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QEP Resources: Low Cost Natural Gas Producer

By Tim Plaehn   |   Tuesday, 06 Dec 2011 03:18 PM

Natural gas production is a growth industry in the United States, but the value of this energy source has not kept up with the price of crude oil. Gas producer QEP Resources (QEP) is a possibility for investors looking for a low-cost natural gas producer.

QEP Resources was spun off by Questar (STR) in mid 2010 and is a standalone natural gas exploration and production company. The company's reserves and production areas are split between a Northern region in the Rocky Mountains and North Dakota and a Southern region in Texas and Oklahoma.

Approximately a quarter of QEP's operating earnings are derived from gas field services, including gathering and NG liquid processing for other gas exploration and production companies.

For the first nine months of 2011 QEP Resources reported operating earnings of $1.50 per share, up 23 percent from the $1.27 earned in the first three quarters of 2010. For the 2011 third quarter operating income increased by more than 40 percent from a year earlier to 57 cents per share.

These earnings gains occurred during a period of time when the price of natural gas as indicated by the Henry Hub spot price was in a steady decline.

Low cost, plus growth

QEP Resources management reports that the company's cost to produce 1 million cubic feet of natural gas is $1.58 compared to an industry average of $2.94. With the gas spot price hovering around $3 to $3.50, the low cost advantage allows the company to continue with profitable production and to fund its growth objectives.

The stated company goal in 2011 is to double reserves and production within 5 years. The midstream and NG liquids capability provide an additional source of earnings growth as the value of NGL's increases faster than dry natural gas. Field services fees plus liquids revenues now comprise 42 percent of total company revenues.

Recently, the analysts at Deutsche Bank initiated coverage on QEP with a buy rating. In other recent analyst comments, Jefferies & Company analysts reiterated their buy rating and the folks at Goldman Sachs maintained their neutral rating.

The company next reports on Feb. 23.

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Natural gas production is a growth industry in the United States, but the value of this energy source has not kept up with the price of crude oil. Gas producer QEP Resources (QEP) is a possibility for investors looking for a low-cost natural gas producer. QEP Resources was...
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