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Observers skeptical of reports of interest in QEP Resources


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Observers skeptical of reports of interest in QEP Resources

QEP Resources Inc. has been on the market for three months with limited interest, a company up for sale in an environment where oil and gas M&A activity is being frowned upon. There are new rumors of serious suitors for the Denver-based producer, but analysts are divided on just how seriously to take those rumors.

In a May 20 report, Bloomberg cited unnamed sources saying that private equity firm Blackstone Group LP, along with fellow upstream companies Callon Petroleum Co. and Whiting Petroleum Corp., has expressed interest in acquiring QEP. The company announced in January that it had received a $2 billion buyout offer from Elliott Management Corp., and CEO Timothy Cutt said during QEP's fourth-quarter 2018 earnings call Feb. 21 that all options were on the table.

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QEP Resources' assets in the Williston Basin are up for sale. Whether there are any willing buyers remains a matter of speculation.

Source: Associated Press

"We believe the best way to accomplish this goal [of maximizing shareholder value] is to run a comprehensive process to identify the potential value of these strategic alternatives, whether through a strategic alternative or by continuing to develop our two premier oil assets on a stand-alone basis," Cutt said.

Since that time, there has been no movement in terms of making a deal with Elliott or anyone else. The private equity firm's deal, which would pay $8.75 per share — about 90 cents above QEP's stock price the afternoon of May 21 — remains on the table, but QEP seems disinclined to take it.

Bloomberg said in its report that QEP had made no decision on whether to accept any offer from Blackstone, Callon or Whiting, and some analysts believe that there may not be any offer to accept at all.

"This doesn't make sense for either [producer]," Williams Capital analyst Gabriele Sorbara said. "I'm sure Callon and Whiting were in the data rooms, but I don't think the transactions [will] occur and I don't think they should occur."

Acquisitions made over the past year have been considered negatives by investors, who have been more interested in seeing shareholder returns as opposed to growth. Companies on the acquiring end of such moves have seen their stock price suffer as Occidental Petroleum Corp.'s has over the past two weeks since its $57 billion bid was accepted by Anadarko Petroleum Corp. QEP is nowhere near the size of Anadarko, but Sorbara noted that its price would be steep for Callon or Whiting.

"QEP assets are not necessarily cheap," Sorbara said, estimating that the company is worth about $4 billion. The company's assets in the Permian Basin would represent the larger portion of the price and would probably be worth about $2.5 billion. QEP's acreage in the Williston Basin may be worth about $1.5 billion.

Another potential problem could be the size of the companies involved. QEP's market cap May 21 was about $1.88 billion, Callon's was $1.77 billion, and Whiting's was $2.11 billion. Making any move for QEP would stretch both companies considerably. The damage to their balance sheets should be enough to give both companies pause, Sorbara said.

"Callon will have a massive dilution," Sorbara said. "It doesn't make sense for Whiting, either. They already have a lot of debt."

Sorbara also described a recent conversation that made him believe that Callon's interest in QEP may be overstated.

"I spoke to Callon recently, and they said they're not looking at big transactions," Sorbara said.

Tudor Pickering Holt & Co. discussed another possibility in a May 21 note: the possibility of Callon and Whiting collaborating, perhaps even with funding from Blackstone, to divide QEP's assets.

"We continue to think that breaking QEP up would be the best strategic option," the firm said, with Whiting buying the Bakken assets and Callon purchasing the Permian holdings. Tudor Pickering Holt also took a dissenting view on the idea of M&A activity, believing that it is more likely to happen among near equals than having one larger company swallow up another.

"We'd continue to buy on our thesis of 2019 being a year for mergers of equals as more market cap and synergies are needed to garner investor mindshare in the space," the firm said.