Quicksilver: Shareholders Applaud Barnett Shale Asset Sale

| About: Quicksilver Resources (KWK)

Shares of Quicksilver Resources (NYSE:KWK) rose sharply in Monday's trading session, trading with gains of up to 39%. The independent oil and gas company on Friday announced the sale of a 25% interest in Barnett Shale assets to TG Barnett Resources LP, a subsidiary of Tokyo Gas.

Shares gave up some of the gained ground towards to session end and closed the day with gains of 15.5%, to close at $2.60 per share.

The Deal

Quicksilver Resources announced that it has agreed to sell a 25% interest in its Barnett Shale oil and gas assets. Quicksilver will receive $485 million from TG Barnett Resources, and the firm will remain the operator of the assets.

The companies furthermore announced that future capital requirements will be shared proportionally to each party's working interest in accordance with applicable operating agreements.

CEO Glenn Darden commented on the sale, "We are pleased to have Tokyo Gas as a partner to develop the full potential of our Barnett Shale asset base. We look forward to a successful long-term relationship, which will benefit both of our companies."

Quicksilver expects to close the deal on April 30, 2013. The deal is subject to customary closing conditions, and Quicksilver will use the proceeds of the deal to reduce the sizable debt position of the company.


Quicksilver Resources ended its full year of 2012 with $5.0 million in cash and equivalents. The company operates with $2.06 billion in long term debt, for a sizable net debt position.

Quicksilver Resources generated full year revenues of $670.8 million, down 29% on the year before. The company reported a $2.49 billion loss, compared to a profit of $90 million in the year before. Losses were entirely driven by a $2.77 billion impairment charge. Quicksilver made a change in its accounting policies regarding its hedge accounting, and the likelihood of recovery and pricing of its proved undeveloped reserves.

Factoring in a 15% jump on Monday, Quicksilver Resources is valued around $450 million. This values operating assets at merely 0.7 times annual revenues.

Given the large losses, Quicksilver does not pay a dividend at the moment.

Some Historical Perspective

Shareholders of Quicksilver could use some good news. Shares peaked a little over $40 during the summer of 2008. Shares ended the year with losses of 90% as the recession resulted in lower oil and gas prices, just after the company acquired the Barnett assets at the top of the market. The recession and the structurally lower natural gas prices proved a dangerous cocktail, especially for leveraged independent oil and gas companies.

Shares steadily recovered in the years following the recession towards $15 per share, but steadily fell back to lows of $1.62 in March of this year. Factoring in Monday's gains, shares have already recovered more than 60% in recent weeks.

Investment Thesis

Investors reacted favorably to the deal which Quicksilver Resources which has been made last Friday. The Barnett Shale assets produced 72% of firmwide production in the fourth quarter of 2012, some 247 million cubic feet of natural gas equivalent per day. The deal furthermore reinforces the belief that no further asset impairments are imminent at the moment.

Quicksilver generated $156 million in fourth quarter revenues in 2012. As such the 72% fair share of the Barnett Shale activities implies that the fields generated $112 million in quarterly revenues, or the equivalent of roughly $450 million per year. The deal for a 25% stake in the assets, valued at $485 million, implies that the entire assets are valued at $1.94 billion.

As such the deal seems favorable for Quicksilver's shareholders as the equity of the firm is merely valued at $450 million. As the company operates with $2.06 billion in net debt, the enterprise value of the firm is valued around $2.5 billion. Given the significant reduction in debt as a result of this deal, there is plenty of upside for the equity part of the business, thereby offering upside for shareholders.

In 2012, Quicksilver generated roughly $100 million in operating income, excluding the massive impairment charges. Operating income could fall by an estimated $20 million as a result of the divestiture.

Yet the company continues to report losses as it paid some $164 million in interest expenses on its $2 billion debt position, or little over 8% on average. The sale of the 25% stake will not only reduce the debt position towards $1.6 billion, it will also result in a lower yield on the remainder of debt. If Quicksilver can negotiate a lower interest yield towards 7%, it could save $50 million per year in lower interest expenses.

As such profitability remains in sight, especially as strong operating cash flows could further provide cash flows to pay down its expensive debt.

Shareholders applaud Quicksilver's recent move. Despite the difficult financial position of the firm, the selling price seems to be everything but a distressed sale. Given the increased prospects as a result of the deal, and the recent recovery in natural gas prices, shares might be worth the gamble.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.