QEP Resources (NYSE:QEP) recent acquisition of additional acreage exposed to the Bakken play in North Dakota increases the company's leverage to this popular and fast-growing resource play and makes the company one of many operators to bet on the future productivity and viability of the Bakken.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

What Are They Buying?
QEP Resources plans to purchase 27,600 net acres in the Williston Basin for $1.38 billion. The properties are located in Williams and McKenzie counties in North Dakota, fairly close to the company's core acreage. The properties have both developed and undeveloped acreage and have current production of 10,500 barrels of oil equivalent (BOE) per day.
QEP Resources estimates the acreage contains net proved and probable reserves of approximately 125 million BOE, with approximately 90% of the reserves composed of oil and other liquids. The company will finance the acquisition with cash and an existing credit facility. Black Hills Corp (NYSE:BKH) is one of the sellers in the deal and will receive $243 million for 85% of the company's Bakken properties. The company estimates that it will record a capital gain from $20 million to $40 million on the sale.

SEE: Oil And Gas Industry Primer

During a conference call held to discuss the purchase, the management of QEP Resources discussed the reasons for the purchase. The properties are located in a "black oil" basin where the liquids component is crude oil rather than condensate or natural gas liquids. The deal also fit in with the company's strategic goal of increasing its liquids reserves and production. The acreage was also contiguous to existing properties held by QEP Resources, allowing the company to leverage economies of scale in its operations.

Balance Sheet Impact
Most of the acquisition will be funded with debt and this will obviously increase the company's leverage. The company estimates that net debt will reach $3.2 billion after the purchase, up from $1.7 billion, while net debt to book capital will be 48%, up from 34%. QEP said that this level of debt is above its long term goal and that it would look for an opportunity to reduce leverage, possibly through a divestiture. The company also told investors not to expect a dilutive transaction assuring them that selling equity was "last thing you should expect us to do."

Previous Position
QEP Resources already had a substantial position prior to the acquisition and held 90,000 net acres with proved reserves of 43.2 million BOE as of the end of 2011. The company estimates that it had 420 gross locations into the Bakken and Three Forks before the most recent purchase and could earn a 10% before tax rate of return assuming oil prices of $65 per barrel.

SEE: 5 Biggest Risks Faced By Oil And Gas Companies

Like most other exploration and production companies, QEP Resources has shifted capital spending over the last few years away from dry gas and towards crude oil and liquids. In 2012, the company plans to spend only 9% of its capital on natural gas properties, compared to 84% in 2009.

Other Acquisitions
The industry has been active over the last year in buying acreage exposed to the Bakken formation. Northern Oil and Gas (NYSE:NOG) and Kodiak Oil and Gas (NYSE:KOG) operate exclusively in the Bakken or Three Forks and purchased additional acreage at the end of 2011. Kodiak Oil and Gas has budgeted $585 million in capital spending in 2012 to develop its properties, while Northern Oil and Gas will spend $387 million during the year.

Some investors have speculated that Chevron Corporation (NYSE:CVX) is considering a large acquisition as the company has been building up its cash on its balance sheet. The company reported $21.4 billion in cash and cash equivalents at the end of the second quarter of 2012, compared to total debt of $10.2 billion.

SEE: Investing In Oil And Gas UITs

The Bottom Line
Many exploration and production companies are trying to grow the production of oil and other liquids and are targeting the Bakken formation in the Williston Basin. Investors that wish exposure to this play have many different choices available but need to be confident that high oil prices are here to stay.

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

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Investing

    Top Investment Banks In The Energy Industry

    Many global Investment banks are highly involved in the energy industry, but there are also some smaller banks and boutiques that are strong players.
  3. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  4. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  5. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  6. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  7. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  8. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  9. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  10. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  1. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!