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 Condensed Consolidated 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, 2018
(
2018
Form 10-K) and analyzes the changes in the results of operations between the
three months ended
March 31, 2019
and
2018
. 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
2018
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".
In February 2018, QEP's Board of Directors unanimously approved certain strategic and financial initiatives (2018 Strategic Initiatives), including plans to market its assets in the Williston Basin, Uinta Basin and Haynesville/Cotton Valley and focus its activities in the Permian Basin. The Company sold its Uinta Basin assets in September 2018 (Uinta Basin Divestiture) and closed the sale of the Haynesville/Cotton Valley assets in January 2019 (Haynesville Divestiture). In addition, the Company entered into a purchase and sale agreement for its Williston Basin assets in November 2018. However, in February 2019, the Company agreed with the buyer to terminate the purchase and sale agreement.
In February 2019, QEP's Board of Directors commenced a comprehensive review of strategic alternatives to maximize shareholder value, which could result in a merger or sale of the Company or other transaction involving the Company's assets. Additionally, in light of the reduction of the Company's operational footprint over the last twelve months, QEP continues to reassess its organizational needs and intends to significantly reduce its general and administrative expense (excluding $61.0 million of expenses associated with our 2018 Strategic Initiatives) by approximately 45% to ensure its cost structure is competitive with industry peers. The Company incurred
$20.3 million
of general and administrative restructuring costs related to organizational changes implemented during the first quarter of 2019 and continues to evaluate reductions in general and administrative expense.
As a part of the 2018 and 2019 strategic initiatives, QEP has incurred or expects to incur additional 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.
Acquisitions and Divestitures
While we believe our inventory of identified drilling locations provides a solid base for growth in production and reserves, we will continue to evaluate and acquire properties in our operating areas to add additional development opportunities and facilitate the drilling of long lateral wells.
Acquisitions
During the
three months ended
March 31, 2019
, QEP acquired various oil and gas properties, which primarily included proved acreage in the Permian Basin for an aggregate purchase price of
$0.6 million
, subject to post-closing purchase price adjustments.
During the
three months ended
March 31, 2018
, QEP acquired various oil and gas properties, which primarily included proved and unproved leasehold acreage in the Permian Basin for an aggregate purchase price of
$36.2 million
, subject to post-closing purchase price adjustments. Of the
$36.2 million
,
$35.7 million
was related to acquisitions from various entities that owned additional oil and gas interests in certain properties included in the 2017 acquisition of oil and gas properties in the Permian Basin (2017 Permian Basin Acquisition) on substantially the same terms and conditions as the 2017 Permian Basin Acquisition in the fourth quarter of 2017.
Divestitures
In January 2019, QEP closed its previously announced Haynesville Divestiture for net cash proceeds of
$615.3 million
, subject to post-closing purchase price adjustments, and recorded a pre-tax
loss
on sale of
$18.0 million
. Of the
$18.0 million
pre-tax
loss
on sale,
$15.0 million
was recognized during the
three months ended March 31, 2019
, and
$3.0 million
was recognized during the fourth quarter of 2018 within "Net gain (loss) from asset sales, inclusive of restructuring costs" on the Condensed Consolidated Statements of Operations. Included in the
$15.0 million
pre-tax loss on sale is
$1.4 million
of restructuring costs related to the Haynesville Divestiture during the
three months ended
March 31, 2019
. Refer to
Note 9 – Restructuring
for more information. As of
March 31, 2019
,
$22.1 million
remained in escrow due to title defects asserted prior to closing, to be resolved pursuant to the purchase and sale agreement's title dispute resolution procedures, of which $5.8 million was included in "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. As of
December 31, 2018
, the Haynesville/Cotton Valley assets were classified in the Company's Condensed Consolidated Financial Statements as held for sale. 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 received 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.
During the
three months ended
March 31, 2018
, QEP received net cash proceeds of
$33.3 million
and recorded a pre-tax
gain
on sale of
$3.5 million
, primarily related to the divestiture of properties outside our main operating areas in the Williston Basin, Pinedale and Other Northern areas.
Financial and Operating Highlights
During the
three months ended
March 31, 2019
, QEP:
|
|
•
|
Closed the Haynesville Divestiture, for net cash proceeds of
$615.3 million
;
|
|
|
•
|
Delivered oil and condensate production of
5.1
MMbbls, a
2%
increase
over the
first quarter
2018
volumes;
|
|
|
•
|
Increased oil and condensate production in the Permian Basin by
35%
to
2.9
MMbbls over the
first quarter
2018
;
|
|
|
•
|
Reported net realized oil price of
$48.50
per bbl, a
6%
decrease
from the
first quarter
2018
;
|
|
|
•
|
Generated a net
loss
of
$116.7 million
, or
$0.49
per diluted share; and
|
|
|
•
|
Reported Adjusted EBITDA (a non-GAAP financial measure defined and reconciled below) of
$119.8 million
.
|
Outlook
The Company continues to focus on reducing its operating costs and per well drilling costs and managing its liquidity. We believe our balance sheet and sufficient liquidity will allow us to grow oil and condensate production in our operating areas and achieve our strategic initiatives.
Based on current commodity prices, we expect to be able to fund our planned capital program for 2019 with cash flow from operating activities, cash on hand and borrowings under our credit facility. Our total capital expenditures (excluding property acquisitions) for
2019
are expected to be approximately
$640.0 million
, a
decrease
of approximately
46%
from 2018 capital expenditures. We continuously evaluate our level of drilling and completion activity in light of drilling results, commodity prices 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
Shareholder Activism
Elliott Management Corporation (Elliott), is a beneficial holder of approximately 4.9% of our common stock (based on Elliott's Form 13F-HR filed on February 14, 2019). On January 7, 2019, Elliott made a proposal to our Board to acquire all of our outstanding shares of common stock for $8.75 per share in cash. Our Board made a decision to engage in a process to explore strategic alternatives, which could result in a merger or sale of the Company or another transaction involving the Company's assets. Our business and/or operations could be adversely affected by these and any future actions of activist shareholders. Responding to actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of our management and employees. Activities of activist shareholders could interfere with our ability to execute our strategic plan or realize short- or long-term value from our assets and could interfere with our ability to pursue strategic alternatives to Elliott's proposal. Perceived uncertainties as to our future direction could also result in the loss of potential business opportunities, make it more difficult or costly to attract and retain qualified personnel and affect the trading price of our securities.
Supply, Demand, Market Risk and their Impact on Oil Prices
Oil prices are affected by many factors outside of our control, including changes in supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials, export capacity, strength of the U.S. dollar and other factors. In recent years, oil prices have been affected by supply growth, particularly in the U.S., driven by advances in drilling and completion technologies, and fluctuations in demand driven by a variety of factors.
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 proved undeveloped (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. Historically, field-level prices received for QEP's oil production have been volatile. During the past five years, the posted price for WTI crude oil has ranged from a low of $26.19 per barrel in February 2016 to a high of $107.95 per barrel in June 2014. If oil prices decline to early 2016 levels or further, our operations, financial condition and level of expenditures for the development of our oil reserves may be materially and adversely affected.
Global Geopolitical and Macroeconomic Factors
QEP continues to monitor the global economy, including Europe and China's economic outlook; the Organization of Petroleum Exporting Countries (OPEC) countries' oil production and policies regarding production quotas; political unrest and global economic issues; slowing growth in certain emerging market economies; 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; 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 could have a significant impact on oil, gas and NGL supply, demand and prices and the Company's ability to continue its planned drilling programs and 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. At
March 31, 2019
, QEP forecasted its
2019
annual production to be approximately
29.4
MMboe (mid-point of guidance) and had approximately
64%
of its forecasted oil and condensate production covered with fixed price swaps. 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, 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 fair value 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, 2019
, there was no impairment related to proved and unproved oil and gas properties. During the
three months ended
March 31, 2019
, the Company recorded impairment charges of
$5.0 million
related to an office building lease.
During the
three months ended
March 31, 2018
, QEP recorded an impairment charge of
$0.7 million
, which was primarily related to the impairment of proved properties related to a divestiture in the Other Northern area and expiring leaseholds on unproved properties.
We could be at risk for proved and unproved property and operating lease right-of-use asset impairments if forward oil prices decline from
March 31, 2019
levels, we experience negative changes in estimated reserve quantities or from our strategic initiative results. The actual amount of impairment incurred, if any, for these 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 the properties, weighted-average cost of capital, operating cost estimates and future capital expenditure estimates.
Tax Legislation
The Tax Legislation enacted in December 2017 reduced our federal corporate tax rate from 35% to 21%. In addition, the Tax Legislation eliminated Alternative Minimum Tax (AMT) and QEP has the ability to offset its regular tax liability or claim refunds for taxable years 2018 through 2021 for AMT credits carried forward from prior years. The Company currently anticipates it will realize approximately $148.4 million in AMT credit refunds over the next four years with $74.2 million to be realized in 2019 for tax year 2018, which is included in "Income tax receivable" with the remaining $74.2 million included in "Deferred income taxes" on the Condensed Consolidated Balance Sheet as of
March 31, 2019
.
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 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. In certain of our producing areas, 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. As a result, multi-well pad drilling delays the completion of wells and the commencement of production. 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 planned conversion 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
2018
Form 10-K. The Company's Condensed Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of the Company's Condensed Consolidated 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, asset retirement obligations, revenue recognition, litigation and other contingencies, derivative contracts, pension and other postretirement benefits, share-based compensation, income taxes and purchase price allocations, among others, may involve a high degree of complexity and judgment on the part of management.
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, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operated
|
|
Non-operated
|
|
Drilling
|
|
Drilling
|
|
Waiting on completion
|
|
Drilling
|
|
Waiting on completion
|
|
Rigs
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
Northern Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Williston Basin
(1)
|
1
|
|
|
7
|
|
|
6.4
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
0.0
|
|
|
11
|
|
|
0.9
|
|
Other Northern
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Southern Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permian Basin
(2)
|
3
|
|
|
11
|
|
|
11.0
|
|
|
46
|
|
|
46.0
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
0.4
|
|
Other Southern
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
____________________________
|
|
(1)
|
All 7 gross operated drilling wells in the Williston Basin represent wells in which surface casing has been set as of
March 31, 2019
.
|
|
|
(2)
|
The number of gross operated drilling wells in the Permian Basin includes 9 wells for which surface casing has been set as of
March 31, 2019
.
|
Each gross well completed in more than one producing zone is counted as a single well. 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 conversion of PUD reserves to proved developed reserves. QEP had
46
gross operated wells waiting on completion as of
March 31, 2019
.
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, 2019
:
|
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|
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|
|
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|
Operated Put on Production
|
|
Non-operated Put on Production
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
Northern Region
|
|
|
|
|
|
|
|
Williston Basin
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other Northern
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Southern Region
|
|
|
|
|
|
|
|
Permian Basin
|
12
|
|
|
12.0
|
|
|
—
|
|
|
—
|
|
Other Southern
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The following table presents the number of operated wells in the process of being drilled or waiting on completion at
March 31, 2019
and operated wells completed and turned to sales (put on production) for the
three months ended
March 31, 2019
:
|
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|
|
|
|
|
|
|
|
|
|
|
Permian Basin
|
|
Williston Basin
|
|
As of March 31, 2019
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
Well Progress
|
|
|
|
|
|
|
|
Drilling
|
11
|
|
|
11.0
|
|
|
7
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
At total depth - under drilling rig
|
3
|
|
|
3.0
|
|
|
—
|
|
|
—
|
|
Waiting to be completed
|
28
|
|
|
28.0
|
|
|
—
|
|
|
—
|
|
Undergoing completion
|
4
|
|
|
4.0
|
|
|
—
|
|
|
—
|
|
Completed, awaiting production
|
11
|
|
|
11.0
|
|
|
—
|
|
|
—
|
|
Waiting on completion
|
46
|
|
|
46.0
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Put on production
|
12
|
|
|
12.0
|
|
|
—
|
|
|
—
|
|
RESULTS OF OPERATIONS
Net Income
QEP generated a net
loss
during the
first quarter
of
2019
of
$116.7 million
or
$0.49
per diluted share, compared to a net
loss
of
$53.6 million
or
$0.22
per diluted share, in the
first quarter
of
2018
. QEP's 2019 net
loss
was primarily driven by a
$134.2 million
decrease
in oil and condensate, gas and NGL sales due to a
74%
decrease in gas production due to the Haynesville/Cotton Valley and Uinta Basin divestitures and a
19%
decrease
in average field-level oil prices, and a
$128.5 million
increase in realized and unrealized derivative
losses
. These changes were partially offset by a
$98.1 million
increase in income tax benefit, a
decrease
in depreciation, depletion, and amortization expense of
$73.2 million
, and a
decrease
in both transportation and processing costs and lease operating expense of $44.1 million due to the Haynesville/Cotton Valley and Uinta Basin divestitures.
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 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 would 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,
|
|
2019
|
|
2018
|
|
(in millions)
|
Net income (loss)
|
$
|
(116.7
|
)
|
|
$
|
(53.6
|
)
|
Interest expense
|
34.0
|
|
|
35.0
|
|
Interest and other (income) expense
|
(2.8
|
)
|
|
0.7
|
|
Income tax provision (benefit)
|
(112.0
|
)
|
|
(13.9
|
)
|
Depreciation, depletion and amortization
|
123.3
|
|
|
196.5
|
|
Unrealized (gains) losses on derivative contracts
|
175.8
|
|
|
10.0
|
|
Net (gain) loss from asset sales, inclusive of restructuring costs
|
13.2
|
|
|
(3.5
|
)
|
Impairment
|
5.0
|
|
|
0.7
|
|
Adjusted EBITDA
|
$
|
119.8
|
|
|
$
|
171.9
|
|
In the
first quarter
of
2019
, Adjusted EBITDA
decrease
d to
$119.8 million
compared to
$171.9 million
in the
first quarter
of
2018
, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures and a
19%
decrease
in average field-level oil prices partially offset by a
$37.3 million
decrease in realized derivative losses.
Revenue
The following table presents our revenues disaggregated by revenue source.
|
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2019
|
|
2018
|
|
Change
|
|
(in millions)
|
Oil and condensate, gas and NGL sales, as presented
|
$
|
275.6
|
|
|
$
|
409.8
|
|
|
$
|
(134.2
|
)
|
Transportation and processing costs included in revenue
(1)
|
13.8
|
|
|
12.7
|
|
|
1.1
|
|
Oil and condensate, gas and NGL sales, as adjusted
(2)
|
$
|
289.4
|
|
|
$
|
422.5
|
|
|
$
|
(133.1
|
)
|
|
|
|
|
|
|
Oil and condensate sales
|
$
|
249.5
|
|
|
$
|
300.7
|
|
|
$
|
(51.2
|
)
|
Gas sales
|
23.0
|
|
|
102.0
|
|
|
(79.0
|
)
|
NGL sales
|
16.9
|
|
|
19.8
|
|
|
(2.9
|
)
|
Oil and condensate, gas and NGL sales, as adjusted
(2)
|
$
|
289.4
|
|
|
$
|
422.5
|
|
|
$
|
(133.1
|
)
|
____________________________
|
|
(1)
|
Transportation and processing costs are deducted from revenue and a portion of total transportation and processing costs incurred. 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 Condensed Consolidated 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, 2019
, compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and condensate
|
|
Gas
|
|
NGL
|
|
Total
|
|
(in millions)
|
Oil and condensate, gas and NGL sales, as adjusted
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
$
|
300.7
|
|
|
$
|
102.0
|
|
|
$
|
19.8
|
|
|
$
|
422.5
|
|
Changes associated with volumes
(1)
|
6.6
|
|
|
(75.3
|
)
|
|
6.1
|
|
|
(62.6
|
)
|
Changes associated with prices
(2)
|
(57.8
|
)
|
|
(3.7
|
)
|
|
(9.0
|
)
|
|
(70.5
|
)
|
Three months ended March 31, 2019
|
$
|
249.5
|
|
|
$
|
23.0
|
|
|
$
|
16.9
|
|
|
$
|
289.4
|
|
____________________________
|
|
(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, 2019
, as compared to the
three months ended
March 31, 2018
, by the average field-level price for the
three months ended
March 31, 2018
.
|
|
|
(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, 2019
, as compared to the
three months ended
March 31, 2018
, by the respective volumes for the
three months ended
March 31, 2019
. 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,
|
|
2019
|
|
2018
|
|
Change
|
Total production volumes (Mboe)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
3,377.0
|
|
|
3,729.7
|
|
|
(352.7
|
)
|
Uinta Basin
|
—
|
|
|
804.5
|
|
|
(804.5
|
)
|
Other Northern
|
24.7
|
|
|
105.5
|
|
|
(80.8
|
)
|
Southern Region
|
|
|
|
|
|
|
Permian Basin
|
4,082.3
|
|
|
2,782.9
|
|
|
1,299.4
|
|
Haynesville/Cotton Valley
|
317.2
|
|
|
4,290.5
|
|
|
(3,973.3
|
)
|
Other Southern
|
5.1
|
|
|
11.5
|
|
|
(6.4
|
)
|
Total production
|
7,806.3
|
|
|
11,724.6
|
|
|
(3,918.3
|
)
|
|
|
|
|
|
|
Total equivalent prices (per Boe)
|
|
|
|
|
|
Average field-level equivalent price
|
$
|
37.08
|
|
|
$
|
36.04
|
|
|
$
|
1.04
|
|
Commodity derivative impact
|
(0.75
|
)
|
|
(3.70
|
)
|
|
2.95
|
|
Net realized equivalent price
|
$
|
36.33
|
|
|
$
|
32.34
|
|
|
$
|
3.99
|
|
Oil and Condensate Volumes and Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
Oil and condensate production volumes (Mbbl)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
2,158.0
|
|
|
2,612.2
|
|
|
(454.2
|
)
|
Uinta Basin
|
—
|
|
|
151.7
|
|
|
(151.7
|
)
|
Other Northern
|
11.0
|
|
|
37.8
|
|
|
(26.8
|
)
|
Southern Region
|
|
|
|
|
|
Permian Basin
|
2,914.5
|
|
|
2,159.1
|
|
|
755.4
|
|
Other Southern
|
0.1
|
|
|
13.2
|
|
|
(13.1
|
)
|
Total production
|
5,083.6
|
|
|
4,974.0
|
|
|
109.6
|
|
Average field-level oil prices (per bbl)
|
|
|
|
|
|
Northern Region
|
$
|
50.88
|
|
|
$
|
60.93
|
|
|
$
|
(10.05
|
)
|
Southern Region
|
$
|
47.75
|
|
|
$
|
59.82
|
|
|
$
|
(12.07
|
)
|
|
|
|
|
|
|
Average field-level price
|
$
|
49.08
|
|
|
$
|
60.45
|
|
|
$
|
(11.37
|
)
|
Commodity derivative impact
|
(0.58
|
)
|
|
(8.91
|
)
|
|
8.33
|
|
Net realized price
|
$
|
48.50
|
|
|
$
|
51.54
|
|
|
$
|
(3.04
|
)
|
Oil and condensate revenues
decrease
d
$51.2 million
, or
17%
, in the
first quarter
of
2019
compared to the
first quarter
of
2018
, due to
lower
average field-level prices, partially offset by
higher
oil and condensate production volumes. Average field-level oil prices
decrease
d
19%
in the
first quarter
of
2019
compared to the
first quarter
of
2018
primarily driven by a
decrease
in average NYMEX-WTI oil prices for the comparable periods and a $3.28 per bbl, or 133%, increase in the basis differential relative to the average NYMEX-WTI oil price in the
first quarter
of
2019
compared to the
first quarter
of
2018
. The
2%
increase
in production volumes was driven by an increase in production in the Permian Basin due to increased well completions, partially offset by a decrease in production in the Williston Basin due to the lack of new well completions in the second half of 2018 and a loss of volumes as a result of the Uinta Basin Divestiture.
Gas Volumes and Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
Gas production volumes (Bcf)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
3.8
|
|
|
3.4
|
|
|
0.4
|
|
Uinta Basin
|
—
|
|
|
3.7
|
|
|
(3.7
|
)
|
Other Northern
|
0.1
|
|
|
0.4
|
|
|
(0.3
|
)
|
Southern Region
|
|
|
|
|
|
|
Permian Basin
|
3.4
|
|
|
1.9
|
|
|
1.5
|
|
Haynesville/Cotton Valley
|
1.9
|
|
|
25.7
|
|
|
(23.8
|
)
|
Other Southern
|
—
|
|
|
—
|
|
|
—
|
|
Total production
|
9.2
|
|
|
35.1
|
|
|
(25.9
|
)
|
Average field-level gas prices (per Mcf)
|
|
|
|
|
|
Northern Region
|
$
|
3.24
|
|
|
$
|
2.79
|
|
|
$
|
0.45
|
|
Southern Region
|
$
|
1.93
|
|
|
$
|
2.94
|
|
|
$
|
(1.01
|
)
|
|
|
|
|
|
|
Average field-level price
|
$
|
2.49
|
|
|
$
|
2.91
|
|
|
$
|
(0.42
|
)
|
Commodity derivative impact
|
(0.31
|
)
|
|
0.03
|
|
|
(0.34
|
)
|
Net realized price
|
$
|
2.18
|
|
|
$
|
2.94
|
|
|
$
|
(0.76
|
)
|
Gas revenues
decrease
d
$79.0 million
, or
77%
, in the
first quarter
of
2019
compared to the
first quarter
of
2018
, due to
lower
gas production volumes and
lower
average field-level prices. Production volumes
decrease
d
74%
in the
first quarter
of
2019
compared to the
first quarter
of
2018
, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures. Average field-level gas prices
decrease
d
14%
in the
first quarter
of
2019
compared to the
first quarter
of
2018
, primarily driven by a decrease in average NYMEX-HH gas spot prices and regional basis differentials for the comparable periods.
NGL Volumes and Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
NGL production volumes (Mbbl)
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
Williston Basin
|
578.8
|
|
|
551.4
|
|
|
27.4
|
|
Uinta Basin
|
—
|
|
|
36.3
|
|
|
(36.3
|
)
|
Other Northern
|
(0.3
|
)
|
|
3.3
|
|
|
(3.6
|
)
|
Southern Region
|
|
|
|
|
|
|
Permian Basin
|
599.9
|
|
|
312.9
|
|
|
287.0
|
|
Other Southern
|
0.4
|
|
|
0.5
|
|
|
(0.1
|
)
|
Total production
|
1,178.8
|
|
|
904.4
|
|
|
274.4
|
|
Average field-level NGL prices (per bbl)
|
|
|
|
|
|
Northern Region
|
$
|
12.78
|
|
|
$
|
22.58
|
|
|
$
|
(9.80
|
)
|
Southern Region
|
$
|
15.80
|
|
|
$
|
20.89
|
|
|
$
|
(5.09
|
)
|
|
|
|
|
|
|
Average field-level price
|
$
|
14.31
|
|
|
$
|
21.99
|
|
|
$
|
(7.68
|
)
|
Commodity derivative impact
|
—
|
|
|
—
|
|
|
—
|
|
Net realized price
|
$
|
14.31
|
|
|
$
|
21.99
|
|
|
$
|
(7.68
|
)
|
NGL revenues
decrease
d
$2.9 million
, or
15%
, during the
first quarter
of
2019
compared to the
first quarter
of
2018
, due to
lower
average field-level prices, partially offset by
higher
NGL production volumes. The
35%
decrease
in NGL prices during the
first quarter
of
2019
compared to the
first quarter
of
2018
was primarily driven by a decrease in propane, ethane and other NGL component prices. The
decrease
in price was partially offset by a
30%
increase
in NGL production volumes primarily driven by increases in production in the Permian Basin due to increased well completions and higher gas capture rates as a result of the completion of our midstream infrastructure and production increases in the Williston Basin due to higher gas capture rates, partially offset by a loss of volumes from the Uinta Basin Divestiture.
Resale Margin and Storage Activity
QEP purchases and resells oil and gas primarily to mitigate credit risk related to third party purchasers, to fulfill volume commitments when our production does not fulfill contractual commitments and to capture additional margin from subsequent sales of third party purchases.
With the conclusion of gas sales agreements QEP retained with the Pinedale and Uinta Basin divestitures in 2018 and the Haynesville Divestiture in 2019, including our firm transportation agreements in the first quarter of 2019, purchase and resale of gas will be minimal going forward.
The following table is a summary of QEP's financial results from its resale activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
|
(in millions)
|
Purchased oil and gas sales
|
$
|
1.3
|
|
|
$
|
14.1
|
|
|
$
|
(12.8
|
)
|
Purchased oil and gas expense
|
(1.4
|
)
|
|
(15.5
|
)
|
|
14.1
|
|
Realized gains (losses) on gas storage derivative contracts
|
—
|
|
|
0.2
|
|
|
(0.2
|
)
|
Resale margin
|
$
|
(0.1
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
1.1
|
|
Purchased oil and gas sales and expense were higher in the first quarter of 2018 compared to first quarter of 2019, primarily due to the fulfillment of a gas sales agreement related to Pinedale that was retained and not part of the Pinedale divestiture, and fulfillment of our firm volume commitments in Haynesville/Cotton Valley and our underground storage facility, which were divested in January 2019 and May 2018, respectively.
Operating Expenses
The following table presents QEP production costs and production costs on a per unit of production basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
|
(in millions)
|
Lease operating expense
|
$
|
51.5
|
|
|
$
|
72.5
|
|
|
$
|
(21.0
|
)
|
Adjusted transportation and processing costs
(1)
|
24.7
|
|
|
46.7
|
|
|
(22.0
|
)
|
Production and property taxes
|
24.0
|
|
|
28.9
|
|
|
(4.9
|
)
|
Total production costs
|
$
|
100.2
|
|
|
$
|
148.1
|
|
|
$
|
(47.9
|
)
|
|
(per Boe)
|
Lease operating expense
|
$
|
6.60
|
|
|
$
|
6.18
|
|
|
$
|
0.42
|
|
Adjusted transportation and processing costs
(1)
|
3.17
|
|
|
3.98
|
|
|
(0.81
|
)
|
Production and property taxes
|
3.07
|
|
|
2.47
|
|
|
0.60
|
|
Total production costs
|
$
|
12.84
|
|
|
$
|
12.63
|
|
|
$
|
0.21
|
|
____________________________
|
|
(1)
|
Below are reconciliations of transportation and processing costs (the most comparable GAAP measure) as presented on the Condensed Consolidated 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 Condensed Consolidated Statements of Operations. Management adds these costs together with transportation and processing costs reflected on the Condensed Consolidated Statements of Operations 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,
|
|
2019
|
|
2018
|
|
Change
|
|
(in millions)
|
Transportation and processing costs, as presented
|
$
|
10.9
|
|
|
$
|
34.0
|
|
|
$
|
(23.1
|
)
|
Transportation and processing costs deducted from oil and condensate, gas and NGL sales
|
13.8
|
|
|
12.7
|
|
|
1.1
|
|
Adjusted transportation and processing costs
|
$
|
24.7
|
|
|
$
|
46.7
|
|
|
$
|
(22.0
|
)
|
|
(per Boe)
|
Transportation and processing costs, as presented
|
$
|
1.40
|
|
|
$
|
2.90
|
|
|
$
|
(1.50
|
)
|
Transportation and processing costs deducted from oil and condensate, gas and NGL sales
|
1.77
|
|
|
1.08
|
|
|
0.69
|
|
Adjusted transportation and processing costs
|
$
|
3.17
|
|
|
$
|
3.98
|
|
|
$
|
(0.81
|
)
|
Lease operating expense (LOE).
QEP's LOE
decrease
d
$21.0 million
, or
29%
, in the
first quarter
of
2019
compared to the
first quarter
of
2018
, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures. Excluding those divestitures, LOE
decrease
d
$3.7 million
, driven by a decrease in workovers and maintenance and repair expenses in the Williston Basin.
During the
first quarter
of
2019
, LOE
increase
d
$0.42
per Boe, or
7%
, compared to the
first quarter
of
2018
, but was down 18% excluding the loss of lower LOE production due to the Haynesville/Cotton Valley and Uinta Basin divestitures. The 18% per BOE decrease related to lower cost production from the recent horizontal well completions in the Permian Basin and decreased workovers and maintenance and repair expenses in the Williston Basin.
Adjusted transportation and processing costs (non-GAAP).
Adjusted transportation and processing costs
decrease
d
$22.0 million
, or
47%
, in the
first quarter
of
2019
compared to the
first quarter
of
2018
. The
decrease
in expense was primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures. Excluding those divestitures, adjusted transportation and processing costs increased $0.6 million, primarily due to increased production in the Permian Basin, partially offset by decreased production in the Williston Basin.
During the
first quarter
of
2019
, adjusted transportation and processing costs decreased
$0.81
per Boe, or 20%, during the
first quarter
of
2019
compared to the
first quarter
of
2018
. The
decrease
was primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures, which had higher adjusted transportation and processing costs per Boe. Excluding the Haynesville/Cotton Valley and Uinta Basin divestitures, adjusted transportation and processing costs per Boe were down 9% due to increased production in the Permian Basin, which has lower adjusted transportation and processing costs per Boe.
Production and property taxes.
In most states in which QEP operates, QEP pays production taxes based on a percentage of field-level revenue, except in Louisiana, where severance taxes were volume-based. Production and property taxes
decrease
d
$4.9 million
, or
17%
, in the
first quarter
of
2019
compared to the
first quarter
of
2018
, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures. Excluding those divestitures, production and property taxes increased $0.4 million, primarily due to increased property taxes and revenues in the Permian Basin, partially offset by decreased revenues in the Williston Basin.
During the
first quarter
of
2019
, production and property taxes
increase
d
$0.60
per Boe, or
24%
, compared to the
first quarter
of
2018
, but decreased 10% excluding the Haynesville/Cotton Valley and Uinta Basin divestitures. The 10% decrease was due to a decrease in average field-level equivalent prices in the Permian and Williston basins.
Depreciation, depletion and amortization (DD&A).
DD&A expense
decrease
d
$73.2 million
in the
first quarter
of
2019
compared to the
first quarter
of
2018
, primarily due to the Haynesville/Cotton Valley and Uinta Basin divestitures. Excluding those divestitures, DD&A expense decreased $27.7 million, primarily due to a 2018 impairment of our Williston Basin assets which lowered the associated DD&A rate. This decrease was partially offset by increased DD&A in the Permian Basin due to increased volumes and a slightly higher DD&A rate.
Impairment expense.
During the
first quarter
of
2019
, QEP recorded impairment charges of
$5.0 million
, which related to impairment of an office building operating lease. During the
first quarter
of
2018
, QEP recorded an impairment charge of
$0.7 million
, which was primarily related to the impairment of proved properties related to a divestiture in the Other Northern area and expiring leaseholds on unproved properties.
General and administrative (G&A) expense.
During the
first quarter
of
2019
, G&A expense
increase
d
$3.2 million
, or
5%
, compared to the
first quarter
of
2018
. During the
first quarter
of
2019
and 2018, QEP incurred $26.0 million and $9.5 million, respectively, in costs associated with the implementation of our strategic initiatives, of which
$20.3 million
and
$7.9 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 these costs, G&A expense decreased by $13.2 million, primarily due to $10.0 million lower labor, benefits and other associated costs due to the reduction in our workforce and $4.8 million in lower legal and outside service costs.
Net gain (loss) from asset sales, inclusive of restructuring costs.
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), partially offset by a
$0.4 million
gain related to the divestiture of other properties. During the
first quarter
of
2018
, QEP recognized a
gain
on the sale of assets of
$3.5 million
primarily related to the divestiture of properties outside of our main operating areas in the Williston Basin, Pinedale and Other Northern areas.
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
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 settled derivative 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). During the
first quarter
of
2018
,
losses
on commodity derivative contracts were
$53.2 million
, of which
$43.2 million
were realized
losses
and
$10.0 million
were unrealized
losses
.
Interest expense.
Interest expense
decrease
d
$1.0 million
, or
3%
, during the
first quarter
of
2019
compared to the
first quarter
of
2018
. The
decrease
during the
first quarter
of
2019
was primarily related to decreased borrowings under the credit facility.
Income tax (provision) benefit.
Income tax
benefit
increase
d
$98.1 million
during the
first quarter
of
2019
compared to the
first quarter
of
2018
. The
increase
in
benefit
was the result of a larger net
loss
during the
first quarter
of
2019
compared to a smaller net
loss
during the
first quarter
of
2018
. QEP's income tax
benefit
was impacted by a higher combined effective federal and state income tax rate of
49.0%
during the
first quarter
of
2019
compared to a rate of
20.6%
during the
first quarter
of
2018
. The
increase
in effective income tax rate was primarily driven by the re-measurement of QEP's deferred tax assets and liabilities at a lower blended state tax rate due to exiting the state of Louisiana as a result of the Haynesville Divestiture during the first quarter of 2019.
LIQUIDITY AND CAPITAL RESOURCES
QEP strives to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility and fund its development projects, operations, capital expenditures and its strategic initiatives. 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. The Company expects that cash flows from its operating activities, cash on hand and borrowings under its revolving credit facility will be sufficient to fund its operations and capital expenditures during the next 12 months and the foreseeable future.
During the quarter ended
March 31, 2019
, QEP closed the Haynesville Divestiture for net cash proceeds of
$615.3 million
, subject to post-closing purchase price adjustments. As of
March 31, 2019
,
$22.1 million
remained in escrow due to title defects asserted prior to closing, to be resolved pursuant to the purchase and sale agreement's title dispute resolution procedures, of which $5.8 million was included in "Accounts receivable, net" on the Condensed Consolidated Balance Sheets. QEP used the proceeds to repay the outstanding balance on its revolving credit facility and for general corporate purposes.
As of
March 31, 2019
, the Company had
$89.9 million
in cash and cash equivalents, no borrowings under its revolving credit facility and
$1.3 million
in letters of credit outstanding. The Company estimates that as of
March 31, 2019
, it could incur additional indebtedness of approximately
$552.7 million
and be in compliance with the covenants contained in its revolving credit facility. To the extent actual operating results, realized commodity prices or uses of cash differ from the Company's assumptions, QEP's ability to incur additional indebtedness and liquidity could be adversely affected.
Credit Facility
QEP's revolving credit facility, which matures, subject to satisfaction of certain conditions, 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 governing QEP's revolving credit facility 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 1.40 times through December 31, 2019, and must exceed net funded debt by 1.50 times at any time on or after January 1, 2020. As of
March 31, 2019
and
December 31, 2018
, QEP was in compliance with the covenants under the credit agreement.
During the
three months ended
March 31, 2019
, QEP's weighted-average interest rate on borrowings from its credit facility was
4.73%
. As of
March 31, 2019
, QEP had no borrowings outstanding and
$1.3 million
in letters of credit outstanding under the credit facility. As of
December 31, 2018
, QEP had
$430.0 million
of borrowings outstanding and
$0.3 million
in letters of credit outstanding under the credit facility. As of
April 19, 2019
, QEP had no borrowings outstanding and had
$1.3 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, 2019
, totaled
$2,099.3 million
principal amount and are comprised of five issuances as follows:
|
|
•
|
$51.7 million
6.80% Senior Notes due March 2020;
|
|
|
•
|
$397.6 million
6.875% Senior Notes due March 2021;
|
|
|
•
|
$500.0 million
5.375% Senior Notes due October 2022;
|
|
|
•
|
$650.0 million
5.25% Senior Notes due May 2023; and
|
|
|
•
|
$500.0 million
5.625% Senior Notes due March 2026.
|
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 condensate production for the next 12 to 24 months.
Net cash provided by (used in) operating activities is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
|
(in millions)
|
Net income (loss)
|
$
|
(116.7
|
)
|
|
$
|
(53.6
|
)
|
|
$
|
(63.1
|
)
|
Non-cash adjustments to net income (loss)
|
206.8
|
|
|
200.2
|
|
|
6.6
|
|
Changes in operating assets and liabilities
|
(11.8
|
)
|
|
13.8
|
|
|
(25.6
|
)
|
Net cash provided by (used in) operating activities
|
$
|
78.3
|
|
|
$
|
160.4
|
|
|
$
|
(82.1
|
)
|
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 taxes benefit. The
decrease
in changes in operating assets and liabilities of
$11.8 million
primarily resulted from
decrease
s in accounts payable and accrued expenses and deferred credits, partially offset by
decrease
s in accounts receivable and prepaid expenses and an
increase
in accrued income taxes.
Net cash
provided by
operating activities was
$160.4 million
during the
first quarter
of
2018
, which included a
$53.6 million
net
loss
,
$200.2 million
of non-cash adjustments to the net
loss
and a
$13.8 million
increase
in cash from operating assets and liabilities. Non-cash adjustments to the net
loss
primarily included DD&A expense of
$196.5 million
,
$9.2 million
of non-cash share-based compensation expense and unrealized
losses
on derivative contracts of
$10.0 million
, partially offset by
$14.1 million
of deferred income tax benefit and a net
gain
on asset sales of
$3.5 million
. The
increase
in cash from operating assets and liabilities primarily resulted from
decrease
s in accounts receivable and prepaid expenses and an
increase
in interest payable, partially offset by a
decrease
in accounts payable and accrued expenses.
Cash Flow from Investing Activities
A comparison of capital expenditures for the
first quarter
of
2019
and
2018
, are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Change
|
|
(in millions)
|
Property acquisitions
(1)
|
$
|
0.6
|
|
|
$
|
36.2
|
|
|
$
|
(35.6
|
)
|
Property, plant and equipment capital expenditures
|
167.2
|
|
|
418.8
|
|
|
(251.6
|
)
|
Total accrued capital expenditures
|
167.8
|
|
|
455.0
|
|
|
(287.2
|
)
|
Change in accruals and other non-cash adjustments
|
(2.6
|
)
|
|
(48.1
|
)
|
|
45.5
|
|
Total cash capital expenditures
|
$
|
165.2
|
|
|
$
|
406.9
|
|
|
$
|
(241.7
|
)
|
____________________________
|
|
(1)
|
Excludes acquisition deposits held in escrow of
$0.2 million
for the
three months ended
March 31, 2018
.
|
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), a
decrease
of
$251.6 million
compared to the
first quarter
of
2018
. In the
first quarter
of
2019
, QEP's primary 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.
In the
first quarter
of
2018
, on an accrual basis, the Company invested
$418.8 million
on property, plant and equipment capital expenditures (which excludes property acquisitions), including
$253.8 million
in the Permian Basin (including midstream infrastructure of
$10.9 million
, primarily related to fresh water supply, produced water gathering, salt water disposal and oil and gas gathering),
$88.0 million
in the Williston Basin,
$72.0 million
in Haynesville/Cotton Valley (including midstream infrastructure of
$7.0 million
, primarily related to gas gathering) and
$4.3 million
in the Uinta Basin. In addition, in the
first quarter
of
2018
, QEP acquired various oil and gas properties, primarily proved and unproved leasehold acreage in the Permian Basin related to the 2017 Permian Basin Acquisition, for an aggregate purchase price of
$36.2 million
.
The mid-point of our
2019
forecasted capital expenditures (excluding property acquisitions) is
$640.0 million
. QEP intends to fund capital expenditures (excluding property acquisitions) with cash flow from operating activities, cash on hand and borrowings under the credit facility. The aggregate levels of capital expenditures for
2019
and the allocation of those expenditures are dependent on a variety of factors, including drilling results, oil, gas and NGL prices, industry conditions, the extent to which properties or working interests are acquired, the availability of capital resources to fund the expenditures and changes in management's business assessments as to where QEP's capital can be most profitably deployed. 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
2019
, net cash
used in
financing activities was
$440.1 million
compared to net cash
provided by
financing activities of
$214.3 million
in the
first quarter
of
2018
. During the
first quarter
of
2019
, QEP made repayments on its credit facility of
$474.5 million
and had borrowings from the 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
.
During the
first quarter
of
2018
, QEP had borrowings from its credit facility of
$1,068.5 million
and repayments on its credit facility of
$772.5 million
. In addition, QEP used
$52.8 million
of cash to repurchase common stock under the Company's share repurchase program and had treasury stock repurchases of
$4.7 million
related to the settlement of income tax and related benefit withholding obligations arising from the vesting of restricted share grants. QEP also had a decrease in checks outstanding in excess of cash balances of
$24.2 million
.
As of
March 31, 2019
, long-term debt consisted of
$2,078.4 million
, of which
$2,099.3 million
is senior notes and
$20.9 million
of 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, 2019
, 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 2018 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. The close of the Haynesville Divestiture resulted in a
$195.4 million
reduction in contractual cash obligations and other commitments subsequent to December 31, 2018, primarily related to firm transportation agreements and asset retirement obligations. There have been no other material changes to our contractual obligations from those disclosed in our 2018 Annual Report on Form 10-K.