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Analyst Blog

On May 30, 2014, we initiated coverage on Denver, Colorado-based independent energy company QEP Resources Inc. (QEP - Analyst Report). While we like QEP Resources for its diversified asset base, exposure to emerging plays and quality acreage in multiple basins, the stock’s natural gas-heavy production mix and limited fundamental support keep us on the sidelines.

QEP Resources – a leading independent energy company engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids – possesses a diversified reserve base in multiple U.S. basins, to go with its focused investment in high-return areas such as the Pinedale, Uinta, Bakken and Permian.

Since its split from Questar Corp. (STR - Analyst Report) in 2010, QEP Resources has established a strong track record of production growth, while maintaining a competitive cost structure, which contributes to the consistency of its growth and returns throughout the business cycle.

Additionally, management has not been shy of divesting assets, particularly those that do not fit into the company’s long-term growth plan. During 2013, QEP Resources sold approximately $200 million worth of non-core oil and gas properties around the world, thereby freeing up capital to concentrate on its longer-term high-grade prospects. In May 2014, the company unveiled another trio of deals to sell primarily gas assets in the Midcontinent and Williston Basin for a combined price of $807 million.

Finally, we remain positive on QEP Resources’ plans to pursue separation of its midstream segment, as it holds the promise of unlocking significant value. Importantly, the move will allow the company to improve its operational efficiency, as management will be able to focus all its attention on the upstream business.

We, however, think that these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from current levels. Moreover, QEP Resources’ natural gas-heavy production and high debt continue to cloud the company’s value.

QEP Resources currently carries a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

While we expect QEP Resources to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Athlon Energy Inc. (ATHL) and Encana Corp. (ECA - Analyst Report) as good buying opportunities in the energy exploration and production space. Both carry a Zacks Rank #1 (Strong Buy).

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