Volumes Buoy Quicksilver – Analyst Blog

Quicksilver Resources Inc’s (KWK) second quarter 2010 earnings of 18 cents per share, climbed compared with the Zacks Consensus Estimate of 16 cents but slipped 25% from last year’s earnings of 24 cents.
 
Operational Update
 
Total revenues of $228.6 million rose 11% from the Zacks Consensus Estimate and year-ago revenues of $206 million. Net natural gas, natural gas liquids (NGL) and oil sales in the quarter improved 6.2% to $211.7 million. The 6.2% increase was driven by greater production volumes of natural gas and higher realized prices for natural gas, NGLs and crude oil.
 
Quicksilver Resources achieved record average daily production of 350 million cubic feet of natural gas equivalent (MMcfe), an increase of 5.6% from 331 MMcfe in the second quarter of 2009. Total production in the quarter was 31.8 billion cubic feet of natural gas equivalents (Bcfe) compared with 30.1 Bcfe last year. The production volumes in the quarter comprised roughly 78% natural gas, 20% natural gas liquids (NGL) and 2% crude oil and condensate. Higher volumes of dry gas in the quarter were due to increased activities at the company’s Lake Arlington and Alliance projects in the northern portion of its Fort Worth Basin acreage.
 
Total realized prices during the quarter improved marginally (0.6%) to $6.65 per Mcfe, driven by increased prices for oil and natural gas, offset by a decline in NGL prices. The average realized oil, NGL and natural gas prices in the quarter were $70.24 per barrel (up 33.8%), $31.27 per barrel (up 29%), and $6.93 per thousand cubic feet (Mcf) (up 7.8%), respectively.
 
During the quarter, the company incurred $38.2 million toward production expenses, up 20.5% year over year, primarily due to higher compression costs associated with increased production volumes from the Alliance project in the Fort Worth Basin of north Texas and increased costs associated with new production from the Horn River project. Unit production expense increased 15 cents per Mcfe to $1.20 per Mcfe during the quarter.
 
Furthermore, production and ad valorem taxes in the quarter moved up 3 cents per Mcfe to $0.28 per Mcfe. However, depletion, depreciation and accretion expenses in the quarter decreased 10 cents per Mcfe to $1.59 per Mcfe and general and administrative expenses declined 33% to $0.54 per Mcfe.
 
Financials
 
The company generated net cash provided by operating activities of $246.5 million in the quarter, down from $310.3 million in the same period last year. The company’s long- term debt in the quarter increased $2 million from year-end 2009 to $2.6 billion. As on June 30, 2010, the company had $3.3 million of cash and equivalents.
 
During the quarter, the company incurred capital costs of roughly $137 million, primarily associated with drilling and completion activities in the Fort Worth Basin. In addition, Quicksilver acquired the remaining 25% working interest in the Lake Arlington property for about $125 million. Approximately half of the purchase price was funded with approximately 3.6 million units of BBEP.
 
On July 22, the company entered into a definitive agreement to sell all of its interests in Quicksilver Gas Services to Crestwood Midstream Partners II LLC, a portfolio company of First Reserve Corporation. Quicksilver will receive $701 million at closing and up to an additional $72 million in earn-out payments for all of its general partner, limited partner and subordinated units and the note receivable from Quicksilver Gas Services L.P. (“KGS”). The transaction is not subject to financing contingencies and is expected to close in October 2010.
 
Guidance
 
For the third quarter of 2010, the company expects production volumes of roughly $365–$370 MMcfe per day. As a result of the Quicksilver board of directors’ decision to divest the company’s interests in Quicksilver Gas Services, the company will no longer consolidate the results of Quicksilver Gas Services.
 
The company expects production, gathering & processing, and transportation expenses in the range of 60–65 cents per Mcfe, 70–75 cents per Mcfe and 40–45 cents per Mcfe, respectively. Production taxes, per Mcfe, are expected in the 20–25 cent range. G&A and DD&A expenses are expected to be 50–55 cents per Mcfe and $1.40–$1.45 per Mcfe, respectively.
 
Additionally, the company has hedged about 68% of its expected total production for the remainder of 2010. About 65% of Quicksilver’s natural gas for the rest of 2010 is hedged through collars at a floor price of $7.40 per Mcf. The company also has in place fixed-price swaps at a price of $33.47 per barrel for about 85% of its NGL production for the rest of 2010.