U.S. Markets closed

Edited Transcript of QEP earnings conference call or presentation 21-Feb-19 2:00pm GMT

Q4 2018 QEP Resources Inc Earnings Call

DENVER Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of QEP Resources Inc earnings conference call or presentation Thursday, February 21, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Richard J. Doleshek

QEP Resources, Inc. - Executive VP & CFO

* Timothy J. Cutt

QEP Resources, Inc. - CEO, President & Director

* William 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

* John C. Nelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Kashy Oladipo Harrison

Piper Jaffray Companies, Research Division - Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Rajul Aggarwal

Oak Hill Advisors L.P. - MD

* Timothy A. Rezvan

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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

Presentation

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

Operator [1]

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

Greetings, and welcome to do QEP Resources Fourth Quarter and Year-End 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. William Kent, Director of Investor Relations. Thank you. You may begin, Mr. Kent.

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

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

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

Thank you, and good morning, everyone. Thank you for joining us for the QEP Resources Fourth Quarter and Year-End 2018 Results Conference Call. With me today are Tim Cutt, President and Chief Executive Officer; Richard Doleshek, Executive Vice President and Chief Financial Officer; Joe Redman, Vice President of the Western Region; and Jeffery Tommerup, Senior Vice President of the Eastern Region and HSE.

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

In today's conference call, we use certain non-GAAP measures, including EBITDA, which is referred to as adjusted EBITDA in our earnings release and SEC filings, and adjusted transportation and processing costs. 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. 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, and good morning, everyone, and thanks for joining the call. This morning my focus will be on QEP's strategic path forward, including details on the plan reset of our company's corporate cost structure and near-term capital investment plans. I will also provide some color on our decision regarding Williston Basin transaction, specifically what it means for us going forward, before returning the call over to Richard to provide an update on QEP's operating and financial results.

While I will leave the majority of the details to Richard, I wanted to point out a few significant highlights from 2018. During the year, production in the Permian Basin increased by 94% for a record [16] million barrels of oil equivalent. Lease operating expense per Boe decreased by 26%. And perhaps most importantly, we continue to make significant progress on identifying the optimum well spacing for our Permian tank-style development.

On the well spacing front, the drilling spacing units drilled at lower densities during the late 2017 and early 2018, continue to deliver as expected, which gives us great confidence as we move forward with our 2019 drilling program.

We have continued to optimize our investment in our Permian midstream infrastructure over the past several years. In 2018, we built a company owned and operated water recycling plant and can now recycle 100,000 barrels of water per day into clean frac water, for less than $0.15 a barrel, much less than the current market rate of closer to $1 a barrel.

While our operating costs in the Permian were competitive with our peers, we will continue to look for opportunities to lower these costs while maintaining our longstanding focus on safety and integrity.

As you know, 2018 was a year of significant transition, as we sold our natural gas-weighted assets and pivoted from a multi-basin, multi-commodity operation to a more focused organization. With these asset sales behind us, we enter 2019 with a renewed focus on ensuring that our cost structure is competitive with the best in industry. We continue to evaluate our organizational needs going forward and intend to significantly reduce our G&A expense, excluding restructuring costs, by approximately 45% when comparing 2018 to 2020.

We will be implementing the necessary structural changes in 2019, with the majority of the changes occurring in the first half of this year. Our ultimate goal is to establish a long-term overhead structure of less than $3 per Boe beginning in 2020, which is competitive with our peers.

I'll now spend a few minutes discussing the status of the Williston Basin transaction. As you're aware, QEP and Advantage Energy signed a purchase and sale agreement for the Williston assets on November 6, 2018. At that time oil was trading at $62 per barrel. The near-term price subsequently dropped to $40 a barrel before recovering to approximately $57 a barrel today. Given the deterioration in product price and that it became unlikely that the conditions to closing would be satisfied, Advantage and QEP agreed to terminate the purchase and sale agreement. We now intend to move forward with a pace development of the remaining high return Williston inventory to maximize the value of the asset. The Williston assets are well understood, remain cash flow positive at current oil price for the foreseeable future and are aligned with QEP's strategic focus on oil versus natural gas.

With that as a backdrop, I will touch briefly on our capital guidance for 2019. During 2018, we invested approximately $1 billion in the Permian and Williston basins, including Permian midstream infrastructure capital. Recognizing the lower price environment and focusing on the value delivery versus volume growth, we have lowered our 2019 capital guidance by 39% to $640 million, approximately 80% of which is planned to be spent in the Permian.

At a $55 oil price, we expect to be cash flow positive late in the second half of the year including interest expense, and cash flow positive for the full year of 2020.

At our planned level of investment, we will operate 3 rigs in the Permian in the first half of the year, before dropping to 2 rigs in the second half, and expect to put on 47 gross wells; while in the Williston, we will operate 1 rig for part of the year and put 7 gross wells on production. This activity level will result in a 10% decrease in total company oil production but an 8% increase in Permian oil production.

While we will remain poised to increase activity and deliver higher growth as price recovers, we currently see no reason to aggressively develop our premier drilling inventory by current prices.

In an effort to further bolster our liquidity and strengthen our balance sheet in 2019, we plan to evaluate strategic alternatives around our Permian midstream assets and our non-operated business in the Williston. We have determined that there is diminishing strategic advantage in operating our gas gathering system in the Permian. As a result, we intend to market the asset in the first half of the year.

We also plan to initiate discussions with water companies to evaluate whether a partnership makes sense for our Martin County water facilities.

We will lower our overall capital intensity of our business with the dual imperative of matching our activity to the current commodity price environment and reaching cash flow neutrality in 2019.

Let me wrap up my comments by discussing our strategic path forward. During the past few months, a number of companies have expressed interest in QEP from both an acquisition and merger perspective, including Elliott's public proposal. We take this interest seriously and have reached out to many of our shareholders to determine the best path forward.

As always, our goal is to maximize value for our shareholders. And we believe the best way to accomplish this goal is to run a comprehensive process to identify the potential value of these strategic alternatives, whether through a strategic alternative or by continuing to develop our two premier oil assets on a standalone basis, we are confident that we will be able to clearly identify the best path forward for the company.

As a strategic assessment process plays out, we will remain focused on operating the business and delivering peer-leading results, while continuing to focus on improving our capital, costs and operational efficiency.

I'll now turn the call to Richard to provide a summary of our operating and financial results along with additional guidance.

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

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

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

Thank you, Tim. I'll give some color on the quarter and year-end results, outline our 2019 guidance, then we'll open the call for Q&A.

In the fourth quarter of 2018, we generated $194 million of adjusted EBITDA compared to $326 million of adjusted EBITDA generated in the third quarter and $195 million in the fourth quarter of 2017.

Production in the fourth quarter was 11.6 million barrels of oil equivalent, 2.8 million barrels equivalent lower than the 14.4 million Boes we produced in the third quarter year. Oil volumes were 5.75 million barrels, down 891,000 barrels from third quarter level. Permian Basin oil volumes were down about 280,000 barrels to 3.25 million barrels, which is down 9% from the third quarter, but up 1.3 million barrels or 69% from the fourth quarter of last year. In the Permian Basin, 17 wells were placed in production during the quarter, which was in line with our quarterly guidance.

Williston oil volumes were 2.48 million barrels, down 487,000 barrels from third quarter. In the Williston, development activity in the second half of the year consisted of four refracs that came on in production in November. Natural gas volumes were 28.1 Bcf, down 10 Bcf from the third quarter. The primary contributor to the lower natural gas volumes in the quarter were the sale of the Uinta Basin assets which produced 2.7 Bcf in the quarter, the lack of drilling or refrac activity in Haynesville, which was down about 6.8 Bcf from the third quarter. NGL volumes were 1.19 million barrels, which was down about 16% from the third quarter.

We developed our guidance for 2019, taking the lower oil price environment into consideration. We plan to have 3 rigs drilling in the Permian Basin in the first half of 2019 and plan to drop to 2 rigs at midyear. We also plan to drill 7 wells during the summer in the Williston Basin.

As a result, our guidance for oil allowance for 2019 are 20.5 million to 21.5 million barrels. Our guidance for natural gas volumes for 2019 is a range of 23 Bcf to 25 Bcf and is reflective of no longer owning gas assets in the Uinta Basin and the Haynesville/Cotton Valley.

Our guidance for NGL volumes for 2019, assuming that we'll be in ethane recovery all year in the locations at which we can make a recovery or rejection election, is 3.7 million to 4.2 million barrels.

For the first quarter, our guidance for oil volumes is 6.83 million to 7.26 million barrels of oil equivalent. Please see our earnings release for additional details.

QEP Energy's net realized equivalent price, which includes a settlement of our commodities derivatives, averaged $32.70 per Boe in the fourth quarter, which was $3.51 per Boe lower than we realized in the third quarter, and $0.49 per Boe higher than we realized in the fourth quarter of 2017. The weighted average field level equivalent price in the fourth quarter was $35.38 a barrel, which was $3.49 per Boe lower than we averaged in the third quarter. The equivalent price reflects field-level crude oil process that was $51.67 per barrel, natural gas prices that was $3.25 per Mcf and field-level prices for NGLs that were $19.12 per barrel. Field-level crude oil revenues account for 72% of total field-level revenues, which was about 2% higher than the third quarter.

Derivatives settlements were an outflow of $31 million, resulting in a loss of about $2.68 per Boe in the quarter compared to an outflow of $38.4 million or a loss of $2.60 per Boe in the third quarter.

For mine lease operating and adjusted transportation expenses, including the $14.1 million of transportation expenses that are netted against revenues, were $98 million in the quarter, down from $108 million in the third quarter and $122 million in the fourth quarter of 2017. On a per unit basis, lease operating expenses were $5.11 per Boe, which is $0.62 per Boe higher than third quarter. Adjusted transportation expense was $3.31 per Boe, which was up $0.27 per Boe from the third quarter.

Our guidance for lease operating and adjusted transportation expenses for 2019, is $9 to $10 per Boe. For calendar year 2018, if you exclude the Uinta Basin and Haynesville assets, the combined lease operating adjusted transportation expense was about $10 per Boe. So we expect to continue improvement in that area.

G&A expenses were $57.5 million in the quarter, up $9.2 million from the third quarter. Included in the quarter was $24.4 million of expenses related to our strategic initiatives, which compares to $14.3 million in the third quarter. For full year 2018, G&A expenses were $221.7 million, which included $61 million of expenses related to our strategic initiatives.

Our guidance for G&A expense for 2019 is $170 million to $180 million, of which approximately $30 million is share-based compensation expense. Our guidance includes $50 million to $55 million of expenses associated with our strategic initiatives, including our employee retention and severance programs. We expect to incur a significant portion of these restructuring expenses in the first half of the year.

For the fourth quarter, we reported a net loss of $629 million. Driving the net loss was a $1.16 billion impairment expense associated with Williston Basin assets. Offsetting a portion of that expense was a $362 million gain associated with the unrealized value of our derivatives portfolio.

By December 31, the commodity derivatives portfolio was a net asset of $122 million compared to a net liability of $239 million at September 30.

DD&A expense was $184 million, which was $51 million less than we reported in the third quarter.

Capital expenditures, excluding acquisitions, on an accrual basis in the fourth quarter were $188.5 million of which $163 million was directed to the Permian Basin and $24 million to the Williston Basin. In addition, we also reported $17.3 million of acquisitions in the quarter, the majority of which was associated with the final assortment of the Friends and Family acquisition associated with our 2017 Robertson Ranch acquisition.

For 2019, excluding acquisitions and divestiture activity, we are forecasting the midpoint for capital expending to be about $640 million, which includes about $70 million for midstream infrastructure. The Permian Basin will be allocated about 80% of the 2019 capital budget. Capital expenditures in the first quarter, excluding acquisitions, should be in the range of $200 million to $225 million.

Year-end crude reserves were 658 million barrels of oil equivalent, down 4% from year-end 2017. Recall that at year-end 2017, the Uinta Basin had 101 million barrels of proved reserves. So excluding Uinta Basin, reserves were up about 74 million barrels equivalent or approximately 13% from last year.

We have 76 million barrels equivalent of extensions and discoveries, primarily in the Permian Basin. Higher SEC prices resulted in positive provisions of about 17 million barrels equivalent and acquisitions add about 11 million barrels of equivalent.

Approximately 35% of crude reserves are developed, 52% of the equivalent crude reserves were oil. And the SEC PV10 of the proved reserves was $5 billion. And the pre-income tax PV10 in reserves was $6.2 billion.

With regard to our balance sheet, at the end of the year, total assets were $6.1 billion and shareholder equity was about $2.75 billion. Total debt was approximately $2.53 billion, of which $430 million was debt under our revolving credit facility.

In January, we closed a previously announced divestiture of our Haynesville assets, received $605 million of cash and placed an additional $32 million of cash into an escrow account pending resolution of asserted title defects.

With those prepared comments, we're now ready to turn the call over to Q&A.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) The first question is from Mr. Gabe Daoud, Cowen and Company.

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

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

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

Was wondering if you could just start at a high level and thinking about how the business looks, assuming the strategic review doesn't bring a transaction. In the Permian, you go into 2 rigs in the second half, in the Williston, obviously, on the year just 7 wells. So is that the appropriate pace to think about for 2020? And I guess just overall, how do you think about pace and growth against the push for more free cash flow generation? And if you do see free cash flow in 2020, is there any way that you could quantify that at this point?

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

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

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

Appreciate the question. I think that I'll do is start off by giving a little bit of an overview of both the Permian and Williston. I know we have more rigs running. We've dropped back. You're used to looking at quarter-on-quarter, but I think we need to reset the thinking a little bit around that. So let me start with the Permian. So a very high level, in the Permian Basin, once we get down to about 2 rigs, I think you should expect the production would stay relatively flat. This year, we're going to run 3 rigs first half, 2 rigs in the second half, and that results in about an 8% increase. If we go to 3 rigs as price recovers, you should expect to see about a 15% per annum growth and also a similar type of growth in EBITDA. So we need to make a call about how to do that. Our view is, living within cash flow at lower prices is important. The prices have been very volatile. You'll recall recently we were down to $40 a barrel. So living within cash, I think, is important. But as you said, I think it needs to be balanced with an eye to growth in the future. And so we're taking a hard look at that. When you think about trying to model the company and getting away for some of the quarterly thinking, I'll give you a few numbers to work into your models. So to run a rig, you can run a rig in the Permian Basin for about $55 million per year and deliver about 22 wells. Those 22 wells cost about $85 million to complete, and then you got to add facility costs of about $35 million to hook up, or about $175 million. So to step up from 2 rigs to 3 rigs, it's about $175 million or about $8 million per well. I think the Spraberry wells are about low 7s. The Wolfcamp wells, in the high 8s. But I think with that, you kind of think about a shift from kind of neutral on production to 15% growth with an increase of about $175 million. So we're watching price closely. We want to be paced in our thinking. We don't want to react to short-term price lags. But as we see price recovery, we're going to want to move forward and move forward with a higher pace. So we've modeled very low prices and [a bit] prices at $55 and then higher prices in the $60 to $65, and I think we'll be poised to do that. Switching over to the Williston Basin, we stopped activity. We had very little activity last year. And when that happens, you get on the very steep part of the hyperbolic curve and you see a pretty steep decline. We saw about 30% decline on the base, which is as expected. And we believe with about a one rig program, we can keep that Williston Basin about flat. We have an inventory of refracs that we don't plan to do at these lower prices. With the refracs, you can grow. And then again, when you get back to about 2 rigs, you can see the Williston Basin grow and we've got good inventory going forward. So overall, that's how we're thinking about the company is that simple. And it really is the balance you've asked about, Gabe, on kind of groveling down the growth, retaining the good inventory for the higher prices, which we think's the right thing to do. We don't want to go out and borrow more; we have enough debt. And we'll stay where we are today. So I know that's a long answer to a short question. But I think it kind of sets how we're thinking about the business going forward.

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

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

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

Yes. No, Tim, that's perfect. Thanks a lot for that. And then maybe just a follow-up, two-part question at the asset level in the Permian. Any color you can give on the latest batch of well results here just in terms of zones and density being tested? And then is there an EBITDA or invested capital number that you can share related to the Permian gathering and water infrastructure assets?

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

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

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

So the biggest message I think out of the Permian is the work that was done in late 2017 and into 2018 to increase the spacing on the DSUs has been effective. Each of the DSUs in each of the different zones are now following the type curve. The wells that were drilled on the tighter spacing are declining at a bit more of an exponential decline. All the rest of the wells are on hyperbolic, and they're following the type curve. And so I feel good about that. It takes a long time to kind of dissect every zone, each DSU. I've spent a lot of time with the technical folks and Joe and the operating folks going through that. So I think those kind of questions are probably better to take off line. We're happy to take those calls at a later date and kind of take you through that detail. But it’s -- as you know from past calls, it's a pretty complex-type answer there.

Do you [want to take it], Richard?

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

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [6]

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

Yes. With regard to the EBITDA associated with the various assets and midstream assets in the Permian Basin, we're just not ready to talk about that yet.

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

Operator [7]

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

The next question is from Derrick Whitfield, Stifel.

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

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [8]

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

I'll touch on where the last question was. But specifically in most recent PowerPoints, there was a lot of technical detail on spacing and views on tank-style development. While you touched on it in the opening remarks, would it be fair to assume all past views on spacing and tank-style development remain intact?

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [9]

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

Could you repeat the last part of that? All what?

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

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [10]

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

Sure. Would it be fair to assume that all of the past views on spacing and tank-style development remain intact?

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [11]

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

Exactly. And again when I got here, I spent several days with Joe and Eric and the team kind of going through each of the decline curves, each of the DSUs, each of the individual zones, and feel good about it. So I think now we can kind of dial in. When we say we can pick up a rig and deliver a certain amount of growth, we feel confident with that. There'll be some variation across the acreage, but it's pretty consolidated acreage and we like what we're seeing. I mean, the decision on spacing is partially an economic decision as well. $100 oil, you might go to a little lower spacing and have a little lower decline curve and make more money. Right now at $55 to $65 oil, I think we've dialed it in pretty well. We've increased spacing in the different zones, probably by an average of 30% to 40% by zone. And we're not seeing the interference we were seeing on the tighter spacing.

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

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [12]

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

Perfect. Thanks for the extra detail. And then as you step back and assess the state of your Permian operations broadly, what gives you the greatest concern as it relates to your 2019, 2020 plan?

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [13]

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

We've pulled back, Derek, to a relatively conservative plan, so we don't have a lot of concern. I think we've got the costs well in control, both the LOE and we're very competitive on our cost all-in per well. Now are we satisfied with that? No. I come from a long and deep operating background with fairly conservative companies. And so I'm looking to Joe and Jeff. We're going to keep driving that down every day and we're excited to go do that. On the volume side, again, unless we see some deviation on the wells we're drilling now, we should feel very good about being able to do that. We're going to little fluctuations for weather and treating and different things. But overall, I think the wells, as long as they stay on their decline curve, it's pretty predictable and we're getting much more into that manufacturing mode now.

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

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [14]

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

Great. And one quick follow-up question on the PV10 value. Do you have that specifically for the Permian and Bakken at year-end?

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

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [15]

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

No. Derrick, I think if you just go look at the reserve breakdown, you'd get a pretty good idea of how it's allocated. But we're not giving that number out.

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

Operator [16]

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

We have a question from Neal Dingmann, SunTrust.

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

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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

My question on the Bakken. How do you all see, kind of based on the plan, how do you anticipate sort of maximizing the value and minimizing decline through this year and into 2020?

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [18]

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

Yes. So we've got two opportunities. We have a drilling package that looks very attractive. We also, I think worked through the refracs last year, worked through some mechanical issues and we're confident we have quite a large inventory of refracs. With the asset coming back into the fold, we didn't want to go too hard too fast, and we also want to live with an overall cash flow for company. The Williston, as you know, delivers free cash flow both on an asset level and with the corporate overhead included. And so we believe picking up the rig this year, drilling 7 wells will basically halt the decline. We're also coming lower on the hyperbolic curve on individual wells. So it's going to be, the decline's going to slow naturally by itself. And as we go forward, we have the opportunity if we want to see some growth [with] increasing price, we'll turn into the refracs. And then ultimately, we have enough inventory to pick up probably -- we're going out probably 1 year, 1 1/2 years, pick up a second rig. So we've got our hands on the throttle. We can move that pretty quickly; our confidence aside on the results of the refracs, especially now we've gotten through a few mechanical issues. So again, pretty simple outcome. It dropped pretty hard. That wasn't a surprise. Our PDPs look great. Our growth wedge looks really solid. But now it's really that balance that Gabe asked about is how do you throw all that back up without running through a pretty high quality inventory too quickly at lower price.

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

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

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

No, makes sense. And then lastly, commend you all for that obviously material G&A cut. And I'm just wondering, will that focus be in any one area? I mean is it in Bakken, the Perm or just sort of broad-based? Thank you, all.

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [20]

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

The D&A cuts are the hardest thing we have to do; they impact people. I know we have a lot of our employees listening. And it's across the board. We were a company that were in multiple basins, and in a fairly short period of time it reduced down. So the G&A in the past had been fairly competitive. If we do nothing, our G&A going forward into '19, '20, gets up into the $5 to $6 range. It's unacceptable. And so we need to pull back pretty hard. So we've taken a hard look at that. That was underway before I got here. And we've accelerated to certain things. And now we're looking at, we believe, when I look at the benchmark data, something at $3 or below is going to be very competitive. As we increase volumes in the Permian, you'll see that $3 per barrel come down with time. I really don't think we're going to need to add a whole lot of G&A as we go forward. So we're trying to do a fundamental reset to what do we need? And we're going to remove everything that's kind of a nice to have and we're going to keep everything that's a need to have. And the most important thing is, through all the things that are going on and all the outside influences we've had and now the announcement on the strategic initiative, the most important thing we need to do is maintain good trust and communication with our employees; we've got some of the best in the industry. We're doing some of our most interesting and best things in our Permian and now back into the Williston assets. And so that's going to be kind of our core challenge and our core focus. But it's something that has to happen. Talked to our employees about this and we're going to communicate more fully as we go forward over the next several days. But I hope that helps.

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

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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

No, that does. Thanks for the details, Tim.

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

Operator [22]

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

We have a question from Mr. Tim Rezvan, Oppenheimer.

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

Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [23]

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

My first question is for Tim. Tim, I know the board has been actively reaching out to large shareholders recently, and I imagine you've been in touch with large shareholders as well since you became the CEO. As QEP lays out its sort of new plan moving forward as a 2-asset company, can you talk about how much this plan was really influenced by or is kind of consistent with comments from those large shareholders? Or is this new plan really kind of your initial take on the path forward as you assume the role of CEO?

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [24]

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

Well, it's probably a combination of things. I mean obviously, when you have companies looking at your assets saying we think they're worth more than you're trading, you got to take that seriously, and that's what we're doing. I think you're going to see that we'll run a process. But in parallel, my primary focus to that process is going to be get the business even more healthy, take the cost out and be positioned when we have an answer on what the market's willing to pay for the company or through a merger deal. How does that honestly compare? And I think that's our biggest challenge. We've got to run that hard. We got to stay focused on that. We're going to try and carve off a small subset of the company to work through the strategic assessment. And obviously, I'll be working with the board. But every day, every company is either going to sell and merge or continue on. And you get unsolicited calls. This one is more public process. It was taken public, and we're fine with that. And I think we just have to deal with that. So I don't think it's necessarily shareholder outreach or my particular plan. It is the circumstance we own. We're going to take it forward. But I think you're going to hear much more from me about how do we drive the assets forward? How do we get our cost down? And how do we show that it's very difficult for another company to do that at a lower cost basis?

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

Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [25]

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

Okay. And second question. You announced a sharply lower CapEx figure for 2019. At the same time, your reserve report showed PUD reserve bookings at 65% of total reserves and I think there was a $4.3 billion cost associated with developing those reserves over the next 5 years. Certainly looks aggressive relative to the 2019 program and your goal of long-term free cash flow neutrality. Can you talk about the assumptions behind that? And your comments like or feedback on that possibly being an aggressive sort of booking methodology?

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

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [26]

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

Yes. Tim, it's Richard. With regard to there was a report, all the PUDs are complying with the SEC guidelines for 5 years and a capital plan that you can demonstrate that you can prosecute that development. So with regard to that, certainly $640 million is the midpoint of capital guidance this year relative to your observation of $4 billion to fully develop those PUDs, it's backend loaded. When we developed the plan for this year, we were in an oil price environment that didn't feel very good. We clearly have the options to keep rigs running versus dropping rigs if prices recover. But I think the whole capital deployment issue is driven by the commodity price. And so certainly we feel good about the reserves that are booked and the capital available and the liquidity available to prosecute that 5-year plan. We're just reacting to what we see today, and it's a dynamic situation.

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

Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [27]

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

Okay. So that would be consistent with free cash flow neutrality longer term, that $4.3 billion number.

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

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [28]

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

That's correct.

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

Operator [29]

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

(Operator Instructions) We have a question from Mr. John Nelson from Goldman Sachs.

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

John C. Nelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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

Congratulations, Tim, on your appointment. QEP has been a leader on the tank development practice. And Tim, I appreciate your comments earlier regarding kind of the petrophysical side analysis you did with the team early on. I guess my question is more if tank development can be executed efficiently on just the 2-rig program.

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [31]

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

Yes, that's a good question, John. I think you're getting right at the edge because you're trying to build a pressure front ahead of you, and we're taking advantage of that now. As you go to 2 rigs and we have different assets in different places and you start splitting those up, I think you're down to where you're right on the edge of that. I think we can be effective going forward. The real optimum rig count for us is about 3 1/2 rigs in the Permian, because how you take that one frac crew doing [some with] fracs and support 3 1/2 rigs. So that would probably be the optimum pace at 3 to 4 rigs. In the tank-style, there's no reason to back off. I mean, I think we're going to be smart. We're going to be selective and you're just tightening your sphere down into a smaller area to make sure you take advantage of the pressure front. So can it be done? Yes. Is it overly optimum? Potentially not. But we also are encouraged by the recovery we're seeing in price. We're not going to bet on that. But we'd be poised to kind of move back into a stronger pace of development if the price warrants.

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

John C. Nelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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

Do you have the ability in 2019 to draw down some of the uncompleted well inventory as you kind of wait for higher prices? Or is that not really how the plan is set up?

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

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

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

I don't think we really want to. You have a certain amount of inventory, we're really focused on overall value and the overall value of the assets that we have for the longer term. We could go out and keep the frac crew running. I mean, right now when we drop the rig, the frac crew will be on and off on a more sporadic basis. It's that fundamental decision of you preserve that value for the long term or do you frac it off and keep that volume growth? And that's kind of a conundrum for shale is when you kind of turn the corner and power through, the confidence on price right now, the price has been a little bit too uncertain, I think, for us to say we want to power through and keep that going. Now if we see something happen in OPEC, we see a big price spike, it looks like it's more sustainable and we have the fundamentals to back it up, we can always make decisions not to drop the rigs, we can make decisions to keep frac crews going. And I think that's kind of the beauty of shale is you can do that versus a lot of my history in the offshore, once you're committed, you're committed and then you deplete the reservoir. So yes, we'll watch it. We'd say at this point we would not want to kind of just blow down, work off that inventory.

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

John C. Nelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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

That makes sense. And then two, hopefully just more housekeeping items. The comment earlier that you can hold Bakken production flat with one rig, is that off of 4Q levels or is that off the low 20s levels implied by the guidance you gave earlier?

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [35]

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

Yes. So I'm saying once we hit kind of the level we've given guidance on for '19, by running one rig and doing the 7 wells and continuing on into the following year, we'd be able to keep the production flat. If we want to see an increase in that or we want to offset that if we see some decline, we also have the refracs we can mobilize on pretty quickly.

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

John C. Nelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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

Okay. And then just because volumes will be falling, I guess over at least part of the year, relative to your LOE guidance for the year, should we expect the company to be exiting towards the high end of that range? Or just any color on how we should think about that LOE trajectory.

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [37]

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

No. We're going to aim to the middle, but hope we get much lower. So I mean, I don't think we've done everything possible yet to take cost out. We're going to be working on that very closely. I think Jeff has a challenge up in the Williston with some of our costs there are probably not competitive. We're going to take those costs down fairly quickly. I'm going up with Jeff to visit next week. Then the Permian, we're getting into a continuous improvement cycle where we just need to every day just a little bit more out. So hopefully we wouldn't be ever aiming to the high side. We're going to aim to the middle, hope for the low. And every action we take is going to be driving it more to the low side.

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

John C. Nelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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

Great. Well, congrats again. Thanks.

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

Operator [39]

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

Next question is from Kashy Harrison, Simmons Energy.

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

Kashy Oladipo Harrison, Piper Jaffray Companies, Research Division - Research Analyst [40]

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

So just one quick one for me. Earlier in the prepared remarks, I think you mentioned that the Permian CapEx was going to be roughly 80% of the total budget during 2019. I was just wondering if you could give us a sense of what either Permian oil or total production looks like for full year '19.

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

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [41]

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

Kashy, this year we're not -- this is Richard. We're not going to give Permian standalone guidance. It didn't really help us last year to give the guidance. And so we're going to kind of revert back to where we were. You can kind of just extrapolate what the first quarter guidance is, the fourth quarter exit rate was. But we're just not giving the basin guidance.

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [42]

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

Yes. What I did say, and I think you can do the math on this, is if you look at what our full year is ends up being for '18, we expect to see a year-on-year growth of about 8% in the Permian oil.

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

Kashy Oladipo Harrison, Piper Jaffray Companies, Research Division - Research Analyst [43]

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

I'm sorry. You broke up for a second. Did you say 80% or 8%?

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

Richard J. Doleshek, QEP Resources, Inc. - Executive VP & CFO [44]

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

8%.

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

Timothy J. Cutt, QEP Resources, Inc. - CEO, President & Director [45]

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

8%. Yes, 8%. So if you take the last year's, do the math on that, what I had in my prepared remarks was 8% year-on-year. And again, part of that is we got the 3 rigs going to 2. Once we go to 2, it's going to stay more flat. Go to 3, I'd say we'd be able to see about a 15% growth. That's kind of the boundaries. I think that'll help you with your math.

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

Operator [46]

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

We have a question from Raj Aggarwal, Oak Hill Advisors.

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

Rajul Aggarwal, Oak Hill Advisors L.P. - MD [47]

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

Just one quick clarifying question. On the CapEx number, I think you said the 80% of CapEx was going to be spent in the Permian. And I think you said average well including facilities, was $8 million a well. I'm just trying to square how 47 wells in the Permian lead to that sort of number. If you can help us reach that, that would be very helpful.

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

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

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

Yes. So if you think about this year and you take the 80%, you're talking about probably close to $500 million. And I said to drill, complete and hook up with one rig is about $175 million. You add that math up, also we're drilling a water disposal well; we've now finished that. So you had a heavier capital load. So we have 4 rigs in the first quarter. And then you put $70 million worth of midstream costs on top of that. You do that math pretty quickly, you get to $500 million, which is about 80% of the total, I think, if I've got my math right.

It sounds like we're maybe finished up with the questions. So let me just close out by making a few comments and hopefully this came out fairly clearly. But overall what I'd like to say is we're committed to being cash flow neutral including corporate overhead and interest, before the end of 2019. And that is at a flat $55 price. And we're using a bit of a differential there also. And then cash flow positive as we said for 2020, at $55 flat. Committed to aggressively reducing the G&A costs during the first half of 2019, but continually improving against our LOE per Boe. We've optimized the well spacing and have confidence in delivering the forward volume plan. We liked the Williston deal at the agreed-upon price, but we didn't see a need to go to any other place on that. We'll test the market value of the company but remain very confident in our ability to be a competitive developer of the assets. We've not established a timeframe to complete the marketing process, but that process will begin immediately. We don't plan to give updates on that. But I think most of you have kind of watched those processes from afar. They can be a wide range of timing outcomes. And but ultimately just want you to have confidence we're going to do whatever is in the best interest of the shareholders. So with that, I think I'll turn it back over to Will.

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

William Kent, QEP Resources, Inc. - Director of IR [49]

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

Thank you very much for your interest in QEP, and we'll talk to you all soon.

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

Operator [50]

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

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.