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Executives

Philip Cook - Chief Financial Officer and Senior Vice President

Thomas Darden - Chairman, Chairman of MSR, Chief Executive Officer of MSR and President of MSR

Glenn Darden - Chief Executive Officer, President and Director

Richard Buterbaugh - Vice President of Investor Relations & Corporate Planning

Analysts

Jeffrey Robertson - Barclays Capital

Brian Singer - Goldman Sachs Group Inc.

David Kistler - Simmons & Company International

Eli Kantor - Jefferies & Company, Inc.

Brian Corales - Howard Weil Incorporated

Marshall Carver - Capital One Southcoast, Inc.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Unknown Analyst -

Michael Bodino - Global Hunter Securities, LLC

Noel Parks - Ladenburg Thalmann & Co. Inc.

Quicksilver Resources (KWK) Q1 2011 Earnings Call May 9, 2011 11:00 AM ET

Operator

Good morning. Welcome to the Quicksilver First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Rick Buterbaugh, Vice President of Investor Relations and Corporate Planning. Mr. Buterbaugh, you may begin your call.

Richard Buterbaugh

Thank you, Debbie, and good morning. Joining me today are Toby Darden, Chairman; Glenn Darden, President and Chief Executive Officer; Phil Cook, Senior Vice President and Chief Financial Officer; Chris Cirone, Senior Vice President and General Counsel; and John Hinton, Vice President of Finance.

This morning, the company issued a press release detailing Quicksilver's results for the first quarter of 2011. If you do not have a copy of the release, you can retrieve a copy of it 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 those forward-looking statements. Additional information concerning risk factors that could cause such differences is detailed in the company's filings with the SEC.

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

At this time, I'll turn the call over to Glenn Darden to review our financial and operating results.

Glenn Darden

Thank you, Rick. Good morning. Quicksilver Resources today reported adjusted net income for the first quarter of 2011 of $2.8 million or $0.02 per diluted share as compared to $0.18 per diluted share in the previous quarter. Production volumes were on target, averaging 392 million cubic feet equivalent per day, up 23% year-over-year, with cost in line and coming down.

Phil Cook, our Chief Financial Officer, will give you the details on the revenue and expenses following my remarks.

Quicksilver is on target to grow production volumes in excess of 20% this year, primarily on the back of our Barnett development. This growth rate does not factor in any significant volumes from our new project drilling. Our team has done an excellent job of not only containing unit costs, but actually lowering them in terms of lease operating expense, G&A and interest expense.

Before I go into more discussion on operations and new projects, I would like to address the "take private" effort that my family recently discontinued. This process was very educational for both the Darden family, Quicksilver's largest shareholder, and the Quicksilver Board of Directors.

We received confirmation from savvy outside investors of the tremendous value of the assets in Quicksilver's portfolio, value that is not being recognized in the company's stock price today. After a thorough process and analysis, the Darden family decided that the best way to close that value gap was to continue as a public company and to be more aggressive in highlighting and developing these various assets. And that we will do. We have outlined these plans to the Quicksilver Board, and we are fully aligned going forward.

As you see by our production results and cost numbers, the company did not skip a beat in terms of efficiency and that is a tribute to the management and employees continuing to do their jobs. We truly appreciate their dedication and focus.

As we said in the company's earnings release, Quicksilver has assembled the largest and highest potential inventory of new projects in company history, with large acreage blocks leased in a number of attractive areas and basins. We will be drilling initial test wells this summer in our 200,000-acre Niobrara project in the Sandwash Basin of Northwest Colorado.

The company initially leased in the gas window and we have good prospects there, but all of this new acreage is updip and definitely in the oil window, targeting the Niobrara Shale at depths between 5,000 and 9,500 feet.

Also this summer, our Canadian team will complete a horizontal Exshaw/Bakken well to test the potential of this shallow fractured shale in the Horn River Basin in British Columbia. Activity in this play is increasing as other neighboring companies are currently testing the Exshaw as well.

We anticipate new drilling in the Alberta Bakken leasehold Quicksilver has in northern Montana where several formations look attractive to pursue oil development. Quiksilver holds approximately 175,000 acres in this area.

One other oil project we are working on is in West Texas where we will test the Bone Springs and Wolfcamp formations in an area originally taken for deeper gas potential.

In all of these projects, we have assembled large acreage positions at low-curve acre costs and low royalty rates.

The new project that has the most momentum is the Horn River Basin, Devonian shale play and associated midstream build-out. Quiksilver has drilled 8 wells on our 130,000 acre block and have only 2 more wells to drill to validate all of our exploratory licenses and convert these licenses into 10-year development leases.

Quiksilver has completed 4 of the 8 horizontal wells with excellent results. Production rates have been constrained due to gathering infrastructure, but as we recently announced, this will improve very shortly.

Quiksilver has built a 20-mile, 20-inch gathering line which will serve as the spine of our transportation system. Final tie-in of the line into the specter system is now complete, and today, Quicksilver is flowing gas from its 4 completed wells at rates in excess of 30 million cubic feet a day.

Quiksilver also previously announced an agreement with the NOVA Gas Transmission, a subsidiary of TransCanada, to support the building of a new TransCanada 70-mile pipeline extending TransCanada's Alberta system. This agreement will provide Quicksilver with a low-cost solution for gathering, treating and transporting natural gas from the Horn River Basin to multiple markets along the TransCanada system. With access and take-away with Spectra and TransCanada, we'll be able to maximize margins for the significant production volumes we anticipate ramping up over the next several years.

With our expanded pipeline to Spectra, we'll have up to 100 million cubic feet a day of take-away, and beginning in 2014 at the completion of the TransCanada line, that take-away capacity for Quicksilver can more than quadruple.

There's no question that Quicksilver has very marketable assets, whether to monetize or to bring in partners. The interest in these assets is increasing, and we have been approached and are in discussions with multiple parties on several of the new projects I've just covered. We will be aggressive in locking up the necessary capital to properly fund each of these projects while not straining Quicksilver's balance sheet and keeping significant positions to maximize the value to the company.

As this year plays out, you'll see significant progress in Canada in the Horn River Basin, the testing of the 4 new oil plays I've talked about, growth in our core base of Barnett production and an improvement in Quicksilver's overall financial strength. These are aggressive but achievable goals, and we are committed to reaching them. We look forward to reporting on the results.

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

Philip Cook

Thanks, Glenn, and good morning. Total production revenue decreased from $224 million in first quarter -- fourth quarter of 2010 to $190 million in the current quarter, a 15% decrease sequentially. Of this approximate $35 million decrease in revenue, $31 million is attributable to lower realized prices due to hedge floors being lower in the first quarter versus the fourth quarter of 2010 and lower absolute prices.

Production revenue for the quarter versus the prior year quarter of 2010 was also lower. Of the $11 million difference, approximately $45 million was led to lower pricing offset by $34 million increase due to higher production volume. Production volumes were up 23% year-over-year.

Our realized natural gas prices for the quarter was $5.07 per MCF, compared to $6.38 in the fourth quarter of 2010. NGL realized prices were $37.84 per barrel in the first quarter compared to $32.46 a barrel in the fourth quarter. Realized oil prices were $87.05 a barrel in the current quarter compared to $77.16 in the fourth quarter.

For 2011, we have 109 million cubic feet a day of natural gas hedged with a weighted average floor of $5.95, and 10,500 barrels per day of NGLs with a weighted average floor of $38.84. Based on current gas and NGL prices, we would expect our realized gas price for the year to be approximately $5.15 and our unrealized NGL prices to be $40.60. Our realized gas price of $5.15 includes the impact of our hedging activities and is based on the NYMEX for the rest of the year of approximately $4.40 in MCF. As comparison, our average realized price for natural gas in 2010 was $6.86 per MCF.

And looking at the operating cost structure for the quarter, Quicksilver continued its focus on reducing unit costs which declined year-over-year at all categories, excluding gathering, processing and transportation expense. Unit lease operating expense declined $0.09 per MCF to $0.61 in the first quarter of 2011, down 13% from the 2010 rates and down 2% sequentially from the prior quarter.

In the first quarter of the year, on a unit basis, production and ad valorem tax expense declined 30%; depletion, depreciation and accretion expense declined 9%; G&A expense declined 28%; and interest expense declined 16% versus the prior year quarter, resulting in a total reduction of $0.77 per Mcfe. Unit gathering, processing and transportation expense was $1.25 per Mcfe for the first quarter of the year, which is an increase of $0.69 year-over-year.

If you will recall, the unit gathering, processing and transportation expense increased, led to the sale of end of last year of our interest in KGS to Crestwood and the fact that we no longer consolidate that entity.

Overall, our costs are down 2% or $0.08 year-over-year, including the significant increase in gathering, processing and transportation expense.

Given where gas prices are, cash margins remained relatively strong. If look at it simply, our cash generation from commodities sales was $5.39 per Mcfe of product produced. Our unleveraged cash expenses were $2.44, which generated a cash margin of almost $3 for the quarter. And we expect that margin to grow a bit by the time we get to the end of the year and be around $3.10 per Mcfe.

On a leverage basis, our cash margin was $1.75 per unit of production, which obviously includes the impact of cash interest expense. And for the full year, we expect the leveraged cash margin to just be north of $2.

Maybe just as important as cash margins are, are capital forward economics. The prices in the Barnett is $6 gas prices, we generate an excess of 30% returns. In Canada and the Horseshoe Canyon project, at $6, we also generate 30% returns. And in the Horn River strip pricing for gas, our returns are just north of 20%.

Clearly, these returns are acceptable and therefore, we will continue develop our assets even in this gas price environment.

Adjusted net income, as Glen spoke about a few minutes ago, for the quarter, was approximately $3 million or $0.02 a diluted share as compared to adjusted net income of $30 million and $0.18 a diluted share in the fourth quarter of 2010. Adjustments primarily relate to our equity-method investment in BreitBurn, along with gains on BreitBurns units that were sold during the quarter.

Also excluded from the first quarter 2011 is a noncash full-cost ceiling test impairment charge related to our Canadian-owned gas properties.

In thinking about adjusted net income for the quarter compared to the fourth quarter, the difference of $0.16 a share is made up of a couple of items. Of that difference, $0.12 a share is related solely to the reduction in commodity price which, of course, is a function of hedging and absolute prices. The remaining $0.04 is related to increased operating expenses of approximately $0.02 a share and changes in BreitBurn income of approximately $0.02 a share.

I'd like to touch moment on taxes because for reported earnings, we have a tax rate that does not look normal. For our quarter earnings, we project our full year Canadian taxable loss due to the impairment to be entirely offset by U.S. taxable income. The Canadian taxable loss received a benefit of only 25%, whereas the U.S. statutory tax rate of 35% is applied to taxable income in the U.S. The interplay of these rates are relatively low levels of taxable income, plus the income -- plus the impact of approximately $7 million of permanent differences, caused us to project the negative tax rate for 2011, with pursuant to GAAP, we applied to the first quarter pretax income.

We expect all tax expense for 2011 to be deferred and to not trigger payment of cash taxes. If our estimates of taxable income do not change as we earn pretax income in subsequent quarters, such earnings will receive this negative tax rate and if tax benefit will be recorded on those pretax earnings. With clean earnings, we expect tax rates to be about 36.5%.

For the first quarter of 2011, capital expenditures were approximately $197 million. We expect to incur $250 million to $300 million of additional capital expenditures towards our 2011 capital program.

Total debt at March 31, 2011, was approximately $2 billion. Of this amount, our revolving credit facility was approximately $150 million drawn on a borrowing base of $1 billion. This leaves the company with approximately $795 million of liquidity in the facility after consideration of outstanding letters of credit. As of last Friday, our syndication of banks reaffirmed our borrowing base up to $1 billion level.

As a reminder, the holders of our $150 million convertible debentures can put those debentures to us on November 1, 2011, as the result of these debentures are classified as current liabilities on our March 31, 2011, balance sheet. In addition to the holders ability to put these debentures to us, we also have the right to call them on November 8, 2011, at par.

Now I'll turn the call back to Rick for guidance and the question portion of the call.

Richard Buterbaugh

The guidance is detailed in our earnings release, so I will not repeat that now, but we are on track to achieve those numbers and our full year guidance for production volumes for the year.

Debbie, at this time, I'd like to open the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Dave Kistler with Simmons & Company.

David Kistler - Simmons & Company International

Real quickly, looking at your Q2 production guidance and then, from your April investor presentation, your full year production guidance, it seems to me that if you keep that sort of growth target that you currently highlighted for Q2 versus Q1 and run that forward, it positions you to pretty dramatically outperform the full year guidance. Can you give us a little color on maybe if there are unusual uptick in Q2 or are we're just being conservative at this time? Or how should I think about that?

Glenn Darden

We think we're being very realistic on our overall growth targets and what we think we can achieve. Now keep in mind, the second quarter is seeing a significant uptick. A lot of that is coming from the benefit of completions and tie-ins in the Barnett that happened either late in the fourth quarter last year or throughout the first quarter of this year. So you are seeing a nice uptick in the second quarter, but we still believe we're on track for about a 20% year-over-year average growth for the company.

Philip Cook

Dave, as we said on this call, we're not really factoring in any significant volumes for many of the new projects that we're talking about -- that we talked about this morning. So it may end up being conservative, but that's the best picture we have today.

David Kistler - Simmons & Company International

Great. That's helpful. And maybe, tying that into the CapEx run rate, if I looked at your first quarter here, obviously, with your guidance of about $480 million, it's about 40% of your budget that you spent so far in the first quarter, can you talk about how you're thinking about the balance of the year? If I just think of the run rate, it would be putting you to levels that we haven't seen in a couple of years as far as forward CapEx spend.

Philip Cook

Well, as I've said -- Dave, this is Phil, as I've said, we're going to spend about $250 million to $300 million in the last 3 quarters of the year. As you know, our capital program is front-end loaded, particularly in Canada, so we think we're on target here, the $450 million to $500 million of capital.

David Kistler - Simmons & Company International

Okay, great. And then just one last one, if I could sneak it in. Looking at the completions that you're going forward with in the Barnett and working down through that inventory, is that what's also contributing to kind of a lower trend in the cost structure over the next -- obviously, those are going to be lower cost out of the production and so on in Mcfe basis would be helping to push that cost factored down. Is that the number one thing or are we also seeing efficiency gains and higher EURs per well? Just trying to ballpark that.

Philip Cook

Yes. I don't think that the completing of the wells that where in the PDMP category is contributing necessarily to lower unit costs. Obviously, higher production contributes to lower unit costs, but you've got to keep the absolute costs at least steady. So I think you're see more efficiency than anything else.

David Kistler - Simmons & Company International

Great. Well, that's helpful, guys.

Operator

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

Noel Parks - Ladenburg Thalmann & Co. Inc.

I wanted to start with the Delaware Basin, and in your comments in the press release, you talked about the acreage you have there. And as far as your expectations for the Bone Springs -- well, first, I'm assuming, is this the same acreage that you had originally been looking for Barnett and Woodford in some -- a few years ago?

Glenn Darden

In general, yes.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Okay. And do you -- are you're -- can you give us a sense as to sort of how exploratory you consider the Bone Springs to be there, very -- very high likelihood, low likelihood?

Glenn Darden

Noel, we've been watching the play emerge in the general vicinity of our acreage and have now warmed at least to a comfort level where we're interested in getting involved in it. And as a result, we're announcing it. But we have keyed largely on our existing acreage and have taken some additional acreage that will augment that as far as the Wolfcamp, Bone Springs play. So we're pretty excited about it. The early results look good. We certainly don't have any data yet and won't announce it until we do. But we did feel that those are material enough to make the announcement on this call.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Okay, great. And -- but also, could you just talk a little bit about your process for the additional Niobrara acreage, the original acreage, of course, again, you're looking mainly for gas, I know you're in the oil window, just -- it's such a vast play, how did you, or sort of what guided you to -- acreage you plan on taking?

Glenn Darden

Well, Noel, this was generated from our new ventures group. And basically, in drilling with deeper gas-window acreage that we have, which is deeper in the basin and overpressured, and quite a resource unto itself. They tracked an uptick into the oil window and had -- they had enough data to give us strong encouragement to go forward and take a significant acreage position there. We've now got about 200,000 acres in that portion of the play alone, in addition to what we have in the gas window. So...

Noel Parks - Ladenburg Thalmann & Co. Inc.

And then just the last one. Can you give a sense of sort of what you know about sort of pressures and difficulty of the drilling down there, either the Niobrara or the other formation you have to get through to get to it?

Glenn Darden

We don't anticipate any significant drilling problems that are unusual or would add to the cost significantly. And as we talked about, Noel -- this is Glenn -- we are targeting shallower depths, so these initial wells will be in the 6,000, 6,500-foot range. But our overall acreage position kind of covers Niobrara to the base of the Niobrara, down to maybe as deep as 10,000 -- 9,500 to 10,000. But 5,000 to that 9,500-foot range, so I think we're going to be in good shape on the drilling side.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Great.

Operator

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

Brian Singer - Goldman Sachs Group Inc.

In the Horn River, with some of the midstream agreements that you've signed or looking at, how set are you at developing the Horn River for consumption in the North American markets versus seeking a piece of some of the LNG export solutions? And I guess on that regard, how open and involved are you towards potentially selling a piece of upstream production in the Horn River?

Philip Cook

Brian, as Glen mentioned, we've had interest from multiple parties on most of our opportunities. But in the Horn River Basin particularly, the key, we feel, to making this commercial project earlier is a low-cost transportation and treating solution for the gas from the Horn River. With the agreements with NOVA and with the building of our 20-inch gathering system, we're going to have what we feel is a very competitive transportation and treating costs out of the Basin. Where we go out of the Basin has been subject to where the markets will be. We're highly optimistic that there will be an export solution off the West Coast of British Columbia, but that is some years in the making. So in the meantime, we are tying in to the mainstream distribution system, which is largely TransCanada-based. And we'll be able to get to all the markets of TransCanada, including later of Spectra going West if we need to. So we've got all of those solutions covered, but we just think the lowest cost option is the one into TransCanada in the short run, which will access multiple markets.

Glenn Darden

And I'll add one thing to that, Brian, this is Glenn. We see a large percentage of that gas being sold and utilized in Canada.

Brian Singer - Goldman Sachs Group Inc.

Got it. And that applies to your production as well?

Glenn Darden

Yes.

Brian Singer - Goldman Sachs Group Inc.

Got it. And then secondly, in the areas, the exploration areas that you highlighted, Exshaw, Niobrara, Delaware Basin, can you just run through the timeline beyond the next couple of wells that you're drilling of when you would expect that it could really start contributing to, or to become material for Quicksilver or Quicksilver production, or when you'd have a real sense that these are development plays and exploration play?

Glenn Darden

Well, we'll drill these initial wells first, and then we'll have a better idea. But we're moving fairly quickly on the Niobrara. It's, perhaps, the most aggressive drilling schedule that we have currently. But we'll see on results how these move, but we're gearing up to get these financed in the proper way and are gearing for success.

Brian Singer - Goldman Sachs Group Inc.

I guess you mentioned in one of the earlier questions that there was a chance that production overall could -- or guidance could prove to be conservative if there was some potential response from some of these exploration areas. Is it the Niobrara that has the one that could actually become material to production this year, or are these just small increases or small impacts on the margin?

Glenn Darden

Well, we're going to be active in the Niobrara this summer. So could it make material difference? Probably not significantly, for the end of the fourth quarter anyway. But we are going to go at it aggressively. We are completing the Exshaw and the Horn River Basin, that could have some impact on our thinking there. But most materially, I think you're going to see us testing all of these basins during the summer and fall, and the bigger impacts will be in next year's operations if they're successful.

Brian Singer - Goldman Sachs Group Inc.

Great.

Operator

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

Brian Corales - Howard Weil Incorporated

Back to the Delaware Basin, is almost all this acreage left over from the West Texas Barnett and -- or is some of it new? And what are kind of the lease terms that are left?

Philip Cook

Some of it is new, Brian, so that has longer lease terms. We have renewed some of the acreage that we had, so we're in pretty good shape on lease terms as a general rule.

Brian Corales - Howard Weil Incorporated

Okay. And then kind of switching to the Niobrara, and this is, I guess, for the West of where we've seen a lot of the other activity from the industry, but is there other industry participants that are drilling, or at least is acreage, is it a fight right now in that area?

Philip Cook

It has become a fight. Fortunately, we were in there early, and we have established a large position. But it's in an area of proven Niobrara vertical production, of some size. So I think other players have gotten interested and the leasing activity has heated up. But we've got a pretty solid block in there.

Brian Corales - Howard Weil Incorporated

And just one final one on the Niobrara. I know you're testing vertically, is the thought that this is a vertical play or is this just a test and ultimately could be horizontal?

Glenn Darden

We'll be looking at it in both ways, Brian. We'll be testing it both vertically and horizontally during the year and into the future. And it's not yet determined which will be the better, or more economic solution. But we do have a very nice target to shoot for.

Operator

Your next question comes from the line of Eli Kantor with Jefferies & Country -- Company.

Eli Kantor - Jefferies & Company, Inc.

It looks like you increased the number of wells you plan on tying in from the drilled but uncompleted Barnett well inventory. I'm just wondering what caused the acceleration of tying in those wells.

Philip Cook

I think we were just probably a little conservative in early guidance, but we're not truly accelerating that. We're on pace. We have 2 frac crews working, we've got 2 drilling rigs running in the Barnett and we're having good results. And really, we had accelerated some of the development of work, some of the completion of those ducts in the fourth quarter of last year, and they're just now coming on into the first quarter. So a pretty good chunk of the capital related to that difference in the duct inventory was on the balance sheet at the end of 2010. Drilled but incomplete, yes, sorry.

Eli Kantor - Jefferies & Company, Inc.

Got it. The 125,000 net Alberta Basin Bakken acreage you guys have a drill-to-earn option on, is that contiguous with the 175,000 that you have presented at the map in Eastern Glacier or Western Toole counties? Or is that in another area, the U.S. portion of the play?

Philip Cook

Yes, contiguous. And it's in what is termed a "wells agreement." And that gives Quicksilver the right to earn oil rights in an area that has been developed on the gas side. So the company that owns the gas rights has the right to drill gas wells on our oil rights, so it's reciprocal. But in this case, we do have that right. It is contiguous.

Eli Kantor - Jefferies & Company, Inc.

Okay. And then just lastly, I think I missed this. How much of the -- your acreage position in Northwest Colorado, how much of that is perspective to the sub-dip Niobrara oil window?

Philip Cook

It's all in the oil window, we believe.

Glenn Darden

The 200,000 acres we've announced on this call is all in oil window.

Eli Kantor - Jefferies & Company, Inc.

Okay, great.

Philip Cook

And one other thing to add to that, we have about 75,000 acres on top of that that's down-dip, and originally where we drilled for gas targets.

Operator

Your next question comes from the line of Michael Bodino with Global Hunter Securities.

Michael Bodino - Global Hunter Securities, LLC

Actually, I want to follow up on that question just a bit here. I was trying to figure out on the Sandwash Basin acreage, how much of it has already been disclosed through your Greater Green River Basin acreage, you had about 143,000 net acres at year-end. Is that overlapping with this updip into the Sandwash Basin, or how does that the acreage fit in proximity?

Glenn Darden

I think that was, Michael, but just to set the numbers -- set it straight, we have 200,000 acres in the oil window. That's in addition to the acres that we have down-dip in the gas window. So the combined number is about 275,000 acres.

Michael Bodino - Global Hunter Securities, LLC

Right. That does help. I'll ask another question. On your capital budget, you had a pretty good chunk of it allocated to midstream. Could you give us a little bit of color on your raw budget, the $480 million to $500 million, how much in aggregate do you expect to spend on midstream? Then maybe a breakdown of that, how much you spend on the aggregate budget in terms of exploration knowing that that's a little bit of a moving target at this time?

Philip Cook

Of the $480 million, there's about $80 million of midstream capital. And then I would say that from -- when you say exploration, do you mean drilling or do you mean acquiring acreage?

Michael Bodino - Global Hunter Securities, LLC

No, I meant drilling.

Philip Cook

Generally, it's been about 10% of our budget, and I would say that's pretty close this year.

Glenn Darden

And I'll add one thing here on just the overall, the way we look at this project. As you know, over the last couple of years, we have lived within cash inflows and that's still the way we look at the business. We're not changing our spots here. And so if we accelerate some of these projects or expand on projects, we will bring in outside dollars to do that. So as I said in earlier remarks, we're not going to strain the balance sheet. And in fact, we intend to improve it this year.

Philip Cook

And so having said that, as all of you -- you all have your own models as to how much cash flow we're going to generate. We've said that our capital budget is $480 million, and that will leave it shy of about $150 million to $170 million on cash. To be more clear on that, we plan on bringing that capital into the house through some transaction.

Michael Bodino - Global Hunter Securities, LLC

Great. And my last question, relative to the drilling budget, looking at all these prospects you've aggregated over the last couple of years. Is there -- is it just too early to think about the allocation of capital from a rate return? How do you -- how are you approaching this from saying, okay, we want to spend so much dollars in the Delaware, so much in the Sandwash, so much in the Exshaw, or right now just spread it across all the projects and see when one matures?

Philip Cook

Yes. I think from a return point of view, I talked this morning about what our returns are in our gas plays and I think you're exactly right. Each of those oil plays, it's just too early to tell. But hopefully, by the end of this year, we'll have more information with regard to several of them.

Eli Kantor - Jefferies & Company, Inc.

Very good.

Operator

Your next question comes from the line of Jeff Robertson with Barclays Capital.

Jeffrey Robertson - Barclays Capital

Most of my questions were answered, but I guess in the sense of the Niobrara play, when would you all expect to have all 6 of your vertical wells drilled?

Thomas Darden

We're going to start drilling this month, so we're going to drill through the end of the year, drill at complete through the end of the year. So we'll have most of that tested by year-end.

Jeffrey Robertson - Barclays Capital

Will those wells test a large part of this 195,000 acres, or were they going to be concentrated in any certain areas?

Thomas Darden

We'll be testing representatively across the acreage bar.

Jeffrey Robertson - Barclays Capital

And then lastly, Toby, will you have disclosed results as you go or will you wait until you get all 6 rolls down?

Thomas Darden

Well, as you know, the drilling and completion is nonlinear. The drilling is pretty linear, but the completion aren't always linear. So we'll announce significant results when it's time. But to the degree we're in preliminary stages of any of it, we won't announce that.

Operator

Your last question comes from the line of Marshall Carver, with Capital One.

Marshall Carver - Capital One Southcoast, Inc.

Just a question of the Niobrara, you talked about how it was in the neighborhood of proven Niobrara vertical production. So I imagine you had some expectations on the wells coming up. What are your thoughts on costs and EURs, or on the wells that have been drilled in the area?

Thomas Darden

Well, Marshall, it's going to be evolutionary. Obviously, we think we're bringing new technology to the play which will undoubtedly be more expensive than what it costs them to drill open hole unstimulated completions before. So we think the play has its best upside from bringing new technology to it. So our costs profile is still somewhat undetermined, and the real economics of producing those wells, or producing the zones, is still undetermined. So as we have real numbers, We'll bring them forward.

Marshall Carver - Capital One Southcoast, Inc.

Okay. So the current proved vertical, I mean that was all using old techniques and -- okay, well that -- that clears that up. So it's not -- there hasn't been a lot of new big de-frac jobs and completions and stuff like that, that your base that statement on?

Thomas Darden

No, that was -- it's all over production.

Operator

We have one more question that just came in from the line of Mike Scialla with Stifel, Nicolaus.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Question on the Delaware Basin. You said you have, I think in your release, 54,000 net acres. I think in your last presentation, you were showing 110,000. Did some of that acreage expire, or how do those 2 numbers tie?

Glenn Darden

Just the current amount is 54,000 net acres. It represents about 110 gross.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Okay. So it's gross and net. Got you. And so you talked about the play, you're watching it develop near your acreage. If I remember correctly, most of this legacy acreage was in Reese County. So is this closest to the vertical Wolfbone play or is it more of the horizontal Wolfcamp and horizontal Bone Springs?

Thomas Darden

We've actually taken some additional acreage, Mike, that is in a different area in addition to our older vintage acreage, which we have remained as Glen mentioned. So we'll really be testing a couple of concepts when we go at it.

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Okay. Can you elaborate at all? Is it the horizontal play or the vertical play?

Thomas Darden

A part of it is the vertical Wolfbone play, as they call it. Part of it is the more traditional Wolfcamp horizontal. And we're going to be testing both of those prospective areas. But we're still taking acreage, so we're not to get more granular than that.

Operator

We have one more question from the line of Stephen Couple [ph] with Credit Suisse.

Unknown Analyst -

This one's for Phil. You alluded to the revolver in the release here. What is the plan in terms of extension of that in general? I thought it was about a year, a year and a half till that used to be rolled. Is that right, or did you already roll that?

Philip Cook

Yes. And so in the fall, we extended it a year, and it expires in February of 2013. And our plan would be, obviously, to renegotiate a longer-term credit facility sometime this year.

Unknown Analyst -

Okay. And what's the plan for the capital structure in general? What would you like to see in terms of maybe on an absolute basis, the debt level?

Philip Cook

Oh, I don't know that we've necessarily put a target on it, but as Glen said, we plan on reducing total debt this year. And I suspect that we'll make some meaningful progress in the next couple of years. As you know, we look at debt on a Mcfe basis, and we're pretty comfortable where it is today. Certainly, debt's been higher, and we haven't really had any issues. But we'd like it to be overall lower.

Unknown Analyst -

Yes, I mean, do you have a target basis? Clearly, on a per Mcfe, it's come down pretty substantially, I mean probably almost at half, right? What's the latest target, maybe?

Philip Cook

I don't know that we've specifically set a target, but certainly, it is to not let it increase as we move through the year. And that's why we said, to the extent that we are out spending cash flow generation, we'll bring cash in to fund our drilling activities.

Unknown Analyst -

Right. And what -- possibilities on equity, then?

Philip Cook

I didn't say that. No, we're not looking at equity, Steve.

Unknown Analyst -

And then on the convert, then, plans on the convert, that will not be equity?

Philip Cook

It's not our intention. As you know, the convert holders have a put to us and we have a call. We have other ways of generating cash. As you know, we continue to own $300-plus million of BreitBurn units. So we still have some options out there to generate cash, short of a deal. And of course, as Toby said, we've been approached by a number of parties on several different fronts regarding transactions with regards to our assets.

Unknown Analyst -

I'm glad you brought up the BreitBurn, that was my next question. Was 100,000 units were sold, I think. I think that was in the quarter. It was kind of a small number. Was there any reason it was so small or was that a pricing issue? Was it a timing or trading or...

Philip Cook

We were trying to sell it with no discount, and I think we were pretty successful. So we had put a program in place that lasted about 6 weeks. So I'm not sure that that's how we'll sell the balance of them, but that program was successful.

Operator

At this time, there are no further questions. Mr. Buterbaugh, do you have any closing remarks?

Richard Buterbaugh

Yes, thank you, Debbie. Just as a reminder, a replay of this call will be available on the company's website for 30 days. I'd like to thank you for your time and interest in Quicksilver this morning. This concludes our call.

Operator

Thank you for participating in today's Quicksilver conference call. You may now disconnect.

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