Quicksilver Resources' CEO Discusses Q2 2012 Results - Earnings Transcript

Quicksilver Resources (KWK)

Q2 2012 Earnings Call

August 08, 2012 11:00 a.m. ET

Executives

David Erdman – Investor Contact

Glenn Darden – President, Chief Executive Officer

John Regan – Chief Financial Officer

Tobey Darden – Chairman

Analysts

Noel Parks – Ladenburg Thalmann

Brian Corales – Howard Weil

Brian Singer – Goldman Sachs

Steven Karpel – Credit Suisse

Scott Hanold – RBC Capital Markets

James Spicer – Wells Fargo

David Epstein – Wedbush Securities

Louis Nardi – Buckman & Reid

RJ Cruz – US Fixed Income

Maryana Kushnir – Nomura Securities

Presentation

Operator

Good afternoon. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr. David Erdman. Mr. Erdman, you may begin your conference.

David Erdman

Thank you, Erica, and good morning, everyone. I’m joined by Toby Darden, Chairman, Glenn Darden, President and Chief Executive Officer, and John Regan, Chief Financial Officer. This morning the company issued a press release detailing our results for the second quarter of 2012. If you don’t have a copy of the release, it’s available on the Investor Relations page of our website, at www.qrinc.com under the News and Updates tab.

During this morning’s call, the company will be making forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning risk factors which could cause such differences will be detailed in the company’s filings with the SEC.

Today’s presentation will include information regarding adjusted net income, which is a non-GAAP financial measure. As required by SEC rules, a reconciliation of adjusted net income to the most directly comparable GAAP measures are available with the press release we issued this morning.

So with that, I’ll turn the call over to Glenn Darden.

Glenn Darden

Thank you, David. Good morning. Quicksilver Resources today announced preliminary 2012 second question results. The adjusted net loss for the second quarter, a non-GAAP financial measure, was $21 million or $0.13 per diluted share compared to adjusted net income of $11 million or $0.06 per diluted share in the 2011 period. Including the impact of one-time items, the net loss was $673 million or $3.96 per diluted share.

Second quarter 2012 results were impacted by a $992 million non-cash impairment of oil and gas properties due to lower average natural gas and NGL prices compared to the 12 months ended March 31, 2012 and a non-cash gain of $8 million related to the change in hedge ineffectiveness. John Regan, our Chief Financial Officer, will provide the details with his discussion.

Quicksilver is aggressively attacking costs and cutting capital expenditures with these low gas prices. In addition, we have amended our credit facility, which gives the company more flexibility to execute our plan. We have pushed out capital commitments in all areas of operations and we will walk through those changes on this call.

We’re seeing production improvements in the field in our newer areas and progress with securing outside capital for our projects. Quicksilver has slowed spending in the core dry gas areas of both the Barnett and Horseshoe Canyon areas due to the low gas prices. Even though we realize roughly $6 per Mcf equivalent on the wet gas marketed at Mont Belvieu in our wet area of the Barnett, we have slowed to keep capital inside of cash inflows. We do not have lease expiration issues in either of these areas, so we will accelerate the developments again with better pricing.

The Barnett MLP has received the green light from the SEC, but we are currently on hold awaiting better marketing conditions. We remain committed to monetizing a portion of the Barnett this year in order to reduce company debt and whether that comes in the form of the MLP or perhaps an asset sale will depend on value.

Moving to Canada, the Horn River Basin is looking very, very good. It appears that we are in an excellent area of the Basin geologically with well-developed sections of both the Muskwa and Klua formations in the Devonian section which exceed 520 feet of combined thickness. Our first multi-well drilling pad alternated Muskwa and Klua wells so that no completed section was closer than 1,200 feet to the next comparable well. From previous results, we have recognized the tremendous potential of the Muskwa, and with this new pad coming on line, we see the capability of the lower Klua section to be as strong or stronger.

Shortly after the end of the second quarter, Quicksilver finalized completion operations on this eight well pad. Production has been curtailed due to flow limitations of the test equipment, but individual wells have tested at rates between 20 million and 30 million cubic feet of gas a day. These wells were drilled with 6,000 to 8,500 foot laterals, depending on the lease boundaries. At this point, these eight wells have an estimated production capacity in excess of 150 million cubic feet of gas per day. To put that in perspective, this one pad which comprises less than 1% of our acreage position in the Horn River Basin can bring on gas volumes equal to 40% of our current total company production.

We will continue to flow the wells into completion clean up and then curtail this production to levels required to meet pipeline and processing commitments over the next year. We project the prolific nature of this production will allow us to drill fewer wells to meet these obligations going forward. We have pushed out some of these commitments and John will give you more details in his remarks.

Currently, we have 60 million cubic feet of gas a day hedged in Canada for this year at $5.82 per Mcf. As we have previously discussed, our team has been working hard on the downstream part of this project and we are making good progress on connecting this large supply of gas with end users. There’s significant interest in Western Canadian Gas underscored by recent M&A activity. We believe that the HRB is well positioned for the export market. We will update you on this side of the project as it develops.

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