Quicksilver Resources Inc. (KWK), primarily engaged in the development of long-lived, unconventional onshore natural gas reserves in the North American continent, reported third quarter 2011 adjusted earnings per share (EPS) of 3 cents, substantially lower than the year-ago earnings of 17 cents. Quarterly earnings also dipped compared to the Zacks Consensus Estimate of 5 cents.
On a GAAP basis, the company reported earnings of 17 cents per share compared with earnings of 13 cents in the year-ago quarter. The difference between GAAP and operating earnings related to non-cash mark-to-market gain related to long-term derivatives, a non-cash gain associated with the company's equity interest in BreitBurn Energy Partners (BBEP), a gain on the sale of BBEP units and a loss for acceleration of unamortized debt issuance costs, professional services relating to strategic transactions and settlement of the Eagle litigation.
Total Revenue
Total revenue in the third quarter 2011 was $260 million, up 9.2% from $238 million in the year-ago quarter. During the quarter the company experienced a fall in its production revenue, which was mainly due to lower realized prices for natural gas. However, the negative impacts were offset by higher sales volumes of natural gas and higher realized prices for NGLs and crude oil.
Operational Update
Average production increased 17.9% year over year to 427.4 million cubic feet of natural gas equivalent per day (MMcfe/d) from 362.4 MMcfe/d in the third quarter of 2010. The growth in the production level came mainly from a 19% increase in production from the Barnett Shale asset and an increase of over 200% in the Horn River Asset in Northeast British Columbia.
Total realized prices during the third quarter declined 19.2% to $5.29 per Mcfe, resulting from lower natural gas prices realized in the year, offset by a rise in oil and NGL prices. The average realized oil, NGL and natural gas prices during the year were $82.58 per barrel (up 19.1%), $38.68 per barrel (up 25.1%), and $4.96 per thousand cubic feet (Mcf) (down 27.4%), respectively.
Total expenses incurred by the company during the reported quarter rose 11% year over year. The increase in expenses was mainly due to a 177.7% increase in gathering, processing and transportation expenses, a 32.5% increase in lease operating expenses, a 37% increase in cost of natural gas purchased, a 9.9% increase in depletion, depreciation and accretion and a 15% increase in general and administrative expenses, offset by a 17.9% decline in production and ad valorem taxes.
Interest expenses during the quarter were $48.4 million versus $51.5 million in the prior-year quarter.
Financials
Cash and cash equivalents of the company as of September 30, 2011 were $6.6 million versus $54.9 million as of December 31, 2010. The company's total debt was $2.1 billion, a reduction of $317 million from the outstanding balance as on September 30, 2010.
Currently, Quicksilver has $590 million available under its $1.1 billion U.S. and Canadian credit facilities. The available capacity includes $150 million for the repayment of 1.875% convertible notes with the U.S. credit facility on November 1, 2011.
During the third quarter, the company invested $165 million of capital, of which 60% was for drilling and completion activities, 10% for midstream activities, primarily for the Horn River gathering system, and 30% for lease acquisition.
The company expects total capital spending for 2011 to be $690 million, down slightly from the guidance provided in the second quarter.
Guidance
The company expects production volumes in the fourth quarter 2011 in the range of 425–435 MMcfe per day and full-year 2011 production in the 415-420 MMcfe per day.
The company estimates production taxes; gathering, processing, and transportation expenses; and lease operating expenses in the corresponding range of 23–25 cents per Mcfe, $1.28–$1.32 per Mcfe and 68–72 cents per Mcfe. General & administrative expenses and depreciation, depletion and amortization expenses are expected to be 42–45 cents per Mcfe and $1.46–$1.48 per Mcfe, respectively.
The company has hedged about 60% of its expected total production for the fourth quarter of 2011. About 190 MMcf per day of Quicksilver's natural gas is hedged through collars at a floor price of $5.95 per Mcf. The company also has in place fixed-price swaps at a price of $38.84 per barrel for about 10,500 barrels per day of its NGL production.
Peer Comparison
Its peer, Chesapeake Energy Corporation (CHK) announced operating earnings for the third quarter 2011 of 72 cents per share, striding ahead of the Zacks Consensus Estimate of 65 cents. Total revenue of the company surged 54% year over year to $3,977 million from $2,581 million reported in the comparable quarter last year.
Our View
We presently have a long-term Neutral recommendation on Quicksilver Resources, supported by a short term Zacks #3 Rank.
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