NEW YORK ( TheStreet) - Quicksilver Resources (KWK) said on late Wednesday that it will sell interests in its Barnett Shale assets in a spinoff and future initial public offering - causing shares to rally nearly 7% in pre-market trading.
But when the market opened shares reversed, falling nearly 15% at one point, signaling that not all energy spinoffs are created equal.
The markets are telling investors to stay away from the deal, even if the energy sector has been boosted by the wave of spin plans announced during the last several months.
Quicksilver shares closed down nearly 5% at $7.77 a share.In a note, to clients Drew Venker of Lazard Capital Markets wrote that while the spin "may look logical on the surface", its projections "look out of reach." He advised clients to sell Quicksilver shares. The difference seems to be while Chevron (CVX), Sunoco (SUN), Tesoro (TSO), Marathon (MRO)and Williams (WMB - Get Report) are looking at spins to seperate oil & gas exploration businesses from midstream operations like pipeline or refining -- spins to raise capital of less diversified businesses aren't as compelling. By creating a master limited partnership of roughly 18% of its shale assets in the Fort Worth, Texas- Barnett Shale, Quicksilver then expects to IPO the partnership in a tax free manner that is said could raise $400 million. With the funds, Quicksilver intends to retire almost half of its $940 million in callable debt by the end of 2012. "The creation of this MLP achieves several goals for Quicksilver. We believe we will be able to monetize a large maturing asset base at attractive prices which can eliminate all of Quicksilver's existing public debt over the next few years," said Glenn Darden, CEO of Quicksilver when announcing the deal. Lazard Capital Markets' Venker raised the question of whether Quicksilver could raise the money its projected through a spin. In his report, Venker estimates that the company would need to IPO shares carrying a 3.2% dividend yield to raise the $400 million it seeks, well below his estimation of a 7.8% average among similar upstream partnerships. It's a sign that not all spins of oil and gas exploration assets will be cheered by investors - even with a wave of excitement about how energy spins unlock hidden company value. Energy companies like Kinder Morgan (KMI - Get Report), EL Paso (EP) and Williams (WMB - Get Report) are using master-limited partnerships to separate exploration businesses from midstream operations, while maintaining control of the assets contributed to them until they're IPO'ed. Unlike dividends paid from earnings, payouts from master limited partnerships aren't subject to income taxes. In 2010, Quicksilver created a MLP in 2004 for its gas production businesses from the Barnett Shale, now called Crestwood Midstream Partners (CMLP - Get Report) after a 60% buyout in 2010. The company raised $701 million in the sale and maintained a continuing stake. The company also has a 26% interest in BreitBurn Energy Partners (BBEP - Get Report). While the other spins center around unlocking growth or value in a diverse set of businesses, Quicksilver is concentrated in its Barnett Shale business and was looking to lower debt levels with the spin. Of the deal, Brian Corales of Howard Weil wrote to clients that, "This deal came as a bit of a surprise but is positive. KWK clearly needs to raise capital to reduce the Company's debt." Corales expected the company to raise money by entering a joint-venture in its interest in a Horn River Basin pipeline or selling its BreitBurn Energy Partners stake. Mike Jones, an analyst at Imperial Capital wrote to TheStreet that "I believe around $140mn market value from the sale of Brietburn shares and operating cash flow, as well as a near term JV for midstream growth in the Horn River