Here's Why QEP Resources Inc Stock Is Sinking Today

Markets Motley Fool

What happened

Continue Reading Below

Shares of QEP Resources (NYSE: QEP) plunged on Thursday morning, down 16% as of 10:30 a.m. EDT, after the company reported second-quarter results and unveiled a major acquisition in the Permian Basin.

So what

While QEP reported an adjusted loss of $30.2 million, or $0.12 per share, that was $0.08 per share better than analysts were expecting. Furthermore, it was an improvement from the year-ago period, during which it recorded an adjusted loss of $50.2 million, or $0.23 per share. However, driving the continued losses is the fact that not only was production flat during the quarter, but higher-margin oil output declined.

That said, QEP Resources' portfolio is undergoing a dramatic shift toward higher-margin oil in the future as a result of two transactions announced this week. On Monday, the company said it would sell its legacy Pinedale gas properties in Wyoming for $777 million, which it said was "a necessary next step to help fund future development projects and acquisition opportunities." The company took advantage of one such opportunity a few days later by announcing in its second-quarter earnings release that it signed a deal to acquire $732 million in oil and gas properties in the Permian Basin. QEP Resources sees that deal giving it significant scale in the Permian because the transaction will boost its net acreage position by nearly 50% and its potential drilling inventory by over 60%.

In addition to those deals, the company announced that it would add $100 million to its capital expenditure budget, which will enable it to add two more drilling rigs this year. That budget boost comes at a time when most U.S. drillers are "tapping on the brakes," according to oil field service giant Halliburton. Furthermore, Halliburton noted that the rig count in the U.S. is "showing signs of plateauing." For example, Whiting Petroleum cut its budget by $100 million due to the decline in oil prices. That spending cut will result in Whiting Petroleum dropping two rigs, leaving it with just four rigs running through the end of the year.

Continue Reading Below

Now what

QEP Resources' decision to increase spending and add rigs goes against the grain, especially considering that the company only generated $295.2 million of operating cash flow so far this year while spending $477.9 million on capex, which is draining its cash position. The company needs oil and gas prices to rebound for that move to pay off, which is a risky gamble given there are plenty of other drillers offering more growth with less risk.

10 stocks we like better than QEP Resources
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and QEP Resources wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of July 6, 2017

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.