What happened

Shares of QEP Resources (NYSE:QEP) took off on Thursday, surging more than 17% by 10 a.m. EDT. Fueling the energy company's rally was its strong third-quarter report.

So what

QEP Resources' turnaround strategy paid dividends during the third quarter. The oil and gas driller generated $11 million, or $0.05 per share, of adjusted net income, which surpassed the consensus estimate by $0.01 per share. Driving that expectation-beating result was the company's ability to reduce costs, with its lease operating expenses per barrel of oil equivalent declining 20%. That's due to the sale of higher-cost assets in the Haynesville/Cotton Valley and Uinta regions as well as an increase in lower-cost output in the Permian Basin.

Money bursting out of a black barrel on a concrete floor and a happy businessman in a celebratory stance next to it.

Image source: Getty Images.

On the one hand, those asset sales caused QEP Resources' oil equivalent production to plunge 42% year over year. However, the company delivered strong oil growth in the Permian as output surged 12% to a record 4 million barrels during the quarter. That excellent result gave the company the confidence to increase its full-year production guidance.

Meanwhile, its cost-cutting initiatives have had an even better impact than expected. For instance, the company was able to reduce its 2020 general and administrative expense target rate. Overall, those expenses are on track to fall by 40%. As a result, QEP Resources generated some free cash flow during the third quarter and is on track to produce significantly more in the fourth quarter. That's leading its management to believe it can pay down debt while also returning cash to its investors.

Now what

QEP Resources is transitioning to a Permian Basin-focused oil company. That will not only enable the company to grow at a fast pace in the coming years but also use that low-cost region as an ATM to return cash to its investors. This dual approach increases the likelihood that QEP can create value for its investors over the long term.