 100 percent and NGL nearly 40 percent, while less desirable natural gas increased just 1 percent. Moreover, oil and NGL revenues together increased a whopping 52 percent from the 2011 fourth quarter.
“We’re making excellent progress in growing our crude oil production … thanks, in part, to our North Dakota acquisition,” Stanley said. “And that growth is accelerating.”
Oil output rockets 97 percentOil production totaled 6.3 million barrels in 2012 compared to 3.7 million barrels in 2011, a 69 percent increase, he said, adding that for the fourth quarter, QEP produced 2.3 million barrels, a 97 percent increase over the 1.2 million barrels produced in the previous year’s fourth quarter.
QEP Energy’s estimated proved reserves totaled 3.9 trillion cubic feet of gas equivalent at year-end 2012, up 9 percent from year-end 2011. And about 33 percent of proved reserves at year-end 20122 were oil and NGL compared to 24 percent at year-end 2011.
QEP’s North Dakota Bakken acquisition in last year’s third quarter alone added 313.8 bcfe to the company’s total reserve base.
“The positive impact of our North Dakota acquisition is clear,” Stanley said, noting that crude oil alone represented 17 percent of QEP Energy’s production in the fourth quarter of 2012, compared to just 10 percent in the prior year period and 11 percent in the third quarter of 2012.
Drilling pace to pick upMeanwhile, QEP Resources said it intends to pick up the drilling pace considerably in 2013, dedicating 53 percent of its forecasted $1.625-to $1.725 billion capital expenditure budget on the company’s Bakken and Three Forks development, spread between operations on the Fort Berthold Reservation and its recently acquired South Antelope properties.
The 53 percent of capex allocated to the Bakken for 2013 compares to 28 percent in 2012 and 17 percent in 2011.
“This program assumes we ramp up to an eight-rig drilling problem on the Williston Basin assets by mid-year,” Stanley said, noting that four of the seven rigs currently working the region are located in South Antelope. He said a fifth rig is planned this year for South Antelope.
During the fourth quarter, the company completed and put on stream two QEP-operated Three Forks formation horizontal wells on the South Antelope property. Both wells met pre-drill expectations, with average 24-hour initial production, IP, rates of 2,175 boe per day. QEP estimates ultimate recoverable reserves on these two wells of more than 1 million boe.
Well design change at Antelope“We’ve made changes in well design in South Antelope that we believe will allow us to deliver $11 million gross completed or lower well cost going forward on this property,” Stanley said.
On its Fort Berthold acreage, he added, QEP completed and put on line nine wells during the fourth quarter — four Middle Bakken and five Three Forks. He said seven of the wells were drilled on the Independence Pad in the northwest corner of the company’s acreage, “and all of them had excellent 24-hour IPs of 2,400 to 2,900 boe per day.”
However, the two remaining Fort Berthold wells were drilled on the eastern edge of QEP’s acreage and produced lower IPs of around 900 boe per day. “That’s not surprising given their location toward the margin or the pinch out of the Bakken and Three Forks on the eastern part of our acreage,” Stanley explained.
Well costs at Fort BertholdHe said that during the fourth quarter, the company was able to deliver completed well costs of about $11 million on its Fort Berthold acreage.
Most of the remaining half of QEP’s 2013 capital budget is being distributed among the company’s other oil and liquids-rich plays in Wyoming, Utah, Texas and Oklahoma. Pinedale will get roughly 14 percent of the budget. Granite Wash, along with the Cana, Tonkawa and Marmaton programs, will receive about 17 percent of total capital, “driven in large part by the high level of anticipated non-operated drilling activity in these plays,” the company said, while the Uinta Basin will attract about 6 percent of QEP’s total capital.
“We continue development of Lower Mesaverde liquids-rich natural gas play and Green River formation oil development,” Stanley said.
Haynesville dry gas to plungeWith no drilling activity planned this year for QEP’s Haynesville natural gas development in northwest Louisiana, the company is forecasting a 30 percent decline in dry gas production from this area alone, from about 110 bcfe in 2012 to about 75 bcfe in 2013.
“We view that this is a pivotal year for QEP, as we dramatically shift the production mix from one dominated by natural gas to one that’s more balanced between natural gas, oil and NGLs,” Stanley said.