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QEP Resources Initiation Report

QEP Resources

BUY (QEP, $8.34*)

Permian Focused Producer Offers Additional Upside; Initiating BUY With $11 Price Target

July 31, 2017

Glenn Williams Jr.

212.417.3638

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We are initiating coverage on QEP Resources with a BUY rating and $11 price target. Given the company's current price (and our expectations for increased production and cash flows), we see QEP as trading at an unwarranted discount to intrinsic value. To that end, we compared QEP with a set of valuation multiples derived from a selection of industry peers. Additionally, we value QEP's equity on the basis of daily production, proved reserves, and projected EBITDA. In doing so, we arrive at a value per share of $11, implying 33% additional upside, given current prices.

QEP Resources has a strong base of reserves, along with an expanding presence in the Permian Basin. We note a diverse production profile for QEP, though we expect a deeper focus on the Permian, moving forward. As it stands, QEP holds 731.1 million barrels of oil equivalent (Mmboe), across the Permian Basin (TX), Williston Basin (ND), Haynesville Shale (LA), and Pinedale Anticline (WY). We note that approximately 14% of current production is driven by the aforementioned Permian assets, and expect that figure to increase moving forward. To that end, we expect that 6 of the 7 rigs currently being operated by QEP will be located in the Permian for the remainder of 2017.

As Permian based production increases, we expect an expansion in operating margins as well. We expect QEP's oil weighted production mix (35% in 2Q17) to increase as they make progress in the Permian, which in isolation is a 72% oil weighed asset. In turn, we contend that this positions QEP for expanded margins and increased EBITDA in future quarters. Additionally, with production costs of approximately $12 per boe (excluding interest expense and G&A), we see QEP as well positioned to generate positive cash flow, even in what we consider to be a tepid oil price environment.

We base our price target on a blended average of QEP's daily production, proved reserves, and projected EBITDA figures. In doing so, we arrive at a price target of $11 per share (Exhibit 11). Additionally, our model deducts $0.39 for a working capital deficit, while also deducting $7 per share for net debt. Thus, given the 39% implied upside to current prices, we initiate coverage on QEP with a BUY rating.

QEPSource: Capital IQ; National Securities Corporation


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