An Exploration Play For Your Portfolio: Three Reasons To Stick With QEP

| About: QEP Resources, (QEP)

QEP Resources (NYSE:QEP) is an independent oil and natural gas exploration company operating primarily in the western United States.

QEP earnings were dreadful following the market close missing analyst expectations by a mile. QEP reported earnings of $0.17 per share excluding items versus the consensus $0.40 with revenue of $715 million coming in short by more than $40 million. QEPs prospects were dimmed by a shortfall in natural gas production largely due to adverse weather. In after hours trading the shares were down more than 12% to $28.00.

Many analysts have price targets ranging from $36 to $38 largely based on the longer term value of QEP's assets and sum of parts valuation. We believe investors should view this dip as a buying opportunity with several positive catalysts to come.

1. The revenue declines due to adverse weather will likely subside in future quarters. As natural gas production comes back online QEP's earnings and cash flow should rebound.

2. QEP recently announced plans to separate their services business including their interest in QEP Midstream Partners (NYSE:QEPM) Activist hedge fund Jana Partners had been urging the QEP to take steps to separate QEPM to unlock the entities significant value, particularly since the business has become less critical to QEP. Recently the fund signed an agreement with QEP to appoint a board member that will be engaged in the separation activities.

3. Value of QEP's acquisitions have yet to be realized. QEP recently entered into an agreement to purchase assets in the Midland Basin. QEP projects the assets were acquired at significant discount -- less than 4.0 times forecasted adjusted EBITDA. The acquisition will weigh on cash flow in 2014 with substantial increases seen in 2015 and beyond.

In conclusion we believe the stocks adverse reaction to recent earnings will be short lived and recovering production, the mid stream separation, and recent acquisitions will provide several catalyst to move the stock upwards.

Disclosure: I am long QEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.