Prospects for lower prices for natural gas liquids (NGL) and natural gas production have contributed to deteriorating profitability at Fort Worth, TX-based Quicksilver Resources Inc. and prompted a corporate credit rating downgrade by Standard & Poor's Ratings Services (S&P).
S&P Wednesday cut Quicksilver's corporate credit rating to "B-" from "B" and gave it a "negative" outlook.
"The downgrade primarily reflects the prospects for weaker profitability and deteriorating credit protection measures, and the risk of ongoing negative free cash flow and liquidity burn at Quicksilver as a result of our lower natural gas liquids pricing assumptions and our lower production estimate," said S&P credit analyst Carin Dehne-Kiley.
"We recently reduced our NGL pricing assumptions to 42% of West Texas Intermediate (WTI) crude oil in 2012 and 50% of WTI in 2013, from 53% of WTI in each year, previously [see Daily GPI, June 12]. NGLs currently constitute about 18% of Quicksilver's total equivalent production, and although the company has about 60% of its NGL volumes hedged in 2012, it has no NGL volumes hedged for 2013."
The ratings agency lowered its gas production estimates for the company in 2012 due to its lower guidance for second quarter volumes, which was provided by the company in May. Second quarter production guidance was given as 375-385 MMcfe/d, compared with 377 MMcfe/d in the first quarter and an average of 412 MMcfe/d in 2011, S&P said. "In response to lower natural gas prices, the company has significantly slowed drilling and completion activities in the dry gas areas of the Barnett Shale, leading to production declines. We are now assuming production declines about 5% year over year in 2012, versus increasing about 1% in our previous projections."
Earlier this month TheStreet Ratings downgraded Quicksilver shares, which are traded on the New York Stock Exchange, from "hold" to "sell," citing "generally weak debt management, disappointing return on equity, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."
In a regulatory filing Monday Quicksilver said Executive Vice President of Operations Jeff Cook had resigned as of Wednesday (June 20). He was appointed adviser to the chairman on special projects and new ventures, a position he is expected to retain until the end of the year, the company said.
Quicksilver shares zoomed more than 16% Wednesday, closing at $5.05 in trading that was heavier than usual. During the last 52 weeks Quicksilver shares have traded as low as $2.93 and as high as $14.90.
Earlier this year Quicksilver management promised investors that joint ventures would be struck by year-end to allow the company to develop its West Texas and Horn River Basin properties (see Daily GPI, Feb. 28).
On Wednesday S&P also lowered the issue rating on Quicksilver senior unsecured debt to "CCC+" (one notch lower than the corporate credit rating) from "B-" and lowered the issue rating on subordinated debt to "CCC" (two notches below the corporate credit rating).
"Our rating...reflects the company's 'vulnerable' business risk and 'highly leveraged' financial risk," S&P said. "Our assessment of the company's business risk is based on its participation in the cyclical and capital-intensive [exploration and production] industry and its vulnerability to the currently weak natural gas and natural gas liquids markets, given that natural gas and NGLs account for about 80% and 18%, respectively, of its total current production and proven reserve base."
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