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Elliott Management's buyout offer sends shares of Permian driller QEP up 40%

Shares of QEP Resources Inc. skyrocketed Jan. 7, nearly meeting the hefty premium investment firm Elliott Management Corp. offered in a $2 billion takeover proposal for the Permian Basin-focused oil driller.

In a letter to QEP's board of directors, Elliott said it is pleased that the company had moved to divest its assets in the Haynesville Shale and Williston Basin and is working to become a Permian Basin-only operator. Despite that, the private equity firm said, the Denver-based company is still not performing up to expectations.

"Despite the progress to date, Elliott believes that QEP remains deeply undervalued in the market today," Elliott said. "We believe shareholders are frustrated and that a sale of the company would be the best approach to deliver maximum value to shareholders."

The firm offered $8.75 per share in cash, or a 44% premium over QEP's closing price Jan. 4. Elliott said the offer is contingent on the closing of QEP's $735 million sale of its assets in the Haynesville Shale to Aethon Energy Management LLC affiliate Aethon III but not contingent on the completion of QEP's $1.73 billion sale of its Williston Basin holdings to Vantage Energy Acquisition Corp.

Investors bid QEP shares up nearly to the offer price Jan. 7. The stock gained 40.3% to close at $8.53.

SunTrust Robinson Humphrey energy analyst Neal Dingmann estimated that Elliott's offered price gave an asset valuation of approximately $24,000 per acre for QEP's acreage in the Permian's Midland Basin. "Today's bid is understandably positive for QEP shares … with additional upcoming share activity possible given the company's potential acquisition target given its potential upcoming Permian pure play status."

Williams Capital Group Senior Equity Analyst Gabriele Sorbara said the firm would advise a "move to the sidelines" on QEP, downgrading the stock from "buy" to "hold." With the current price environment, it may be tough for the producer to obtain a bid to compete with Elliott's. "While we agree with [Elliott] surrounding the significant value and upside in QEP … a competing bid would be challenging in the current commodity price environment."