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With the stock market at all-time highs, it can be challenging to find industries and stocks that have an opportunity for big gains. I previously wrote an article about three stocks to double in 2014 and would like to add Quicksilver Resources Inc.(KWK) to the list. You can view that article by clicking here. I look for stocks that have been beaten down to ridiculously low levels, and then examine the fundamentals to see if the stock price is warranted. Recently I came upon one such company,

Quicksilver Resources Inc. is an exploration and production company engaged in the development and production of long-lived natural gas and oil properties onshore North America. Based in Fort Worth, Texas, the company is widely recognized as a leader in the development and production from unconventional reservoirs including shale gas and coal bed methane.

Quicksilver is a turnaround company in the process of deleveraging the balance sheet. While painful; it's the right thing to do for shareholders and long-term growth. Quicksilver was a private company for 30 years before going public in 1999 on the NYSE. They have experienced management and are committed to responsibly growing the company and believe that a lower debt load and strategic partnerships with various joint ventures will bring windfall profits soon.

The recent cold spell that has hit the nation has the price of natural gas on the rise. As of 12/19 January futures were trading at $4.46, up 4.9% on from the previous day. Prices are approaching 2011 highs, which bodes well for the industry. you can view this information on the EIA website by clicking here.

The company recently partnered with Tokyo Gas, a Japanese company that is shelling out the first 25 million of a JV (joint venture) project, for a 50% revenue share. This strategy allows Quicksilver to keep operating cost down and have the ability to drill more wells, while limiting their financial expenditures.

Big projects on the horizon

Barnett Shale

Quicksilver announced on the third quarter call that the company drilled one well and completed three wells in the third quarter. The company deployed a rig in early September and expects to drill up to six Barnett wells in the fourth quarter. Though these wells are not expected to be completed until the first quarter of 2014. This rig is expected to be utilized in the Barnett region throughout all of 2014.

Fort Worth Basin

As of 2012 Quicksilver showed proved reserves of 1.2 5 Trillion Cubic Feet Equivalents (Tcfe), with unbooked reserve potential of 1.5 Tcfe, they are in the process of drilling 6 new wells in Q4.

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Let's take a look at a map of gas and shale regions in the US from the EIA.

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Below is a map of Quicksilver's various projects throughout the US and Canada.

The Horn River Basin is one of the most exciting finds in Quicksilver's history. It contains the highest quality shale reservoir in the companies inventory. It holds a potential 14 Tfc, which in my opinion would quadruple the stock price.

Make no mistake, big companies are investing millions with Quicksilver. They see the upside potential for massive future gains which increases shareholder value. These projects take a significant lead time and patience on the part of investors. I recently listened in on a conference call. When questioned by analysts, the CEO stated that he cannot always call an exact time frame for the projects in question. He admitted being wrong sometimes by several months, and I appreciate that honesty. If investors want to make big gains in the market, it is important to not get too emotional about the short term, instead focusing on long-term goals and actions by management to communicate. We are at a very exciting time in history for US energy. I for one want to be in it to win it.

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If Quicksilver is able to prove even half of the potential estimated UN-booked reserve potential, then this company is wildly undervalued. Yes, they have a lot of debt, but they were able to go to market and raise around 1.1B in cash. Total liquidity as of September 30th was $344 million in the form of $56M of cash and cash equivalents, $130M of marketable securities maturing within 12 months and $158M of credit facility availability under the $350M borrowing base.

Earlier in the year they sold a portion of assets to pay down debt. The company reduced long-term debt by over 130M in the last 9 months to 1.9B. You can view the balance sheet here on the 10Q. The company took a huge impairment charge of over 2B for 2012, which caused a restatement of earnings, and a loss of $1.997B or $4.46 per share.

The company recently reported earnings of $10.5M or $0.06 a share for Q3,2013, versus a loss of 790M or $4.65 a share for Q3 2012.

The impairment and losses of 2012 decimated the stock, and with good reason, but I believe the turn is in.

They have an active hedging strategy in place to protect their potential profits. It can be confusing to understand, even to a sophisticated investor. Here is a graph showing positions through 2013. A full accounting of the hedging strategy can be accessed by clicking the link in the preceding paragraph.

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Now let's take a look at the charts to see if there is any near term correlation between the stock price and the fundamentals. For a longer term perspective, I'm going to show you a 10 year monthly. As you can see below, this has been an excruciating long term downtrend that correlated with the lows in natural gas that we witnessed over the last several years. It's a sickening fall, followed by months and months of agonizing pain and financial destruction. It's enough to make any investor want to jump off a bridge, and that is exactly what I like to see when I look for multi-baggers. This is now a stock picker's market, it is not for the faint of heart. It takes courage and a strong will to buy at or near the bottom you have to have ice in your veins and the will to withstand the final shakeout. At the bottom of any cycle all the skeptics come out of the woodwork, screaming bankruptcy, and scare investors out of all of their shares. Sometimes bankruptcy happens and everyone is wiped out. I have experienced that pain first hand in my 15 years as a trader, and it hurts, but what does not kill you makes you stronger.

Quicksilver is not going bankrupt anytime soon, and I believe the rebound is just beginning. This stock made a horrific low in March of 2009,trading to a low of $3.74 from a high of $41 just 10 months earlier. It then had a 400% run into the mid $15 range for a couple years. Investors would have been wise to take the huge gains the market offered.

In August of 2011 the share price plummeted along with the price of natural gas to a new low of $1.66 in 2013 of this year. It then retested that low, undercutting $0.22 cents, to a new all-time low of $1.44 in August. That was the bottom. The stock ran over 100% and then pulled back recently to the $2.60 range. This presented an outstanding buying opportunity.

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Here is a weekly chart, my first price target is $5.50. It is important to note the share price is $1 below the March 2009 low. In my opinion this stock is beginning to break out and correct to the upside.

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Short squeeze?

I always look at the short interest before I buy any stock. According to shortsqueeze.com, there is a 32.8% short interest, representing 28.3M shares with 8.4 days to cover. You can view that here. Any positive developments or news stories and this stock could double overnight. Short interest can act as a major catalyst for an upside move to any stock. Investors that are short often get "caught" and have to cover at much higher prices. The rising price of natural gas is a good catalyst. The developments with Tokyo Gas is a very positive development, as this is its first foray into the natural gas business in America.

Conclusion

Future performance is what drives stock value, and I believe the future is bright for Quicksilver.

Management is committed to deleveraging and communicating with partners and shareholders. The stock is gaining momentum with huge upside potential. The company has 45 years in business, the last 15 as a publicly traded company on the NYSE. I urge readers to do their own research, look at the charts and make good sound unemotional decisions, with an exit strategy in place.

Source: Why Quicksilver Is A Buy