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Quicksilver Details Q2 Results; Plans for Multi-Play Growth

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   |    Tuesday,August 06,2013

Quicksilver Resources Inc. has reported preliminary 2013 second-quarter results.

Highlights:

• Sold 25% of Barnett Shale assets to Tokyo Gas subsidiary for $485 million and secured long-term development partner in the Barnett
• Refinanced $1.0 billion of debt, which extended the company's weighted average debt maturity and reduced weighted average cost of debt
• Executed agreement to sell Montana Asset
• Advanced Horn River Basin joint venture process to formal bidding stage
• Produced 26 billion cubic feet of natural gas equivalent (Bcfe)

Glenn Darden, Quicksilver's Chief Executive Officer, commented: "Quicksilver's primary goal is to improve our balance sheet by completing transactions that highlight the value of our asset base. In the last several months, we have made significant progress on this goal. We've sold assets for excellent value, brought in strong, long-term partners and secured financial flexibility through amending the company's credit facility and refinancing bond debt. We will continue to execute our plan and clearly recognize that performance is the measure that really counts."

Operational Update

The company reported second quarter updates on all of its sectors, which can be found below:

• Quicksilver Talks Horn River Production, Cancelled Pipeline
• Quicksilver Exploring Horn River JV; Asserts 14 Tcf Potential
• Quicksilver Talks Barnett Well Timeline; Seeks Partner for West TX Project
• Quicksilver, Shell Planning Seven Niobrara Sand Wash Wells

Montana Transaction

In July 2013, the company executed an agreement to sell all of its interest in approximately 143,000 acres and approximately 2.6 MMBbl of reserves located in the Southern Alberta Basin in Cut Bank, Montana. The sale is expected to close in the third quarter and is subject to customary closing conditions.

Third-Quarter 2013 Guidance

Third-quarter 2013 average daily production volume is expected to be 275 - 280 MMcfe per day. Full-year average production volume continues to be expected at 290 - 300 MMcfe per day.

Financial Results

Reported net income for the second quarter of 2013 was $243 million, or $1.37 per diluted share, compared to a reported net loss of $802 million (restated), or $4.72 per diluted share in the prior-year quarter.

Second-quarter 2013 reported net income includes the following significant, non-operational items:

• $333 million gain related to the sale of 25% of Quicksilver's Barnett Shale Asset
• $86 million of charges related to debt refinancing and acceleration of deferred financing fees
• $84 million non-cash deferred tax valuation allowance
• $13 million non-cash charge in connection with the termination of an agreement with Nova Gas Transmission Ltd. (NGTL) to construct a pipeline to the Horn River Basin
• $38 million non-cash, unrealized gain from commodity derivatives
• $4 million for accelerated stock compensation expense related to employee retirements

Reported second-quarter 2012 net loss includes a restated $1.2 billion non-cash ceiling test impairment.

Excluding these non-operational items, adjusted net loss for the second quarter of 2013, a non-GAAP financial measure, was $11 million, or $0.06 per diluted share, compared to a restated adjusted net loss of $7 million, or $0.04 per diluted share, in the prior-year quarter.

Unrealized gains and losses on commodity derivatives are excluded for purposes of presenting adjusted net earnings. Further details of unrealized derivative losses and adjusted net income are included in the tables accompanying this earnings release.

Production

Second-quarter 2013 production was 26.1 Bcfe, or an average of 287 million cubic feet of natural gas equivalent per day (MMcfed) compared to 32.7 Bcfe, or an average of 359 MMcfed in the prior-year quarter. Production from the Barnett Shale was 16.5 Bcfe, or 181 MMcfed, which is lower compared to the 2012 quarter due to the sale of 25% of the asset on April 30, 2013, minimal capital activity, and a curtailment at a third-party fractionation facility, which suspended the sale of, on average, approximately 800 barrels per day of natural gas liquids in the second quarter. The curtailment is expected to continue into early in the third quarter but have no significant impact to third quarter production volumes and revenue. Volumes delivered by the company are being stored by the buyer and are expected to be recognized as production and sales in the fourth quarter as volumes are processed.

Including the production from Tokyo Gas' 25% interest in the Barnett Shale, second-quarter 2013 production would have been 221 MMcfed. This compares to 236 MMcfed and 287 MMcfed in the first quarter of 2013 and the second quarter of 2012, respectively.

Production from Canada was 9.4 Bcfe, or 104 MMcfed, which is 52% higher compared to the 2012 quarter due to the completion of an eight-well pad in the Horn River Basin during August and September 2012, and 13% lower compared to the first quarter of 2013 due to a planned 14-day third-party plant turnaround in the Horn River Basin. Production in the Horn River Basin resumed to pre-outage levels in July 2013.

Revenue

Production revenue and realized cash derivative gain/loss for the second quarter of 2013 was $118 million compared to $167 million in the 2012 quarter, which excludes approximately $4 million and $7 million, respectively, of cash proceeds from certain derivatives that will not be recognized until future periods to match their original settlement dates.

The average realized price for the second quarter of 2013 was $4.50 per Mcfe compared to $5.12 per Mcfe in the prior-year quarter, which excludes approximately $0.14 and $0.22 per Mcfe, respectively, of cash proceeds from derivatives described above.

Production revenue and realized cash derivative gain/loss in the second quarter of 2013 was 29% lower than the 2012 quarter due to lower production volumes as described above, and lower contribution from commodity derivatives related to the expiration of 30 MMcfd net of natural gas swaps and all natural gas liquids swaps and lower weighted average strike prices on the remaining swap portfolio. The negative revenue impact in the second quarter of 2013 related to the fractionation curtailment was approximately $2 million, or $0.01 per diluted share. This amount was recorded as deferred revenue and a current receivable in the second quarter, and is expected to be recognized in the fourth quarter as the volumes are processed.

Production revenue and realized cash derivative gain/loss compared to the second quarter of 2012 was also impacted by weaker prices at the AECO sales hub and significantly lower market prices for natural gas liquids, but partially offset by higher natural gas commodity prices.

Expenses

Lease operating expense for the second quarter of 2013 was $20 million, or $0.77 per Mcfe, compared to $22 million, or $0.66 per Mcfe in the 2012 quarter. Lease operating expense in the Barnett Shale declined approximately $3 million, or 20%, compared to the 2012 quarter due to the 25% sale of the Barnett and the impact of variable costs on declining volumes. Lease operating expense in the Horn River Basin increased approximately $0.7 million compared to the prior-year quarter, but decreased 77% on a unit basis due to the relatively fixed nature of operating expenses and substantially higher production volumes.

Consolidated Gathering, Processing and Transportation ("GPT") expense for the second quarter of 2013 was $37 million, or $1.40 per Mcfe compared to $43 million, or $1.31 per Mcfe in the 2012 quarter. GPT in the Barnett Shale was $26 million in the second quarter of 2013, which is approximately $11 million lower compared to the 2012 quarter due to lower production volumes and the 25% sale of the Barnett. On a per unit basis, GPT increased $0.17 per Mcfe due to the production mix between operating areas and, to a lesser extent, the impact of the curtailment at a third-party fractionation facility. The company continued to deliver volumes and incur customary transportation charges in the second quarter despite the third-party plant curtailment described above.

GPT in the Horn River Basin increased $5 million compared to the 2012 quarter due to increased volumes, but decreased $1.83 per Mcfe due to the fixed nature of firm agreements with third parties being spread over increased volumes. GPT in the Horn River Basin includes unused firm capacity of $1.7 million and $1.8 million for the second quarter of 2013 and the 2012 quarter, respectively, due to volume commitments in excess of produced volumes in those periods.

Excluding non-recurring items, General & Administrative expense for the second quarter of 2013 was $11 million, or $0.43 per Mcfe compared to $16 million, or $0.48 per Mcfe in the 2012 quarter. The reduction is primarily due to lower salaries and benefits related to announced retirements and attrition during the quarter.

Cash Flow

Operating cash flow for the second quarter was an outflow of $64 million. Excluding the impact of expenses related to debt refinancing and accelerated interest payments, operating cash flow for the second quarter would have been an inflow of $30 million. Working capital is impacted by the payment of $46 million of interest related to the retirement of the Senior Notes due 2015 and Senior Notes due 2016, which otherwise would not have been paid until the third quarter.

Investing cash flow was a net inflow of $436 million before purchases of marketable securities, comprised of $464 million of asset sale proceeds and an outflow of $28 million for cash capital expenditures. The company invested $119 million in short-term commercial paper, certificates of deposit and other liquid instruments during the second quarter. Total cash and marketable securities at June 30, 2013 was $216 million.

Capital Spending

The company incurred approximately $27 million of capital expenditures in the second quarter of 2013, of which approximately $5 million was associated with drilling and completion activities, $16 million for acreage and surface purchases, $2 million for capitalized interest and $4 million for capitalized overhead.

Capital incurred for the first six months of 2013 was $52 million, which is in line with the capital budget.

Debt/Liquidity/Refinancing

As of June 30, 2013, the company had approximately $245 million utilized under its Combined Credit Agreements. Within the utilized amount is $55 million of outstanding letters of credit, which includes the C$14 million letter of credit posted to the Komie North Project. This letter of credit is expected to be released in connection with the payment by Quicksilver of the costs incurred to date by NOVA Gas Transmission Ltd., which are estimated to be $13 million.

Total liquidity at June 30, 2013 is approximately $321 million comprised of $97 million of cash and cash equivalents, $119 million of marketable securities maturing within 12 months and $105 million of credit facility availability.

On June 21, 2013, Quicksilver executed multiple transactions to extend its debt maturities by substantially paying off its Senior Notes due 2015 and Senior Notes due 2016. The company issued an aggregate $825 million of second lien senior secured debt due 2019 at a price of 97% of par value and $325 million of senior unsecured notes due 2021 at a price of 94.928% of par value. The proceeds from these issuances were used to pay all validly tendered Senior Notes due 2015 and Senior Notes due 2016, accrued interest on those notes, and related transaction expenses. As of June 30, 2013, approximately $21 million of aggregate principal amount of Senior Notes due 2015 and Senior Notes due 2016 remain outstanding.

Total net debt on June 30, 2013 is approximately $1.8 billion, which includes $216 million of cash equivalents and marketable securities. 

Montana Transaction

In July 2013, the company executed an agreement to sell all of its interest in approximately 143,000 acres and approximately 2.6 MMBbl of reserves located in the Southern Alberta Basin in Cut Bank, Montana. The sale is expected to close in the third quarter and is subject to customary closing conditions.

Third-Quarter 2013 Guidance

Third-quarter 2013 average daily production volume is expected to be 275 - 280 MMcfe per day. Full-year average production volume continues to be expected at 290 - 300 MMcfe per day.