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Permian Deep Value: QEP Resources

|Includes: QEP Resources, Inc. (QEP)

Last week I briefly discussed Carrizo Oil and Gas from a "dollars per flowing barrel" perspective.

I have been looking at (and as of last week, own a position in) QEP Resources for quite some time now.

The company operates in five geographically distinct areas: the Permian, Williston, and Uinta basins, and the Pinedale anticline and Haynesville shale. QEP has focused its drilling efforts in the Permian, and has been steadily increasing its oil/gas ratio.

What's to like?

Well, I would start with a reasonably strong balance sheet; the company reported cash and cash assets of $443.8 million in its 2016 Annual Report, adjusted to $338.4 million in the Q1 2017 quarterly report. They carry debt of $2.02 billion, which might seem high until you investigate the cash value for the assets; Pinedale alone has an estimated market value of approx. $1 billion. Proved reserves at all five assets approximate 719 MMboe. Oil equivalent production for Q1 2017 was 13,090.3 Mboe, down from 13,776.5 Mboe in Q1 of 2016; the timing of completions was a factor in the production decrease, although earnings improved from a loss of $101 million last year to $34 million in the first quarter.

The company's guidance for 2017 is to operate 5 rigs in the Permian, with one each working the Williston and Pinedale assets.

Based on QEP's 2016 Annual Report, I calculated a dollars-per-flowing barrel of approx. $77,500 based on Market cap = 2.75 billion, debt of 2.02 billion, cash on hand of 443.8 million, and production of 55,800 Mboe. The company expects total production for 2017 to come in between 57-60 MMboe.

QEP Resources dipped to a low of $11 at market close on Friday, April 21, and closed Wednesday, April 26 at $11.87.

I see the company as a value play (and of course an increase in oil would help also), and initiated a position at $11.81, looking for a target price of $17-18, and higher if oil can get back over $50 and start crawling towards $60.

The company indicated plans to divest the Pinedale asset during the 27 April 2017 earnings call. Presumably a part of any cash generated by the sale of an asset would go towards its standing long-term debt.

Disclosure: I am/we are long QEP.