Exploration & Production | Quarterly / Earnings Reports | Production | Third Quarter (3Q) Update | Forecast - Production

Quicksilver Touts Texas Results as Canadian Output Dips

Share Print Bookmark    |    Monday,November 10,2014

Quicksilver Resources Inc. announced preliminary 2014 third-quarter results.

Third-quarter highlights:

• Global borrowing base reaffirmed at $325 million with unanimous lender approval; received favorable covenant changes
• Revealed strong results in first two West Texas wells completed with joint venture partner, Eni
• Maintained Barnett Shale production compared to Q3 2013 due to 17 net wells brought online in first nine months of 2014

Glenn Darden, CEO of Quicksilver Resources, commented: "Quicksilver has made significant progress on our stated goals since our last earnings call. Oil discoveries in West Texas, improved well results and cost structure in the Barnett and affirmation of our borrowing base and the covenant changes with our banks are all positive developments. These achievements have not only strengthened the company's asset base, but should also be very helpful in our marketing process and other negotiations."

Operational Update

The company has reported a 3Q update on its Texas and Canada operations, which can be accessed below:

Quicksilver Details Permian Discoveries; Improved Barnett Costs

Quicksilver Sees Drop in Horn River, Horseshoe Canyon Output

Production

Third-quarter 2014 production was 22.6 Bcfe, or an average of 246 million cubic feet of natural gas equivalent per day (MMcfed), compared to 25.2 Bcfe, or an average of 274 MMcfed, in the 2013 quarter. The decline is primarily attributable to natural decline in Canadian volumes due to minimal capital activity, a scheduled plant outage at a third-party facility in the Horn River Asset, and lower sales volume in the Barnett Shale due to the rejection of ethane volumes in September 2014. These declines were partially offset by new natural gas volumes from the Barnett Shale related to the company's ongoing completion and workover programs, despite curtailed volume from wells adjacent to completion operations.

Production from the Barnett Shale was 15.2 Bcfe in the third-quarter 2014, or an average of 165 MMcfed, compared to 15.4 Bcfe, or an average of 167 MMcfed in the 2013 quarter. Wells completed in 2014 contributed 21 MMcfed in the third quarter, though approximately 2 MMcfed of volume was temporarily shut-in due to adjacent completion operations during the third quarter.

In September 2014, in light of weak ethane prices, the company rejected ethane volumes from the liquids-rich Barnett Shale and sold it as natural gas. As a result, the loss of equivalent sales volume was approximately 2 MMcfed, on average, in the third-quarter 2014. Despite the loss of sales volume, wellhead production was not impacted and net cash margins were slightly improved. Going forward, the company will continue to evaluate the economics of producing and selling ethane on a month-to-month basis.

Financial Results

Reported net income for the third-quarter 2014 was $24 million, or $0.13 per diluted share, compared to reported net income of $11 million, or $0.06 per diluted share, in the 2013 quarter.

Reported net income includes the following significant, non-operational items:

• $40 million unrealized gain from commodity derivatives in the 2014 quarter compared to a $25 million unrealized gain in the 2013 quarter
• $8 million adjustment to the gain on sale related to the TG Transaction in the 2013 quarter
• $2 million for strategic transaction costs in the 2014 quarter
• $2 million for other non-cash impairments in the 2013 quarter

Excluding the impact of the items noted above and other miscellaneous non-operational items, adjusted net loss for the third-quarter 2014, a non-GAAP financial measure, was $12 million, or $0.07 per diluted share, compared to adjusted net loss of $8 million or $0.05 per diluted share, in the 2013 quarter.

Revenue

Production revenue and realized cash derivative gain/loss for the third quarter of 2014 was $105 million compared to $113 million in the 2013 quarter, which excludes approximately $3 million in each quarter of cash proceeds from certain derivatives that will not be recognized until future periods to match their original settlement dates. The decline in revenue is caused by volume impacts as described above, but is partially offset by higher prices for natural gas, net of derivatives.

The average realized price for the third quarter of 2014 compared to the 2013 quarter improved $0.20 per Mcfe to $4.67 per Mcfe, which excludes approximately $0.13 per Mcfe of cash proceeds in each quarter from derivatives described above. The improved average realized price is mainly attributable to higher natural gas prices in the third quarter of 2014 compared to the 2013 quarter.

Expenses

Consolidated lease operating expense for the third quarter of 2014 was $17 million, or $0.76 per Mcfe, compared to approximately $19 million, or $0.74 per Mcfe in the 2013 quarter. The absolute reduction is the result of the sale of the Montana and Colorado assets, lower rates for gas lift in the Barnett Shale resulting from a recent amendment with third-party midstream providers, and a non-recurring $2 million impairment in the 2013 quarter. These declines were partially offset by higher gas lift volume in the Barnett Shale compared to the 2013 quarter due to completion activity. On a unit basis, the $0.02 per Mcfe increase compared to the 2013 quarter is primarily due to fixed charges applied to lower overall volumes. Additionally, unit costs are also impacted by the loss in sales volume resulting from ethane rejection during the 2014 quarter.

Consolidated gathering, processing and transportation ("GPT") expense for the third quarter of 2014 was $35 million, or $1.54 per Mcfe compared to approximately $36 million, or $1.41 per Mcfe in the 2013 quarter. The $1 million reduction is the result of lower sales volume partially offset by higher volumes originating from the dry gas areas in the Barnett Shale, which carry higher gathering fees compared to the company's liquids-rich acreage. The per Mcfe increase compared to the 2013 quarter is primarily the impact of higher unused treating and transportation in the Horn River as a result of declining volume amid minimal capital activity, the production mix in the Barnett Shale as noted above, and fixed NGL reservation fees in the Barnett Shale resulting from the loss of sales volume associated with ethane rejection.

Production and ad valorem taxes for the third quarter of 2014 was $4 million, or $0.18 per Mcfe, compared to approximately $5 million, or $0.19 per Mcfe, in the 2013 quarter. The majority of the decline is related to reduced appraisal values across the company's assets.

Excluding the impact of non-recurring items and equity compensation, general & administrative ("G&A") expense for the third quarter of 2014 was $6 million compared to $7 million in the 2013 quarter. The decline is attributable to the company's aggressive cost containment efforts over the last 24 months. A reconciliation of non-recurring items is included in the tables accompanying this earnings release.

Capital Spending

The company incurred approximately $29 million of costs related to the capital program in the third quarter of 2014, of which $19 million was for drilling and completion activities, $4 million for leasehold and $6 million for capitalized costs.

Fourth-quarter 2014 capital spending is expected to be in the range of $22 million to $27 million, bringing full-year capital spending to $130 million to $135 million.

Strategic Transactions Update

In September 2014, Quicksilver appointed John Little as Strategic Alternatives Officer pursuant to an engagement agreement between Quicksilver and Deloitte Transactions and Business Analytics LLP. Mr. Little reports to the Board and, in collaboration with Quicksilver's management team, assists Quicksilver in exploring, evaluating and implementing strategic and tactical initiatives including the company's Combined Credit Agreements' semi-annual redetermination, other matters involving the company's capital structure including the maturity of the Senior Subordinated Notes due 2016, the marketing of Quicksilver's assets and maximizing of liquidity in the present environment.

The company also retained Houlihan Lokey Capital, Inc. to lead a broad and more formalized process to market Quicksilver's assets. This process covers any or all of the company's operating assets and is flexible with regard to structure of any transaction proposal. The marketing process calls for receipt of bids in the fourth-quarter 2014, with a targeted closing date on any transaction in the ordinary course following successful execution of sales agreements, which aligns with the company's other strategic activities.

The company continues to explore several avenues to address its capital structure, including the stated and springing maturities. The company is in frequent discussions with certain of the security holders regarding possible paths to be undertaken.

Borrowing Base

In November 2014, the company's global borrowing base under its Combined Credit Agreements was reaffirmed at $325 million and the Combined Credit Agreements were amended to eliminate the requirement to meet the minimum interest coverage ratio requirement beginning in the fourth quarter of 2014 through and including the fourth quarter of 2015. A minimum EBITDAX (Earnings Before Interest, Taxes, Depreciation, Amortization and Exploration expense) covenant was added beginning in the fourth quarter of 2014 through and including the fourth quarter of 2015. Also, certain definitions that impact the calculation of EBITDAX were amended.

Liquidity

Total liquidity at October 31, 2014 was approximately $230 million, of which most was in the form of cash and cash equivalents.

4Q 2014 Guidance

Fourth-quarter 2014 total company average daily production volume is expected to be 238 - 242 MMcfe per day. At current ethane prices, the company expects to continue to reject ethane volumes during the fourth-quarter 2014, which is included in the production guidance as a negative impact of 6 MMcfe per day.

For the fourth quarter of 2014, expected costs are as follows: