Quicksilver Resources Inc. (KWK) posted a loss per share of 4 cents in the third quarter of 2012 versus earnings per share of 3 cents in the year-ago quarter. The loss in the reported quarter was wider than the Zacks Consensus Estimate of a loss of a penny.
The weak quarterly earnings performance was due to lower natural gas and natural gas liquids (NGL) prices as well as a decline in production volumes.
On a GAAP basis, the company reported a loss of $3.83 per share compared with net income of 17 cents per share in the year-earlier quarter. The difference of $3.79 between GAAP and operating loss per share during the quarter was due to the impact of non-operational items.
Total Revenue
Reported revenue at the end of the third quarter 2012 was $177.7 million, down 31.6% from $259.9 million in the year-ago quarter. The fall in natural gas and natural liquids output resulted in the revenue decline.
Quarterly revenue also trailed the Zacks Consensus Estimate of $180 million.
Operational Update
Overall production shrank 15.2% in the third quarter 2012 to 362.4 million cubic feet of natural gas equivalent per day (MMcfed) from 427.4 MMcfed in the year-ago quarter. This was due to diminished capital investments, lower production from existing wells and weak volumes from the Barnett Shale play.
Quicksilver Resources locked in average daily production of 291.3 million cubic feet of natural gas equivalent (MMcfe) in the third quarter 2012, down 17.2% from 351.6 MMcfe in the third quarter 2011. Natural gas liquids also witnessed production loss of 7.3% compared to the 2011 third quarter. Oil production growth of 9.3% in the reported quarter partially mitigated the negative output numbers.
Total realized prices during the third quarter 2012 declined 10.6% to $4.73 per thousand cubic feet equivalent (Mcfe) from $5.29 per Mcfe due to collapsing natural gas and NGL prices partially offset by a marginal increase in oil price. The average realized oil, NGL and natural gas prices in the third quarter were a respective $83.9 per barrel (up 1.6%), $37.8 per barrel (down 2.3%) and $4.23 per thousand cubic feet (Mcf) (down 14.7%).
Total operating expenses during the reported quarter shot up 264.6% year over year to $699.6 million owing to an impairment cost of $546.8 million.
Excluding the impairment charge, operating expenses decreased 20.4% year over year to $152.8 million. Cost decelerated mainly due to a 20% and 37.2% fall in lease and general and administrative expenses, respectively, partially offset by a 6.5% increase in cost of gas purchase.
Moderating lease operating expenses (LOE) resulted from a decline in water hauling, compression and gas lift cost owing to idling of production in high-cost wells and cost control measures. This was also helped by lower LOE in the Canadian operations.
Interest expenses during the quarter were $42.1 million versus $48.4 million in the prior-year period.
Financials
Cash and cash equivalents of the company as of September 30, 2012 were $7.4 million versus $13.1 million as of December 31, 2011.
Long-term debt at Quicksilver, as of September 30, 2012, was $2.2 billion versus $1.9 billion as of December 31, 2011.
Capital expenditure for the third quarter 2012 amounted to $68 million. Out of the total cost, $48.0 million was allocated for drilling and completion activities, $2.0 million for midstream activities, $7.0 million associated with acreage purchases and $11.0 million on corporate and other.
Guidance
The company estimates production volumes in the fourth quarter 2012 in the range of 330–340 MMcfe per day. For 2012, the average output is expected in the range of 350–365 MMcfe per day as Quicksilver’s drilling activity is set to be tepid in the upcoming quarters.
The company projects fourth quarter production taxes; gathering, processing, and transportation expenses; and lease operating expenses in the corresponding range of 20–22 cents per Mcfe, $1.22–$1.26 per Mcfe and 70–75 cents per Mcfe. General & administrative expenses and depreciation, deletion and amortization expenses are expected in the band of 50–53 cents per Mcfe and $1.10–$1.14 per Mcfe, respectively. The company has plans to incur capital expenses of $389 million for the full-year 2012.
The company expects to strengthen its hedging of production capacities to safeguard against fluctuating prices. It has entered into a multi-year hedging program which includes 267 MMcfe/d of output hedged for 2012 which translates to roughly 80% of its expected total equivalent production for the fourth quarter of 2012 at a weighted average price of $6.02 per Mcfe.
For 2013, 2014 and 2015, the volume hedged is 200 MMcfd, 170 MMcfd and 150 MMcfd, at average prices of $5.10 per Mcf, $5.08 per Mcf and $5.23 per Mcf, respectively. For the period 2016-2021, the company has hedged 40 MMcfd at a weighted price of $4.48 per Mcf.
Peer Comparison
A Quicksilver peer, Chesapeake Energy Corporation (CHK), announced operating earnings for the third quarter 2012 of 10 cents per share, beating the Zacks Consensus Estimate by a penny, while plummeting roughly 86% from the year-ago earnings of 72 cents per share.
Total revenue of the company decreased 25.3% year over year to $2,970.0 million but surpassed the Zacks Consensus Estimate of $1,417.0 million.
Our View
Quicksilver reported drab earnings outcome in the third quarter 2012 owing to continued sluggish production and weak prices.
We are however encouraged by the company’s association with high-quality ventures with Royal Dutch Shell plc. (RDS.A) and its development of the oil prospect in West Texas. In addition, the company’s strong hedging profile will cushion its operations from commodity price volatilities leading to stable top-line.
However, costs pressure stemming from environmental laws and disruption in operations from weather conditions and pipeline accidents could limit the growth goals of the company.
Quicksilver Resources presently has a Zacks #3 Rank (Hold rating). Based in Fort Worth, Texas, independent exploration and production company Quicksilver Resources is primarily engaged in the development of long-lived, unconventional, onshore natural gas reserves in the North American continent
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