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Quicksilver Resources, Inc. (NYSE:KWK)

Q2 2014 Earnings Conference Call

August 5, 2014 11:00 am ET

Executives

David Erdman - Director, IR

Glenn Darden - President & CEO

John Regan - CFO

Analysts

Steven Karpel - Crédit Suisse Securities

Noel Parks - Ladenburg Thalmann & Company

David Epstein - CRT Capital

Sean Sneeden - Oppenheimer & Company

Operator

Good morning, and welcome to the Quicksilver Resources Second Quarter 2014 Earnings Call. My name is Mary Kate, and I will be your operator today. 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 David Erdman, Director of Investor Relations. Please go ahead.

David Erdman

Thank you, Mary Kate, and good morning, everyone. I'm joined by Glenn Darden, President, Chief Executive Officer; and John Regan, Chief Financial Officer.

This morning, the company issued a press release detailing our preliminary results for the second quarter of 2014. A copy of the release is available on the Press Releases link of our Investor Relations web page. First, let's cover the Safe Harbor provisions.

During this morning’s call, the company will be making forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning risk factors, which could cause such differences, are presented in length in the press release we issued this morning, as well as in the company’s filings with the SEC. This call will also include information regarding adjusted net income, which is a non-GAAP financial measure. A reconciliation of adjusted net income to the most directly comparable GAAP measure is available with the press release we issued this morning.

So with that, I will turn the call over to Glenn Darden. Glenn?

Glenn Darden

Thank you, David. Quicksilver Resources announced an adjusted net loss of $11 million or $0.07 per diluted share in the second quarter of 2014. These results are essentially flat with the 2013 quarter. John Regan, our Chief Financial Officer, will go through the financial detail following my remarks.

Today, I will lay out what we have done to clarify Quicksilver's story and company goals. While we have made progress this company has more wood to chop. Quicksilver has streamlined its project portfolio to essentially four primary areas, Barnett in West Texas in the U.S., and the Horseshoe Canyon CBM, and Horn River Basin in Canada.

The Barnett and Horseshoe Canyon are steady cash flow generators. With success West Texas provides big upside and oil diversification, and the Horn River can give us large gas volume and reserve growth and we believe an avenue to the Asian markets.

I will talk about progress in each of these areas on this call. Our challenges are clear. We have too much debt on the balance sheet, we need to build cash flows and we must get value for our large investment in the Horn River. Additionally, recently, declining gas prices due to the mild summer have not buoyed investor sentiment. Fortunately, Quicksilver has hedged approximately 75% of estimated 2014 gas production at an average $5 per Mcf. We have hedges in place for approximately two-thirds of 2015's estimated gas production above $5 per Mcf as well.

By reducing capital expenditures over the last few years we have guarded our liquidity but that came at a cost to volume growth. The company is now seeing Barnett production building again after investing in drilling. Our operations team has done an excellent job of maintaining our base production with small declines primarily through low cost high return work over program.

Our rejuvenated drilling and completion activity is bringing on new volumes at attractive returns.

On the debt side, our near term focus is refinancing the $350 million of subordinated notes due in 2016. For optionality, Quicksilver filed a S3 registration statement that has a three-year life. This filing gives the company maximum flexibility for the next three years and issue securities of various types, debt and/or equity. Although we were required to provide a face plate dollar number which in the case of our filing was $1.75 billion. This is in no way commits the company to any process. Again, the current focus is on the sub-debt refinance. John will talk more about that on this call. Ideally, we refinance these notes with a positive company event.

One of the strengths of this company lies in the alliances Quicksilver has formed with strong partners. We have expanded the original scope with Eni and are now pursuing oil targets together in West Texas. We believe that Quicksilver Tokyo gas footprint can expand as well.

Moving to our operational areas, I will begin with West Texas. Quicksilver has started tracking operations on our first horizontal well in the 52,000 acre Eni joint venture in Pecos County. In addition, another horizontal well is in the completion phase in the 7,500 acre farm out project to the northwest. We are also drilling our second well in the Eni farm out as we speak. We will be reporting on these wells as results come in and our partners allow us to talk about each of these areas. We hope to be talking in the near future. Each well of these two completions is targeting the Bone Springs and Wolfcamp formations.

Quicksilver has also signed an expiration agreement on its 31,000 acre lease block in Crockett and Upton counties east of our Pecos County farm out in joint venture area. This agreement calls for the operator to carry Quicksilver in the first five wells and to cover all lease extensions in 2014. Quicksilver will retain a 12.5% interest in all acreage and drilling.

So to summarize our position and activity in West Texas, Quicksilver were focused on it's over 30,000 net acres, 90,000 gross acres in Pecos, Crockett and Upton counties. We will be carried in drilling and completion with no capital outlay in as many as 10 wells across these blocks. And we will have new lease extensions on most of the acreage.

We have attracted best-in-class operators in the farm-out blocks. All of this gives the company very good opportunities to add new development areas on the oil side without spending a testing dollar.

I will now turn the -- we realize the sales process to bring in partners that is taking a long time. We have improved the overall project during this time. And I will give you some details on that in a moment. Nevertheless, we haven't reached an agreement with respect to terms or structure.

We have had the discussion and negotiations with several parties and talked with many more. Our primary push has been with the group of companies from one country and that process continues. But given the pace this has moved, we have open discussions with several additional well qualified companies from Asia.

The common denominator with all of the current players is their drive to lower their energy import costs. There is a reason they are attracted to North American gas and having ownership in a value chain from upstream to export provides the opportunity to control and realize a lower cost of supply. Quicksilver's project offers all of this to the perspective partners.

Concurrently, we have built alternative plans to our main sales efforts. These are shorter in duration and significantly lower in costs on the commitment of full scale LNG development. These alternatives would also address near-term midstream obligations without attracting from the discovery project. We will provide additional information regarding Horn River at the appropriate time.

Picking up on progress of the project, last week Quicksilver filed and application for an export license with the national energy board of Canada. That filing includes site location and the source of gas both of which Quicksilver-owned. This side at Campbell River, British Columbia is large over 1200 acres relatively flat from a terrain perspective and is located on a deepwater shipping channel. In fact, the now shutter pulp mill at the site had a large international export operation for decade. All of these attributes contribute to repurposing the site as an ideal LNG export facility.

Quicksilver is more cooperatively with the First Nations Bank and recently executed a community investment agreement with the Acho Dene Koe First Nation. The ADK's traditional territory covers the majority of Quicksilver's leases in the Horn River Basin. This agreement formalizes Quicksilver's commitment to training and development of local band members, as well as providing for certain community initiatives.

The company has reduced base gathering fees and brought in additional third party volumes, which allow us to spread the fix cost gathering and processing over incremental gas volumes.

As for the production, our wells are performing on or above the tight curves and we have tested the size and quality of the resource under lease. Our resource base is quite large. This quarter third party plant down time has reduced production but overall, company production is within guidance given last quarter. We have been notified by Spectra, operator of this plant that there will be another two weeks of plant outage in the third quarter.

In Texas, the Barnett asset is beginning to grow again. In fact, we have bounced back over 20% from the production low in the first quarter. Overall, Quicksilver's Barnett production grew 11% quarter-over-quarter. We continue to drive down cost, which has pushed IRRs higher. These higher returns have been achieved through better new well performance with efficiencies in drilling, completion and lower operating costs as the main drivers.

Our team poured over the entire Barnett operations when activity is slow and has implemented a number of improvements. By rightsizing fracs and optimizing spacing through detail G&G analysis, we have improved drill site selection. In addition, we have refined low pressure production techniques on the base asset.

The Barnett land team has been busy as well and has added new leases at attractive bonus prices and royalty. These are high graded acres spring by the operations team. We feel we are buying reserves very cheaply in this program and we are continuing to add acres. These add to the drilling inventory and extend potential lateral lengths on proposed wells on existing leases. Notably, we have negotiated cost concessions on existing midstream agreements, as well and John will provide more color on that.

Moving back to Canada for a moment, the Horseshoe Canyon CBM Drilling Program was delayed this spring due to weather. We are now drilling and expect to bring online up to 50 gross wells by year end. Because of the delay in drilling program and current gas prices, the company may reduce capital expenditures be approximately $8 million or so in this area. But we also may redirect these dollars in that spending toward additional Barnett development.

I'll now turn the call over to John Regan for our financial discussion after which I'll provide a recap on the business and strategy. John.

John Regan

Thanks Glenn. Good morning everyone. Before I begin my commentary on the second quarter results, I want to first address recent developments on the financial side of the business. First, as I am sure you have seen, with all the registration statement last week via S3 that once effective creates a shelf that gives us the ability to issue at our discretion any combination of common stock, preferred stock, debt securities, warrants and other listed securities over a three-year period for an aggregate amount of up to $1.75 billion. Because we do not presently qualify as a well-known seasoned issuer we were required to site a specific dollar amount in the S3 filing.

The filing is designed to provide us with flexibility as we execute against our key objectives for this year and for the next several years. And it in no way bonds or limits the company to a particular path or timeline to address those key objectives or requires us to use any or all of that $1.75 billion shelf.

We continue to evaluate solutions to address the springing maturities that may in future require senior sub notes. And while we understand the urgency of extending the maturity run rate, we continue to believe launching a refinance effort on heals of a catalyst event remains a sound strategy. We are tracking this on several fronts and we will update the market at the appropriate time.

I'd like to emphasizes, however, that we established a goal on 2014 to address the senior sub notes. And I still intend for Quicksilver to meet that goal. If we are successful with the re-fi of the sub notes and in extending the maturity of the credit facility, the next scheduled maturity would be 2019, which would create a nice window of optionality for our security holders.

I commented last quarter that we may elect to address this maturity ahead of any transaction involving our Horn River assets. And while that remains a potential strategy, the re-fi path with a catalyst/credit enhancing event remains an organizational focus for the next several months. And thus, we are simultaneously pursuing other opportunities which we believe will improve our credit outlook and thus may provide a more appealing refinance scenario. In any event we have worked with and expect to continue working with our bankers to assist market conditions surrounding the re-fi effort.

I'd also like to address recent reports in the media and other public conjecture that erroneously claim involved debt proposals from holders of our subordinated notes. While we periodically entertain conversations with our security holders in order to gauge investor sentiment, those conversations have not included receipt of any formal proposals to comprehensively address the sub note maturity. At present, we are continuing the collaboration with our board of directors, our management team and our financial and legal advisors to craft a solution for our refinance effort, the priorities of which we focus not surprisingly on the cost of that undertaking and a certainty of its execution.

As of August 1st, we had approximately $272 million of combined liquidity in the form of $26 million of cash and $246 million of availability under our revolver. We expect our current level of liquidity is sufficient to find our capital pursuits through the end of 2015 based on our preliminary forecast and assuming no material debt maturities between today and that time. With a focus on liquidity, we expect to adjust our capital spending based on prevailing natural gas prices, JV successes and drilling results in West Texas.

We expect to comply with the financial covenants in our combined credit agreements through the end of the third quarter of 2015. However, due to higher financial covenant levels that begin to take effect thereafter coupled with hedged expirations and more pronounced recent declines in natural gas street prices, we do not expect to comply with the interest coverage requirement potentially beginning in the fourth quarter of 2015.

We could resolve this issue with a potential credit accretive purchase or sale transaction of which we have pursued several or through amendments to credit facility or a combination thereof. Additionally, well prospects of success are not assured, we may approach the lenders into the credit facility regarding waiving or extending the reductions to the interest coverage requirement.

We expect that our soon to be released 10-Q will contain expanded disclosures regarding several significant matters, including the importance of A&D activity on liquidity and results of operations, plus management's efforts undertaken pursuant to evaluation of the capital structure.

And while we have been tirelessly marketing our Horn River asset and canvassing the market for accretive acquisitions, we have also kept our eyes on the base business. In that regard, we feel like we have accomplished several wins.

As we have discussed previously, we have been working with out midstream providers to try to reduce the gas -- the rates for gas lift and other GP services in the Barnett. We finalized our amendment, which took effect June 1st, under which the rate assess for gas lift was reduced by about 65% for volumes in our core dry gas areas. The gas lift productions are expected to lower production expenses by approximately $1.3 million for the remainder of 2014 and $2.2 million in each of 2015 and 2016. The gas lift savings will be reflected in LOE, in our income statement.

Another factor of the amendment which covers new wells in our southern Barnett reduced the rate assess for aggregate gathering and processing by approximately 40% to 45%. This reduction would effect new well is drilled or completed in the next 24 months, but would apply to those wells for the remaining term of the gathering and processing agreements.

We expect the GPT savings on new wells will result in a higher percentage of future capital activity in the southern portion of the Barnett. The GPT cost reductions improved overall rates of return on new southern Barnett wells by approximately 900 basis points and generate an incremental PV-10 of about $0.4 million for a typical well net area.

Turning to earrings, and as Glenn mentioned, we reported a second quarter adjusted net loss of $11 million or $0.07 per diluted share, compared to an adjusted net loss of an equal amount in the 2013 quarter. To arrive at adjusted net loss in the 2014 quarter, we excluded both the change in the mark-to-market of the derivative portfolio as we have done since exiting hedge accounting and about $1 million of strategic transaction cost among other miscellaneous items, including one time effects related to the joint development agreement with Eni.

The most significant adjustments in the 2013 quarter were the gain on sale from the Tokyo gas transaction and the cost of our debt refinance last summer. As a reminder, adjusted earnings represented non-GAAP financial measure. And as such, we provided a detailed reconciliation to reported net income to the tables of our earnings release.

Production averaged 255 million cubic feet of natural gas equivalent per day in the second quarter, which is 11% higher compared to the first quarter and within the guidance range.

Barnett volumes were solely responsible fro the volume growth as we began our alliance completion program in the back half of the first quarter. For additional context Barnett volumes are up approximately 22% compared to the lowest production point in the first quarter which occurred in early February and our exit rate in the Barnett was up more than 25% from that same February nadir[ph].

You heard increase in Barnett volumes was partially offset by declines in our Horn River asset as we have limited capital activity until we have been able to complete the strategic transaction for that asset. The volume was adversely impacted by several days of unexpected shutdown during June of the third party processing facility that serves our Horn River asset. We were recently notified our planned overhaul at the Fort Nelson treating facility that will take place in the third quarter and David we will cover the impact of the outage later in the call when he presents guidance.

On the cost side, excluding non-operational and non-recurring items as outlined in the press release, total costs for the first quarter, including LOE, GPT, production and (inaudible) taxes, G&A and DD&A were $3.55 per unit in the aggregate, which is $0.12 below our per unit guidance. Our total costs were $82 million again excluding those same expenses which is about $3 million below the lower end of guidance. Lower G&As drove the bulk of that variance but LOE and GPT came in slightly below their guidance.

On a clean basis, LOE and G&A were below guidance to primarily to deferred recognition of long term incentive comp expense which is related to delays in granting equity awards to non-executive employees. Senior executive salaries and long term incentive compensation for those employees remain frozen pending further progress on strategic pursuits or completion of the transaction involving the Horn River assets.

GPT was a $0.01 below guidance primarily due to a currency translation impact caused by the weakening Canadian dollar in the second quarter, but that benefit was partially offset by both production mix in our Barnett shale assets and the unplanned outage of the treating facility in the Horn River.

Of note, our Horn River GPT contracts require payment even in periods of planned shutdowns. Thus, despite moving low volumes through those midstream facilities we continue to incur expenses which adversely impacted the unit cost.

On the CAPEX front, we incurred approximately $37 million of capital in the second quarter of which approximately 40% was directed towards the Barnett where we drilled four gross wells and completed 10 gross wells. As I mentioned earlier, the completion activity drove the second quarter production increase.

Our capital program through June 30, included $20 million of non-drilling and completion dollars, including $6 million in capitalized interest, capitalized G&A plus $14 million for leasing activity. The majority of the leasehold spending was to extend leases in advance of the South Western transaction and Pecos County pursuant to the terms of our joint exploration agreement with Eni.

Total spending during the quarter and for the first six months is within our budget, which was disproportionately weighted to the front part of the year.

Our full year capital spending forecast is $130 million to $135 million which reflect a small response to weak commodity process by differing a portion of our Horseshoe Canyon drilling program. This Horseshoe Canyon deferral will have an insignificant impact on second half of 2014 production enhance we are maintaining our full year production guidance at $245 million to $255 million per day.

As we have mentioned, we now have incentives in the form of GPT maintenance in the Barnett. Recent natural gas price weakness makes further capital deployment in the abatement area less attractive, but we may expand capital if we see price improvement in the back half of 2014 as we have the inventory locations in our portfolio.

We continue to evaluate potential bolt on opportunities among our four operating areas that our current capital plan includes no allotment for acquisition spending. If commodity prices continue to retreat or if we cause on an acquisition we could make further reductions to our organic capital program.

We did pursue the Barnett assets that have been disclosed as changing hands in recent days but ultimately we were unable to agree with the seller on the value for the entire year of the package being offered which included some midstream commitments. At one point now they have given our more favorable cost structure we believe that the metrics from the announced sale have a little correlation to our Barnett asset value.

Turning to hedging, our hedge portfolio continues to be material asset the value of which we estimate to be just over $100 million at July 31. This is about 65% improvement compared to June 30 which results from the sharp near term price to clients we saw in July. Approximately 75% of our remaining production this year is covered by swats of greater than $5 per MCFE and we estimate that greater than two thirds of our 2015 gas production is covered by swats also above $5 per MCFE threshold.

We continue to evaluate the opportunity to add to our hedge position, particularly in 2016 and beyond. The limitation is imposed by the maturity of our credit facility made (inaudible) from doing so in the near term. Before closing, I'd like to announce favorable developments on the legal and internal control fronts.

First, we were notified last month that the SEC staff has completed its investigation under the subpoenas issue to us in July 2011 and June 2012, principally related to oil and gas reserve recognition. The SEC staff reported to us in writing that they do not tend to recommend an enforcement action against us.

Secondly, we believe we've also result in material weakness related to the recording of significant nonrecurring transactions following application of control and asset enhancements in recording the Colorado sale.

As I stated in previous call, the material weakness related to the reconciliation of deferred income taxes will require additional time to remediate. And we are fully committed to that remediation plan. I do, however, want to underscore that we continue to be subject to tax evaluation allowance and thus management does not believe that any potential future adjustment to our deferred tax asset or results in the material change to our financial statements.

With that we will continue to report the deferred tax material weakness in our second quarter 10-Quarter, which we find bilateral markets close either today or tomorrow.

I'll now turn the call back over to David to cover third quarter guidance and then Glen will provide a few additional thoughts.

David Erdman

Thank you, John. As outlined in our press release issued this morning, third quarter 2014 production volume is expected to be 245 million to 250 million cubic feet equivalent per day. As we indicated full year volume was reaffirmed at 245 million to 255 million cubic feet equivalent per day.

Third quarter production is expected to be 2% to 4% lower compared to the previous quarter due to the planned outage of third-party treating facility in the Horn River's that John and Glenn outlined earlier on the remarks.

While net volumes are expected to be flat about a 1% higher, overall compared to the second quarter due to ongoing completions, but the true increases is muted as we might shut in wells adjacent to our fracing operations.

Second quarter 2014 comps are expected to be in the following ranges: LOE between $0.83 and $0.86, which is an increased compared to the second quarter due to expected work overs and over hauls in our Horseshoe Canyon project.

As a reminder, the spending is accounted for as we top rated expense. GPT is expected between $1.52 and $1.54, which have also been increase compared to the prior quarter due to the expected outage of a treating facility it serves our Horn River production. And as was mentioned earlier, we must continue to pay for those treating services, despite no volumes flowing and that outage is causing the distortion of about $0.03 per unit.

Production taxes are expected between $0.16 to $0.18. G&A is between $0.55 to $0.58. And I'll note that is higher number second quarter due to the accelerated expense recognition of non-executive long-term incentive compensation and this is related strictly to the delayed timing of those equity grants. And finally, DD&A is between $0.63 and $0.66, which here is in line with the second quarter.

Let me turn the call back to Glenn for comment before we actually began the Q&A portion of the call. Glenn?

Glenn Darden

Thank you, David. I'd like to give a few comments on recapping and state clearly our company goals in 2014. Our first objective, of course, is unlock and showcase value in the Horn River Basin through a transaction.

We want to build our cash flows in our core areas of Barnett, Horseshoe Canyon, sustain sequential liquidity to pursue these cash flows, address the subordinated notes due in 2016, reduce our overall leverage, progress the West Texas project and continue to attack the cost structure.

Our plan is to work with strong partners to advance growth objectives and realize value on the assets that we already have in the inventory. The company has a strong hedge position for the remainder of '14 and all of '15.

And as I said in the begging in this call, we have some wood to chop and we have our challenges, but we believe we can execute on that plan and this plan will benefit all of our stakeholders. We have made gains in number of areas, but the market and Quicksilver expects more.

And now, I'll turn the call back to our operator, who will open the lines for question and answer. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question this morning is from Steve Karpel from Credit Suisse Securities. Go ahead, Mr. Karpel, your line is open.

Steven Karpel - Crédit Suisse Securities

Maybe I came out first, because I thin you probably talked about it three or four times during the prepared remarks in terms of in asset acquisitions. And if I've read John's comment right, there are certain assets that he is referring to as the one that was announced yesterday. So looking at that price, how would you've paid for that even that you bid on it? And recognizing that maybe your price was lower, but regardless maybe talk big picture, what the plan was to pay for that?

Glenn Darden

Steven, this is Glenn. I would say that equity has been a component of any acquisition that we've looked at. So that would have been a component, but I'm not going to go in to the details of how we formulated or what our bid was. What I would say in the Barnett in particular, and John touched on this with his comments, we have continued to lower our cost structure in our Barnett footprint. And that foot print is pretty large and our land team -- I've said this in my remarks, our land team has been busy acquiring leases that is absolutely the most efficient reserve buy we can make.

We have lowered royalty. These are efficient lease bonus prices and we're adding some significant acreage to it. So I'm not saying that replaces the cash flow of potential acquisition, but these are we're not -- we are expanding our bases with speed.

Speaking on a particular acquisition, I would say as a generic target we would look to use an equity component in that.

John Regan

As I've tried it thinking my prepared remarks that doesn’t forestall inclusion of cash or any potential transaction that we would do. And hence the comment around in an acquisition or bolt on type environment, you may see us alter the organic capital plan in response to utilizing some cash as directed toward acquisition.

Steven Karpel - Crédit Suisse Securities

And Glenn, kind of a separate probably pretty relevant question on the call. I asked you in last conference call, if you were farther along in your negotiations on the Horn River, so I don't know if that was three months ago. So if you look at it where you are today, are you farther along than where you were then and you seem to be alluding to the process has been slow and you are now potentially looking at another parties or may be --

Glenn Darden

Yes. Let me add some clarity to that, Steven. Certainly, I believe we've made progress. There is clearly a group ahead of the others. That group started with one entity. So dealing now with multiple parties complicates this, but perhaps enhances the overall result. I would say that we have -- we have entertained other interests, and that interest is the data room. So I would say that while there is a clear leader that leader needs to move. And we recognize this process has taken way too long although we have improved the overall project along the way. The most recent evidence of filing export license, improvement of our production, etc, and our cost structure. But we need to make something happen there. And when I spoke of doing alternative structures those are -- it’s a bit of a plan B. and John mentioned that as well. These are shorter in duration. They can range from longer term supply contracts to subsets of our project discovery and we have made progress on that front.

So its hard to measure but there certainly has been progress on plan A and I would say there's been progress on plan B. so we are going to cover, our objective is to cover our near term midstream obligations and that involves additional drilling in '15 and beyond. But this we are trying to get the maximum value we can for this asset with the best partners who can take this the farthest down the track.

Steven Karpel - Crédit Suisse Securities

Right. And then shifting to West Texas, given these fields you've got, look to raise some capital, can you just walk through I guess really the two or the three acreage walks? What you have left so to speak? What is your net acreage position to you following these views? And I'm really referring to the Crockett and Upton and last Pecos, knock yourself out to the west.

Glenn Darden

Yes. In those three counties we have approximately a little over 30,000 net acres. So that is a 100% Quicksilver for the 30,000 acres. In the aggregate on the gross side, we are exposed in 90,000 acres and that’s acres Pecos, Upton and Crockett. So, we are, as I said in my remarks, we are covered on the drilling and completion side in as many as 10 wells across that acreage position. So I think we're going to get a lot of looks at the rock here with some experienced players. Our Eni JV is drilling its second well. So we're going to see some results here in the not too distant future.

Steven Karpel - Crédit Suisse Securities

And then lastly I will sneak in, you talked about doing a refinancing around the catalyst. Obviously, Horn River has taken a while, some of these acquisitions you don’t know if you're going to win or lose. Does that mean you're still, I don’t want to spice your words too much, but you're focused on getting a deal done in 2014 toward the 2016 that means with or without an acquisition in Horn River deal?

Glenn Darden

I would say that is one of our 2014 goals, yes.

Operator

Our next question is from Mr. Noel Parks of Ladenburg Thalmann & Company. Go ahead Mr. Parks.

Noel Parks - Ladenburg Thalmann & Company

Let's see, a couple of things. In the Horn River Basin, there have been some pull outs by other parties on the E&P side in just the last month or so. Do you have any thoughts on how that’s changing the landscape for the larger play overall?

Glenn Darden

Are you referring to Apache, Noel?

Noel Parks - Ladenburg Thalmann & Company

Yes.

Glenn Darden

Well, we are not going to speak to what their thought process is. It looks like they're streamlining their portfolio in a number of areas, not just in particular (inaudible). But what I will say is there we continue to get I guess assurance from Canadian government and provincial representatives that all of Canada is firmly behind exporting natural gas.

I would say that our site, we believe, has advantages over some of the Northern BC coastal exports sites. In the terrain in the deepwater channels and several attributes which I outlined in my prepared remarks and probably the biggest thing is the construction of a pipeline over the Rockies to those northern areas. And that’s perhaps is more difficult than our plan. We believe that because we're using existing -- part of our plan is using existing pipeline infrastructure. So I really can't speak to individual companies what they're thinking and what their strategy is but I don’t see this slowing us down or slowing government efforts to get gas offshore.

Noel Parks - Ladenburg Thalmann & Company

Sure. I guess I was wondering for among the parties you're negotiating with on your own projects whether there is any reaction or any comments you heard from them with the realization that alternative projects may be delayed even more than they might have once looked?

Glenn Darden

Well it might be no surprise to say that they hold their cards fairly closely to their vest, but I would say that my feeling is there's no question that the players we're talking with that kick every tire of every export project up there. And they're still talking with us. I think our project has perhaps more of what they're looking and the transparency of cost across the value chain and participation in that value chain. And our project is not tied to crude based pricing. And so, those are some of the key things that we believe distinguish our project from some of the others.

John Regan

I think along those lines as we think about the project and what we're proposing in the project continue to believe that what we are proposing aligns better to the desires of the potential partners as opposed to some of the other projects that are holding steadfast to the terms that don’t necessarily align to our terms.

Noel Parks - Ladenburg Thalmann & Company

Okay, great. And I just want to turn the Permian. With the new joint participation agreement, do you have any small parts then of spoil the interest you retain, what the returns might look like there? I guess I was trying to get at sort of maybe the undivided value of (inaudible) drilling interest that the release on lease expirations that where its all going to be taken care by the partner. So in a way to sort of put a value on what that might look like for Quicksilver?

Glenn Darden

It’s a little early on that, Noel. We will convey that as we get more information, and certainly after drilling results. I would say you brought up one important aspect of that transaction and that lease renewal. And we took these leases three plus years ago and so we were seeing some near term expiration. So we've been able to extend those leases, extend the life of the projects there and participate in a number of wells fired in that particular case at no cost to Quicksilver. So we get the lease renewals and carry and five wells and ongoing participation in that project.

So its important it was just recently executed and more details will follow as we firm up drilling plans etc project does but we're excited about that and I think we've got along here at no additional cost of Quicksilver and lot of acres in West Texas.

Noel Parks - Ladenburg Thalmann & Company

And any thoughts on just your gas assumption going forward after when are we next transmitting the strip, some of that has been given back since then. So just wanted to know about your outlook and also what you might think as far as the various trade-offs with more hedging at this point?

Glenn Darden

Well, these are all personal observations and views. We probably won't disclose our company – we use the strip as in our economic forecasting, but that been a little bit surprise have come down, but that been a little bit surprise of course of the mild summer. But we're August 5th here and I'm not sure summers are over, so we'll watch that. Fortunately, we do have our hedge position. John, do you have anything to add there?

John Regan

I think, when I'll look at some of the recent successes we had in the drilling front and Glenn kind of highlighted some of with the new Alliance wells are doing, but you're seeing kind of a drill cost or drill completion cost and production cost structure, say 275-ish range. And so if that's my recovery cost, but I need to have revenues and [Inaudible] to generate profits. I think we're able to better push the needle down, the cost side then we are able clearly influence the revenue side of things.

But from hedging perspective, we look at three price a day. And again, I think there are one way or the other we've a sufficient portfolio today. I think if we're going to layer hedges it would be 2016 and beyond. And that still remains pretty flat and I think that as we think about in the macro some of the capitalist that may be out there in terms of online some NLG facilities or additional certainty of our own line of NLG facilities.

I think there are some catalyst event that potentially it influence that positively for the company. And I think we're looking for some of those catalyst to come to fruition again in the macros.

Operator

Our next question is from John Kiani with (inaudible) Capital.

Unidentified Analyst

I know Steven Karpel ask this question. I wasn't clear on the answer. Just trying to get a better handle a few different things. First of all, on the revolver, can you talk a little bit about your thoughts around paying that down during the quarter?

John Regan

As to why we did pay down?

Unidentified Analyst

Yes.

John Regan

Yes, so if you recall as we closed the first quarter we were moving through redetermination process with our lenders. And so we thought it was a prudent capital deployment hold on to as much cash as we could going into that effort. And so as we closed second quarter and looking at the interest savings that could be harvest by paying that down shortly after quarter end or after a brief termination effort we paid some of it purposely. I think that is just kind of our ongoing treasury type process around what prudent cash management would be.

Unidentified Analyst

Got it. So eliminate the negative carry and obviously as you were going into the redetermination seem like that make sense to you. And then back on what I think what Steven was touching didn’t we understand, I'm trying to get a better sense for how you're thinking about the sub-notes and refinancing them and dealing with spring maturity on the loans in the situation where obviously you're working hard towards a successful Horn River transaction but its taking a little bit longer than you had originally hoped. What other alternatives plans or strategies do you have to dealt with the spring maturity in the event that this is going to end up taking a little bit longer?

John Regan

Well I'd say you make mention of getting Horn River deal done. I think what Glenn was trying to highlight was some faster track alternatives that potentially help us work through some of that credit accretion that we're trying to capture. But I think one of things that we're also looking at or the various considerations we're making not only is with the right acquisition also be credit accretive, what does West Texas do for us in terms of accretion to the credit, but as we think about with that fact total refi looks like encompassing things like do we need to rework the credit facility in advance or concurrent with a sub note refinance. What is the approximately time, again, concurrent or subsequent to a sub note refi. So I think there are a lot of variables that go into the equation and all of that equation and all of that is sort of underscored by prevailing market conditions and investor sentiment in the Quicksilver story.

Unidentified Analyst

That makes sense. I think I see what you're saying. Is there from a timeframe perspective a line in the sand you’re willing to draw where by a certain point in time you feel like its prudent to go and explore and try to execute some of these other alternatives where the Horn River is taking a little bit too long? How do we think about that?

John Regan

Well, I will come back to Glenn's comments about it’s a 2014 goal to deal with the sub note refinance. And I think what you heard hopefully in my comments and resonate through Glenn's as well that the management team is focused on executing on the types of transactions that would catalyst events for us such that we can accomplish that refinance during the calendar year. But as to whether or not that’s a line in this -- I wouldn’t view that as a line in the sand per se but certainly is an internal target to get that done.

Operator

Our next question is from David Epstein with CRT Capital.

David Epstein - CRT Capital

Hi. When you guys talk about the 30% to 35% IRR at Texas Motor Speedway, you said at current commodity prices which I take to mean without the benefit of your hedges. Can you sort of quantify how many sort of drilling prospects you have that you think can deliver similar kinds of IRRs?

Glenn Darden

Yes, this is Glenn, David. We, as I said, are expanding that portfolio as we speak. But I think the combination and that’s in our northern fairway up north of Alliance. In our southern fairway, John outlined some of the cost savings we have achieved with our recent agreement with our midstream provider. So we have those types of returns in those well. So we have a multi-year inventory certainly at today's base several years of drilling and we're expanding that inventory. So we're quite encouraged obviously we'd love higher gas prices to take advantage of but we make nice returns even at today's gas prices.

David Epstein - CRT Capital

Okay. And I apologize, I didn’t catch the full comment, but what did you say about recent transactions not being an indication of the value of your own assets. Did you say that and can you elaborate?

John Regan

Sure. I think that was my comment and so, there was a public announcement of some Barnett assets trading hands yesterday. And you think about the metrics associated with that transaction and if you were to try to extrapolate those metrics of the Barnett to our Barnett asset. I was simply pointing out that we don't feel that is an appropriate extrapolation because given our lower cost structure and in particular, the way we structured our midstream contracts these are the (inaudible) particular package of assets. Had structure Barnett stream contracts that its necessarily an apples-to-apples comparison.

David Epstein - CRT Capital

Did that -- bucket of assets that was sold, did they have a higher non-dry gas component or is that incorrect?

John Regan

That is correct, that is correct.

David Epstein - CRT Capital

But you still think in -- despite that you think you guys are worth higher on it. I guess, you're probably focused on dollar per proved reserve. So I think the price for flowing was a naturally low it's just that they had a long reserve life, right? But you are probably talking price per proved m?

Glenn Darden

Well, I think it has other complications. And John was alluding to substantial midstream and development commitments involving that. But we truly, we congratulate the sell, yeah.

David Epstein - CRT Capital

Okay. And then just finally, you said that -- as you have said previously one of the advantages of your HRB project is no crude base pricing. Any -- are there any rumblings of the other projects altering near terms to offer pricing that is also not crude based or other features similar to what you are offering?

Glenn Darden

I think you'd have to talk with those other players.

Operator

Our next question is from Mr. Sean Sneeden with Oppenheimer & Company.

Sean Sneeden - Oppenheimer & Company

Hi. Good morning. Most of the questions were answered, but may be on the capital spending side. You have been in this strip that you highlighted a few times now. How re you thinking about capital expenditures you are particularly heading to next year kind of priority to minimize the outspend or may be talk about how you are thinking about that?

John Regan

Sure. I think the -- as we think about 2015 in the course this is in a vacuum of sorts agnostic to pricing. But generically, I would say that you are looking at spending levels that approximate what 2014 spending level look like. And again, I think you are going to see the preponderance of the loan majority of those dollars deployed into our core areas

Barnett, Horseshoe Canyon where we have got the inventory of fairly nice return assets.

And again, I think we will plan on eliminating Horn River capital pending the completion of the JV affair and gain we are open to compensate rather than later and provide additional clarity there. But I think as we think about near term pricing and given what declined figures look like, we are going capture a significant portion of the economics in (inaudible) one. And so, 2015 you will still have a significant garnering of the economics under the hedged portfolio that we have in place today.

Sean Sneeden - Oppenheimer & Company

Okay. So it sounds like then you are still comfortable with call as the similar level outspend that you are looking at this year, is that sort of right way to read next year?

John Regan

Well, of course we haven't poured that capital planned in concert yet, but as we think about where we want to spend the dollars I think it is clear to say that in the West Texas drilling exploration program is a bit of a wildcard there. But we are expecting the majority of dollars to be Barnett and Horseshoe Canyon. And the overall level I don't expect it's going to exceed what you are going to see this year.

Sean Sneeden - Oppenheimer & Company

Okay. That's helpful. And can you just may be remind us what your current big decline is and perhaps NYMEX breaking new levels for both Barnett and Horn River?

John Regan

The base decline?

Sean Sneeden - Oppenheimer & Company

Yes.

John Regan

Sub 20% in the Barnett and a bit higher in the Horn River because we haven't applied any capital to it. And then, I think from a NYMEX perspective I realize we're blending Horseshoe Canyon and then Barnett here but it's probably sub $3 not buy bunch but just underneath $3.

Sean Sneeden - Oppenheimer & Company

That's for the company as a whole sub 3 or do you (inaudible)?

John Regan

No.

Sean Sneeden - Oppenheimer & Company

Okay. (inaudible).

John Regan

Both Barnett Horseshoe.

Sean Sneeden - Oppenheimer & Company

Okay. And then, just lastly, for me. Could you remind me what the limitation on heading is within your credit facility, its just maturity itself or is there other restrictions in that?

John Regan

I am sorry Sean. You are cracking up. Could you repeat that please?

Sean Sneeden - Oppenheimer & Company

Yes, sure. Just the limitation on hedging within your credit facility. Is it just the maturity itself or are there other restrictions that don't allow you to currently hedge 2016 beyond?

John Regan

No, its just the maturity.

Operator

Our last question is from Mr. (inaudible).

Unidentified Analyst

Hi. You guys have alluded to these faster track, planned the option for Horn River and you haven't really been specific at all about what that might be and what it means for the longer term story. Can you just explain what that I that you are talking about and how you view that as -- I'm not talking about something of safety, but I'll just say look if we can get this (inaudible) done we have fast track options. We can do something else and this is going to allow us to re-file ourselves. Can you give us more clarity because it just seems like very -- it's very opaque?

Glenn Darden

Well, we are not going to go into detain on that. We -- what I was trying to convey is, we have a plan A, which is the full LNG project that we have discussions on going. That has gone significantly slower than we would like and certainly than the market likes. But we have developed concurrently some kind of off ramps with smaller projects that would accomplish our midstream -- clear or midstream hurdles in terms of some new drilling and production. And I mentioned on the call, that these could be long term supply contract, they could be take the form or a subset of the bigger LNG project. And truly, that's all we want to convey today is that those are kind of going on (inaudible) with different players in discussion.

John Regan

I kind of think of them as intermediate steps to ultimate accomplishment of what's (inaudible) caption plan A. And so, in no way the tracking form the ability to execute plan A. But as we have outlined plan A is comprehensive. Plan A is -- it requires a significant absorption of capital over decades. And so, I am thinking about how we can sort of agree (inaudible) two plan A managed through some of the midstream obligations that we have and accomplish a couple ancillary benefits associated with our core business. And I'd say it (inaudible) in this case, its additional proving up of the resource potential. So anyway, I think again we are operating too far at point on that or unveiling too much information, view that as a sound step forward for the company.

Unidentified Analyst

I mean, can you -- I understand you don't want to disclose details but how confident are you that these intermediate steps can be taken and executed in a timely fashion because it does seem like truly the life of company is changing on the ability to get something done before the end of the year. What kind of confidence you will have around this time?

Glenn Darden

Well, as I said, we understand the timing. We understand the urgency to get something done, I commented on it several times on this call. We know what we have to do. And our objective is to do it. So I am not going to put a percentage on that of confidence level. I do have confidence in the players that were talking, well that they can accomplish these goals.

Unidentified Analyst

Okay. I mean, how do you weigh that with -- often just trying to refinance it now. And is that one of things diluted for equity or at terms that the company doesn't want, how do you weigh the certainty or potential certainty being able to refinance something now versus hoping and working on but really hoping that a transaction falls in place?

John Regan

Yeah. I mean, that is a very delicate power. So in that I can walk you through the probabilistic equations that what we were going to -- that we would go with on that. We do know from our market intel that it was going to be very expensive and dilutive as I sort of intimated. And to go with -- and today is sort of paradigm. And we feel like we have got realistic shots a couple of credit accretive events and we feel like on balance pursuing those as high priority items for unified management team is the way to go at this. And the words weren't all low when I said two things. One, I understand the urgency to get the refinance done and two, that the management team has (inaudible) around and understands the priority of getting these credit accretive transactions done. So I balance it on our team's ability to execute and I think our team has the ware with all to do that.

Glenn Darden

And I would add one more thing. We have some confidentiality on some of these alternative plans in terms of non-binding agreements. And so, we are not going to go in the detail but we have players who are intense at getting something done as we are and we will see if we can accomplish those things. Obviously, we are very, very motivated to get things done.

Unidentified Analyst

I mean that's the kind of information and I -- with all due respect to confidentiality and (inaudible) specific parts, that's the kind of information, I think the market needs to know about in some form to have any kind of confidence that there are transactions there. I mean, if you say that there is -- you are talking to players and they want to do stuff then, we are -- then these are in works and there are papers kind of being signed in that (inaudible). I think (inaudible) you know.

Glenn Darden

No, no.

Unidentified Analyst

Wholesome that kind of disclosure it is helpful.

Glenn Darden

We are being as wholesome as we can be with given some certain restrictions. So -- and I appreciate your position and I appreciate the position of our shareholder base and our bondholder base wanting to know more and we will give you more when we can and as we accomplish it.

Operator

That is all the time we have for questions today. Mr. (inaudible) would you like you make any closing remarks?

Glenn Darden

Yes. Thank you. Just before ending the call, I just want to remind everyone that we do use our Investors Relations web site to post company news, filling and presentations and other non-public financial information to comply with this disclosure obligations under (inaudible) FD. And we do use our access as a routine channel to supplement distribution of this information. So encourage you to register on a web site to receive these (inaudible) and you could do so by visiting investors.qrinc.com/rfc. Thank you everyone for joining us this morning. We appreciate your interest in Quicksilver Resources. This now concludes our call.

Operator

Thank you to all of our speakers. And thank you all the audience for joining us today. The call has concluded. You may now disconnect.

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Source: Quicksilver Resources' (KWK) CEO Glenn Darden on Q2 2014 Results - Earnings Call Transcript
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