Quicksilver Resources: Solid Growth From Its Core; New Oily Ventures to Be Tested Near Term

| About: Quicksilver Resources (KWK)

Quicksilver Resources Inc. (KWK) Quick Look

Quicksilver is no longer one of my closely tracked names but it feels like time to get reacquainted so here's a short book report. Just the basics:

The Core Plays ...

The Barnett Shale Remains Its King Pin:

  • 155,000 net acres in four areas
  • This represents 2.6 of the company's 2.7 Tcfe proved reserves
  • It calls less than half of its position developed leaving a 10+ year inventory.
  • 81% of 1Q11 production
  • Plan here remains to grow low cost production and the older wells now provide a stable base of cash flow as declines shallow out. For 2011, it is looking to grow it 20%.
Horseshoe Canyon - (Canada - CBM gas)
  • 316,000 net acres
  • 15% of total 1Q11 production, coalbed methane, typical manufacturing operation.
  • Plan: minimize declines and funnel cash from here to Horn River development.

Horn River Basin - (British Columbia, Canada - Gas)

  • 130,000 net acres
  • 3% of total 1Q11 production coming from a handful of horizontal Devonian shale gas wells.
  • These are large target wells, to date ranging from an estimated 9.5 to 19.4 Bcf per well EUR. The more recent wells are coming in at the higher end of the range. EOG, Apache (NYSE:APA) and others have a presence here as well and report similar strong results.
  • Reserve upside thinking there is 10+ Tcf.
  • Plan: Continue to slowly drill gas wells, which can be piped to end markets in either the midwest or the Pacific northwest as well as end users within Canada. When gas prices rise they can relatively quickly ratchet gas production.
... And The Upside Potential
Horn River Basin (British Columbia - Oil)
  • Awaiting the first horizontal Exshaw Shale/Bakken Shale shallow oil test in either late Summer or early Fall of 2011, somewhere on the acreage position outlined above.
  • Murphy Oil (NYSE:MUR) is in the area and has commented that the Exshaw is the geological equivalent of the Bakken (black shale with interbedded limestone or limestone on top in places), but centered on Alberta with part of the play getting up into BC and part dipping down into Montana. Geologically, the Exshaw is composed of a lower black shale and an upper siltsone layer. MUR has drilled at least two horizontals that delivered light oil from it in British Columbia. I've seen sources that say the upper siltstone and limestone parts of the Exshaw package are missing this far north. We shall see, but so far news out of the play, and there are others scattered across aside from MUR, has been scarce due to leasing concerns.

Niobrara (Sandwash Basin, NW Colorado)

  • 197,000 net acres in the oil window (another 75,000 net acres in the gas window to the east)
  • The company thinks it is largely in the oil window in Moffat and Routt counties, CO, far west from where we normally talk about the play. Shell (NYSE:RDS.A) is in the area and leasing having bought East Petroluem, which had drilled at least one horizontal in Moffat county. Gulfport (NASDAQ:GPOR) bought a small amount of Niobrara PDP in the form of three vertical wellbores earlier this year. And there are others taking leases in the area now.
  • Plan for 2011: Drill as many as six verticals; timing would be summer through year-end on this and I would bet the company keeps the program under wraps up to at least the 3Q call.

Southern Alberta Basin (NW Montana)

  • 175,000 net acres
  • The acreage is on the eastern edge of Glacier county, spilling over into Toole, largely contiguous and would be just east of where Rosetta (NASDAQ:ROSE) and Newfield (NYSE:NFX) are drilling now.
  • For now they're letting ROSE and NFX forge ahead with vertical and horizontal programs and seeing how they do. We should get details on both of those efforts before year end and quite possibly by the 3Q calls.

Bone Springs (Delaware Basin, West Texas)

  • 54,000 net acres, primarily in Presidio County, TX, still adding acreage.
    • In the general area you have a plethora of operators including Apache (APA), El Paso (EP), EOG, Devon Energy (NYSE:DVN), and Chesapeake (NYSE:CHK).
  • Plan for 2011 is to re-enter a number of wells in search of the Wolfbone vertical potential as well as to examine the idea of Wolffork horizontals.

Balance Sheet

  • 64% net debt to cap,
  • Management has indicated it plans to reduce debt, probably slowly (if at all) this year, with plans to more noticeably reduce leverage in the next two years. My sense is that management's view is that current debt levels are more than easily managed but it gets the Street's more typical aversion to it and so has said it will be bringing it down. Any real reduction in debt in the next two years is likely highly contingent upon the success in the new ventures arena with greater success limiting capital diverted to debt reduction.
  • Management has mentioned potentially monetizing assets from portions of some of the plays mentioned above to some of the considerable midstream assets to the rest of the BreitBurn Energy (BBEP) MLP holdings as possible cash raising avenues.

Capital Budget

  • $480 to $500 mm for 2011, with probably 50% of it already spent
  • This is essentially in line with expected current year cash flow plus the proceeds of their recent BBEP asset sale.

Nutshell: I don't own it but I find it more interesting in the wake of a failed attempt to take it private, the recent sale of half of its MLP stake, and what appears to be a renewed focus on new ventures. The Barnett should continue to be the lead on production growth this year and early next but an oilier set of opportunities could begin to become impactful as soon as mid year 2012. In the meantime the Barnett provides a stable (and well hedged) source of cash flow.

The name is not expensive or inexpensive on a P/CF basis (see table above) but given its ability to predictably grow production from the relatively manufacturing-like business of the Barnett until the other plays come to the fore - the outyear multiple isn't excessive. At $1.57 /Mcfe for proved reserves it's fairly cheap to many of its gassy peers. When you throw in the 10 Tcfe potential comment from Horn River and potential upside from large acreage tracts in both Canada and the U.S., plays which offer potential oily reserves, the name would appear to be undervalued. Not that it hasn't been that way for some time, but with some of the plays being tested by management and some soon to be tested by offset operators it is conceivable that the name could start to discount some of the new play value.

Disclosure: I am long ROSE, NFX.

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