This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Energy Spin Boom Ends With Quicksilver

Stocks in this article: KWK WMB KMI EP CMLP BBEP

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) 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), EL Paso (EP) and Williams (WMB) 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) 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).

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 will pay for operations going forward."

In its most recent quarter ended on June 30, Quickslver reported $128 million of net income on $248.4 million in revenue. In 2010, the company reported its first net profit since the recession, earning $435 million.

Previously, chief executive Darden and his family had shown interest in taking the company private, but reversed course this March. The Darden family founded the Fort Worth -based Quicksilver in 1963 and took it public in 1999.

The company presented its spin idea Wednesday but will file documents for an IPO by the end of the year, Quicksilver said in its press release announcing the strategy. On an analyst call Thursday, CFO Phillip W. Cook said the company put out the plan this week so bondholders with option expiries at the end of October would be informed.

For now, it seems that Quicksilver's proven not all spins are created equal -- and that energy investors looking to profit from the spinoff boom are better off looking at highly diversified companies.

-- Written by Antoine Gara in New York

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.54 +7.89 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs