Shale player QEP Resources Inc. continues to bring down costs across its assets as the company gears up for more refracs and gas lift in the Bakken along with a fourth-quarter 2019 return of frac crews to the Permian Basin.

The Denver-based company has lowered its G&A expenses by about 40% since third-quarter 2018, aiming to bring it down to less than $3 per barrel of oil equivalent (boe) by 2020.

QEP’s divestment of assets in the Haynesville/Cotton Valley Shale and Uinta Basin also helped drive a 41% drop in lease operating expense (LOE), which fell to $38.3 million for third-quarter 2019 compared to a year earlier. Divestitures aside, the company reported a $14.1 million drop in LOE attributable to expense-reduction efforts in the Permian and Williston basins.

In the Permian, D&C costs have fallen by 20% since 2018—more than $1 million per well in cost reductions—with more recycled water and in-basin sand use, optimized brine and freshwater drilling mud, walking rigs and increased pump rate down for wells.

Plus, facility and artificial lift cost efficiencies in the Permian have led to a 33% drop in well equipment costs.

“Our strong operational performance coupled with continued focus on operating expenses resulted in QEP being free cash flow positive in the third quarter and positions the company to generate significant free cash flow in the fourth quarter,” QEP CEO Tim Cutt told analysts Oct. 24.

The company reported Oct. 23 free cash flow of $17.5 million for third-quarter 2019, down from the $26.2 million generated a year earlier but better than the negative $15.5 million for second-quarter 2019—elevated by asset sale proceeds.

Faced with pressure from investors, E&P companies have been challenged to become more returns driven and operationally efficient amid struggles to cope with market volatility and resist temptation to rack up more debt.

Many have already cut spending on new drilling this year while improving the productivity of existing wells. Some are also shedding assets to bring in cash.

QEP lowered the mid-point of its 2019 capex guidance by about $15 million, down $65 million year-to-date, to $567-$582 million but upped its total production guidance by 6% to 32-32.6 million barrels of oil equivalent.

‘Strong’ Performance

Third-quarter 2019 earnings were $81 million, up from $7.3 million in the year-ago quarter, mainly due to gains on derivative contracts.

Permian Basin assets produced a company net oil equivalent record of about 61,500 boe/d during the quarter, an 18% increase.

Analysts appeared pleased with the quarterly results. Williams Capital Group described them as “strong,” beating expectations on lower spending levels.

On the back of the stellar beat-and-raise 3Q19 results, we believe there now is greater visibility on execution, free cash flow and the company’s ability to de-lever its balance sheet and return capital back to shareholders,” Williams Capital Group said in a note. “We see incremental upside from a potential JV/partnership of its Permian water infrastructure assets expected later this year or early next year, as well as from the expected tax refunds through 2022.”

Third-quarter production fell 42% to an average 91,300 boe/d from 156,500 boe/d a year earlier. A 78% drop in gas production was behind most of the decrease, as produced oil and condensate volumes fell by 15%.

Losses were associated with divestitures and lower volumes in the Williston Basin where activity slowed down. Williston net oil equivalent production fell 38%.

Looking Forward

Cutt said the timing of upcoming development programs is critical to understanding how QEP plans to deliver free cash flow in the coming year.

In the Permian due to improved operational efficiency, the single frac crew can support a three- to four-rig program,” he said. “Based on our planned two-rig program, we expect drilling activity to continue year-round in the basin with new wells being completed and put on production in the first three quarters of the year.”

Next year’s Permian development program will focus on County Line acreage, mostly in the proven Spraberry Shale formation.

In the Williston Basin, most of the completion activity will be completed from April to September.

“This operational seasonality will mean the capital spend during the first half of the year will be significantly higher than the second half of the year, and volumes will generally peak in the third quarter,” Cutt added. “This will likely translate into cash outspend during the first half of the year before significant free cash flow generation in the second half of the year.”

QEP still sees opportunities to further bring down costs.

In the Permian, where QEP has 49,604 net acres, “We’ve gone to a simul frac where we’re basically fracking two wells simultaneously,” Cutt said. “The next phase of that is to increase our pump rates. We’ve had pump rates on each well of maybe 60 barrels a minute. We think we can raise that to about 80 barrels a minute.”

He also believes facilities costs can come down some more.

Further efficiency gains are also expected in the Bakken where the company is converting to gas lift from rod pump. “We’ll have a lot less workover rigs,” Cutt said. QEP has 94,608 net acre in the Bakken.

QEP’s 2020 development program for the Williston Basin also includes a refrac program.

“We’ve got 30 refracs that are online. They’re all performing as expected,” Cutt said.

More than 100 refrac candidates have been identified.

Costs are currently running about $5 million per refrac, which QEP also aims to bring down.