QEP Resources Management Discusses Q2 2012 Results - Earnings Call Transcript

QEP Resources (QEP)

Q2 2012 Earnings Call

August 01, 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

Jay B. Neese - Executive Vice President

Analysts

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

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

Brian M. Corales - Howard Weil Incorporated, Research Division

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

Subash Chandra - Jefferies & Company, Inc., Research Division

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

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Dan McSpirit - BMO Capital Markets Canada

Hubert Van der Heijden - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Presentation

Operator

Good morning. My name is Mary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the QEP Resources Second Quarter Earnings Conference Call. [Operator Instructions] After the speakers' 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, Mary, and good morning, everyone. And thank you for joining us for our second quarter 2012 results conference call. With me today 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.

Many of you have already met Greg. He joined QEP 3 months ago from Halliburton, where he was part of their highly regarded IR team. We're thrilled to have Greg and want to thank Scott Gutberlet for serving as QEP's IR Director since the spin. Scott has been moved back to the operations side of the business and has been promoted to Vice President of Commercial and Technical Services. We think that Greg will continue to provide the same high level support to our various stakeholders and leading our Investor Relations team. If not, I'm sure you'll let us know about it.

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 and is reconciled to net income in the earnings release and SEC filings. In addition, we'll be making numerous forward-looking statements. 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 we refer everyone to our more robust forward-looking statements disclaimer and the discussion of risks facing our business in our earnings release and our SEC filings.

In terms of reporting of results, we filed our Form 10-Q with the SEC yesterday, and we issued a combined operations update and earnings release in which we reported second quarter and 6-month 2012 results and reported second quarter 2012 production of 79.6 Bcfe, 20% of which was composed of crude oil and natural gas liquids. We updated operating activities in our core areas and we updated our guidance for 2012 as follows: we lowered the top end of our EBITDA guidance slightly to be in the range of $1.35 billion to $1.4 billion, reflecting weaker crude oil and NGL prices; we reaffirmed our production guidance to be in the range of 305 Bcfe to 310 Bcfe; and we raised the bottom end of our CapEx guidance to be in the range of $1.45 billion to $1.5 billion.

In terms of reported 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 derivative portfolio runs through our income statement instead of through other comprehensive income. In addition, the impact of settled derivatives 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 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 netted transportation expenses against revenues. We are now reporting these expenses in a separate line item in the operating expense section of the income statement and have recast historical revenue in product price to reflect this change in presentation. We'll be happy to provide additional information about the changes and how we report our financial results during Q&A.

Turning to our financial results. When comparing the second quarter of 2012 to the first quarter of 2012, the story was a slightly stronger financial performance at QEP Energy, our E&P business, and somewhat weaker financial performance at QEP Field Services, our gathering and processing business.

QEP Energy reported 7% higher equivalent production, which included sequentially higher crude oil and NGL production. The production increase was offset by a 6% decrease in quarter-to-quarter net realized equivalent prices. Field services' second quarter results were lower than the previous quarter primarily due to lower NGL volumes and prices.

Our second quarter EBITDA was $338.5 million, which was $7 million or 2% lower than the first quarter of 2012, but up $2 million from the second quarter of 2011. QEP Energy contributed $266 million or 79% of our aggregate second quarter EBITDA, and field services contributed $72 million or about 21%. QEP Energy's EBITDA was up about $5 million, while field services' EBITDA was $13 million lower than the respective first quarter 2012 levels.

Factors driving our second quarter EBITDA include QEP Energy's production, which was 79.6 Bcfe in the quarter, 7% higher than the 74.2 Bcfe reported in the first quarter of 2012. And the quarter's production was 23% higher than the 64.7 Bcfe reported in the second quarter of 2011. Of note, oil volumes were 1.3 million barrels, up 7% from the first quarter, and NGL volumes were also 1.3 million barrels, up 6% from the first quarter of 2012. Combined oil and NGL volumes were 2.6 million barrels in the quarter, double the 1.3 million barrels of combined volumes in the second quarter of 2011.

QEP Energy's net realized equivalent price, which included the settlement of all of our commodity derivatives, averaged $5.13 per Mcfe in the quarter, which was 6% lower than the $5.47 per Mcfe realized in the first quarter of 2012 and $0.58 per Mcfe lower than the $5.71 realized in the second quarter of 2011. The lower equivalent price reflects field level gas prices that were $2.17 per Mcf or 20% lower than the first quarter of 2012.

QEP Energy's commodity derivatives portfolio contributed $117 million of EBITDA in the quarter, compared to $83 million in the first quarter of 2012 and $37 million in the second quarter of 2011. The derivatives portfolio added $1.47 per Mcfe to QEP Energy's net realized price in the second quarter, compared to $1.13 per Mcfe in the first quarter of 2012 and $0.57 in the second quarter of 2011.

QEP Energy's combined lease operating transportation and production tax expenses were $117 million quarter, up from $114 million in the first quarter of 2012 and up from $103 million in the second quarter of 2011. On a per unit basis, combined LOE, transportation and production tax expenses were $1.47 per Mcfe in the second quarter compared to $1.54 per Mcfe in the first quarter of 2012 and $1.58 per Mcfe in the second quarter of 2011.

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