Debt- and dry gas-laden Quicksilver Resources Inc. posted a hefty loss for the second quarter, largely due to a nearly $1B asset impairment reflecting low commodity prices. On Tuesday management talked up plans to right the balance sheet and weather the low-price period with spending cuts and other measures.
Executives told financial analysts Tuesday that a midstream master limited partnership (MLP) is teed-up for potential launch when market conditions are better. A couple of joint ventures (JV) are in the works, too. They said the company is committed to a deleveraging program while it dials back spending and activity, particularly in dry gas areas.
“Quicksilver is aggressively attacking costs and capital expenditures in this low-commodity price environment,” said CEO Glenn Darden. “We have proactively amended our credit facility, reduced capital spending and pushed out capital commitments in the Horn River Basin and our other operating areas. At the same time, we have made significant gains in British Columbia and Colorado. Negotiations on two joint ventures have progressed significantly. We believe these transactions will help push this company forward.”
Darden told analysts the company has a “green light” from the U.S. Securities and Exchange Commission for an MLP that would include a portion of its Barnett Shale assets (see Shale Daily, Feb. 13). However, whether an MLP comes to pass depends upon market conditions, including commodity prices. Other options include asset sales or JVs, he said, declining to disclose details of ongoing talks.
He said the company is seeing increased interest in assets from players that are taking a longer-term view on commodity prices. There is “a lot more value” in Quicksilver’s assets than is reflected in the price of the company’s shares.
Management said the company expects to be operating within “cash inflows” by year end, and these amounts would include any proceeds from asset sales. Proceeds from any JVs would primarily fund new projects with excess amounts used to pare debt.
Investors seemed heartened on Tuesday, driving Quicksilver shares up nearly 7% to $4.59 at midday. During the last 52 weeks, Quicksilver shares have dipped as low as $2.93 and climbed as high as $10.34.
The company’s adjusted net loss for the second quarter, was $21 million, (minus 13 cents/share) compared to adjusted net income of $11 million (6 cents/share) in the 2011 period. Second-quarter results were impacted by a $992 million noncash impairment of oil and gas properties due to lower natural gas and natural gas liquids (NGL) prices. Including the impact of one-time items, the net loss for the second quarter was $673 million (minus $3.96/share) compared to net income of $109 million (61 cents/share) in the prior-year period.
Asked by an analyst whether there was a risk of future asset writedowns, Darden said that depends upon the forward curve. “I think there is some risk in that regard…” he said. “We need to see where the September price comes out. I think you’re accurate in suggesting that there is some risk there.”
Capital spending is projected to be $70 million for the second half of 2012 and approximately $360 million for full-year 2012, or $50 million less than the original budget of $410 million. The reduction is due to a reduction in drilling and related activity across the company’s assets.
At June 30 Quicksilver’s total debt was approximately $2.1 billion. Based on reserves at June 30 the company’s redetermined global borrowing base was set at $850 million, the interest coverage covenant was adjusted downward to provide increased flexibility, and other limitations were introduced, including increased interest margins and additional financial and other covenants.
Production averaged 359 MMcfe/d during the second quarter, down from 417 MMcfe/d in the prior-year quarter, and down from 377 MMcfe/d in the first quarter of 2012. The decline from both periods was primarily due to the delay in bringing Horn River volumes online; a reduction in completion activity in the Barnett Shale (45 fewer wells were connected to sales in the first half of 2012 compared to the first half of 2011); natural production decline of existing wells and temporary shut-ins to support development activity.
Production for the second quarter of 2012 was 80% natural gas and 20% NGLs, crude oil and condensate.
Production revenue for the second quarter of 2012 was $151 million, down 28% from the prior-year quarter and down 12% from the first quarter of 2012 due to production declines and lower realized prices for natural gas and NGLs.
Third-quarter average daily production is expected to be 385-400 MMcfe/d. Full-year 2012 average production is expected to be 365-380 MMcfe/d.
The company has 272 MMcfe/d of hedges in place for 2012 at a weighted average price of $6.02/Mcf, which covers more than 70% of expected total equivalent production for the remainder of 2012, and 160 MMcf/d of hedges for 2013 at a weighted average price of $5.30/Mcf.
In the Horn River Basin, Quicksilver’s plan is to restrict the flow from its eight-well drilling pad once initial production rates are established in order to optimize midstream commitments under various agreements, and subsequently, to increase production to meet increased throughput commitments as necessary, or if natural gas prices improve. No additional wells are planned in the second half of 2012 as was contemplated in the original budget.
The company is operating one rig in the high-BTU acreage of the Barnett Shale and is scaling back activity with plans to drill four wells, complete six wells and connect eight wells to sales for the remainder of 2012.
Quicksilver said it continues to see improvements in well performance and drilling/completion cost in its Colorado Niobrara project. It plans to drill one well and complete two wells for the remainder of 2012 and defer construction of a planned gathering line and related facilities.
The company is completing two wells after seeing promising shows while drilling in its West Texas project, one in Pecos County targeting the Third Bone Spring formation and one in Upton County targeting the Wolfcamp formation. The company plans to drill and complete two wells during the remainder of 2012.
In Canada, Horseshoe Canyon drilling, completion and pipeline activities were suspended for most of the second quarter due to the seasonal break-up period. The company does not expect to drill any further wells in Horseshoe Canyon during the second half of 2012.
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