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Quicksilver: Barnett 'Alive, Well,' Horn River in Sight

August 17, 2009
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Lifted by its Barnett Shale operations, Quicksilver Resources Inc.'s total natural gas volumes jumped 40% in 2Q2009 from a year ago to 331 MMcfe/d, the producer said last week. Service costs, meanwhile, fell by a third from a year ago to $1.05/Mcfe.

Essentially all of Fort Worth, TX-based producer's growth, which is 71% weighted to natural gas, was fueled by activities in the Barnett Shale of North Texas; output in the Fort Worth Basin jumped by 54% from a year ago. Quicksilver also secured Italian producer Eni as a partner in the basin during the quarter (see NGI, May 25).

"Operationally the Barnett continues to be the focus of our development activity," CEO Glen Darden said during a conference call with energy analysts. "Despite speculation of its demise, the Fort Worth Basin is alive, well and providing increasing opportunities for Quicksilver...With more than 1,500 locations yet to be drilled, Quicksilver has a lot of running room remaining to fuel double-digit growth for multiple years in the proper price environment."

The "proper price environment" is key, however.

Quicksilver has hedges covering almost 80% of its expected 2009 gas volumes at a New York Mercantile Exchange (Nymex) price of $8.83/Mcf, but even "with the benefit of our firm transportation out of the basin, [and] an average basis differential of less than 25 cents off the Nymex price for the remainder of 2009, we don't believe that today's natural gas price provides appropriate long-term returns to accelerate our development program at this time," Darden said. "Therefore, we are maintaining our drilling activity at just five rigs this year to conserve both our capital and our natural gas resources."

The five rigs in the Barnett Shale are projected to drill around 100 wells in 2009; Quicksilver plans to complete 70 of the wells. As a result, "we project our inventory of drilled and cased but uncompleted wells in the Barnett to increase to approximately 150 wells by year end," Darden said.

Most of the company's Canadian exploration efforts have turned to the Horn River Basin of British Columbia, where it holds 127,000 net acres. Two horizontal wells were drilled in the basin during the winter drilling season, and completion activities are ongoing on the first wells in the Upper Muskwa formation. After the upcoming winter freeze begins, Quicksilver plans to complete the second well.

The BC basin "is an area that has had excellent early production results by operators surrounding us in the basin and is of great interest to other players, including international and domestic producers, end users and as a supply source for a possible LNG [liquefied natural gas] export facility," said Darden. Kitimat LNG Inc. is talking with BC producers about supplying a proposed LNG export terminal in the area (see related story).

With development activities in Horn River under way Quicksilver is looking for another joint venture partner, said Darden. To estimate the basin's worth, Quicksilver is relying on published competitor data, said Chairman Toby Darden.

"What we've seen in our own drilling has conformed pretty well to what we've seen in the acreage offsetting us," the chairman told analysts. Other Horn River operators have reported recoveries of 7-10 Bcf per well, he said, "and we're looking at costs coming down to a point that should achieve about 750 MMcf per stage of frac [hydraulic fracture] with 10 to 14 stages of frac and about a Bcf per stage of frac."

For now no plans are in place to aggressively ramp up activity in Horn River before 2012, Glen Darden told analysts.

"Our total commitment from here is about eight more wells over the next three years to validate all the exploratory licenses and convert to leases, and from there our commitment over the next 10 years is maybe another 70 or so wells to hold all of that acreage," the CEO said. "One of the things we're looking at is certainly we don't want to drill a whole lot of wells before there's infrastructure to take the gas away, and it's just an advantage...not to move very fast...It parallels what we've done in the Barnett development early on as well."

Quicksilver's reported net income in 2Q2009 fell from a year earlier to $41.2 million (24 cents/share) from $65.9 million (40 cents). Including one-time charges, Quicksilver reported a net loss of $21.8 million (minus 13 cents), compared with net income of $51.3 million (31 cents) in 2Q2008. Sales of natural gas, natural gas liquids and crude oil totaled $199.3 million in 2Q2009 and were essentially unchanged from the first three months of 2009, the company said. Total production expense was $31.7 million, down $1.3 million from 2Q2008.

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