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Horn River Pipeline Setback Aids Quicksilver's Timing

Quicksilver Resources Inc. found a silver lining in the recent decision by Canada's National Energy Board (NEB) to reject TransCanada Corp.'s Komie North Extension pipeline project in the Horn River Basin.

The Fort Worth, TX-based producer had been the project's sole customer when weeks ago NEB rejected it and indicated that it would prefer the project have multiple shippers (see Shale Daily, Feb. 4). The project is intended to connect Horn River production with TransCanada's Alberta system.

Quicksilver CEO Glenn Darden told financial analysts Monday the company still expects the project by TransCanada unit Nova Gas Transmission Ltd. to go forward, eventually, but with more customers. The additional shippers and project delay lighten some of the financial load on Quicksilver and better align the timing of its Horn River development with the interests of prospective Quicksilver joint venture (JV) partners in the basin.

"...[T]his will defer and reduce our financial commitments over the next several years," Darden said of the NEB action. "We can keep our current production volumes flat over the next several years without requirements to increase volumes and can advance the downstream marketing plan. This deferred spending better fits into the timeline of our potential partners and matches up with their downstream marketing plans as well."

The breathing room on spending comes as the pace in the Horn River is quickening, Darden said, nudging along talks with prospective JV partners. He reiterated "outstanding well performance" of the company's first multi-well pad. "These wells tested at rates from 23 MMcf to 34 MMcf a day per well."

Additionally, the move by Chevron Corp. unit Chevron Canada Ltd. last December to take a 50% interest in the Kitimat, British Columbia (BC), liquefied natural gas export project and proposed Pacific Trail Pipeline, and a 50% interest in 644,000 acres in the Horn River and Liard basins, and be a partner in the project and acreage with Apache Corp. (see Shale Daily, Dec. 26, 2012) is a vote of confidence in what Quicksilver is doing in the basin, Darden said.

"We believe the confirmation by a major of this basin and resource was a significant validation of what we are working toward," he said. "In Canada, particularly in the Horn River Basin, our strategy has been to set up initial infrastructure, drill exploratory wells to convert licenses to leases and to showcase the world-class gas reservoir we have captured."

Meanwhile, debt-laden Quicksilver is still working to improve liquidity. While it had considered dropping its Barnett Shale assets into a master limited partnership, the path forward now appears to be the sale of a minority interest. Darden would not provide additional details on sale/partnering efforts under way in the Barnett or Horn River (see Shale Daily, Jan. 7).

"Our top priorities are to improve liquidity through asset sales, joint ventures and other measures, further reduce the overall company cost structure, and match capital spending to operational cash flow," said Darden. "We are progressing on all of these objectives, which should make us a stronger company, able to operate more efficiently and effectively in the current market environment and beyond."

The company reported an adjusted net loss for 2012 of $46 million (minus 27 cents/share) compared to adjusted net income of $20 million (12 cents/share) for full-year 2011. Including the impact of non-cash impairments and other non-operational items, the net loss for full-year 2012 was $2.5 billion (minus $14.61/share) compared to net income of $90 million (52 cents/share) for 2011.

The fourth quarter of 2012 saw a non-cash ceiling test impairment, primarily generated by a change in hedge accounting, of $1.1 billion ($6.47/share). The results are preliminary as the company is still analyzing non-cash accounting treatment of its hedge portfolio and deferred tax balances.

Last year Quicksilver discontinued hedge accounting to improve the comparability of financial results to its peers, and the value of its hedge portfolio based on Securities and Exchange Commission (SEC) reserve pricing can no longer be included as part of the full-cost ceiling test. The book value of Quicksilver's derivative portfolio at Dec. 31 was $201 million.

The remaining 37% of the impairment is attributable to 2012 reserve revisions related to price, performance and the reclassification of existing proved undeveloped reserves in the Barnett Shale that are not expected to be developed within the SEC's prescribed five-year time frame due to a reduction in drilling activity amid depressed natural gas and natural gas liquids (NGL) prices.

Fourth-quarter 2012 production was 31.5 Bcfe, or an average of 342 MMcfe/d. Production from the Barnett Shale was 22.7 Bcfe, or 247 MMcfe/d, which is down 6% from the previous quarter due to a reduction in capital activity. Production from Canada was 8.5 Bcfe, or 92 MMcfe/d, which was substantially less than the productive capabilities of the asset. Horn River volumes were restricted by about 50% during most of the fourth quarter due to continued delays in commissioning of a third-party treating facility. In mid-December, the company began ramping up Horn River production to 100 MMcf/d of raw gas after it secured alternative treating and transportation arrangements on an interim and interruptible basis.

Quicksilver said it will spend $120 million in its 2013 capital program, which is a reduction of $270 million compared to 2012, primarily the result of lower spending in the Horn River Basin but also because of planned reductions across the asset base as the company resolves to limit spending to operational cash flow. The budget is expected to result in a production decline of about 5% in 2013 compared to 2012. The budget does not include proceeds from potential strategic partnerships or asset sales.

At Dec. 31 Quicksilver debt was about $2.1 billion, about $100 million less than the previous quarter. Included within debt, the company had about $450 million drawn on its combined credit agreements, resulting in $400 million of remaining capacity.

First quarter 2013 average daily production is expected to be 360-365 MMcfe/d, and full-year production is expected to be 335-345 MMcfe/d with 65% in the Barnett Shale, 33% in Canada, and 2% in other U.S. basins. Average daily production volumes are expected to consist of 82% natural gas and 18% NGLs and crude oil.

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