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.
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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.
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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."
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.
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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.
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.
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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.