Quicksilver Resources Inc. Q3 2008 Earnings Call Transcript

Nov. 5.08 | About: Quicksilver Resources (KWK)

Quicksilver Resources Inc. (NYSE:KWK)

Q3 2008 Earnings Call

November 5, 2008 11:00 am ET

Executives

Richard Buterbaugh - Vice President, Investor Relations and Corporate Planning

Glenn Darden - President and Chief Executive Officer

Phil Cook - Senior Vice President and Chief Financial Officer

Toby Darden - Chairman

Analysts

David Kistler - Simmons & Company

Michael Jacobs

Noel Parks - Ladenburg Thalmann & Co

Irene Haas - Canaccord Adams

David Tameron - Wachovia Capital Markets

Operator

Good morning. My name is Angelina and I will be your conference operator today. At this time, I would like to welcome everyone to the Quicksilver Resources Third Quarter 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. Mr. Buterbaugh, you may begin your conference.

Richard Buterbaugh – Vice President, Investor Relations and Corporate Planning

Thank you, Angelina, and good morning. Joining me today are Glenn Darden, President and Chief Executive Officer; Toby Darden, Chairman; and Phil Cook, Senior Vice President and Chief Financial Officer. This morning the company issued a press release detailing Quicksilver’s results for the third quarter of 2008. If you do not have a copy of the release, you can retrieve a copy on the company’s website at www.qrinc.com under the News and Updates tab.

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

Today’s presentation will include information regarding adjusted net income and net cash from operating activities before changes in working capital, which are both non-GAAP financial measures. As required by SEC rules, a reconciliation of the adjusted net income and net cash from operations before changes in working capital to the most directly comparable GAAP measure are available on the company’s website under the Investor Relations tab. Please keep in mind that all references for per share amounts reflect the impact of the two-for-one stock split affected in the form of a stock dividend, which occurred on January, 2008.

For the third quarter of 2008, the company reported adjusted net income of approximately $71 million or $0.41 per diluted share, up approximately 120% in the prior year quarter and up sequentially versus the comparable second quarter 2008 amount. Once again, the continued successful execution of our development program in the Fort Worth Basin Barnett Shale resulted in 108% increase in volumes of natural gas and natural gas liquids versus the prior year quarter and up 24% sequentially from the second quarter of 2008.

On a similar note, our Canadian operations, production was up 10% year-over-year, and was about equal to the second quarter of 2008. The combined results enabled the company to achieve record quarterly production volumes despite the sale last November of our Northeast operations, which accounted for approximately 76 million cubic feet of equivalent per day of production.

Now I will turn the call over to Glenn Darden to review our operating activities in a little more detail.

Glenn Darden - President and Chief Executive Officer

Thank you, Rick, and good morning. As Rick opened with this has been another very good quarter for Quicksilver resources. As Rick, said adjusted net income was $71 million or $0.41 per diluted share up approximately a 120% from the 2007 period. Perhaps the more important number is net cash from operating activities before working capital changes was a $127 million for the third quarter up 64% from the comparable period in 2007.

Some additional meaningful numbers are; we increased Fort Worth Basin daily production of 108% year-over-year, 80% organically. So, we began to see the affects of the Alliance airport acquisition in the quarter. We increased daily production volumes in Canada 10% with a reduced capital budget. We reduced the unit production cost 35% year-over-year and we increased our credit facility from 1 billion to 1.2 billion in these tough credit environment.

We also closed the Alliance Fort Worth Basin acquisition which probably has at least 20% or Asset Basin with an inventory of over 300 wells to drill in a very attractive part of the field. Quicksilver’s focused approach of large consolidated acreage blocks in a limited number of basins helps us control cost and create better margins from the gas produced.

This quarter you’re seeing the results of that cost control as our production cost, as our, excuse me, our production continues to rise and our unit costs are going down.

In October, Quicksilver announced to reduce capital budget for the remainder of the year and for all of 2009. We are currently running 10 drilling rigs in the Barnett and two rigs in the Horseshoe Canyon Project in Alberta and we project a similar number of rigs operating in 2009.

Quicksilver’s estimated maintenance capital or the amount of capital needed to keep the company’s production flat in 2009 is approximately $250; this is one third of our projected 2009 cash flow. That certainly gives the company tremendous flexibility managing the assets and paying down debt. It also speaks of the quality of the assets and cost structure inherent in the company.

Because we’ve carried a higher debt position than some of our peers, we have been more active on the hedging side. Specifically we have floors of $8.60 per MCF on 80% of fourth quarter 2008 gas volumes. The same floor of 8.60 for 70% of all of projected 2009 gas volumes and roughly the same floor in 2010 for 40% of our projected 2010 volumes. Additionally, we have attractive basis hedges in place for both the Texas and Canadian gas volumes. Essentially, all of Quicksilver’s hedging transactions are with members of our bank group with credit ratings ranging from AA to A minus.

Now, I’d like to give you an overview of the company’s debt and Phil Cook our Chief Financial Officer will follow in more detail. First of all Quicksilver’s end of third quarter debt to capitalization ratio was approximately 62% based on consolidated debt outstanding of approximately $2.5 billion which includes $104 million of Quicksilver Gas Services debt. This gas services debt is non-recourse of the peer. None of the debt is due before 2013 and is secured by a current reserve base of 2 trillion cubic feet of gas with an 18 year reserve life and that base is growing at pace in excess of 25% per year. On top of that value, we have a 73% interest in Quicksilver Gas Services and a 41% interest in BreitBurn Energy Partners and new ventures with projects that we believe will more than double our Barnett and Horseshoe Canyon reserves.

On the new venture front, it appears Quicksilver has captured a very valuable acreage position and what is beginning to look like a world class Shale Gas Basin, the Horn River Basin in Northeast British Columbia. In the last couple of weeks, both Apache and EOG have announced conformation wells, production data and reserve estimates from their initial testing programs. This follows similar data disclosed by EnCana, Nexen, and Devon over the last several months that further define this significant Shale play.

Production rates announced by these companies have ranged from 5 to 16 million cubic feet of gas per day per well. Quicksilver has assembled a 127,000 net contiguous acres which sit directly between the EOG and Apache acreage positions. Quicksilver was spud its first two wells on this project in December. We do not anticipate significant production impact before 2010, 2011 timeframe as gathering a processing systems will need to be expanded. In the meantime, Quicksilver will drill as many as 11 test wells to earn on the entire 127,000 acres.

Based on resources assessments and production results from wells surrounding Quicksilver’s acreage position, we believe Quicksilver may have over 5 Tcf of reserves to recover from this project.

Also on the new venture’s front in West Texas, work is continuing on five wells with initial testing of the Woodford Shale and further testing on the Barnett Shale. Our objective here is to have an up production in reservoir information by mid next year to decide how this project stacks up against the company’s other opportunities.

The Barnett development and Fort Worth Basin is going very well as our numbers highlight. The high BTU area and what we call our Southern Barnett area is continuing to show consistency and attractive economics and our latest wells in the Lake Arlington area are coming in at the highest production rates yet.

The first package of Alliance wells, a roughly eight-well package will begin production next month and we believe these production rates can be similar to the Lake Arlington area.

The Quicksilver Canada team has done a great job of drilling Horseshoe Canyon coal project 10% this year with 20% less capital. The most important project in the coals is an infield testing program. This is initial results and the initial results were looking good, if we are successful this project could add 30 to 40% to our proved reserves in the Horseshoe Canyon. And of course their ideas and hard work have put us in the Horn River Basin play.

Recently in order to protect Quicksilver rights and value as a 41% owner and BreitBurn Energy Partners the company filed suit against BreitBurn and others. We do not intend to increase our investment in BreitBurn but we do intend to get the benefit of the bargain we made in selling assets and taking back their units as part of the consideration. We also intend to have a say in vote equivalent to our ownership position. As this matter is now in the legal realm, we will have no further comments on this litigation.

In summary, Quicksilver strategy remains the same as when this company was founded. We have a very focused approach in a limited number of areas where we work to maximize the value and margins, by building this company to be a low cost operator is better equipped to drive cost even lower in times like these. Quicksilver’s concentrated positions in both the Fort Basin and the Western Canadian Sedimentary Basin have created additional opportunities to enhance margins and grow new business. We have a large inventory of low risk development wells and the flexibility to drill at slower pace and still grow production at 25% or better. We will lower our debt through free cash flow, asset sales or creative deal it will showcase the value of the company’s overall portfolio.

Quicksilver fully intends to grow and become stronger in this environment and emerges as a much more valuable company as the economic climate improves. We have the talent experience and the right projects to accomplish these goals.

And now I’ll turn the call over to Phil Cook, our Chief Financial Officer. Phil.

Phil Cook - Senior Vice President and Chief Financial Officer

Thank you Glenn, and good morning. Sequentially, production volumes grew from 236 million cubic feet a day equivalent in the second quarter of 2008 to 277 million cubic feet a day equivalent in the current quarter, a 17% sequential increase. For the current quarter and first nine months of 2008, total production volumes grew by 72% and 78% respectively, when comparing to the same periods a year ago.

Production volumes in the Fort Worth Basin grew by 108% and 129% with respect to the quarter and the first nine months of the year again comparing to the same periods a year ago. And sequentially, volumes in the Fort Worth Basin grew by 24%.

Total production revenues grew from $198 million in the second quarter of 2008 to $218 million in the current quarter, a 10% sequential increase. Total production revenues grew by 94% and 102% with respect to the quarter and nine-month periods compared to a year ago. In the Fort Worth Basin, excluding impacts of hedging, production revenue grew by 200% and 230% for the quarter and nine months periods again comparing to the same periods a year ago. And then sequentially, excluding the effects of hedging, production revenues in the Basin grew by 12%.

Our realized natural gas price for the quarter was $8.20 after hedging compared to $9.02 in the second quarter down 9%. Natural gas liquids realized prices were $53.82 a barrel after hedging in the current quarter compared to $54.45 a barrel in the second quarter, down 1%. Realized oil prices were $84.80 a barrel after hedging in the quarter, down from 88.25 a barrel in the second quarter, a 4% decrease.

Total operating expense for the third quarter, excluding DD&A and a legal settlement that I will discuss later was about $55 million, a 6% sequential increase when compared to the second quarter operating expense again excluding DD&A of about $52 million. Lease operating expense for the current quarter was $0.74 per Mcfe compared to a $1.03 in the second quarter on a unit basis. These amounts exclude transportation, processing and production tax expense, but as you can see our sequential reduction in lease operating unit cost was 28%.

Transportation expense, which is the cost to get our gas from the tailgate of our facilities to market, was $0.41 on an Mcfe basis during the quarter compared to $0.30 in the second quarter of 2008. Most of this increase is attributable to the higher volumes and therefore higher costs on a unit basis of third party transportation on our Alliance and Lake Arlington area production. There is no transportation expense in NGL volumes in the southern portion of the basin as we effectively sell those volumes at the tailgate of our facilities at net back price and therefore as the mix of our production changes and we produce more dry gas, our unit cost on transportation increases.

To say this a different way as dry gas becomes a greater portion of our production mix, our transportation expense increases on a unit basis this is due to the cost of NGL transportation being in the price of the product as we received net back pricing on NGL. Processing expense, which is the cost to gather and process our gas from the wellhead up to the tailgate of our facilities for the current quarter was $0.16 on an Mcfe basis compared to $0.23 in the second quarter of 2008. The decrease in these costs on an Mcfe basis is 100% attributable to lower fuel cost.

So, just as a recap, oil and gas expenses were broken down as follows. Transportation expense was $0.41, processing was $0.16, and LOE was $0.74 for a total of a $1.31 which is a 16% decrease sequentially. As I have discussed with you in pervious quarters the trend on LOE is coming down as compared to previous quarters and as we continue to grow our Texas production, we expect to further reduce our unit costs.

Our cash operating margins based on current prices are in excess of 70% across the company. The DD&A run rate for the current quarter was $2.03 per unit, an increase from the $0.81 per unit reported in the second quarter 2008. Our DD&A rate changes during the year as we placed appreciable assets such as our midstream assets into service, and as the mix of production changes between our two full cost pools.

During July, the month before we recognized the Alliance acquisition, our consolidated DD&A rate was $0.01 per Mcfe an increase to approximately $2.14 per Mcfe in both August and September due to the acquisition. With respect to G&A during the current quarter, the company reached a legal settlement agreement resulting in a $9.6 million charge which is included in G&A in the current quarter. Excluding the settlement, total gross expenses were up slightly about 4% compared to the second quarter 2008 which is primarily attributable to higher salary and bonus expense.

However, on a unit basis, G&A was $0.62 for the quarter as compared to $0.72 in the second quarter, a unit cost decrease of 14%. Adjusted net income for the quarter was $70.9 million or $0.41 of diluted share as compared to adjusted net income of $66.8 million or $0.40 of diluted share in the second quarter. Third-quarter 2008 adjusted net income includes an unrealized non-cash pretax charge of $103.5 million related to the second quarter of mark-to-market loss that BreitBurn Energy Partners recorded as well as the previously discussed $9.6 million legal settlement.

As you know, Quicksilver owned 41% of the limited partner units of BreitBurn as of quarter end and we report our portion of their earnings on a one-quarter lag. We fully expect this charge to reverse itself in the third quarter given where commodity prices were at the end of the quarter, which will result in Quicksilver recognizing or recording income in the fourth quarter related to BreitBurn’s mark-to-market accounting in an amount that I expect to be similar to the charge. During the third quarter, the company generated approximately $127 million of cash flow from operations before working capital changes, as compared to a $135 million in the second quarter, a 6% decrease.

Quicksilver received approximately $31.4 million of cash distributions during the first nine months of 2008, associated with the ownership of the BreitBurn units. These distributions are included in investing cash flows -- on a year-to-date basis 2008, due to the net losses that have been recognized by BreitBurn. However, should BreitBurn generate profits in the fourth quarter the distribution was received, up to our percentage of net income will be reclassified into operating cash flows.

Our revolving credit facility at quarter end was approximately $725 million drawn on a borrowing base of $1.2 billion, as Glenn said. Total Quicksilver debt at quarter end was approximately $2.4 billion, which excludes the KGS debt that Glenn talked about, which is non-recourse to the parent, which translates to a consolidated total net debt to capital of approximately 62%. Current availability on the revolver is about $425 million and we expect to end the year with approximately $375 million as of availability.

As we previously reported, we anticipate drilling within cash flow in 2009 and our current plans indicate that borrowings in 2009 will be approximately $85 million, which is primarily midstream construction cost. At this level of spending, our debt to capital will be approximately 60% at year end 2009.

Let me give you a little more color on our total picture. Having discussed the revolver already, I’ll break down the other pieces of debt. Outside of the revolver we have additional debt of approximately $1.7 billion and I’d like to point out the different traunches of debt and more importantly their maturities.

Our longest outstanding piece of debt is our $150 million convertible debenture which is callable in 2011 and bears an interest rate of 1 7/8% interest until that time. This bond is convertible into Quicksilver shares and has been included in our share count today. The next tranches is our first high-yield on which we issued in March 2006 for $350 million and has an interest rate of 7 and 8 interest having a maturity in 2016. We issued another high-yield bond this summer in the amount of $475 million which has an interest of 8.25 and a maturity in 2018.

And finally, we issued a $700 million, five-year second lien note this summer, which carries a coupon of LIBOR plus 450 basis points. This interest rate changes quarterly, our interest rate during the third quarter was 7.75% interest that will be our interest as well in the fourth quarter, this now matures in August 2013.

So, in summary, as you can see our maturities don’t begin until 2011 that debt is the debt its convertible into Quicksilver stock. The first cash maturity does not occur until 2013, which is the second lien facility. We believe these maturities give the Company significant flexibility regarding cash management over the next few years.

Our financial condition and results of operations including our liquidity and profitability are significantly affected by sales prices that we realized for the products that we sell. The volumes that we produce may be significantly affected by the rates at which we acquire leaseholds and other mineral interest and explore, exploit, and develop our leaseholds and other mineral interests through drilling and production activities. These activities require substantial capital expenditures, as you know, and our ability to fund these activities through cash flow from operations, borrowings, and other sources may be significantly affected by both financial markets and realized prices.

In this regard the turmoil in the credit and financial markets appears to have deepened a bit, resulting in us and other industry participants announcing reductions in planned levels of capital expenditures and activities for the remainder of 2008 and 2009. Although, we presently expect to generate annual production growth of more than 25% in 2009, we do have the flexibility should conditions worsen to pay down debt.

Now I’ll make a couple comments about what to expect in the fourth quarter of 2008. Production volumes for the fourth quarter should be in the range of $325 million to $335 million a day on a gas equivalent basis. With respect to commodity prices during the fourth quarter, you should note that we have an average of approximately 200 million a day of natural gas hedged with collars and swaps. The collars have a weighted average floor of about $9.18 per MMBTU and a weighted average ceiling of about $11.07 per MMBTU and these hedges cover approximately 80% of our expected gas production for the remainder of the year. Sorry, for the remainder of year, we have collars on 1000 barrels of oil a day with a floor of 65 and a ceiling of 75. And additionally for the remainder of the year we have swaps in place for 3000 barrels a day of NGLs with an average swap price of $43.80.

On the unit cost side, obviously they are as much affected by volumes as they are absolute cost and with the volume expectations that we’ve given, the following run rates should be expected for the fourth quarter. LOE should be in a range of $0.70to $0.80 on a unit basis. Transportation expense I would expect would be in the range of $0.40 to $0.45 on a unit basis. Gathering and processing expense would be in the range of $0.15 to $0.20 production taxes in a range of $0.14 to $0.16, and G&A in a range of $0.50 to $0.55. On the G&A side, I would expect that range to be in the $2 to $2.05 basis. So total cash costs will be in the range$1.94 to $2.16 of total unit costs will be in the range of $3.94 to $4.24.

Now I’ll turn the call back over to Rick.

Richard Buterbaugh - Vice President, Investor Relations and Corporate Planning

Thanks Phil. Angelina at this time we will open the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from line of David Kistler.

David Kistler

Good morning guys.

Glenn Darden

Good morning.

David Kistler

Hey quick question on the Barnett production going forward. As you have moved from 14 rigs to 10 rigs in the Barnett and reallocated one rig, one more rig into Lake Arlington and the Alliance acquisition area, so you will have five instead of four, what is that from the efficiencies gained in a higher production in Lake Arlington and the Alliance what is that do to total production vis-à-vis the cut in rig count?

Glenn Darden

Well actually -- we are going to -- we have announced earlier that we are going to reduce that one rig more, so we will..

David Kistler

To nine rigs, Yeah.

Glenn Darden

Yeah nine rigs for the year of 2009. We will grow production at a minimum to 25%. I think what we have is flexibility in moving these rigs around. We’ll have at least four in the Southern Barnett and then the other five are split between Lake Arlington and Alliance. But we will bring our first volumes on or first new volumes, new wells that we’ve drilled volumes on in December from the Alliance Project. But it just gives us some flexibility. What it will impact a little bit is perhaps because there’s more drilling in Lake Arlington and Alliance and those are dry areas of the basin the dry gas areas, will have less NGL as a percentage of the total. The total will rise but less as a percentage.

David Kistler

Okay so just and I’m just trying to just this in a bell but at 35% decrease in rig account however you can still maintain 25% production growth out of the Barnett, just kind of make sure I have got that correct?

Glenn Darden

Okay. Impressive. The production optimization program -- excuse me that’s 25% total company growth.

David Kistler

That’s what I am trying, I m trying to get for that

Glenn Darden

Okay, higher percentage for the Barnett

David Kistler

Okay, even higher in the Barnett okay, perfect. Thank you for that clarification. Production optimization program and kind of the Horseshoe Canyon area, similar kind of getting to rig efficiencies and to total recoveries 65 less wells than expected yet keeping production the same levels, what’s the real driver of that kind of recovery or efficiency gain?

Glenn Darden

It’s a number of things but its production monitoring paying very close attention to production on a well by well basis its also efficiencies on the drilling side and performance side. So, it’s a combination of things but it in a total system but its working very well. Our Canadian team has done an outstanding job with 20% less capital.

David Kistler

And then, just switching over to Horn River for a second as you guys talk about living within cash flow how do you think about developing that over time as obviously that would probably take up some exploration related capital that would necessarily immediately generate near term returns?

Glenn Darden

True and what were looking at, the way we look at the Horn River this is a long term project for the company, we think that this is another big, big field along the size of Barnett for our company in terms of additions. And fortunately, our lease position is secure, we have to drill – it secured in what are termed exploratory licenses where we drill perhaps a total of 11 wells over four year period to hold those licenses, which then give us ten years to fully develop. So, we can look at this for a long term perspective although perhaps it make sense because it is such a large project to perhaps bring in a partner but those discussions are internal at this stage of the game. But, our initial wells that will drill, our first two wells we would be able to tie into sales line, so we will be able to produce those for longer time period and get paid while we’re evaluating but certainly some of the 11 will not be able to tie in. So, how we address this it’s a multiyear project obviously and we will look at it but we will kind of allay some of Horseshoe Canyon budget for the initial couple of years is what it looks right now.

David Kistler

Okay and then one last question I apologize for so many hop off, you previously kind of updated us on asset sale process, I may have missed it on the first part of the call, I got on just some minutes what the status of that how you do think about BreitBurn units, KGS units obviously the BreitBurn issue is a little more complicated but…

Glenn Darden

Well, we got a variety of choices and we’re evaluating all of those we have had interest in lot of our assets because we have valuable assets. So, we are going to be prudent and take our time and make the best deals on every asset of our goal. It doesn’t change we maximize our goal is to maximize every asset we have so if that involves a joint venture or a sale or a modernization could be anyone of those or a combination of all of those.

David Kistler

All right great that’s it from me, I’ll let somebody else jump on, thanks so much guys.

Glenn Darden

Thank you.

Operator

Our next question comes from the line of Michael Jacobs.

Michael Jacobs

Good morning quick question on NGL prices, we’ve seen frac spreads blow out and current prices imply that the NGL barrel selling for about $0.40 on a WTI crude dollar versus the typical $0.55 to $0.60 range, can you update us for your expectations for NGL pricing through the end of 2009 may be a little bit of an update on what we’re seeing on frac spreads and kind of how that changes over time?

Glenn Darden

Yeah this is short cut, I won’t talk about frac spreads but I will talk about NGL prices and what we we’re seeing. We are seeing about $0.40 on a WTI dollar currently. That not what we saw last month or the month before and that’s not what I would expect to see in the long-term, but what I think we do expect is that in 2009, we will be at about 50%, which is if you mean revert the commodity price, that’s kind of where it ends up over time. So, if oil is $80 a barrel, we think it will be $40 for NGLs.

Michael Jacobs

Great, appreciate that. Moving onto Lake Arlington Alliance, you are currently running five rigs and you mentioned earlier you are going to go from 10 to nine. How should we think about your rig allocation in the Barnett as you kind of hold that nine rig count number flat? Is there any chance that you move more rigs over to Lake Arlington Alliance?

Glenn Darden

No, I don’t think so. What we will probably see is that we will have four rigs running in the south and we will have the remaining five rigs between Lake Arlington and Alliance. So we will be spreading that across.

Michael Jacobs

Just a follow-up to that. Another E&P operator recently started laying down rigs and took rigs termination charges and I believe the first of your nine contracted rigs in the Barnett doesn’t come off contract until roughly a year from now. It seems like you’ve done a really good job on the hedging side and have you given any thought to laying down contracted rigs to take advantage of the lower service cost environment?

Phil Cook

No not at all. I think trimming from 14 to nine, as you say, we’ve got nine contracted, which we these are high graded rigs, so these are our best teams drilling and we think that a nine-rig program can still grow this company very nicely and we don’t think we need to drop from there.

Glenn Darden

And even at these gas prices, we have very good returns.

Michael Jacobs

Sure, so keeping that in mind, kind of when we think about the typical $3 million Barnett well and kind of the southern wells, we are assuming that about 3/5of the costs goes to the drilling side and about 2/5 is completion. With a bunch of operators leaving the Barnett, how should we think about kind of those pieces of the prize puzzle changing in ‘09 and where could we see the largest impact?

Glenn Darden

Well, Michael, I would’ve allocated it kind of the other way, 3/5 to completion and 2/5 to drilling. I think we are going to see costs come down. All of this pullback and activity leads inevitably to a better price service environment for us and we are aggressively pursuing better prices on all of our services. So, I think it’s going to lead to better economics than we have projected here. We’ve kept things pretty flat, but I do think we are going to see real opportunities for improvement there.

Michael Jacobs

Is there any way you could quantify for example if we think about 120 million in completion, how low could that go and kind of if you could give us an idea of timing and impact, it would be really helpful?

Glenn Darden

I think on the low side probably 10% reduction and maybe as much as 20%.

Michael Jacobs

And that’s over the next one to two quarters?

Glenn Darden

I would say not fourth quarter probably as much but throughout ‘09.

Phil Cook

But again, we did not plug that into our budget, but we fully anticipate costs coming down.

Michael Jacobs

Okay, sorry, one last question. Just with respect to BreitBurn, and I know you can’t really get into it, but can you just give us a best guess on a timeline for declaratory judgment kind of are we talking about something in the three to six month time frame or is it kind of a year plus and any sort of context would be helpful?

Glenn Darden

We can’t at this time. We truly don’t have an idea how the legal process will work out timing wise.

Michael Jacobs

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Noel Parks.

Noel Parks

Good morning

Glenn Darden

Good morning.

Noel Parks

I have just couple of question could you talk little more about the progress as far as looking towards infrastructure and Basin in I know there was talk of a lot of needs including just even getting sand or propend up there. Just any update on how that is looking or discussions with partners?

Glenn Darden

Yes there is a Knowles of operating group which includes all the major producers in the area. We participate in that and what the group is working on joint solutions to most of those issues currently. The infrastructure is probably major infrastructure and the reason major infrastructure needs to be built for this area. Is there a literally our huge volumes projected to come out of it, so there is a lot of long term planning going into how much infrastructure should we build and how is the most efficient way to get it built? It is well under way on three fronts currently and we are going to see short term solutions to take away and we are going to see longer term solutions over the next three or four years coming in from trans Canada and others. So it is well under way. We will be moving our first gas from test wells through one of those short term solutions next year and on the service side, there are others – everything from rail spurs being planned, I mean it is a huge potential basin from a deliverability standpoint and from a reserves standpoint. If you – undoubtedly read what the other operators are saying about their positions but there are tens of TCF’s that are projected to be retrieved from that basin over the next twenty or thirty years. It is a big project. But the industry has a way of solving each of these issues, somehow life will find a way.

Noel Parks

Right. Thanks for the extra detail and just also in Canada, I know as far as the Horseshoe Canyon down spacing, I believe a few months ago you were saying that you had piloted in a couple of areas and you were now or had maybe six areas altogether that you were looking at. Have you made your way out to wells in those areas or considering expanding it more?

Glenn Darden

Yes, we are working on that right now, Noel and so far so good. I think we really completed a good sample set of couple of these and will be on the next three to four projects as the year goes on and into next year but we think by kind of mid next year, we will have a good handle on that down spacing program and as I say, it is looking good so far.

Noel Parks

Great and sorry if I missed this. Have you told us how many wells you have done at a tighter density so far?

Glenn Darden

Haven’t said that. We haven’t released that at this point.

Noel Parks

Okay and then just one last one as far as look at the infrastructure and the Barnett. Is that plant, if I am right was looking like it was going to be a little bit more urgently needed than maybe originally thought, if -- give us an update on the status of that?

Glenn Darden

Yes, the plant will be completed and operational in the first quarter of -- kind of beginning of the year of `09. What we are seeing right now is additional third party attraction and a need for processing more third party gas, so even though Quicksilver’s budget has been cut and other operators have been cut, there is still quite a bit of demand and that plant is very necessary for the processing side so with that let’s go and [free] while we had a KGS conference call this morning and reiterated that.

Noel Parks

Okay great, that is all for me thanks.

Glenn Darden

Thank you.

Operator

Your next question comes from the line of Irene Haas.

Irene Haas

Hi guys, just a little follow up on the debt reduction aspect. I guess when the deal was done this August; you guys had a goal of reducing debt by about $500 million by year-end 2009. Of course a lot has happened between then and now. Is the deadline a little bit more relaxed and under current condition and then is there any way you have mentioned earlier on that, you would not increase your holding in the BreitBurn units but would you consider still monetizing it while the lawsuit is pending, if you can answer that question?

Glenn Darden

Let me talk about the debt and we will let someone else talk about BreitBurn. We don’t have a hard deadline on the $700 million note Irene, which I think you know. We had come out and said that our intent was to pay that down by $500 million by the end of 2009. We’d still like to do that have, however, we’re not going to give assets away in order to accomplice that objective, but certainly we would like to do that if we see an opportunity to do so.

Phil Cook

On the BreitBurn side, it’s just like another asset, and we will look at that and we will look at that and we do have litigation pending, but it’s another asset in our portfolio and we will work to maximize it.

Irene Haas

Thank you

Glenn Darden

Thank you

Operator

[Operator Instruction]. Our next question comes from David Tameron.

David Tameron

Hi good morning everybody. I had trouble getting on as well. Can you -- somebody mentioned a 250 number at the start in the prepared remarks. Can you recap exactly what that was? Was that a CapEx number?

Phil Cook

That was the maintenance capital number. And, it’s the number to keep our production flat. So, $250 million which is about one-third of our projected cash flow for 2009. So I guess we put out there just to show the flexibility that this company has in attacking our projects and paying down debt, etcetera.

David Tameron

Okay and the750 is based on what debt?

Phil Cook

The 750 is based on $7 and $70 for Gas and oil and as well as hedges, obviously. It also includes there’s two pieces of this 750 that we may not be including one of those pieces is BreitBurn, which is about a $50 million distribution yes we expect to get next year and we also have about a $50 million or tax refund on that we expect to get in 2009. Those were taxes that we paid in 2008 related to the divestiture of Michigan and we will get a refund of those taxes in early 2009

David Tameron

Okay good that helps. Then maybe it’s a question for Glenn, but how do you look at you lay down rigs. Obviously you lay down your worse rigs first, but at some point you start chopping into some big crews. How do you look at the efficiencies or how do you manage the process ramping down and then potentially ramping back up at some point? How do you think about that?

Glenn Darden

Sure, well nine rigs running in the Barnett is still a busy program for us. We’ve got a lot of wells to complete in addition to that of course. But, I think certainly we’ve high graded our team, our drilling team. Our operating team has gotten more efficient. It allows them to catch a breath because we’ve been running at a pretty fast pace over the last several years in getting this project going from grassroots. So, it is something to address and ramping up and ramping down is hard to do from you can can’t just flip the switch, but our operating team is doing a great job of just being flexible and we will become more efficient in this process. There’s no question about it we are driving our costs down.

David Tameron

All right, then one more question. EOG was out there saying they think Barnett production plateaus in 2009 for the gas side. What as you guys look out the next couple years, what are your thoughts about overall Barnett gas production?

Glenn Darden

Well, I will first say that ours doesn’t go into decline our projection and of course this depends on the pace of drilling, but at even a more accelerated pace than next year’s, ours doesn’t peak until probably 2013/2014 so I do think that with the pull back of most of the players here in the play and several of the bigger players saying that they drilled a lot of their locations, we are going to see that peak 2010 sounds a little early to me, but I’m not surprised if it’s 2011.

David Tameron

Okay, thanks I appreciate.

Glenn Darden

Thanks David.

Operator

[Operator Instruction]. There are no further questions at this time.

Richard Buterbaugh

Thank you Angelina. Just as a remainder a replay of this call will be available on the company’s website for 30 days. The company expects to release fourth quarter 2008 earnings on Wednesday, February 25 2009, before the market open. Numbers of the company’s Executive Management Team will also be presenting at various investor meetings, details regarding these presentations will be available on the company’s website and interested parties can listen to these presentations to the web cast links that will also be available of our website. Thank you for your time and interest in Quicksilver this morning. This concludes our call.

Operator

This concludes today’s conference call. You may now disconnect.

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