ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide the reader of the financial statements with a narrative from the perspective of management on the financial condition, results of operations, liquidity and certain other factors that may affect the Company's operating results. MD&A should be read in conjunction with the financial statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The following information updates the discussion of QEP's financial condition provided in its Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K) and analyzes the changes in the results of operations between the three months ended March 31, 2020 and 2019. For definitions of commonly used oil and gas terms found in this Quarterly Report on Form 10-Q, please refer to the "Glossary of Terms" provided in the 2019 Form 10-K.
OVERVIEW
QEP Resources, Inc. is an independent crude oil and natural gas exploration and production company with operations in two regions of the United States: the Southern Region (primarily in Texas) and the Northern Region (primarily in North Dakota). Unless otherwise specified or the context otherwise requires, all references to "QEP" or the "Company" are to QEP Resources, Inc. and its subsidiaries on a consolidated basis. QEP's corporate headquarters are located in Denver, Colorado and shares of QEP's common stock trade on the New York Stock Exchange (NYSE) under the ticker symbol "QEP".
As a result of the reduction of the Company's operational footprint in 2019 following the Board of Directors' comprehensive review of strategic alternatives and determination to move forward as an independent company, QEP reassessed its organizational needs and significantly reduced its general and administrative expense in 2019 to ensure its cost structure is competitive with industry peers.
As a part of the strategic initiatives and reduction in general and administrative expense, QEP has incurred costs associated with contractual termination benefits, including severance, accelerated vesting of share-based compensation and other expenses. Refer to Note 3 – Acquisitions and Divestitures and Note 9 – Restructuring in Part 1, Item I of this Quarterly Report on Form 10-Q for more information.
The Company continues to focus on reducing its operating costs, per well drilling costs, general and administrative costs and managing its liquidity. We believe our plan to generate Free Cash Flow (FCF) on an annual basis will allow us to further strengthen our balance sheet and continue returning capital to shareholders.
Financial and Operating Highlights
During the three months ended March 31, 2020, QEP:
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Generated net income of $367.4 million, or $1.54 per diluted share;
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Reported Adjusted EBITDA (a non-GAAP financial measure defined and reconciled below) of $173.9 million;
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•
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Reported cash provided by operating activities of $151.9 million;
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•
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Reported Free Cash Flow (a non-GAAP measure defined and reconciled below) outspend of $31.6 million;
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•
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Lowered lease operating expense by 22% compared to the first quarter of 2019;
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•
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Reduced general and administrative expenses by 75% compared to the first quarter 2019;
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•
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Recognized an additional $128.1 million in accelerated alternative minimum tax (AMT) credit refunds from the CARES Act, resulting in an aggregate income tax receivable of $165.6 million as of March 31, 2020;
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•
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Repurchased a principal amount of $98.2 million of senior notes, which were due in 2021, 2022 and 2023, and recorded a $25.2 million gain on early extinguishment of debt; and
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•
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Reported oil and condensate production of 3.3 MMbbls in the Permian Basin, an increase of 14% compared to the first quarter 2019;
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Outlook
The novel coronavirus disease (COVID-19) has created unprecedented challenges for our industry, customers and employees. The Company is taking decisive action to protect the core of its business and to ensure the health and safety of our employees, business partners and communities until this crisis passes. The Company instituted various measures, including remote working and business travel restrictions, starting in March 2020, and we remain engaged with our business and community partners on how we can assist them during this time. The Company is taking additional safeguards and has implemented new procedures
and policies to help protect the health and safety of the portion of the workforce whose jobs cannot be completed from home, including those who run our field operations. We continue to monitor the guidelines and recommendations provided by the relevant authorities, and we will continue to make the difficult decisions to ensure we are doing our part in preventing the spread of the virus.
As a result of lower demand caused by the COVID-19 pandemic and oversupply of crude oil, the future prices of crude oil are at or near historic lows. In light of current market conditions, the Company has taken significant steps to proactively manage its cash flow and preserve liquidity by suspending completion operations and releasing two drilling rigs in the Permian Basin as well as suspending the refracturing program in the Williston Basin upon the completion of current projects. These actions have reduced the Company's capital spending forecast for 2020 by 32% compared to our original guidance. While these decisions are expected to result in lower 2020 oil production than originally forecasted, the Company believes that it will be able to maintain positive cash flow and protect its balance sheet, with the ultimate goal of protecting shareholder returns over the long term. Although the Company has already reduced activity dramatically, we are prepared to reduce it further for an extended period if necessary. The Company will utilize this slowdown to improve on its best in class operations and to continue to reduce expenses to the lowest and most efficient cost structure possible.
Due to the Company’s derivative positions and reduction in capital expenditures, the Company expects to generate significant FCF in 2020 despite the current market conditions. In addition to generating FCF, due to changes enacted by the CARES Act, the Company anticipates receiving alternative minimum tax (AMT) credit refunds of $165.6 million in the next 12 months. The Company believes that the cash on hand, generation of FCF and anticipated AMT credit refunds positions the Company to meet its liquidity needs for the next twelve 12 months, including its debt maturity in March 2021.
The Company believes that the overall reduction of global spending on new development projects, especially in the U.S., will cause a reduction in the global oil supply, and that the eventual recovery from the COVID-19 pandemic will cause demand to be more in line with previously anticipated levels and, consequently, cause oil prices to recover. As a result of the actions taken, and continuing to be taken, and the expected stabilization of the global economy, the Company expects to emerge in a stronger position.
Based on current commodity prices, we expect to be able to fund our planned capital program for 2020 with cash on hand and cash flow from operating activities. Our total capital expenditures (excluding property acquisitions) for 2020 are expected to be approximately $385.0 million, a decrease of over 30% from both our 2019 capital expenditures and our original 2020 guidance. We continuously evaluate our level of drilling and completion activity in light of commodity prices, drilling results and changes in our operating and development costs and will adjust our capital investment program based on such evaluations. See "Cash Flow from Investing Activities" for further discussion of our capital expenditures.
Factors Affecting Results of Operations
Supply, Demand, Market Risk and their Impact on Oil Prices
In the first quarter of 2020 the average price of WTI crude oil dropped 65.9% from the first quarter of 2019. Crude oil prices were negatively impacted by a variety of factors affecting current and expected supply and demand dynamics, including: the COVID-19 pandemic and related shut-down of various sectors of the global economy which has resulted in a significant reduction in demand for crude oil, continued U.S. supply growth driven by advances in drilling and completion technologies, and the delay of an agreement on production levels by members of the Organization of Petroleum Exporting Countries (OPEC) and other oil producing countries, including Russia, resulting in increased supply in the global market. Other factors impacting supply and demand include weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials, export capacity, strength of the U.S. dollar as well as other factors, the majority of which are outside of our control. While OPEC and other oil producing countries reached an agreement in April 2020 with respect to production levels, it is not expected to have an immediate impact on crude oil prices until global supply matches current lower levels of demand caused by the factors mentioned above, including the COVID-19 pandemic.
Changes in the market prices for oil directly impact many aspects of QEP's business, including its financial condition, revenues, results of operations, planned drilling and completion activity and related capital expenditures, its PUD reserves conversion rate, liquidity, rate of growth, costs of goods and services required to drill, complete and operate wells, and the carrying value of its oil and gas properties. The decline in the price of crude oil negatively impacted our oil revenue during the first quarter of 2020 but the value of our oil derivatives portfolio increased significantly. Additionally, the volatility in commodity prices has impacted the Company’s stock price and the fair value of the Company's debt securities, all of which impact our financial and operating results. Due to the changes in our drilling plans, we expect that our 2020 proved undeveloped (PUD) conversion rate will be lower than originally anticipated. In addition, a prolonged low price environment may impact our future drilling plans and decrease our total PUD reserves. If oil prices remain consistent with March 2020 levels for an extended period of time, or
decline further, our operations, financial condition and level of expenditures for the development of our oil reserves may be materially and adversely affected.
QEP's producing properties are primarily located in the Permian and Williston basins. As a result of our lack of diversification
in asset type and limited geographic diversification, any delays or interruptions of production caused by factors such as
governmental regulation, transportation capacity constraints, curtailment of production or interruption of transportation, price
fluctuations, natural disasters or shutdowns of the pipelines connecting our production to refineries would have a significantly
greater impact on our results of operations than if we possessed more diverse assets and locations.
Global Geopolitical and Macroeconomic Factors
QEP continues to monitor the global economy, including global economic issues such as COVID-19; political unrest; oil producing countries' oil production and policies regarding production quotas; actions taken by the United States Congress and the President of the United States; the U.S. federal budget deficit; changes in regulatory oversight policy; the impact of regulations and public and financial market sentiment regarding climate change; commodity price volatility; tariffs on goods we use in our operations or on the products we sell; the impact of a potential increase in interest rates; volatility in various global currencies; and other factors. A dramatic decline in regional or global economic conditions, a major recession or depression, regional political instability, economic sanctions, war, or other factors beyond the control of QEP have had, and could continue to have, a significant impact on short-term and long-term oil and condensate, gas and NGL supply, demand and prices and the Company's ability to continue its planned drilling programs which could materially impact the Company's financial position, results of operations and cash flow from operations. Disruption to the global oil supply system, political and/or economic instability, fluctuations in currency values, and/or other factors could trigger additional volatility in oil prices.
Due to continued global economic uncertainty and the corresponding volatility of commodity prices, QEP continues to focus on maintaining a sufficient liquidity position to ensure financial flexibility. QEP uses commodity derivatives to reduce the volatility of the prices QEP receives for a portion of its production and to partially protect cash flow and returns on invested capital from a drop in commodity prices. Generally, QEP intends to enter into commodity derivative contracts for approximately 50% to 75% of its forecasted annual production by the end of the first quarter of each fiscal year. Gains on settled derivatives offset a large portion of the impact of the recent decline in oil prices on our oil revenues. There can be no assurances that we will be able to add derivative positions to cover the balance of our forecasted production for 2020 and 2021 at favorable prices. See Part 1, Item 3 – "Quantitative and Qualitative Disclosures about Market Risk-Commodity Price Risk Management" for further details on QEP's commodity derivatives transactions.
Potential for Future Asset Impairments
The carrying values of the Company's properties are sensitive to declines in oil, gas and NGL prices as well as increases in various development and operating costs and expenses and, therefore, are at risk of impairment. The Company uses a cash flow model to assess its proved oil and gas properties and operating lease right-of-use assets for impairment. The cash flow model includes numerous assumptions, including estimates of future oil and condensate, gas and NGL production, estimates of future prices for production that are based on the price forecast that management uses to make investment decisions, including estimates of basis differentials, future operating costs, transportation expenses, production taxes, and development costs that management believes are consistent with its price forecast, and discount rates. Management also considers a number of other factors, including the forward curve for future oil and gas prices, and developments in regional transportation infrastructure when developing its estimate of future prices for production. All inputs for the cash flow model are evaluated at each date of estimate.
We base our estimates on projected financial information that we believe to be reasonably likely to occur. An assessment of the sensitivity of our capitalized costs to changes in the assumptions in our cash flow calculations is not practicable, given the numerous assumptions (e.g., future oil, gas and NGL prices; production and reserves; pace and timing of development drilling plans; timing of capital expenditures; operating costs; drilling and development costs; and inflation and discount rates) that can materially affect our estimates. Unfavorable adjustments to some of the above listed assumptions would likely be offset by favorable adjustments in other assumptions. For example, the impact of sustained reduced oil, gas and NGL prices on future undiscounted cash flows would likely be offset by lower drilling and development costs and lower operating costs. The signing of a purchase and sale agreement could also cause the Company to recognize an impairment of proved properties. For assets subject to a purchase and sale agreement, the terms of the purchase and sale agreement are used as an indicator of fair value.
During the three months ended March 31, 2020, the Company recorded no impairment charges. During the three months ended March 31, 2019, QEP recorded impairment charges of $5.0 million related to an office building lease.
We could be at risk for proved and unproved property and operating lease right-of-use asset impairments if current market conditions persist for an extended period of time, we experience negative changes in estimated reserve quantities or the
forward oil prices decline from March 31, 2020 levels. The actual amount of impairment incurred, if any, for oil and gas properties will depend on a variety of factors including, but not limited to: subsequent forward price curve changes, the additional risk-adjusted value of probable and possible reserves associated with our properties, weighted-average cost of capital, operating cost estimates and future capital expenditure estimates.
Income Tax
The tax legislation enacted in December 2017 reduced our federal corporate tax rate from 35% to 21%. In addition, the tax legislation eliminated the corporate Alternative Minimum Tax (AMT), allowing the Company to claim AMT refunds for AMT credits carried forward from prior tax years. The Company received $73.9 million of AMT credit refunds in 2019. The CARES Act enacted in March 2020 permitted the Company to carry back its net operating loss (NOL) generated in 2018, creating additional AMT credits, and accelerate all of its AMT credit refunds into 2020. The Company now anticipates it will receive $165.6 million of AMT credit refunds, after carry backs in the next 12 months. The AMT credits refunds are included in "Income tax receivable" on the balance sheets as of March 31, 2020.
Acquisitions and Divestitures
QEP's strategy is to generate Free Cash Flow (FCF) (a non-GAAP financial measure defined and reconciled below), and it believes its inventory of identified drilling locations provides a solid base to achieve this strategy, but it will continue to evaluate and potentially acquire properties in its operating areas to add additional development opportunities and facilitate the drilling of long lateral wells.
Acquisitions
During the three months ended March 31, 2020 and 2019, QEP acquired various oil and gas properties, which primarily included proved acreage in the Permian Basin for an aggregate purchase price of $3.0 million and $0.6 million, respectively, subject to post-closing purchase price adjustments.
Divestitures
During the three months ended March 31, 2020, QEP received net cash proceeds of $12.6 million and recorded a net pre-tax gain on sale of $3.7 million, primarily related to the divestiture of properties outside its main operating areas.
In January 2019, QEP sold its Haynesville/Cotton Valley assets (Haynesville Divestiture) and during the year ended December 31, 2019, reached final settlement on asserted environmental and title defects and received aggregate net cash proceeds of $633.9 million. QEP recorded a net pre-tax loss, including restructuring costs, of $4.0 million, of which $15.0 million of the pre-tax loss on sale was recognized during the three months ended March 31, 2019, and was recorded within "Net gain (loss) from asset sales, inclusive of restructuring costs" on the statements of operations. Refer to Note 3 – Acquisitions and Divestitures in Part 1, Item I of this Quarterly Report on Form 10-Q for more information. In addition to the Haynesville Divestiture, during the three months ended March 31, 2019, QEP recorded net cash proceeds of $2.1 million and recorded a net pre-tax loss on sale of $0.4 million related to the divestiture of properties outside our main operating areas.
Multi-Well Pad Drilling and Completion
To reduce the costs of well location construction and rig mobilization and demobilization and to obtain other efficiencies, QEP utilizes multi-well pad drilling, where practical. For example, in the Permian Basin, QEP utilizes "tank-style" development, in which we simultaneously develop multiple subsurface targets by drilling and completing all wells in a given "tank" before any individual well is turned to production. We believe this approach maximizes the economic recovery of oil and condensate through the simultaneous development of multiple subsurface targets, while improving capital efficiency though shared surface facilities, which we believe will reduce per-unit operating costs and result in expanded operating margins and improve our returns on invested capital. Because wells drilled on a pad are not completed and brought into production until all wells on the pad are drilled and the drilling rig is moved from the location, multi-well pad drilling delays the completion of wells, the commencement of production from new wells, and may negatively affect production from existing offset wells. In addition, existing wells that offset new wells being completed by QEP or offset operators may need to be temporarily shut-in during the completion process. Such delays and well shut-ins have caused and may continue to cause volatility in QEP's quarterly operating results. In addition, delays in completion of wells may impact the timing of planned conversions of PUD reserves to proved developed reserves.
Uncertainties Related to Claims
QEP is currently subject to claims that could adversely impact QEP's liquidity, operating results and capital expenditures for a particular reporting period, including, but not limited to those described in Note 11 – Commitments and Contingencies, in Item 1 of Part I of this Quarterly Report on Form 10-Q. Given the uncertainties involved in these matters, QEP is unable to predict the ultimate outcomes.
Critical Accounting Estimates
QEP's significant accounting policies are described in Item 7 of Part II of its 2019 Form 10-K. The Company's financial statements are prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make assumptions and estimates that affect the reported results of operations and financial position. QEP's accounting policies on oil and gas reserves, successful efforts accounting for oil and gas operations, impairment of long-lived assets and income taxes, among others, may involve a high degree of complexity and judgment on the part of management. Further, these estimates and other factors, including those outside of the Company’s control, such as the impact of sustained lower commodity prices, could have a significant adverse impact to the Company’s financial condition, results of operations and cash flows.
Drilling, Completion and Production Activities
The following table presents operated and non-operated wells in the process of being drilled or waiting on completion as of March 31, 2020:
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Operated
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Non-operated
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Drilling
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Drilling
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Waiting on completion
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Drilling
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Waiting on completion
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Rigs
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Gross
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Net
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Gross
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Net
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Gross
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Net
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Gross
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Net
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Northern Region
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Williston Basin(1)
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1
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6
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4.3
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—
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—
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5
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1.9
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16
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1.7
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Southern Region
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Permian Basin(2)
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3
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18
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18.0
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36
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34.5
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—
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—
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—
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—
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____________________________
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(1)
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Five of the six gross operated wells in the Williston Basin represent wells for which surface casing had been set as of March 31, 2020.
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(2)
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One of the three rigs in the Permian Basin was an intermediate drilling rig, and fifteen of the 18 gross operated wells in the Permian Basin represent wells for which intermediate casing had been set as of March 31, 2020. Subsequent to March 31, 2020, due to the current market conditions, the Company released two of the three rigs.
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Delays and well shut-ins resulting from multi-well pad drilling have caused and may continue to cause volatility in QEP's quarterly operating results. In addition, delays in completion of wells could impact planned conversions of PUD reserves to proved developed reserves. QEP had 36 gross operated wells waiting on completion as of March 31, 2020.
The following table presents the number of operated wells in the process of being drilled or waiting on completion at March 31, 2020 and operated wells completed and turned to sales (put on production) for the three months ended March 31, 2020:
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Permian Basin
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Williston Basin
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As of March 31, 2020
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Gross
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Net
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Gross
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Net
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Well Progress
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Drilling
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18
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18.0
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6
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4.3
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At total depth - under drilling rig
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—
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—
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—
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—
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Waiting to be completed
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25
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25.0
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—
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—
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Completed, awaiting production
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11
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9.5
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—
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—
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Waiting on completion
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36
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34.5
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—
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—
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Put on production
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25
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24.9
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—
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—
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The following table presents the number of operated and non-operated wells completed and turned to sales (put on production) for the three months ended March 31, 2020:
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Operated Put on Production
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Non-operated Put on Production
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Three Months Ended
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Three Months Ended
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March 31, 2020
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March 31, 2020
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Gross
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Net
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Gross
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Net (1)
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Northern Region
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Williston Basin
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—
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—
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5
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—
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Southern Region
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Permian Basin
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25
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24.9
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—
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—
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_______________________
(1) Net working interest related to the 5 gross non-operated wells in the Williston Basin is immaterial as QEP's working interest is less than 0.1% for the three months ended March 31, 2020.
RESULTS OF OPERATIONS
Net Income
QEP generated net income during the first quarter of 2020 of $367.4 million or $1.54 per diluted share, compared to a net loss of $116.7 million or $0.49 per diluted share, in the first quarter of 2019. The $484.1 million increase in net income in the first quarter of 2020 compared to 2019 was primarily due to $631.6 million increase in realized and unrealized derivative gains, partially offset by an $178.3 million increase in income tax expense.
See below for additional discussion regarding the components of net income (loss) for each of the periods presented.
Adjusted EBITDA (Non-GAAP)
Management defines Adjusted EBITDA (a non-GAAP measure) as earnings before interest, income taxes, depreciation,
depletion and amortization (EBITDA), adjusted to exclude changes in fair value of derivative contracts, exploration expenses,
gains and losses from asset sales, impairment, gains or losses from early extinguishment of debt and certain other items. Management uses Adjusted EBITDA to evaluate QEP's financial performance and trends, make operating decisions and allocate resources. Management believes the measure is useful supplemental information for investors because it eliminates the impact of certain nonrecurring, non-cash and/or other items that management does not consider as indicative of QEP's performance from period to period. QEP's Adjusted EBITDA may be determined or calculated differently than similarly titled measures of other companies in our industry, which could reduce the usefulness of this non-GAAP financial measure when comparing our performance to that of other companies.
Below is a reconciliation of net income (loss) (the most comparable GAAP measure) to Adjusted EBITDA. This non-GAAP measure should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP.
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Three Months Ended March 31,
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2020
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2019
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(in millions)
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Net income (loss)
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$
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367.4
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$
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(116.7
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)
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Interest expense
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31.6
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34.0
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Interest and other (income) expense
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2.6
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(2.8
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)
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Income tax provision (benefit)
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66.3
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(112.0
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)
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Depreciation, depletion and amortization
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142.2
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123.3
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Unrealized (gains) losses on derivative contracts
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(407.3
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)
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175.8
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Gain from early extinguishment of debt
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(25.2
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)
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—
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Net (gain) loss from asset sales, inclusive of restructuring costs
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(3.7
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)
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13.2
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Impairment
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—
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5.0
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Adjusted EBITDA
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$
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173.9
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$
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119.8
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In the first quarter of 2020, Adjusted EBITDA increased to $173.9 million compared to $119.8 million in the first quarter of 2019, primarily due to a $48.5 million increase in realized derivative gains, a $47.4 million decrease in general and administrative expenses, primarily due to a reduction in workforce in 2019, an $11.3 million reduction in lease operating expenses, primarily as a result of continuing efforts to reduce operating expenses in both the Permian and Williston basins. The increase in Adjusted EBITDA was partially offset by a $53.8 million decrease in oil, gas, and NGL sales, primarily due to a 20% decrease in average field-level prices, partially offset by a 21% increase in equivalent production in the Permian Basin.
Free Cash Flow (Non-GAAP)
Management defines Free Cash Flow as Adjusted EBITDA plus non-cash share-based compensation less interest expense, excluding amortization of debt issuance costs and discounts, and accrued property, plant and equipment capital expenditures. Management believes that this measure is useful to management and investors for analysis of the Company's ability to repay debt, fund acquisitions or repurchase stock.
Below is a reconciliation of Net Cash Provided by (Used in) Operating Activities (the most comparable GAAP measure) to Free Cash Flow. This non-GAAP measure should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP.
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Three months ended March 31,
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2020
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2019
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Cash Flow Information:
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Net Cash Provided by (Used in) Operating Activities
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$
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151.9
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$
|
78.3
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Net Cash Provided by (Used in) Investing Activities
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(155.0
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)
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452.2
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Net Cash Provided by (Used in) Financing Activities
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(92.4
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)
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(440.1
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)
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Free Cash Flow
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Net Cash Provided by (Used in) Operating Activities
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$
|
151.9
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|
|
$
|
78.3
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Amortization of debt issuance costs and discounts
|
(1.3
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)
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|
(1.3
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)
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Interest expense
|
31.6
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|
|
34.0
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Unrealized (gains) losses on marketable securities
|
(3.3
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)
|
|
1.9
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Interest and other income (expense)
|
2.6
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(2.8
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)
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Deferred income taxes (benefit)
|
(195.0
|
)
|
|
117.9
|
|
Income tax (provision) benefit
|
66.3
|
|
|
(112.0
|
)
|
Non-cash share-based compensation
|
(3.3
|
)
|
|
(8.0
|
)
|
Changes in operating assets and liabilities
|
124.4
|
|
|
11.8
|
|
Adjusted EBITDA
|
$
|
173.9
|
|
|
$
|
119.8
|
|
Non-cash share-based compensation
|
3.3
|
|
|
8.0
|
|
Interest expense, excluding amortization of debt issuance costs and discounts
|
(30.3
|
)
|
|
(32.7
|
)
|
Accrued property, plant and equipment capital expenditures
|
(178.5
|
)
|
|
(167.2
|
)
|
Free Cash Flow
|
$
|
(31.6
|
)
|
|
$
|
(72.1
|
)
|
In the first quarter of 2020, Free Cash Flow outspend was $31.6 million compared to outspend of $72.1 million in the first quarter of 2019, primarily due to a $54.1 million increase in Adjusted EBITDA, partially offset by an $11.3 million increase to accrued property, plant and equipment capital expenditures.
Revenue
The following table presents our revenues disaggregated by revenue source.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
|
Change
|
|
(in millions)
|
Oil and condensate, gas and NGL sales, as presented
|
$
|
221.8
|
|
|
$
|
275.6
|
|
|
$
|
(53.8
|
)
|
Transportation and processing costs included in revenue(1)
|
14.3
|
|
|
13.8
|
|
|
0.5
|
|
Oil and condensate, gas and NGL sales, as adjusted(2)
|
$
|
236.1
|
|
|
$
|
289.4
|
|
|
$
|
(53.3
|
)
|
|
|
|
|
|
|
Oil and condensate sales
|
$
|
220.0
|
|
|
$
|
249.5
|
|
|
$
|
(29.5
|
)
|
Gas sales
|
6.5
|
|
|
23.0
|
|
|
(16.5
|
)
|
NGL sales
|
9.6
|
|
|
16.9
|
|
|
(7.3
|
)
|
Oil and condensate, gas and NGL sales, as adjusted(2)
|
$
|
236.1
|
|
|
$
|
289.4
|
|
|
$
|
(53.3
|
)
|
____________________________
|
|
(1)
|
Depending on the terms of the contract, a portion of the total transportation and processing costs incurred by the Company are deducted from revenue. Refer to the Operating Expenses section below for a reconciliation of total transportation and processing costs.
|
|
|
(2)
|
Oil and condensate, gas and NGL sales (the most comparable GAAP measure) as presented on the statements of operations is reconciled to oil and condensate, gas and NGL sales, as adjusted (a non-GAAP measure). Management excludes costs deducted from revenue to reflect total revenue associated with its production prior to deducting any expenses. Management believes that this non-GAAP measure is useful supplemental information for investors as it is reflective of the total revenue generated from its wells for the period. This non-GAAP measure should be considered by the reader in addition to, but not instead of, the financial measure prepared in accordance with GAAP. Refer to Note 2 – Revenue in Part 1, Item I of this Quarterly Report on Form 10-Q.
|
Revenue, Volume and Price Variance Analysis
The following table shows volume and price related changes for each of QEP's adjusted production-related revenue categories for the three months ended March 31, 2020, compared to the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and condensate
|
|
Gas
|
|
NGL
|
|
Total
|
|
(in millions)
|
Oil and condensate, gas and NGL sales, as adjusted
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
$
|
249.5
|
|
|
$
|
23.0
|
|
|
$
|
16.9
|
|
|
$
|
289.4
|
|
Changes associated with volumes(1)
|
6.7
|
|
|
(2.9
|
)
|
|
2.7
|
|
|
6.5
|
|
Changes associated with prices(2)
|
(36.2
|
)
|
|
(13.6
|
)
|
|
(10.0
|
)
|
|
(59.8
|
)
|
Three months ended March 31, 2020
|
$
|
220.0
|
|
|
$
|
6.5
|
|
|
$
|
9.6
|
|
|
$
|
236.1
|
|
____________________________
|
|
(1)
|
The revenue variance attributed to the change in volume is calculated by multiplying the change in volume from the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, by the average field-level price for the three months ended March 31, 2019.
|
|
|
(2)
|
The revenue variance attributed to the change in price is calculated by multiplying the change in average field-level price from the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, by the respective volumes for the three months ended March 31, 2020. Pricing changes are driven by changes in commodity average field-level prices, excluding the impact from commodity derivatives.
|
Production and Pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Change
|
Total production volumes (Mboe)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
2,978.1
|
|
|
3,377.0
|
|
|
(398.9
|
)
|
Other Northern
|
2.6
|
|
|
24.7
|
|
|
(22.1
|
)
|
Southern Region
|
|
|
|
|
|
|
Permian Basin
|
4,946.7
|
|
|
4,082.3
|
|
|
864.4
|
|
Haynesville/Cotton Valley
|
—
|
|
|
317.2
|
|
|
(317.2
|
)
|
Other Southern
|
3.5
|
|
|
5.1
|
|
|
(1.6
|
)
|
Total production
|
7,930.9
|
|
|
7,806.3
|
|
|
124.6
|
|
|
|
|
|
|
|
Total equivalent prices (per Boe)
|
|
|
|
|
|
Average field-level equivalent price
|
$
|
29.78
|
|
|
$
|
37.08
|
|
|
$
|
(7.30
|
)
|
Commodity derivative impact
|
5.37
|
|
|
(0.75
|
)
|
|
6.12
|
|
Net realized equivalent price
|
$
|
35.15
|
|
|
$
|
36.33
|
|
|
$
|
(1.18
|
)
|
Oil and Condensate Volumes and Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Change
|
Oil and condensate production volumes (Mbbl)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
1,905.7
|
|
|
2,158.0
|
|
|
(252.3
|
)
|
Other Northern
|
(3.2
|
)
|
|
11.0
|
|
|
(14.2
|
)
|
Southern Region
|
|
|
|
|
|
Permian Basin
|
3,316.3
|
|
|
2,914.5
|
|
|
401.8
|
|
Other Southern
|
0.3
|
|
|
0.1
|
|
|
0.2
|
|
Total production
|
5,219.1
|
|
|
5,083.6
|
|
|
135.5
|
|
Average field-level oil prices (per bbl)
|
|
|
|
|
|
Northern Region
|
$
|
41.66
|
|
|
$
|
50.88
|
|
|
$
|
(9.22
|
)
|
Southern Region
|
$
|
42.43
|
|
|
$
|
47.75
|
|
|
$
|
(5.32
|
)
|
|
|
|
|
|
|
Average field-level price
|
$
|
42.15
|
|
|
$
|
49.08
|
|
|
$
|
(6.93
|
)
|
Commodity derivative impact
|
8.17
|
|
|
(0.58
|
)
|
|
8.75
|
|
Net realized price
|
$
|
50.32
|
|
|
$
|
48.50
|
|
|
$
|
1.82
|
|
Oil and condensate revenues decreased $29.5 million, or 12%, in the first quarter of 2020 compared to the first quarter of 2019, due to lower average field-level prices, partially offset by higher aggregate oil and condensate production volumes. Average field-level oil prices decreased 14% in the first quarter of 2020 compared to the first quarter of 2019 primarily driven by a decrease in average NYMEX-WTI oil prices for the comparable periods, partially offset by a $2.55 per bbl, or 44%, decrease in the basis differential relative to the average NYMEX-WTI oil price in the first quarter of 2020 compared to the first quarter of 2019. The 3% increase in production volumes was primarily driven by an increase in production in the Permian Basin due to continued drilling and completion activity in the first quarter of 2020, partially offset by a decrease in production in the Williston Basin due to a reduced level of activity.
Gas Volumes and Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Change
|
Gas production volumes (Bcf)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
3.0
|
|
|
3.8
|
|
|
(0.8
|
)
|
Other Northern
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
Southern Region
|
|
|
|
|
|
|
Permian Basin
|
5.1
|
|
|
3.4
|
|
|
1.7
|
|
Haynesville/Cotton Valley
|
—
|
|
|
1.9
|
|
|
(1.9
|
)
|
Other Southern
|
—
|
|
|
—
|
|
|
—
|
|
Total production
|
8.1
|
|
|
9.2
|
|
|
(1.1
|
)
|
Average field-level gas prices (per Mcf)
|
|
|
|
|
|
Northern Region
|
$
|
1.59
|
|
|
$
|
3.24
|
|
|
$
|
(1.65
|
)
|
Southern Region
|
$
|
0.36
|
|
|
$
|
1.93
|
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
Average field-level price
|
$
|
0.81
|
|
|
$
|
2.49
|
|
|
$
|
(1.68
|
)
|
Commodity derivative impact
|
—
|
|
|
(0.31
|
)
|
|
0.31
|
|
Net realized price
|
$
|
0.81
|
|
|
$
|
2.18
|
|
|
$
|
(1.37
|
)
|
Gas revenues decreased $16.5 million, or 72%, in the first quarter of 2020 compared to the first quarter of 2019, due to lower average field-level prices and lower gas production volumes. Average field-level gas prices decreased 67% in the first quarter of 2020 compared to the first quarter of 2019, primarily driven by a decrease in average NYMEX-HH gas spot prices and a $0.48 per Mcf, or 72% increase, in regional basis differentials relative to the average NYMEX-HH gas price in comparable periods. Production volumes decreased 12% in the first quarter of 2020 compared to the first quarter of 2019, primarily due to the Haynesville Divestiture and a reduced level of activity in the Williston Basin. These production decreases were partially offset by increased production in the Permian Basin due to continued drilling and completion activity in the first quarter of 2020.
NGL Volumes and Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Change
|
NGL production volumes (Mbbl)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
585.4
|
|
|
578.8
|
|
|
6.6
|
|
Other Northern
|
0.6
|
|
|
(0.3
|
)
|
|
0.9
|
|
Southern Region
|
|
|
|
|
|
|
Permian Basin
|
782.8
|
|
|
599.9
|
|
|
182.9
|
|
Other Southern
|
0.3
|
|
|
0.4
|
|
|
(0.1
|
)
|
Total production
|
1,369.1
|
|
|
1,178.8
|
|
|
190.3
|
|
Average field-level NGL prices (per bbl)
|
|
|
|
|
|
Northern Region
|
$
|
6.02
|
|
|
$
|
12.78
|
|
|
$
|
(6.76
|
)
|
Southern Region
|
$
|
7.77
|
|
|
$
|
15.80
|
|
|
$
|
(8.03
|
)
|
|
|
|
|
|
|
Average field-level price
|
$
|
7.02
|
|
|
$
|
14.31
|
|
|
$
|
(7.29
|
)
|
Commodity derivative impact
|
—
|
|
|
—
|
|
|
—
|
|
Net realized price
|
$
|
7.02
|
|
|
$
|
14.31
|
|
|
$
|
(7.29
|
)
|
During the first quarter of 2020 and 2019, the Company elected to recover ethane in the Permian Basin. NGL revenues decreased $7.3 million, or 43%, during the first quarter of 2020 compared to the first quarter of 2019, due to lower average field-level prices, partially offset by higher NGL production volumes. The 51% decrease in NGL prices during the first quarter of 2020 compared to the first quarter of 2019 was primarily driven by a decrease in propane, ethane and other NGL component prices. The 16% increase in NGL production volumes was primarily driven by continued drilling and completion activity in the Permian Basin and increased ethane recovery in the Williston Basin; partially offset by decreased activity in the Williston Basin.
Operating Expenses
The following table presents QEP production costs and production costs on a per unit of production basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Change
|
|
(in millions)
|
Lease operating expense
|
$
|
40.2
|
|
|
$
|
51.5
|
|
|
$
|
(11.3
|
)
|
Adjusted transportation and processing costs(1)
|
27.8
|
|
|
24.7
|
|
|
3.1
|
|
Production and property taxes
|
18.7
|
|
|
24.0
|
|
|
(5.3
|
)
|
Total production costs
|
$
|
86.7
|
|
|
$
|
100.2
|
|
|
$
|
(13.5
|
)
|
|
(per Boe)
|
Lease operating expense
|
$
|
5.06
|
|
|
$
|
6.60
|
|
|
$
|
(1.54
|
)
|
Adjusted transportation and processing costs(1)
|
3.51
|
|
|
3.17
|
|
|
0.34
|
|
Production and property taxes
|
2.37
|
|
|
3.07
|
|
|
(0.70
|
)
|
Total production costs
|
$
|
10.94
|
|
|
$
|
12.84
|
|
|
$
|
(1.90
|
)
|
____________________________
|
|
(1)
|
Below are reconciliations of transportation and processing costs (the most comparable GAAP measure) as presented on the statements of operations and on a unit of production basis to adjusted transportation and processing costs. Adjusted transportation and processing costs includes transportation and processing costs that are reflected as part of "Oil and condensate, gas and NGL sales" on the statements of operations. Management adds these costs together to reflect the total operating costs associated with its production. Management believes that this non-GAAP measure is useful supplemental information for investors as it is reflective of the total production costs required to operate the wells for the period. This non-GAAP measure should be considered by the reader in addition to, but not instead of, the financial measure prepared in accordance with GAAP. Refer to Note 2 – Revenue in Part 1, Item I of this Quarterly Report on Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
Change
|
|
(in millions)
|
Transportation and processing costs, as presented
|
$
|
13.5
|
|
|
$
|
10.9
|
|
|
$
|
2.6
|
|
Transportation and processing costs deducted from oil and condensate, gas and NGL sales
|
14.3
|
|
|
13.8
|
|
|
0.5
|
|
Adjusted transportation and processing costs
|
$
|
27.8
|
|
|
$
|
24.7
|
|
|
$
|
3.1
|
|
|
(per Boe)
|
Transportation and processing costs, as presented
|
$
|
1.71
|
|
|
$
|
1.40
|
|
|
$
|
0.31
|
|
Transportation and processing costs deducted from oil and condensate, gas and NGL sales
|
1.80
|
|
|
1.77
|
|
|
0.03
|
|
Adjusted transportation and processing costs
|
$
|
3.51
|
|
|
$
|
3.17
|
|
|
$
|
0.34
|
|
Lease operating expense (LOE). QEP's LOE decreased $11.3 million, or 22%, in the first quarter of 2020 compared to the first quarter of 2019, primarily due to a decrease in maintenance and repair expenses, power and fuel expenses, labor and workovers in the Permian and Williston basins as a result of continuing efforts to reduce operating expenses.
During the first quarter of 2020, LOE decreased $1.54 per Boe, or 23%, compared to the first quarter of 2019, primarily due to continuing efforts to reduce operating expenses.
Adjusted transportation and processing costs (non-GAAP). Adjusted transportation and processing costs increased $3.1 million, or 13%, in the first quarter of 2020 compared to the first quarter of 2019. The increase in expense was primarily due to increased production in the Permian Basin and increased gathering and processing rates in the Williston Basin, partially offset by the Haynesville Divestiture and decreased production in the Williston Basin.
During the first quarter of 2020, adjusted transportation and processing costs increased $0.34 per Boe, or 11%, compared to the first quarter of 2019. The increase was primarily due to increased gathering and processing rates in the Williston Basin, partially offset by the Haynesville Divestiture, which had higher adjusted transportation and processing costs per Boe.
Production and property taxes. Production and property taxes decreased $5.3 million, or 22%, in the first quarter of 2020 compared to the first quarter of 2019, primarily due to decreased revenues in the Williston and Permian basins and the related production taxes, combined with decreased property tax expense in the Permian Basin.
During the first quarter of 2020, production and property taxes decreased $0.70 per Boe, or 23%, compared to the first quarter of 2019, primarily due to a decrease in revenues and the associated production taxes in the Permian and Williston basins and lower property tax expense per Boe in the Permian Basin.
Depreciation, depletion and amortization (DD&A). DD&A expense increased $18.9 million in the first quarter of 2020 compared to the first quarter of 2019, primarily due to increased production in the Permian Basin and higher DD&A rates in the Permian and Williston basins. These increases in DD&A expense were partially offset by a decrease in production in the Williston Basin.
Impairment expense. During the first quarter of 2020, there were no impairment charges. During the first quarter of 2019, QEP recorded impairment charges of $5.0 million, which related to impairment of an office building lease.
General and administrative (G&A) expense. During the first quarter of 2020, G&A expense decreased $47.4 million, or 75%, compared to the first quarter of 2019. During the first quarter of 2020 and 2019, QEP incurred $1.4 million and $26.0 million, respectively, in costs associated with the implementation of our strategic initiatives, of which $1.4 million and $20.3 million, respectively, related to restructuring costs (refer to Note 9 – Restructuring, in Item I of Part I of this Quarterly Report on Form 10-Q). Excluding costs associated with the implementation of our strategic initiatives, G&A expense decreased by $22.8 million, or 61%, primarily due to an $11.5 million decrease in expense related to the reduction in market value on the deferred compensation plan, $8.5 million decrease in labor, benefits and bonus, primarily due to workforce reductions and $1.5 million decrease in share-based compensation due to the reduction in workforce and the decline in QEP's stock price.
Net gain (loss) from asset sales, inclusive of restructuring costs. During the first quarter of 2020, QEP recognized a gain on the sale of assets of $3.7 million, primarily related to divestitures of properties outside our main operating areas. During the first quarter of 2019, QEP recognized a loss on the sale of assets of $13.2 million, primarily related to a net pre-tax loss on sale of $15.0 million related to our Haynesville Divestiture, which included $1.4 million of restructuring costs (refer to Note 9 – Restructuring, in Item I of Part I of this Quarterly Report on Form 10-Q for more information).
Non-operating Expenses
Realized and unrealized gains (losses) on derivative contracts. Gains and losses on derivative contracts are comprised of both realized and unrealized gains and losses on QEP's commodity derivative contracts, which are marked-to-market each quarter. During the first quarter of 2020, gains on commodity derivative contracts were $449.9 million, of which $407.3 million were unrealized gains and $42.6 million were realized gains on settled derivative contracts. During the first quarter of 2019, losses on commodity derivative contracts were $181.7 million, of which $177.6 million were unrealized losses, $5.9 million were realized losses on derivative contracts related to production contracts and $1.8 million were unrealized gains related to the Haynesville Divestiture (refer to Note 7 – Derivative Contracts, in Item I of Part I of the Quarterly Report on Form 10-Q for more information).
Gain on early extinguishment of debt. Gain on early extinguishment of debt increased by $25.2 million in the first quarter of 2020 compared to the first quarter of 2019. The increase during the first quarter of 2020 was due to the early repayment of $98.2 million in principal amount of our senior notes at a discount (Refer to Note 10 – Debt, in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information).
Interest and other income (expense). Interest and other income (expense) decreased by $5.4 million, or 193%, during the first quarter of 2020 compared to the first quarter of 2019. The decrease was primarily related to a $5.3 million loss on the deferred compensation plan.
Interest expense. Interest expense decreased $2.4 million, or 7%, during the first quarter of 2020 compared to the first quarter of 2019. The decrease during the first quarter of 2020 was primarily related to decreased interest expense on senior notes, a reduction of accrued interest on the Company's uncertain tax position that expired in the fourth quarter of 2019 and decreased borrowings under the credit facility.
Income tax (provision) benefit. Income tax expense increased $178.3 million during the first quarter of 2020 compared to the first quarter of 2019. The increase in expense was the result of having pre-tax income during the first quarter of 2020 compared to a pre-tax loss in 2019. QEP’s effective federal and state income tax rate was 15.3% during the first quarter of 2020 compared to a rate of 49.0% during the first quarter of 2019. The decrease in the federal and state income tax rate was primarily driven by the impact of discrete items (unusual or infrequent items impacting the tax provision) recognized during the first quarter of 2019 and 2020. The primary discrete item recognized during the first quarter of 2020 related to the remeasurement of deferred taxes related to a NOL carryback under the CARES Act to a year with a higher federal tax rate. The primary discrete item recognized during the first quarter of 2019 related to the remeasurement of deferred taxes associated with the Haynesville Divestiture.
LIQUIDITY AND CAPITAL RESOURCES
QEP strives to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility and fund its development projects, operations and capital expenditures and return capital to shareholders. The Company utilizes derivative contracts to reduce the financial impact of commodity price volatility and provide a level of certainty to the Company's cash flows. QEP generally funds its operations and planned capital expenditures with cash flow from its operating activities, cash on hand and borrowings under its revolving credit facility. QEP also periodically accesses debt and equity markets and sells properties to enhance its liquidity. Additionally, in March 2020, the Board of Directors indefinitely suspended the payment of quarterly dividends. The Company expects that the annual generation of Free Cash Flow, cash on hand and expected AMT credit refunds will be sufficient to fund its operations, capital expenditures, interest expense and debt maturities, including $332.3 million of Senior Notes due March 1, 2021, during the next 12 months and the foreseeable future. To the extent that the Company sells additional assets, the Company plans to use the proceeds to fund on-going operations, reduce debt and for general corporate purposes.
During the three months ended March 31, 2020, QEP received cash proceeds from the disposition of assets of $12.6 million. QEP used the proceeds to repurchase a portion of its senior notes and for general corporate purposes.
As of March 31, 2020, the Company had $70.3 million in cash and cash equivalents, no borrowings under its revolving credit facility and $2.9 million in letters of credit outstanding. The Company estimates that as of March 31, 2020, it could incur additional indebtedness of $238.6 million and be in compliance with the covenants contained in its revolving credit facility. The Company estimates that as of March 31, 2020, the maximum allowable total debt it may incur and remain in compliance with the covenants in its credit facility is approximately $2,175 million. To the extent actual operating results, realized commodity prices, receipt of AMT credit refunds or uses of cash differ from the Company's assumptions, QEP's liquidity could be adversely affected. Further, we may from time to time seek to retire, amend or restructure some or all of our outstanding debt or debt agreements through cash purchases, exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Credit Facility
QEP's revolving credit facility, which matures in September 2022, provides for loan commitments of $1.25 billion. The credit facility provides for borrowings at short-term interest rates and contains customary covenants and restrictions. The credit agreement contains financial covenants (that are defined in the credit agreement) that limit the amount of debt the Company can incur and may limit the amount available to be drawn under the credit facility including: (i) a net funded debt to capitalization ratio that may not exceed 60%, (ii) a leverage ratio under which net funded debt may not exceed 3.75 times consolidated EBITDA (as defined in the credit agreement), and (iii) a present value coverage ratio under which the present value of the Company's proved reserves must exceed net funded debt by 1.50 times at any time on or after January 1, 2020. As of March 31, 2020 and December 31, 2019, QEP was in compliance with the covenants under its credit agreement.
A present value is required to be delivered to the bank group by April 1 of each year for the present value coverage ratio covenant and is calculated using the prior year end reserve report and an average commodity price deck provided by a subset of the bank group. As of April 23, 2020, the present value coverage ratio was the most restrictive financial covenant with respect to the Company incurring additional indebtedness. Based on the current market conditions, the Company can make no assurance regarding future availability under its revolving credit facility, continued compliance with restrictive financial covenants and ability to borrow under the credit facility beyond April 1, 2021, at which time the next present value calculation is required to be delivered to the bank group. The Company has a variety of options to minimize this risk, including, but not limited to, either amending its existing credit facility or entering into a new credit facility. See “Risk Factors” in this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for risks related to our credit facility and other debt instruments.
As of March 31, 2020 and December 31, 2019, QEP had no borrowings outstanding and $2.9 million in letters of credit outstanding under the credit facility. As of April 23, 2020, QEP had no borrowings outstanding and had $4.1 million in letters of credit outstanding under the credit facility and was in compliance with the covenants under the credit agreement.
Senior Notes
The Company's senior notes outstanding as of March 31, 2020 totaled a principal amount of $1,934.2 million and are comprised of four issuances as follows:
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•
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$332.3 million 6.875% Senior Notes due March 2021;
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•
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$465.1 million 5.375% Senior Notes due October 2022;
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•
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$636.8 million 5.25% Senior Notes due May 2023; and
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•
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$500.0 million 5.625% Senior Notes due March 2026.
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During the period ended March 31, 2020, QEP repurchased principal amounts of $50.1 million of its 6.875% Senior Notes due March 2021, $34.9 million of its 5.375% Senior Notes due October 1, 2022 and $13.2 million of its 5.25% Senior Notes due May 1, 2023. The Company recorded $25.2 million in "Gain from early extinguishment of debt" on the statements of operations associated with the repurchase of Senior Notes during the period ended March 31, 2020.
The Company expects to fund the maturity of its 6.875% Senior Notes due March 2021 with cash on hand, the annual generation of FCF and the expected AMT credit refunds.
Cash Flow from Operating Activities
Cash flows from operating activities are primarily affected by oil and condensate, gas and NGL production volumes and commodity prices (including the effects of settlements of the Company's derivative contracts) and by changes in working capital. QEP typically enters into commodity derivative transactions covering a substantial, but varying, portion of its anticipated future oil and gas production for the next 12 to 24 months.
Net cash provided by (used in) operating activities is presented below:
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Three Months Ended March 31,
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2020
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2019
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Change
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(in millions)
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Net income (loss)
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$
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367.4
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$
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(116.7
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)
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$
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484.1
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Non-cash adjustments to net income (loss)
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(91.1
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)
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206.8
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(297.9
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)
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Changes in operating assets and liabilities
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(124.4
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)
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(11.8
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)
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(112.6
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)
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Net cash provided by (used in) operating activities
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$
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151.9
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|
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$
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78.3
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|
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$
|
73.6
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Net cash provided by operating activities was $151.9 million during the first quarter of 2020, which included $367.4 million of net income, $91.1 million of non-cash adjustments to net income and $124.4 million in changes in operating assets and liabilities. Non-cash adjustments to net income of $91.1 million primarily included $407.3 million of unrealized gains on derivative contracts and $25.2 million of gains from early extinguishment of debt, partially offset by deferred income tax of $195.0 million and DD&A expense of $142.2 million.
The decrease in changes in operating assets and liabilities of $124.4 million primarily resulted from an increase in income tax receivable of $128.0 million.
Net cash provided by operating activities was $78.3 million during the first quarter of 2019, which included $116.7 million of net loss, $206.8 million of non-cash adjustments to the net loss and $11.8 million in changes in operating assets and liabilities. Non-cash adjustments to the net loss of $206.8 million primarily included $175.8 million of unrealized losses on derivative contracts, DD&A expense of $123.3 million, net loss from assets sales, inclusive of restructuring costs, of $13.2 million, and $8.0 million of non-cash share-based compensation expense, partially offset by $117.9 million of deferred income tax benefit. The decrease in changes in operating assets and liabilities of $11.8 million primarily resulted from decreases in accounts payable and accrued expenses and deferred credits, partially offset by decreases in accounts receivable and prepaid expenses and an increase in accrued income taxes.
Cash Flow from Investing Activities
A comparison of capital expenditures for the first quarter of 2020 and 2019, are presented in the table below:
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Three Months Ended March 31,
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2020
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2019
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Change
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(in millions)
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Property acquisitions
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$
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3.0
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$
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0.6
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$
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2.4
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Property, plant and equipment capital expenditures
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178.5
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167.2
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11.3
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Total accrued capital expenditures
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181.5
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167.8
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13.7
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Change in accruals and other non-cash adjustments
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$
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(13.9
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)
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$
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(2.6
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)
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$
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(11.3
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)
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Total cash capital expenditures
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$
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167.6
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$
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165.2
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$
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2.4
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In the first quarter of 2020, on an accrual basis, the Company invested $178.5 million on property, plant and equipment capital expenditures (which excludes property acquisitions), an increase of $11.3 million compared to the first quarter of 2019. In the first quarter of 2020, QEP's primary capital expenditures included $144.4 million in the Permian Basin (including midstream infrastructure of $5.1 million, primarily related to oil and gas gathering and water handling) and $33.8 million in the Williston Basin.
In the first quarter of 2019, on an accrual basis, the Company invested $167.2 million on property, plant and equipment capital expenditures (which excludes property acquisitions). QEP's significant capital expenditures included $163.0 million in the Permian Basin (including midstream infrastructure of $18.1 million, primarily related to oil and gas gathering and water handling), and $5.0 million in the Williston Basin.
The mid-point of our 2020 forecasted capital expenditures (excluding property acquisitions) is $385.0 million. QEP intends to fund capital expenditures (excluding property acquisitions) with cash on hand, cash flow from operating activities and proceeds from our derivative portfolio. The aggregate levels of capital expenditures for 2020 and the allocation of those expenditures are dependent on a variety of factors, including the continued impact on the market due to the COVID-19 pandemic and OPEC actions, oil, gas and NGL prices, industry conditions, changes in management's business assessments as to where QEP's capital can be most profitably deployed, drilling results, the extent to which properties or working interests are acquired or divested and the availability of capital resources to fund the expenditures. Accordingly, the actual levels of capital expenditures and the allocation of those expenditures may vary materially from QEP's estimates.
Cash Flow from Financing Activities
In the first quarter of 2020, net cash used in financing activities was $92.4 million compared to net cash used in financing activities of $440.1 million in the first quarter of 2019. During the first quarter of 2020, QEP used $72.7 million of cash to repurchase senior notes and paid a quarterly dividend of $4.8 million. During the first quarter of 2020, QEP had a decrease in checks outstanding in excess of cash balances of $14.1 million.
During the first quarter of 2019, QEP made repayments on its credit facility of $474.5 million and had borrowings from its credit facility of $44.5 million. In addition, QEP had treasury stock repurchases of $5.8 million related to the settlement of income tax and related benefit withholding obligations arising from the vesting of restricted share grants. During the first quarter of 2019, QEP had a decrease in checks outstanding in excess of cash balances of $4.3 million.
As of March 31, 2020, the total amount of long-term debt was $1,919.0 million, of which $1,934.2 million was the principal amount of its senior notes and $15.2 million was net original issue discount and unamortized debt issuance costs.
Off-Balance Sheet Arrangements
QEP may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. At March 31, 2020, the Company's material off-balance sheet arrangements included drilling, gathering, processing and firm transportation arrangements and undrawn letters of credit. There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on QEP's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. For more information regarding off-balance sheet arrangements, we refer you to "Contractual Cash Obligations and Other Commitments" in our 2019 Annual Report on Form 10-K.
Contractual Cash Obligations and Other Commitments
We have various contractual obligations in the normal course of our operations and financing activities. There have been no material changes to our contractual obligations from those disclosed in our 2019 Annual Report on Form 10-K.