QEP Resources (NYSE:QEP) has several promising crude oil and wet-gas areas in the company's portfolio, and it plans extensive development of these plays over the next few years. This will start to diversify the company away from a heavy dependence on natural gas in its reserve and production base.
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Strategy
QEP Resources reported total proved reserves of three Tcfe at the end of 2010, with 86% of these reserves composed of natural gas. The company's production is also in line with its proved reserves and has a liquids content of only 15%. (For related reading, see Oil: A Big Investment With Big Tax Breaks.)

QEP Resources has adopted a strategy of diversifying away from natural gas and has dedicated 75% of its 2012 capital budget towards formations that produce crude oil, natural gas liquids or condensate.

Uinta Basin
QEP Resources is active in the Uinta Basin where the company is developing the Red Wash Lower Mesaverde play. Production from this play is approximately 40% liquids and comes from multiple sandstone formations. QEP Resources is developing the play with vertical wells.

QEP Resources is planning to drill 40 wells into the Lower Mesaverde play in 2012, and will also initiate a pilot program to test 10- and 20-acre spacing. If 10-acre spacing is successful, the company will have an inventory of 3,200 hundred drilling locations in this area.

QEP Resources has also identified a potential oil bearing formation in the Uinta Basin and plans to test the Green River play, which the company must drill through to get to the Lower Mesaverde.

Williston Basin
QEP Resources is also active in the Williston Basin, and has 90,000 net acres under lease with exposure to the Bakken and Three Forks formation. The company has the majority of its acreage within the Fort Berthold Indian Reservation and has reported several successful wells with high initial production rates.

QEP Resources estimates that it has approximately 240 gross Bakken locations assuming 160-acre spacing. The company also has an additional 160 locations in the Three Forks formation.

The Bakken is one of the most active plays in the United States and has attracted some of the world's largest oil companies. In October 2011, Statoil (NYSE:STO) announced the acquisition of Brigham Exploration Company (NYSE:BEXP) in a deal valued at $4.7 billion. Brigham Exploration Company was one of the leaders in developing the Bakken play.

Another operator in the Bakken is Kodiak Oil and Gas (NYSE:KOG), which saw its stock price jump after the deal was announced. The company plans to spend $585 million in capital in 2012 on 51 net wells.

Marmaton Lime
QEP Resources is involved in the Marmaton Lime in Western Oklahoma and has 31,000 net acres under lease. This is an oil play, and a recent horizontal well drilled by the company was reported with an initial production rate of 1,063 barrels of oil per day. If this success can be replicated across the company's entire position, QEP Resources will have nearly 100 drilling locations, assuming 320-acre spacing.

Powder River Basin
QEP Resources is also testing a number of different plays in the Powder River Basin, including the Niobrara, Sussex and Shannon formations. These plays also have the potential to add to the company's future liquids production growth.

The Bottom Line
QEP Resources has jumped into a number of oil and liquid plays that offer higher returns than dry gas development. Although it will take years for the company to lose its reputation as a natural gas operator, the strategy is the correct course to follow. (For related reading, see What Determines Oil Prices?)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.



Tickers in this Article: QEP, STO, BEXP, KOG

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