U.S. Markets close in 1 hr 14 mins

Edited Transcript of QEP earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 QEP Resources Inc Earnings Call

DENVER Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of QEP Resources Inc earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Joseph T. Redman

QEP Resources, Inc. - VP of Energy

* Richard J. Doleshek

QEP Resources, Inc. - Executive VP & CFO

* Timothy J. Cutt

QEP Resources, Inc. - CEO, President & Director

* William I. Kent

QEP Resources, Inc. - Director of IR

================================================================================

Conference Call Participants

================================================================================

* Derrick Lee Whitfield

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst

* Gabriel J. Daoud

Cowen and Company, LLC, Research Division - Senior Analyst

* Gail Amanda Nicholson Dodds

Stephens Inc., Research Division - MD & Analyst

* Kashy Oladipo Harrison

Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P

* Kevin Moreland MacCurdy

Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Betty Jiang

Crédit Suisse AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to QEP Resources Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to turn the conference over to your host today, Mr. William Kent, Director of Investor Relations. Thank you. You may begin.

--------------------------------------------------------------------------------

William I. Kent, QEP Resources, Inc. - Director of IR [2]

--------------------------------------------------------------------------------

Thank you, Rob, and good morning, everyone. Thank you for joining us for the QEP Resources Third Quarter 2019 Results Conference Call. With me today are Tim Cutt, President and Chief Executive Officer; Richard Doleshek, Executive Vice President and Chief Financial Officer; Bill Buese, Vice President of Finance; and Joe Redman, Vice President of Energy.

If you've not done so already, please go to our website, qepres.com, to obtain copies of our earnings release, which contains tables of our financial results, along with the slide presentation with supporting materials.

In today's conference call, we'll use certain non-GAAP measures, including EBITDA, which is referred to as adjusted EBITDA in our earnings release and SEC filings; and free cash flow. These measures are reconciled to the most comparable GAAP measure in the earnings release and SEC filings. In addition, we'll be making numerous forward-looking statements. We remind everyone that our actual results could differ materially from our forward-looking statements for a variety of reasons, many of which are beyond our control. We refer everyone to our more robust forward-looking statement disclaimer and discussion of these risks, facing our business in our earnings release and SEC filings.

With that, I'd like to turn the call over to Tim.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thanks, Will. Good morning, and thank you for joining the call today. I'll begin with an update to our third quarter operational performance, followed by a brief update to our business strategy, before turning the call over to Richard to discuss the financial performance and guidance for the full year. I'm pleased to report that operational performance during the third quarter in all categories was in line with or better than guidance.

In particular, oil production exceeded our expectations due to the continued outperformance of our most recent DSUs in the Permian Basin. G&A expense, excluding special items, is now in line with and projected to -- at the projected run rate for 2020, down 45% from the 2018 quarterly run rate and work is well underway to continue to lower nonemployee G&A expense going forward. Lease operating expense continues to improve against our year-to-date budget. Our strong operational performance, coupled with continued focus on operating expenses resulted in QEP being free cash flow positive in the third quarter and positions the company to generate significant free cash flow in the fourth quarter.

Oil and condensate production in the Permian Basin increased by 20% from the second to third quarter of 2019. Permian gas sales remained higher than forecast, giving our focus on environmental stewardship and the resulting reduction of flared volumes. The DSUs completed in 2019 drilled at our go-forward spacing assumptions detailed on Slides 9 through 12 of the IR deck are currently producing on or above their projected production profile, enabling us to stay ahead of our volume plan.

The 2 Permian rigs moved from Mustang Springs to County Line during the third quarter and fracking operations, included in Mustang Springs in late August. We expect fracking operations would begin in County Line late in the fourth quarter. As a result of the planned suspension in fracking activity, we delivered peak Permian production in the third quarter and expect production to decline from the third to fourth quarter.

In the Williston Basin, we initiated production from our 7-well Vegas pad located on South Antelope late in the third quarter. At quarter end, we had 3 of the 7 wells on production and the early performance of these wells is very encouraging. With the addition of these wells, we expect oil production to increase in the fourth quarter back to levels roughly equivalent to the first quarter.

During the fourth quarter, the forecasted increase in the Williston Basin production is anticipated to offset the decline in the Permian Basin, resulting in overall production for QEP growing slightly from the third to fourth quarter.

I'll spend the next few minutes explaining the planned timing of our development program as we move forward. Understanding and ultimately modeling this timing is critical to understanding the cadence at which QEP will deliver free cash flow.

In the Permian, due to improved operational efficiencies, a single frac crew can support a 3- to 4-rig program. Based on our planned 2-rig program, we expect drilling activity to continue year-round in the basin with new wells being completed and put on production in the first 3 quarters of the year.

In the Williston, we expect drilling activity to begin in the first quarter each year, while the majority of the completion activity, including the execution of our refrac program will be completed in the warmer months from April through September to ensure lower completion and construction costs.

This operational seasonality will mean that capital spend during the first half of the year will be significantly higher than the second half of the year and volumes will generally peak in the third quarter. This will likely translate into cash out spend during the first half of the year before significant free cash flow generation in the second half of the year as demonstrated on Slide 13 of the IR deck.

We understand that this nonlinear trajectory is a departure from the past, but is extremely important to understand the seasonality as we transition to a development program that consumes less capital and delivers positive annual free cash flow at $50 oil. During the last call, I mentioned that we were evaluating a variety of options to maximize the value of our substantial water business, including a full or partial sale or joint venture transaction. We continue to evaluate these options and look forward to sharing our plans for the water business during the year-end call.

Before turning the call to Richard to discuss our financial results, I wanted to spend a minute discussing the announced transition of our CFO position. As you read in yesterday's announcement, Richard Doleshek will leave the company at the end of the year after more than 10 years of service. Richard will be replaced by Bill Buese, our current VP of Finance and Treasurer, effective January 1, 2020.

Richard has been mentoring Bill for several years in preparation for this change, and we are confident that we will experience a smooth transition. Consistent with our focus on reducing corporate overhead, Bill's role of VP Finance, will be eliminated. This move concludes our reduction of officer head count, which has been reduced by 60% from 2018. I'd like to thank Richard for his excellent service and congratulate Bill on his promotion.

With that, I'll turn the call over to Richard.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Tim, and thanks for your kind words. I'm actually grateful to have been a part of QEP from its inception. I believe we did a lot of good things, but I can honestly say, I won't miss the 7 a.m. Mountain Time earnings calls. Bill and I've worked together for the last 7.5 years, and I'm highly confident in his abilities and excited about this opportunity for him.

I'll now give some more color about the third quarter results and update our 2019 guidance before we open up the call for Q&A.

Our third quarter was the best quarter of the year and sets the stage for a strong year-end and a start for 2020. In the third quarter, we generated $193.5 million of adjusted EBITDA. The higher adjusted EBITDA compared to the second quarter is reflective of, among other things, 11.5% higher equivalent production, accompanied by lower G&A, lower LOE and lower production tax expenses. The impact of which was partially offset by higher adjusted transportation expense and lower field level prices when compared to the second quarter. We know that the transportation expense looks high, but the expense in the quarter includes the present value of future payment obligations, firm pipeline transportation service in an area in which we no longer have production operations.

For the third quarter, we reported net income of $81 million. Driving net income was a $92 million unrealized gain associated with our commodity derivatives portfolio. At the end of the third quarter, the derivative portfolio was a net asset of $92 million compared to a net liability of $1 million at the end of the second quarter. We continued to enter into commodity derivative contracts during the third quarter, and as of September 30, we held contracts, excluding basis swaps totaling 18.2 million barrels of oil, which covers about 75% of forecasted 2019 oil production and doubles the volume covered by derivatives for 2020 such that greater than 60% of forecasted 2020 oil production is now covered by fixed price swaps at $58.31 a barrel.

During the quarter, we delivered $17.5 million of free cash flow. And as a reminder, we define free cash flow as adjusted EBITDA plus noncash stock-based compensation, less cash interest expense and cash capital expenditures, including acquisitions.

With regards to our balance sheet at the end of the quarter, total assets were $5.6 billion and shareholder equity was about $2.8 billion. Total debt was approximately $2.1 billion, all of which were our senior notes. We had nothing outstanding under the revolving credit facility, and had $92 million of cash, which is about the same level as the end of the second quarter. Further, yesterday, we announced the early redemption of the $52 million of senior notes that are due to mature in March of 2020, and we'll use cash on the balance sheet to fund that redemption.

In terms of 2019 guidance, there are several updates driven by better well performance, higher gas capture rates, increased capital efficiency and our continuous focus on driving down costs. We are increasing our overall production guidance to a range of 32 million to 32.6 million barrels of oil equivalent, a 6% increase at the midpoint from our previous guidance. We are increasing our oil guidance for the full year to a range of 21.6 million to 21.9 million barrels, an increase of 0.5 million barrels at the midpoint. We're increasing our guidance for natural gas volumes to a range of 32.4 to 32.9 Bcf, a 13% increase at the midpoint. And finally, our guidance for NGL volumes for 2019 has increased to 5 million to 5.2 million barrels.

The team's continued strides in cost reduction and improved efficiencies position us to lower our 2019 capital guidance by additional $15 million at the midpoint. In addition, we're lowering our G&A guidance by $5 million as well for the year. There are additional details about our guidance in our earnings release.

I'll now turn the call back over Tim to provide a brief summary before we open the call up for Q&A.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thanks, Richard. In summary, we are delivering against the improved business plan that I described during the last call. We're committed to generating free cash flow and delevering our balance sheet. We're confident in our ability to deliver on this commitment as a result of our improved performance and deliverability of our high-quality, oil-dominant asset base, a significant decrease in drilling completion facility costs as well as the successful and sustainable reduction of corporate overhead.

Clearly, none of this would be possible without the contributions of our high-quality workforce that persevered through an unprecedented level of change during the last 3 quarters. The individuals in this organization have set the company up for success, and I want to thank each of them personally.

With that, we'll open up the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Gabe Daoud with Cowen & Company.

--------------------------------------------------------------------------------

Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

Maybe just starting with 2020, given the efficiencies and D&C savings, you guys have realized thus far. And I guess the fact that you mentioned Permian spend in 2020 would be about $45 million less than '19. What does the updated budget look like in '20? I guess just trying to figure out what that $600 million run rate number could ultimately look like given the savings this year?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes, Gabe, we're still working through 2020. We've got the preliminary numbers out there. I mean if you think about our plan over the next several years, we're going to be plus or minus $600 million, I think, next year, a bit lower than that. And so we need to work all of these savings through. We're moving out of Mustang Springs into County Line. And so we want to make sure that we're conservative on our thinking of what changes that could bring, but we're still confident that if you think about our program of plus or minus $150 million up in North Dakota and $450 million or less in the Permian. I think that's a good number to start with. And as we get closer, we'll continue to update you on that.

--------------------------------------------------------------------------------

Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

Okay. Understood. And then I guess, just as a follow-up, maybe just talking about the balance sheet, I guess, for a second and redeem the 20 notes, but how should we think about the way you guys will handle the 21 notes. I think it's about $400 million, just curious on that.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Gabe, it's Richard. We're going to evaluate what to do with those. Clearly, we're going to have a bunch of cash at year-end and continue to generate cash through next year. So the maturities in March of '21, so it gives us some time. But obviously, that's going to be our focus -- is trying to reduce those as we approach to maturity date.

--------------------------------------------------------------------------------

Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [6]

--------------------------------------------------------------------------------

Richard, all the best to you and congrats Bill.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [7]

--------------------------------------------------------------------------------

Thanks, Gabe.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Derrick Whitfield with Stifel.

--------------------------------------------------------------------------------

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [9]

--------------------------------------------------------------------------------

Congrats on a strong press release and ops update. Richard, also -- hope you can enjoy some time away from the business in the coming months.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Thank you. Thank you.

--------------------------------------------------------------------------------

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [11]

--------------------------------------------------------------------------------

Tim, over the last year, QEP has done an exceptional job of taking operating capital costs out of the business, your Midland DC&E costs are arguably the lowest in the basin. As you look forward, where do you see the greatest remaining cost opportunities, capital or operating?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [12]

--------------------------------------------------------------------------------

Yes. So thanks for that. We've put a huge focus on that. A lot of the costs have come out in the completion costs. We're still optimizing there. I mean we've gone to a simul frac, where we're producing -- we're basically fracking 2 wells simultaneously. The next phase of that is to increase our pump rates. We've had pump rates on each well of maybe 60 barrels a minute. We think we can raise that to about 80 barrels a minute. And what that does is just speed the whole process up. And so speed is our friend, the way we work our contracts with our suppliers. We're focused on that.

We're drilling again. So $12 -- I mean, 12 days per well, that will continue to bring that down. I think we've still got more to do on the facility costs. We have started, obviously, doing the -- build the skids in the shop and bringing the location, which would -- the same kind of thinking to our last pad in North Dakota, and it was a phenomenal outcome. I mean our previous pad, say, I'm just going to throw numbers. Say it was a $20 million to $30 million project. Our Vegas pad was completed on the facility side of sub-$10 million. So it's that just continuous improvement thinking about -- how to work straight things, how minimize the time on-site and get things hooked up really just in time, so that's important.

And then on the OpEx side, I'm not sure if you asked about that. But this is something that where we have spent a huge amount of time on, and that will come just a little bit at a time. I'll give you an example. In North Dakota, most of our wells are on run pump up there, and we're in the process now of converting over to gas lift. Gas lift will be a lot more efficient. We'll have less workover rigs. And so it's just a whole bunch of blocking and tackling going forward.

--------------------------------------------------------------------------------

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [13]

--------------------------------------------------------------------------------

And perhaps for Richard with my follow-up. With regard to the water infrastructure business, how would you characterize where you are in the evaluation process?

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

I think from the valuation process, we're pretty well done with that. We think we understand what an implication of a sale or monetization would be to our operating and capital process. And now we're really in the -- is it a full sale, is it a joint venture, partial monetization? Is it both sets of -- both areas or just one area. So we're sort of in the fine-tuning phase. But I think from the standpoint of our evaluation of what we have and what a transaction will do to us going forward, I think we're substantially complete in that.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question comes from Neal Dingmann with SunTrust.

--------------------------------------------------------------------------------

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

--------------------------------------------------------------------------------

Congrats, Richard and Bill, we look forward to working with you. Tim, my question for you or Richard. I'm just wondering, when you kind of guide for 2020, I'm wondering, is your primary target for next year, that free cash flow around 120, and this will ultimately set your activity? Or I'm just wondering, again, I know you don't have and you mentioned earlier, you don't have full 2020 out. But I'm just wondering, is it more -- and then again, you certainly have added some hedges, and that will help. Just wondering what sort of when you all think about it and sit down, is the primary driver that you want to generate x amount of free cash flow? Or do you want to generate x amount of activity? Just sort of trying to get your mindset there.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [17]

--------------------------------------------------------------------------------

Yes, that's a really good question. So as we went through our budget process, we kind of back calculated it and say what's it going to take to delever the balance sheet? And what -- how much cash we're going to have in the balance sheet at the end of the year? How much do we need for 2021? And what do we need to do throughout the year, end of this year and next year to make sure we have cash on hand to deal with the 2021. So I think you're right. I mean that 120 is important number to us. Do remember, we have another $37.5 million, that should come on top of that in the form of tax refunds, all of that has been considered.

So we've had a few questions over the last day or 2, just about -- things are improving. We haven't changed that 120. Do understand we're modifying things as we get closer to the year. NGL prices are off, differentials have come off a little bit. And so we're making sure that everything we're doing at least substantiates at a $55 price for that volume is not hedged, we'll deliver that $120 million. So it's an important number to us.

I'm not going to say that caps us in any way. So we figure out how to go faster, better, cheaper. Hopefully, we can do more to deliver higher volumes and then build into the end of next year and a stronger movement into 2021. So we started on the journey at a pretty tough time through the strategic process, our organization is fairly lean now. We're very focused and excited about the plan. And I think the 120 is a good number that we keep coming back to, as we move variables around. But don't think we're not aiming to improve on that as time goes forward.

--------------------------------------------------------------------------------

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

--------------------------------------------------------------------------------

Great color. And then just maybe a dovetail into that. When -- just in terms of -- you've talked a lot about the Perm on the Bakken side, still very, very great asset, and you've had a bit of a decline there. I think, more just because of, obviously, the amount of activity and capital put there.

I'm just wondering, anything else you could talk about there? Do you -- in terms of -- will you bring out maybe more refracs? Will you try to be more active there next year? I mean obviously, you've got a great oil content there. Just anything you can say about the Bakken in general.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [19]

--------------------------------------------------------------------------------

So if you heard on my talk -- on my speaking notes. The activity that we've just completed on the Vegas pad will actually take us back to volumes, when you look at full quarter, fourth quarter to the full quarter, first quarter, we're going to have fairly equivalent volumes between those 2 quarters. So we've stepped back up after a fairly long decline period with almost no activity. We will start drilling the [Disco pad] early in the year, and then we'll have all of our completion activities starting in the spring all the way into the very early fall between 18 refracs and bringing on 6 new drill wells there.

So our plan is to basically keep the Williston relatively flat, about 8 million barrels per annum. And you're going to see the volumes oscillate as we're active, and we're bringing wells on, production will peak, and then will come off for a few quarters come back up. Very similar to the Permian. The only difference in the Permian is each of our peaks will slowly get higher and higher as we go forward. We think the Bakken over the next 7 years will stay relatively flat at those rates.

And we do feel great about the refracs. We have 30 refracs that are online, they're all performing as expected. We're looking forward to moving forward. We continue to high-grade our inventory there, but between FBIR and South Antelope, we have about 100 opportunities there, and we've got a pretty special circumstance with how we completed our original wells field, to get in there, set pipe and almost frac these wells like they're new wells.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question comes from Kashy Harrison with Simmons Energy.

--------------------------------------------------------------------------------

Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [21]

--------------------------------------------------------------------------------

Congrats, Richard, on the next stage. So just a few questions from me. I was wondering if you could discuss what the desired leverage target is before you begin more aggressively returning capital to shareholders up and beyond the dividend.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [22]

--------------------------------------------------------------------------------

Hey, Kashy. And thanks for the -- the good wishes. It's Richard. Our leverage target, first step, is to deleverage down below 2x debt multiple of EBITDA and we're getting close. If you sort of look at the cash flow, the cash in the balance sheet, any potential proceeds from monetization and look at what consensus EBITDA is for next year.

By the time we get to the end of next year, we should be at or floating with that 2x, first step target. When we first spun out of Questar, we were at 1.25x, and that gave us a ton of flexibility to pursue acquisitions and do other things. So I think we're going to be on the path that we're on right now with a fairly consistent development program, refrac program until we get to the 2x. And then I think in terms of doing anything more aggressive and that we've got to be below that target.

--------------------------------------------------------------------------------

Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [23]

--------------------------------------------------------------------------------

Okay. And then that's actually is a good segue to my next question, which is how much EBITDA is associated with the water infrastructure assets? I know it could take all sorts of different structures, but I'm just trying to get a handle on the amount of cash flow associated with the water infrastructure assets as it stands today.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [24]

--------------------------------------------------------------------------------

So Kashy, that water business is embedded inside the E&P asset. And so we don't generate a financial statement around it, the costs are the LOE associated with running it. And so if you said, hey, if it was a standalone business, we would have to calculate a theoretical sort of EBITDA assuming contract rates for disposal, freshwater source, et cetera. So I mean, as it stands today, that business is just part of our LOE, and we don't generate, but we could. We -- get on the whiteboard and write out some numbers. I think if we were at the capacity that we've generated and had market rates, that number would probably in the $40 million to $50 million 3-year EBITDA range.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [25]

--------------------------------------------------------------------------------

Yes. And Kashy, I'll build on that. I mean one of the ways you can think about the opportunity here is that we process, produce water from $0.15 to $0.20 a barrel. And as you know, buying treated water for fracking isn't [$0.70 to $1] barrel type of range. We inject water for $0.10 a barrel. The market rate of that is probably $0.40 to $0.50 a barrel. So there's -- that's where the economics sit. And we can easily expand the capacity of that business by adding additional processing trains for fairly low capital investment. So the big infrastructure is there. We just have to figure out the best way to leverage that and who the best partner potentially would be to grab some of that margin.

--------------------------------------------------------------------------------

Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [26]

--------------------------------------------------------------------------------

And then finally, last one for me, just more of a modeling nuance question. Can you help us think through what a good run rate is for the LOE adjusted transport line item? Just trying to think about how that number could evolve as we look towards 2020.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [27]

--------------------------------------------------------------------------------

Joe, why don't you --?

--------------------------------------------------------------------------------

Joseph T. Redman, QEP Resources, Inc. - VP of Energy [28]

--------------------------------------------------------------------------------

Yes. Most of our transportation and processing volumes move through contracts. And so that's really a direct relationship to our volume forecast through the year, and there's not a lot of subjectiveness or variability in that outside of volume.

--------------------------------------------------------------------------------

Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [29]

--------------------------------------------------------------------------------

So yes, I meant a good rate per unit.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [30]

--------------------------------------------------------------------------------

Yes, it's about $3 a barrel equivalent. If you take out the onetime charge associated with the pipeline commitments, on average, it's going to be plus or minus, $3 a Boe.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from Gail Nicholson with Stephens.

--------------------------------------------------------------------------------

Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [32]

--------------------------------------------------------------------------------

I just want to dig into LOE a little bit more. You guys saw a really good decrease quarter-over-quarter. I mean you talked about transitioning to gas lift versus the rod pumps in the Bakken. With that transition to gas lift, could you talk about the potential LOE savings you could see in the Williston? And then where does the Permian sit on an LOE aspect versus the Williston today, currently?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [33]

--------------------------------------------------------------------------------

Okay. I'm going to flip this over to Joe Redman. He's our head of production.

--------------------------------------------------------------------------------

Joseph T. Redman, QEP Resources, Inc. - VP of Energy [34]

--------------------------------------------------------------------------------

Thank you for the question on our operating expenses. In the Williston, we have been employing an initial lift method of ESPs and gas lift. We'll probably be using some gas lift optimization around our new drilling as we go forward. And I think that will come in at a lower op cost than we've historically seen around our ESPs. We've also been working in that field just around our fixed expenses and then bidding activities. We've done the same in the Permian, and we are continuing to drive our LOE down there kind of through similar methodologies. And as you mentioned, our LOE in the Permian is quite a bit less -- we're running this year in the range of about $4 a Boe.

--------------------------------------------------------------------------------

Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [35]

--------------------------------------------------------------------------------

Okay. Great. And then just looking at the refracs in the Williston, can you remind me what the current cost of those are? And do you think there's any incremental room for potential improvement on the cost side as you look in 2020?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [36]

--------------------------------------------------------------------------------

Yes. So I'll take that one. So right now, it's about $5 million per well on the refrac. We absolutely, as we get back into a rhythm here, we have more in series, want to take that cost down. So we're already talking to our suppliers around how to do that. And we've encouraged that the lower it goes, the more we can do.

And the same thing on the drilling and facility costs in the Williston. We talk about 100 locations remaining in the Williston, but that number expands all the way up to about 700 if you get better price and much lower cost. And so we are very motivated to bring those costs down. So I don't want -- I wouldn't want to guess a number, but we're at 5, will we get to 4? Probably not, but we're going to work towards that.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Betty Jiang with Crédit Suisse.

--------------------------------------------------------------------------------

Betty Jiang, Crédit Suisse AG, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

I have a question on the artificial lift strategy change. Could we get a bit more detail on the impact? I see -- understand that you have seen the benefit of shorter cleanup time, but do you expect to see any change in the shape of production? Or is there any change in the decline profile?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [39]

--------------------------------------------------------------------------------

Yes, Betty, that's a good question because this has been quite a big change for us. And we've been watching what industry is doing. We've been testing all of our technical thoughts around this, and we concluded that going a little bit harder, early, not only won't hurt things, we might actually help things. And so we've moved to a strategy that opens up the wells a bit quicker. We're still staging about 100 ps -- drawing about 100 PSI for change in choke size, but you can see the production is coming on quite quicker. And when it does that, the pressures come down in your ESP and you can get on with producing quite a bit quicker.

We don't know over time. We've talked a lot in the past. We've been dinged a little bit for coming on slowly, but we've always said by day 365, we're kind of caught back up. Same thing could happen here. We could go back to where you get back on a decline curve to where you're -- ultimately, you are as fairly similar. We still think regardless from a productivity of the well, and NPV of the well, it still makes sense to bring these on a bit quicker.

So final tell, you can see on DSU 13, we're getting close to the curve there over the next several months, we'll see where that goes. But we feel good that that's declining and flattening as expected, and we're encouraged by what we're seeing.

--------------------------------------------------------------------------------

Betty Jiang, Crédit Suisse AG, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

And then my next question is on the 4Q oil guidance, just with no completions in the Permian. Could you just help us understand the dynamics between the Bakken and the Permian, that's driving the implied increase in oil volumes? And then also just on 2020, with the lumpiness of the completion profile. Does -- how does 4Q '20 product oil volumes compared versus 4Q '19.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [41]

--------------------------------------------------------------------------------

Yes. Okay. So on the first question, sorry, remind me what you're asking?

--------------------------------------------------------------------------------

Betty Jiang, Crédit Suisse AG, Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

What's -- the dynamics between the Bakken and the Permian, that's driving the increase?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [43]

--------------------------------------------------------------------------------

Yes, got it. So yes, so you're going to -- we have a substantial increase right now in the Bakken, bringing those new wells on. Remember, the Bakken wells average north of 2,200 to 2,500 barrels of oil each per day, and we did 7 wells. Part of keeping the cost out on the facility, we built a 10,000 barrel a day facility. That facility will stay flat for the next 2, 3 months and then start declining. And so over the next 3 months, we should have -- we should see all of the gains and maintain those gains over that 3 months. And so you'll see a big uplift there. And then you start to go on decline. And we just now started to go on decline in the Permian. Obviously, that decline is more modest than the uplift of the Bakken. And so you see flat to slightly increased production quarter-over-quarter.

Betty, I think it's early for us to speculate on the fourth quarter of next year, we put some numbers out on what we think will happen. We want to continue to get better. We want to continue to get faster. That takes more dollars out. That allows us to do a little bit more. And I think the shape of that curve for next year is generally set, where you're down a little bit more in the first quarter, you start building again on the second, peak in the fourth -- in the third, and then you come off -- start coming off again in the fourth. And so I think for us to get an accurate kind of '19 fourth quarter to '20 fourth quarter, we're going to have to get a little bit closer to it. And again, our whole goal is to get better every single day. And so as we get closer to this, we'll continue to guide and update as we can.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Our next question comes from Kevin MacCurdy with Heikkinen Energy.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [45]

--------------------------------------------------------------------------------

To follow-up on the question around LOE. Per barrel costs were materially lower quarter-over-quarter. Can that continue? Is that kind of the new standard going forward?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [46]

--------------------------------------------------------------------------------

Ken, I think we had a few prior periods in there. I think if you look at our forecast, what we put for the full year, you'll calculate a good accurate number for the LOE.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [47]

--------------------------------------------------------------------------------

Okay. Fair enough.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [48]

--------------------------------------------------------------------------------

But these things are lumpy. You have things that come and go and they can be a little bit lumpy. But generally, we've had a substantially low quarter. It may come back up a little bit in the fourth quarter. But overall, it's dependent on seasonality and a lot of different things.

--------------------------------------------------------------------------------

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [49]

--------------------------------------------------------------------------------

And Kevin, just to give you an example, workover expense, which is fixing things that break was down more than $1 million from the second quarter to the third quarter, we don't control that. [Rod] parts when they want to part. So we had a really good third quarter in terms of fix/break stuff.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [50]

--------------------------------------------------------------------------------

Great. So maybe some lumpiness, but overall, the trend is down?

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [51]

--------------------------------------------------------------------------------

Absolutely. Yes, if you look at our unit cost is coming down. It's clearly month-over-month, quarter-over-quarter as we add in new facilities, as we add in new water injection facilities, production facilities, more wells, the absolute costs goes up, and you'll see the unit cost kind of move with our production profile that we described in the deck.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [52]

--------------------------------------------------------------------------------

And my next question is, you mentioned that the frac crew is coming back to the Permian in late fourth quarter. What month will we start to see [turn in lines]? I'm just trying to get an idea of production for Q1.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [53]

--------------------------------------------------------------------------------

Yes. We've had a few questions about kind of capital profile in the fourth quarter. I mentioned in my talk, we will start late in the quarter. We expect to start fracking again in December. We have built an inventory by December of about 40 wells in County Line. And that enables us to get started and go on a continuous frac program into next year, into the late second quarter, early third quarter. And so December is the optimum time to get started. Those 4 wells will be fracked, but they likely won't come online until early in February. So you'll see kind of January continue to decline. February, we start to bring those back online.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd now like to turn the call back to Tim Cutt for closing comments.

--------------------------------------------------------------------------------

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [55]

--------------------------------------------------------------------------------

Yes, not much more to add. I appreciate the questions. I appreciate the interest. I hope you see that we're serious about delivering what we've set out to deliver. I just really want to say another thanks to our organization. We've gone through a lot. We've made a lot of changes. But we've landed on a very, very strong organization, capable of doing great things and I've been super impressed. So I just want to thank the organization. With that, I think we'll close.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.