Quicksilver Resources Inc. Q2 2010 Earnings Call Transcript

Aug. 9.10 | About: Quicksilver Resources (KWK)

Quicksilver Resources Inc. (NYSE:KWK)

Q2 2010 Earnings Call Transcript

August 09, 2010 11:00 am

Executives

Rick Buterbaugh - VP, IR

Glenn Darden - President and CEO

Phil Cook - SVP and CFO

Analysts

David Heikkinen - Tudor, Pickering, Holt

Noel Parks - Ladenburg Thalmann

Brian Singer - Goldman Sachs

Kim Pacanovsky - MLV

Brian Corales - Howard Weil

Jude Bintger - Lazard Capital Management

Philip Dodge - Tuohy Brothers Investments

Noel Parks - Ladenburg Thalmann

Eli Kantor - Jefferies & Company

Operator

Good morning and welcome to the Quicksilver second quarter 2010 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)

I would now like to turn the call over to our host Rick Buterbaugh Vice President of Invest Relation and Corporate Planning. Thank you Mr. Buterbaugh you may begin your conference.

Rick Buterbaugh

Thank you Sherday and good morning. Joining me today are Glenn Darden, President and Chief Executive Officer and Phil Cook, Senior Vice President and Chief Financial Officer. This morning, the company issued a press release detailing Quicksilver Resources' results for the second quarter of 2010. If you do not have a copy of this 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 risks and uncertainties. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning risk factors that could cause such differences as detailed in the company's filings with the SEC.

Today's presentation will include information regarding adjusted net income and net debt which are non-GAAP financial measures. As required by SEC rules, reconciliations of adjusted net income and net debt to the most directly comparable GAAP measures are available on our website under the Investor Relations tab.

At this time, I will turn the call over to Glenn Darden to review of our financial and operating activities in more detail.

Glenn Darden

Thank you, Rick and good morning. Quicksilver reported net income of $86.8 million or $0.49 per diluted share for the second quarter of 2010. Second quarter 2010 adjusted net income was $30.4 million or $0.18 per diluted share. For the second quarter average daily production was approximately 350 million cubic feet equivalent, a record production level for the company. This production was an increase of approximately 6% over the same period last year which included roughly 12 million cubic feet of gas per day from the alliance area that was sold to Alliance area that was sold to Eni in June of 2009.

On July 22, this year Quicksilver announced and entered into a definitive agreement to sell all of interest in Quicksilver Gas Services to Crestwood Midstream Partners II, a portfolio company for First Reserve Corporation.

We anticipate that this transaction will result in total liquidity of more than $1 billion for the company. Quicksilver will completely pay down its senior secured credit facility and eliminate $228 million of consolidated debt associated with Quicksilver Gas Services LP. This transaction is the latest in a series of moves undertaken over the last 18 months to improve the financial strength of Quicksilver Resources.

First we refinanced our long term debt eliminating the second lien notes and removing all owners’ debt covers. Next we sold approximately 121 Bcf of gas or 27.5% working interest in our Alliance project to Eni for $280 million. We later replaced those reserves at half the price in a purchase of 125 Bcf of gas for $122 million. This acquisition was in our best Barnett project Lake Arlington and 50% of the consideration was in by BreitBurn Energy units.

We had previously beneficially settled all outstanding legal issues with BreitBurn and with Lake Arlington transaction we have lowered our ownership position in BreitBurn from 40% to approximately 33%. All the while, we have continued to add reserves with the drill bit and are now at 2.8 trillion cubic feet equivalent, over two-thirds of which is proved developed.

The net results of all these transactions is that Quicksilver Resources has reduced its debt on a pro forma basis by 28% over the last year without selling any reserves on a net basis and without selling any equity. So today on a pro forma basis, Quicksilver’s net debt to proved reserves is $0.63 per Mcf equivalent as compared to a $17 per Mcf equivalent 12 months ago.

We have an additional $300 million or so of value in the BreitBurn units as well. While debt has been reduced productivity has improved as measured by EBITDA per Mcf equivalent despite a declining gas price environment and Phil Cook will go through those numbers and that analysis. We have more work to do, but I’m quite proud of the team’s accomplishment in making these very positive strides for the company.

On the operational fund we currently have four routes running in the Barnett. We have added one rig on a temporary basis to drill in Lake Arlington area following the receipt of permits and rights of way that we had expected at the beginning of the year. The company still expects to drill and complete a total of 80 wells in the Basin in 2010. Company also expects to complete at least 25 additional wells from its existing inventory of drill, but uncompleted wells.

In Canada, activity was suspended for most of the second quarter due to the seasonal breakup period. In the Horseshoe Canyon, we expect to drill 11 operated wells during the second half of the year, resulting in a total of 21 wells in the area for the full year of 2010. Company expects to begin completion activities on its third Horn River Basin well in late summer and began completion work on the fourth well, by year end.

We are also planning to reenter an existing vertical well on our Horn River Basin acreage plot, to test the oil potential in the actual formation later this year. We are also planning drilling activity in the Alberta Bakken play in Montana for 2011.

Quicksilver has not changed its 12% production growth target for 2010. We do not have significant drilling commitments to maintain leases over the next several years therefore, we have lots of flexibility. Our assets however, give us the ability to grow production up to 25% in 2011, given the right gas prices. But our plan is to maintain capital discipline.

One feature of the sale of our KGS position to Crestwood Midstream is an additional $72 million earn out payment upon reaching certain production targets. So we do have additional capital to work down our inventory of uncompleted wells in the Barnett.

This company has worked hard to improve our balance sheet in the difficult environment. We’ve done it without diluting our shareholders, and without reducing the company's reserve base and Quicksilver still retains 100% of its Horn River Basin assets and upside. We will always be on the hunt for new opportunities, but we have no intension of levering up our balance sheet.

And now, I’ll turn the call over to Phil Cook to discuss the numbers. Phil?

Phil Cook

Thank you Glenn and good morning. Production volumes from our projection at 350 million cubic feet of natural gas equivalent per day in the second quarter of the year up 10% from the 318 million cubic feet a day reported in the first quarter. For the quarter and the first six months of 2010, total production volumes grew by 6% and 1% respectively when comparing the same periods a year-ago. This growth was driven primarily from activities in the Fort Worth basin.

Our realized natural gas price for the quarter was $6.93 per Mcf after hedging, compared to $7.44 in the first quarter of the year. You will recall that we’ve hedged 200 million cubic feet a day with a weighted average floor of $7.40 throughout 2010.

NGL realized prices were $31.27 a barrel in the second quarter roughly flat with the $31.19 a barrel in the first quarter. And realized oil prices were $70.24 a barrel in the second quarter, down slightly from $71.36 realized in the first quarter.

Sequentially, total production revenues increased from $201.6 million in the first quarter to $211.7 million in the current quarter. Of this $10 million increase in revenue, $17.3 million is attributable to higher production offset by $7.2 million from lower realized prices.

Lease operating expense on a unit basis, was $0.67 per Mcfe for the first quarter, up from $0.62 for the first quarter. This sequential increase was related to higher soft water disposal and utility cost. Keep in mind that approximately $0.02 for both periods is non-cash and is related to stock compensation for our operational employees. These amounts exclude processing, transportation and production tax expense.

Processing expense, which as you know is the cost to gather and process our gas from the wellhead to the tailgate of our facilities, was $0.15 per Mcfe for the second quarter compared to $0.20 for the first quarter. This decrease reflects the absence of two significant first quarter events; one was the compression overhaul expenses on the KGS systems and compression rentals which were utilized temporarily at our alliance facilities.

Transportation expense which is the cost to get the gas from the tailgate of our facilities to market was $0.38 per Mcfe for the second quarter compared to $0.44 for the first quarter of the year. This decrease primarily relates to lower fuel charges resulting from lower prevailing natural gas prices.

So just as a recap, unit oil and gas expenses for the second quarter were broken down as follows: LOE was $0.67, processing was $0.15 and transportation expense was $0.38 for a total of $1.20, which is down $0.06 or approximately 5% sequentially.

Production taxes and ad valorem taxes were $0.28 per Mcfe for the second quarter of the year compared to $0.30 for the first quarter, and the DD&A run rate for the second quarter was $1.59 compared to $1.63 in the first quarter. These decreases for both are primarily attributable to the per Mcfe effect of higher production, as the dollar amount of such cost was roughly flat sequentially.

G&A for the second quarter was $0.54 per Mcfe compared to $0.72 in the first quarter a 25% decrease. Approximately $0.16 for both periods is related to non-cash stock based compensation. The decreases is primarily due to lower legal fees following the resolution of legal matters with BreitBurn, and to a lesser extent on the absence of payroll taxes on stock grants to investors in the first quarter of each year.

As a brief recap, our cash expenses for oil and gas expenses, production taxes, and G&A for the second quarter were $1.84, compared to $2.09 in the first quarter, a 12% decrease.

For the quarter and first six months of the year, operating income increased $28 million or 34% and $33 million or 22% respectively despite flat realized composite prices for both periods.

In addition, adjusted EBITDA Mcfe which really is the measure of the economics of our assets in the current six month period was $4.76 per Mcfe compared with $4.51 pre Mcfe in the year ago period, a 6% increase but again in a period of time when natural gas equivalent price realizations were flat.

As Rick said, a reconciliation of adjusted EBITDA to its nearest GAAP equivalent is available on our website. In the second quarter we finalized settlement of our litigation with BreitBurn and received $18 million from BreitBurn and another third party.

This gain is recorded in other income which is below operating income. We also recognized a pre tax gain of $35.4 million from the conveyance of $3.6 million BreitBurn common units as a partial consideration in the acquisition of our additional working interest in our Lake Arlington project, also included in other income below operating income.

Adjusted net income for the quarter was $30.4 million or $0.18 per diluted share as compared to adjusted net income of $33.8 million or $0.20 per diluted share in the first quarter of the year. Adjustments in both quarters primarily relate to our equity method investment in BreitBurn Energy Partners and unrealized valuation losses and gains on our liability at Eni which is our gas purchase commitment for the estimated effects of future production.

Decreased adjusted net income resulted from realized losses on the Eni gas purchase commitment, higher interest costs and more net income from KGS, attributable to non-controlling interest. These factors were partially offset by improved operating income on higher production levels.

For the second quarter of the year capital incurred was approximately a $137 million excluding acquisitions. We expect to incur approximately $180 million to $190 million of additional capital expenditures towards our 2010 capital program and currently expect that the 2010 capital program will total approximately $470 million, again excluding acquisitions. Of that amount, approximately $55 million is related to the midstream business and therefore for Quicksilver Resources only capital is approximately $415 million compared to cash generation of approximately $435 million expected for the year.

Total Quicksilver debt at June 30 was approximately $2.4 billion excluding $226.8 million of KGS debt which as you know is non-recourse to Quicksilver. Of this amount our revolving credit facility was approximately $493 million drawn on a borrowing base of $1 billion. This leaves the company with approximately $500 million of liquidity in the facility.

As a reminder, our Board decided last month to sell our interest in Quicksilver Gas Services. At closing we expect to use the initial cash proceeds of $701 million to completely pay the outstanding borrowing under our credit facility. Thereafter, we expect to how our entire $1 billion credit facility undrawn and available. The remaining cash from closing in excess of the outstanding credit facility will be temporarily held in December with an estimated AMT tax payment of about $130 million associated with the gain when this transaction comes due.

In addition, please keep in mind that with this transaction we will no longer consolidate Quicksilver Gas Services and will now treat their results as discontinued operations in all periods presented. As of the end of the third quarter all of our public filings will be retrospectively represented showing KGS on a discontinued operations basis. So each period will be comparable. We have had some questions regarding cash costs and what is the impact on the sale of KGS to Quicksilver and so let me, I am going try to lay it out as simply as possible and then we will answer questions later in the call.

Regardless of what the income statement reflects with respect to costs let's talk about the impact on cash to the company. That impact is really the distributions that the company will forego which is $30 million on an annual basis. On the positive side we will have interest in operating cost savings that more offset the loss of distributions. We've put a cost table on page 39 of our 10-Q for this quarter, which will be filed later today that shows that our total costs were down 7% for the remainder of 2010 as compared to reported cost for the first half of the year.

Specifically on the cash side, costs will be up from a $1.96 the $2.14 per unit excluding interest and when you include the interest they will be down about 2% from $3.64 to $3.56 per unit which only reflects the interest statements for the fourth quarter as the transaction will not close until the end of the quarter. So actually the savings will be a bit more than that as we pay down the credit facility.

And now I will turn the call back over to Rick for guidance for the third quarter.

Rick Buterbaugh

Thanks Bill. Production volumes for the third quarter are expected to be in the range of 365 million cubic feet natural gas equivalent to date to 370 million Mcfe per day. Also as a reminder, 200 million cubic feet per day of natural gas production has been hedged in the third quarter. With weighted average floor price of $7.40 with the ceiling of $9.88.

In addition we have swaps covering 10,000 barrels per day of our expected liquids production for the third quarter. For the respective unit costs that are detailed in our press release but just as a reminder these costs reflect the treatment of KGS as discontinued operations. Sherday at this time I would like to open the call to any questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Heikkinen with Tudor, Pickering, Holt.

David Heikkinen - Tudor, Pickering, Holt

Glenn, your comment about allowing for much higher growth rates in 2011 at the right gas prices, how do you think about what are the right gas prices and how do NGL prices factor into that as well?

Glenn Darden

Well, certainly we don’t think $4.50 is the right gas price. And we do have a lot of flexibility there David, to ratchet back because of our lack of lease obligations et cetera. But is it $5.50 or $6, we make great money at $5 anyway. We just like to see a bit stronger price to pull our resource out that. The liquid side is an added benefit that we have in the Southern area, and a lot of our completions…

[Technical Difficulty]

Glenn Darden

All right we apologize for all the technical difficulties and Quicksilver actually getting dropped off the call. At this time we will go back to David Heikkinen’s question, and respond and pick up from there. David, are you on the line?

David Heikkinen - Tudor, Pickering, Holt

Can you hear me?

Glenn Darden

Yes

David Heikkinen - Tudor, Pickering, Holt

Good deal. So we were talking about liquid side in the southern area, and just kind of how that impacts returns?

Glenn Darden

Yes, as I was saying high percentage of our drilled but uncompleted wells are in the southern area, probably 50%. So, we will begin accelerating that as I said in the prepared remarks, as this year progresses and depending on prices move a little faster next year. We make very good returns of $5, we can make better returns of $6. So we would just like to see the overall gas price increase before we accelerate but the liquids do play a part in that, I think we have realized probably $7.50 to $8 at current prices with our liquids hedged at $33. So, we made nice returns but it would probably the overarching strategy is to live within cash inflows as we have been and that's been a guide for us.

David Heikkinen - Tudor, Pickering, Holt

And just Glenn as we think about motivations to bring out more gas in the industry one of the things is your thresholds are still fulfilling in the Crestwood agreement, can you talk at all about details around how much volume growth you actually need to garner those thresholds so if we can kind of get our mind around your activity level and completion activity.

Phil Cook

This is Phil. On an average gas basis we need to increase production next year about 40 million a day. So it’s not a huge amount.

David Heikkinen - Tudor, Pickering, Holt

Okay. That’s helpful. And then the completion schedule or testing schedule in the Alberta Bakken, can you talk at all about is that vertical wells, or any horizontal wells or is it a appraising the acreage and get an idea of what to expect this year or later this year next year.

Phil Cook

It may be a combination of all of those David, it's certainly appraising what's going on around us but also our operating team is working on a plan of our own, which would involve horizontal drilling but it may involve some vertical testing as well.

Operator

Your next question comes from the line of Noel Parks with Ladenburg Thalmann.

Noel Parks - Ladenburg Thalmann

A couple of things, if I understood right from the figure you gave earlier that proved reserves at 2.8 Mcfe now and sort of backing up production year-to-date and the Lake Arlington acquisition, does that come out to about 300 (inaudible) of net reserve adds or net additions from the drill there.

Phil Cook

Yes, roughly.

Noel Parks - Ladenburg Thalmann

And also back to the Horn River Basin, could you just update us a little bit on what the completions are going to look like, the stages and whether you have a sense that getting the right completions is still challenging or is there enough consensus on best practices that it’s pretty straightforward.

Phil Cook

I think its fairly straight forward Noel. We are completing both of these well is in Muskwa. So that would make three out of our four wells let’s say at year end in the Muskwa. We have a couple of wells performing very nicely but we are just, we can hold the acreage and we think we would like to test the Muskwa. In these wells we’ve had excellent shales well drilling.

But as far as the completion side, there's still some evolution going on but the template is fairly well set in terms of the multiple stages. I am not sure we are going to go to as many stages as a couple of the players are but we will see as we go along. These laterals are roughly 5000 feet in length so I think we will be pushing the lateral link as we develop display, I think we will be pushing the number of stages but at this point we’re probably still evolving a little bit.

Noel Parks - Ladenburg Thalmann

Okay and just the last one, how is the infrastructure picture looking out there and even things like roads are so forth. I realized that not everything can happen here around out there, but is that growing up as you had hoped.

Phil Cook

It is and on the roadside we’re putting in our all weather roads etc. as our other operators and there are various areas on the gathering and processing side, that’s moving apace and that takeaway capacity is doubling by end of 2012 from about 600 million a day to 1.2 billion a day. So lots of dollars are being spent by the various companies and it’s moving along pretty speedily.

Operator

Your next question comes from line of Michael (Pinal) with Simmons & Company

Unidentified Analyst

Glenn, a question for you, you’re looking at you’re 3Q 2010 production guidance and the exit rate guidance, looks like your 4Q 2010 production ramp up looks pretty strong. Can you just walk through what's causing that and how you expect to achieve it and what the risks are getting there?

Glenn Darden

Yes we’ve always said that this was going to be back end loaded in the year and its probably due more to as I mentioned in the prepared remarks some write away issues and so we could put in some pipelines to streamline the gathering systems, also in particular in the Lake Arlington area. We’ve been waiting for well over a year for a couple of work permits to access an area that we believe is very prolific in that Lake Arlington area, on the drilling side.

So, all of this is kind of coming together in the second half of the year, we had anticipated it earlier a bit, but we feel good about the guidance.

Unidentified Analyst

And then could you just go through the 25 wells that you expect to complete, the drilled uncompleted wells, how many of those are going to be 3Q versus 4Q, and then how many do you expect to complete related to wells that were drilled in the same quarter?

Glenn Darden

There will be more in the fourth quarter. So we are starting that program now ramping it up a bit, and it will move. What probably will result in is fun and loading 2011 a bit. So we will be accelerating through the end of the year.

Unidentified Analyst

And then just a question on getting KGS done and materially paying down debt, how does that change the way you think about funding Horn River development and specifically JV? Does it change your thoughts on whether or not you would do one, or maybe the size of potential JV?

Glenn Darden

I think more than anything it gives us flexibility to do the right deal. We are not opposed to doing a joint venture there.

I think I mentioned in the call on the KGS transaction that we are certainly looking hard at midstream joint venture, and that is where a lot of the spending early will be. But, it eases the pressure on that, although we still view Horn River needing to stand on its own from a financial perspective.

So, we will be looking at that. We are still in discussions with a couple of parties. But it gives us flexibility on the negotiating side, we believe.

Unidentified Analyst

Okay great, and then last question, 2011 hedging, it looks like you have roughly half as much gas as a percentage of total hedged for '11, and just based on our estimate relative to 2010, is there a certain level that you are comfortable with? What do you expect to do there?

Glenn Darden

We would like to add more. We are interested in higher numbers of course. But, we are about 50% hedged as you say, and could we live with that? Yes, we would like a little bit higher, but we have been reluctant to hedge it at kind of lower numbers until we saw what was going to happen this summer with weather, etcetera. But the way our industry is drilling, I am not sure our gas prices are going to go up anytime soon.

Operator

Your next question will come from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

Just wanted to follow up, and I think it was David Heikkinen’s questions, maybe just more paraphrasing to make sure that I think we kind of interpreted your answer correctly. I think you indicated that you had to grow liquids-rich production 40 million cubic feet a day to meet the Crestwood agreement, and then is it fair to say that meaningful additional drilling beyond that would require a $5 MMBtu gas price?

Glenn Darden

Well, in answer to the first question Brian it is total gas, so its not liquids-rich gas. So make that distinction, I am glad you brought that up. And the second part, related to $5 gas?

Brian Singer - Goldman Sachs

That’s right.

Glenn Darden

Well, certainly we make very good returns at $5 gas, but I am sorry I missed the...

Brian Singer - Goldman Sachs

I guess you mentioned that $4.50 is not the right gas price, but you got good returns at $5, and so I was trying to really just read between the tea leaves on what that meant for drilling levels at various gas prices beyond achieving the minimum commitments they require to?

Glenn Darden

Yes, I think that we can hold and validate all leases and meet all requirements with the three rig drilling program. We do have an inventory of these uncompleted wells that we'll attack first.

So, rather than adding rigs initially if gas were at $6 tomorrow we would begin working off, and accelerate that uncompleted well program. So, we would push to do that, and truly the efficiency of the rigs, we might add a rig or two, if prices firmed in 2011. But, the intent is still to stay within the cash flows

Brian Singer - Goldman Sachs

And then when we think about to get the combination of any frac rig constraints along with any existing agreements with ENI, are there any limits to how active you could be in the Southern area next year, or the priorities if you want to shift capital entirely into the Southern area, beyond minimum of completing the 25 uncompleted wells?

Glenn Darden

There are no limits other then staying within cash flow. And we envision spending more dollars in the South next year than we did this year.

Phil Cook

And just to be clear Brian, on the $40 million a day that I suggested, that $40 million is directly related to $72 million. So that is 40 million of incremental production, above what as Glenn said what would be just normal cash flow

Glenn Darden

Related to the $72 million of earn out.

Phil Cook

Yes, so extensionally we’ve got $72 million available to create an additional $40 million a day of production.

Brian Singer - Goldman Sachs

Got it, thanks and lastly any additional color on how you are thinking about the midstream versus upstream JVs in the Horn River Basin.

Glenn Darden

We are looking at both Brian I think what this transaction, the KGS transaction does for us, is gives us a bit more, a better bargaining position if you will and we don't have to do anything there but longer term…

[Technical Difficulty]

Rick Buterbaugh

Brian, this is Rick Buterbaugh. Unfortunately AT&T is having problems I guess in the Fort Worth area. So I am going to try this one more time and if not I will be available this afternoon just try to answer more detailed questions. Let's go ahead and resume your questions now, hopefully everybody can hear us just as well. Can you hear me Brian?

[Technical Difficulty]

Operator

Mr. Singer your line is open.

Brian Singer - Goldman Sachs

I think I was actually just finishing up, you mentioned that the KGS transaction gave you a better bargaining position and I think we might have missed anything you said after that, that you didn't have to do anything now but if there was more recovery it would be probably dropped off at that point, my question is rather incomplete?

Glenn Darden

Well, Brian, what I was going to add is that we've always viewed and I have said this earlier in the call, we’ve always viewed as the Horn River project having its own financial structure and we still do. That hasn't changed. So, it's just the timing and structuring the right deals whether they are midstream alone or upstream alone or a combination of both or just standing alone. But we do believe longer term we are going to put a separate structure in place.

Phil Cook

And we do think that there are two deals to be done there potentially, that maybe done with the same party but we do think that there are two transactions, one on the upstream side and one on the midstream side.

Operator

Your next question comes from the line of Kim Pacanovsky with MLV.

Kim Pacanovsky - MLV

On the Alberta Bakken, Rosetta this morning said that they perched several intervals in two of their 2009 wells and the report was that they saw any vertical pass moveable high quality oil? And I’m wondering if you know where those two locations are and if they are in the further eastern part of their acreage that is closely adjacent to your acreage?

Glenn Darden

Kim I’m not sure which wells they are referring to. We have a couple of wells that are within the couple of miles to the west of our acreage block. We do have scouts on the ground and an operation up there. So we will know but we will find out more.

Kim Pacanovsky - MLV

Okay, and did I hear you right that the budget now is $470 million?

Glenn Darden

That’s correct

Kim Pacanovsky - MLV

So down from $510 million and you have spent about $320 million already of the $470, is that correct?

Glenn Darden

We have spent about $300 million. Now this is excluding acquisitions okay, but we expect to spend about $180 million to $190 million in the last half of the year.

Operator

Your next question comes from the line of Brian Corales with Howard Weil.

Brian Corales - Howard Weil

How do you look at your exploration projects, I mean are there any lease issues that are going to force some to be accelerated. Obviously, we know where the Horn River stands but regarding the Montana, Bakken and the Green River, where do those stand, in terms of when they are going to be kind of a development type place?

Glenn Darden

Well, the Montana, Bakken Brian is all about production. So we don't have any constraints there. The Green River does have some where adequately they are minimal. So we’ve got a large lease position we can hold with the drilling of only a handful of wells.

Brian Corales - Howard Weil

And then a couple of both the Exshaw and the Montana Bakken kind of very (oily) type place, how could that change Quicksilver’s I guess capital allocation going forward, if those are successful?

Glenn Darden

Obviously, we do hope they are successful and we are spending dollars to get them there. I think we are still a gas company that will be development areas that we hope we can ramp up with additional dollars. We would reallocate the budget more towards that, obviously the ore prices are much stronger, so we’ll just have to see based on results Brain.

Operator

Your next question comes from the line of Jude Bintger with Lazard Capital Management.

Jude Bintger - Lazard Capital Management

Good morning, of your uncompleted well inventory, how much are you expecting to be in that by year end?

Glenn Darden

I believe we said we were going to work it down by 25 wells this year, that’s probably accelerating through the end of the year and into 2011. What we talked about was we have a $72 million earn out with the Crestwood people in our transaction, on the mid stream side. So we have additional budget we can direct to that uncompleted inventory.

Jude Bintger - Lazard Capital Management

Okay, and so if you get through those 25 wells, will you be at around 100 drill, but uncompleted?

Glenn Darden

Yes, roughly.

Jude Bintger - Lazard Capital Management

Okay, is that what is normal or something around 100?

Glenn Darden

Depends on the number of rigs running, but probably a normal inventory is 50 to 60 wells, something like that.

Operator

Your next question comes from the line of Philip Dodge with Tuohy Brothers Investments.

Philip Dodge - Tuohy Brothers Investments

Good morning everybody, I think I heard more remorse out there in quite a while, but it was entertaining. So probably my question has been covered, but let me phrase it this way, when will you have complete flexibility to shift Barnett activity to the Southern portion from the Northern portion, if you chose to do that?

Glenn Darden

Well, we have flexibility today. I am not sure of the definition of complete flexibility, we have some obligations on the ENI transaction.

Philip Dodge - Tuohy Brothers Investments

Exactly yes, I mean that's specifically what I was wondering.

Glenn Darden

I think one of the things that you need to bare in mind that they are getting price support through this year, and that expires at the end of this year. So, we are on a level playing field in terms of prices.

So, they may want to accelerate and they can propose that, but there is no obligation for us to accelerate. They may want to decelerate, and we may agree with. So, that’s just kind of a working interest arrangement under the [JOA].

But, I think you will see more spending, and I said this earlier, you will see more spending in the Southern area in 2011, than you have. So, we will be directing more dollars down there. And actually that's happening later this fall, beginning..

Philip Dodge - Tuohy Brothers Investments

Winding up just so I'm clear, I mean could you go totally to the Southern area if you chose to do so?

Phil Cook

Not totally, we still have some obligations up North just in terms of leases et cetera. But we will have more flexibility.

Operator

Your next question comes from the line of Noel Parks with Ladenburg Thalmann

Noel Parks - Ladenburg Thalmann

Hi, just wanted to check on a couple of other things. In the adjusted net income calculation that you have in the press release, the $30.6 million figure was what you had for the tax effects of the various adjustments. And I am just trying to get down toward sort of a discretionary cash-flow number, is any of that tax adjustment something I should consider a cash tax effect or is it pretty much like the overall?

Phil Cook

It’s all deferred Noel, this itself.

Noel Parks - Ladenburg Thalmann

Okay it is all deferred.

Phil Cook

Yes.

Noel Parks - Ladenburg Thalmann

Great, okay and I guess the other thing I wanted to ask you about Horn River Basin, so at this point the oil play that you may up there and you hope to re-complete a well to look at that later in the year. I guess I'm wandering what would you need to find there to encourage you to pursue that aggressively? I guess more aggressively going forward, maybe sort of independent of what’s going on with gas prices.

Glenn Darden

Well Noel we haven’t set an exact target. What we are hoping to find is what we've seen in the course is mobile oil, and it covers a 60 foot section. What we would like to see is a good productive several hundred barrel a day type test, but we will see we haven’t truly put any parameters, yet until we know what the cost can be, et cetera. To start of with very early.

Noel Parks - Ladenburg Thalmann

And when do you think you might have results for that either internally, or be prepared to talk about in publicly?

Glenn Darden

That’s probably going to be beyond the first quarter.

Noel Parks - Ladenburg Thalmann

Okay.

Glenn Darden

Of next year.

Operator

Your next question comes from the line of David Heikkinen with Tudor, Pickering, Holt.

David Heikkinen - Tudor, Pickering, Holt

Just a quick follow up, make sure I am understanding the earn out as seen is additive to cash flows for us, how you think about your overall capital budget for remainder of 2010 and 2011?

Glenn Darden

Yes definitely David.

Operator

(Operator Instructions) Your next question comes from the line of Eli Kantor with Jefferies & Company.

Eli Kantor - Jefferies & Company

Can you give any indication on timing for the Horn River JV? Do you expect to have something announced this year; is it more of a 2011's end? I know that on the July 23 call you had indicated that a midstream JV was more likely is that on a faster track?

Glenn Darden

We have discussions ongoing with a couple of parties, both on the midstream and the upstream side. So is it on a fast track, midstream on a faster track, we’re going to be spending more midstream dollars in the next couple of years than drilling dollars, so I would probably say yes.

Eli Kantor - Jefferies & Company

Can you comment on whether or not you think you’ll have something announced this year?

Glenn Darden

We will announce it when it's baked, and I'm just not sure about that.

Eli Kantor - Jefferies & Company

Okay and I may have missed this, but the temporary rig in Lake Arlington while you guys bring that on, how long is the contract for?

Glenn Darden

Yes we had a drilling down and we’ll release it later this year. It's just to fulfill some requirements. We got some permits and rights of way that we had expected earlier in the year, and we wanted to hit it now. So we added that fourth rig, but that will not go beyond year end, we don’t anticipate.

Eli Kantor - Jefferies & Company

And then just lastly, in your midstream budget capital requirements in the Horn River, is that included in the amount they intend to spend this year?

Phil Cook

Yes, it is.

Operator

(Operator Instructions) At this time there are no further questions. Mr. Buterbaugh do you have any closing remarks?

Rick Buterbaugh

Yes, just as a reminder a replay of this call will be available on the company's website for a few days.

Quicksilver will release our third quarter 2010 earnings on Monday, November 8, 2010 before the market opens. Thank you for your interest and time. Patience morning with this call, this concludes it.

Operator

Thank you for your participation in today's conference call. You may now disconnect at this time.

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