Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Quicksilver Resources Inc. (NYSE:KWK)

October 20, 2011 9:00 am ET

Executives

Philip W. Cook - Chief Financial Officer and Senior Vice President

Glenn M. Darden - Chief Executive Officer, President and Director

John E. Hinton - Vice President of Finance

Analysts

Pearce W. Hammond - Simmons & Company International, Research Division

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

Ravi S. Kamath - Global Hunter Securities, LLC, Research Division

James Jampel - HITE

Jeffrey W. Robertson - Barclays Capital, Research Division

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Marshall H. Carver - Capital One Southcoast, Inc., Research Division

Gary Stromberg - Barclays Capital, Research Division

Mark Caruso - Millennium Partners

Brian M. Corales - Howard Weil Incorporated, Research Division

Unknown Analyst -

Steven Karpel - Credit Suisse

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Operator

Good morning. My name is LaTonya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quicksilver Strategy Discussion Conference Call. [Operator Instructions] Now, I'd like to hand the floor to Mr. John Hinton. Thank you. Please go ahead.

John E. Hinton

Thank you, LaTonya, and good morning. Joining me today are Glenn Darden, President and Chief Executive Officer; Phil Cook, Senior Vice President and Chief Financial Officer; and Chris Cirone, Senior Vice President and General Counsel.

Yesterday, the company issued a press release announcing our plan to form a master limited partnership with a portion of the company's Barnett Shale assets. This call is to discuss strategy matters related to Quicksilver.

In terms of why now, the company's management felt that this was a material information that should be available to company investors and bondholders. We currently have a convertible security with put rights outstanding and the deadline for the bondholders on the exercise of debt purchase is next Friday.

This call and press release gives them notice of our plans. We are not permitted to discuss specific attributes of the MLP. That information will be available on the S-1 when it is filed. 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 path.

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 the forward-looking statements. Additional information concerning risk factors that could cause such differences is detailed in the company's filings with the SEC.

I will now turn the call over to Glenn Darden.

Glenn M. Darden

Good morning, and thank you for joining us. Today, we'd like to discuss with you Quicksilver Resources' strategy to enhance the value of this company. As all of you know, who had followed our company over the years, we have a long-held strategy to acquire acreage in the early stages of unconventional plays and build the acreage out to a level of development at which time we monetize the asset.

You saw us employ this strategy when we developed then sold our Michigan assets to BreitBurn, and again with a different type of asset when we sold our midstream infrastructure in the Fort Worth Basin to Crestwood. The combination of those transactions netted our company approximately $2.3 billion, which we have reinvested back into the business over time.

Today, we are continuing with that strategies through a different vehicle, which will allow the company to monetize our Barnett assets over time, retain an interest in them and pay down the company's debt.

In the near future, we intend to file an S-1 with the SEC to form a publicly traded master limited partnership that will use the proceeds of a proposed initial public offering and borrowings under a new bank facility to buy certain of our Barnett assets.

This new MLP will be called Quicksilver Production Partners. We are targeting the initial drop-down of assets to the MLP to generate in excess of $400 million of proceeds to the parent. We intend to use these proceeds to pay down debt at the parent in the near term and for growth in the long term.

The company has in total about $940 million of public debt that is callable between now and the end of 2012, which we expect to take out with cash generated from the drop-downs to the MLP.

The initial sale to the MLP will have the following profile: 15% of our Barnett reserves, 18% of our current production. And Quicksilver will have the ability to drop-down assets with a similar profile each year, and therefore, grow organically for at least the next 7 years.

Quicksilver will also continue to own a significant percentage of the MLP limited partner units and 100% of the general partner. Quicksilver has a proven track record of managing and growing public MLPs since we first took Quicksilver Gas Services public in 2007. We leveraged our knowledge base from a KGS experience to establish this new entity, and we intend to drop-down assets as they mature.

This strategic move is designed to allow the company to pay down half of its existing public debt over the next 2 years, and ultimately, all of our public debt in the next few years. It will also create another vehicle for Quicksilver to aggregate additional assets outside of the Barnett that are suitable for an MLP. We have a talented team dedicated to our low-cost philosophy. We project Quicksilver Production Partners to be of significant size with the ability to have organic growth via drop-downs for the next 7-plus years, all the while looking for additional opportunities in the marketplace. Quicksilver will have a significant ownership in the MLP, which will reduce over time as asset drop-downs occur. We are also exploring the possibility of monetizing a portion of the general partner interest in the MLP.

The Quicksilver team has gone successfully down this road on the MLP side before with Quicksilver Gas Services, our midstream MLP, which we officially monetized. Our managers are experienced with the operational execution, the governance and a public entity management.

From an overall company viewpoint, we continue to work on several transactions concurrently. As we have previously disclosed, we are in negotiations on a joint venture of the midstream infrastructure in the Horn River Basin, and we are in discussions with third parties on several upstream projects. In addition to its interest in Quicksilver Production Partners and its general partner, Quicksilver retains its large development project in the Horn River Basin, the Horseshoe Canyon coal formation, coal bed methane asset base, its ownership of 8 million BreitBurn Energy Partner units, its 210,000 acre Niobrara project, its West Texas acreage position and its production at large held by production acreage position in Montana, as well as other non-Barnett-related assets.

And now I'd like to turn the call over to Phil Cook to give you more details on the company look and the strategic impact of this.

Philip W. Cook

Thank you, Glenn. To wrap up, I want to reiterate the message that Glenn has given regarding the structure of this strategy and that it is designed to pay down existing public debt. Our intentions in the future are not to lever up, to develop other assets, but rather, to maintain a conservative capital structure. Our exploration assets are large, as you know, and will require capital to be developed. However, in the event that we are out spending cash flow, we intend to bring in capital from outside sources to fund those developments.

Additionally, after reading several reports that are out this morning, I wanted to take just a moment to remind everyone how the accounting for MLPs, who also happen to be owned by C corp.'s, actually work and the economics.

For those of you who remember how we accounted for our midstream MLP, this may be remedial. However, it's not intuitive, so I'll walk through it quickly. Our intent in this initial transaction is to own approximately 50% of the MLP and 100% of the GP. Because of our ownership of the GP, Quicksilver will consolidate the entity. What that means is that from an income statement point of view, we will record all volumes. Those from the remaining assets of Quicksilver and those from the assets of the MLP.

So in other words, no change in volumes or revenues because of this transaction. Also, our costs will include all of our costs, those from the MLP and the larger Quicksilver.

At the bottom of the income statement will be a minority interest line, which is the net activity of the MLP, but it's only that activity or only the portion of that activity that is related to third-party investors' interest.

From a cash point of view, the only leakage from the consolidated group will be the cash that goes to the third-party investors, again, just the distribution to those investors.

For the balance sheet, again, no reserves will move off the books. However, we will have a minority interest line in the equity section of the balance sheet, which reflects the minority interest holders' portion of our assets.

With regard to economics, there are several reports out this morning discussing economics of the drop-down on the reserve in the ground basis. While we have not given any metrics and won't until we file the S-1, keep in mind what I just said about cash flows and the ownership of the MLP by the parent. In reality, depending on the parent's interest in the MLP, the drop-down does not reflect the sale of the gross reserves that may go into the MLP. It's only the portion of reserves owned by the third-party investors.

Again, I will reiterate that the details of the MLP will be included in the S-1 that we will file, and that we'll file before year end. And that we'll not answer any questions in regard to that but are happy to take questions about the strategy at the Quicksilver level.

So with that, I'll open it up -- the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of David Heikkinen.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I had a question on the targeted leverage in paying down debt. How much of that is intended from drop-downs, including the first phase? And how much of that target is the Horn River Basin midstream, other joint ventures, other asset sales as you think about the year-end '12 plans?

Philip W. Cook

That target that we talked about, which is paying down the $940 million of debt that is callable by the end of 2012, we'll do that all from proceeds from this strategy. The other transactions that we're working on we'll go to fund those assets that we are in exploration on and/or development.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. So really the drop-down strategy takes $940 million, everything else is incremental to that?

Philip W. Cook

That's correct.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then, can you give us an update on just timing and kind of status on the Horn River Basin midstream deal? And then other key point is the threshold of volumes to make the $50 million Crestwood payment in the fourth quarter, did you achieve that, or are you on track to achieve that?

Glenn M. Darden

Yes. I'll talk about Horn River, David. The negotiations have dragged on a little longer than we wanted, we anticipated by the end of the third. We're still on track to get that done, and we hope to have it in the boat very shortly.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then volumes and targets for the Crestwood incentive payment?

Philip W. Cook

Yes, David, this is Phil. We're pretty close. I would say we're around 90% of that $50 million at this point. And depending on what volumes are for the fourth quarter, we'll see where we end up. We have the ability to make that up in the next period, as you know.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Right, it's just that I was thinking of timing. And will you give us reserves and current production that make up that 15% and 18%?

Philip W. Cook

No, I can't.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

That will be in the S-1?

Philip W. Cook

It will be in the S-1, yes. Those are based on current production and based on year end...

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Year end '10 reserves?

Philip W. Cook

Yes.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, so not an update. And then any just kind of Quicksilver ongoing strategy around, just curious of your Niobrara results, if you're completing some wells, kind of status of -- hadn't had encouraging results? Can you give us just an update there on the Quicksilver side?

Glenn M. Darden

Well we are encouraged with our Niobrara project. It's early stages. We are in the process of completing 4 wells, and we hope to talk about it perhaps as early as the conference call, earnings call here in a couple of weeks or shortly after that. But we like what we see.

Operator

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

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Just a couple of quick things. Looking at the gas environment and just difficulty in getting agreement on what the right valuation is for assets in this market, going forward, if gas needed to stay weak, do you have an idea for sort of maybe scaling back the drop-downs, if we see a still weaker environment?

Glenn M. Darden

As you know, most of this gas MLPs and oil MLPs, for that matter, have hedges in them for at least 5 years, and this will be no different. We'll be moving hedges down into -- it is well. And we've got a pretty good hedge position on the rest of the Barnett. We're tinkering with that a bit right now, but we'll be significantly hedged over the next 5 years as we move both of the pieces of this forward. But as a reminder, Noel, we have a very low-cost structure in this Barnett asset, and so we make relatively good margins even at today's low gas prices.

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And can you give even a very rough sense as to whether do you think there'll be a significant impact on G&A at the parent company at a consolidated level for the transaction? Or will this pretty much all fit within your current capabilities of your reserve financial structure, et cetera?

Glenn M. Darden

Well as you'll remember, with our KGS business unit, we did have some incremental public company costs. But they're not significant relative to the whole, let's say, $1 million to $2 million possibly.

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And did you guys give any thought to a royalty trust structure instead of the MLP?

Glenn M. Darden

We did, Noel. And we did -- we had advisers giving us good advice, good counsel. We studied the marketplace on the royalty trust. We studied various other options. And this, in the end, was pretty clearly the top pick. And we like the operational control. We like managing it over time. It's not a passive transaction. It's an actively managed one, which we like. And this was clearly the best avenue for us to follow.

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And just my last one, is there any obstacle to putting Canadian assets into the MLP or somehow aligning that subsidiary so you could drop assets down?

Glenn M. Darden

Yes. We probably would not do that. There's a lot of tax friction bringing cash back across the border and distributing it to holders, so that's probably not in the plans.

Operator

The next question comes from the line of James Jampel with HITE.

James Jampel - HITE

I'm wondering, does the formation of the MLP have any impact on your eventual disposition of your BreitBurn units?

Glenn M. Darden

No, it does not. No, and now that you brought that up, as we've talked publicly about before, the ownership for those units, it probably did not belong in our long-term portfolio. So we'll be opportunistic. We sold about 50% of our interest in BreitBurn very efficiently several months ago. And at the right opportunity, we'll monetize those assets, those units.

James Jampel - HITE

Could it be that you're time scale for divesting them is perhaps slower because you have other avenues to raise capital now?

Glenn M. Darden

It's not a question of will we monetize them, it's just a question of the right timing. So, no, I don't think so.

Operator

Your next question comes from the line of Steven Karpel with Credit Suisse.

Steven Karpel - Credit Suisse

Can you give any sense -- well I guess first off, the timing of additional drop-downs and kind of what the plan is, and you've said this $940 million number. The first transaction will be $400 million. Can you bridge us to how you get to the bigger numbers, and how some of that timing works?

Glenn M. Darden

Well, we really can't talk about the MLP specifically, Steve. But there'll be a lot more detail in the S-1.

Steven Karpel - Credit Suisse

Can you give us any sense on the assets at all of -- I don't know, if it's by field or a portion of the field, maybe it's by the alliance or the oil area, of the wetter area versus drier, give us a sense on the first drop-down?

Philip W. Cook

We can't. We selected the assets, but we can't discuss it on this call. It certainly will be in the S-1. I think what we can say is that we're dropping 15% of our proved reserves based on year end reserves, down an 18% of our production. I think the other thing we can say regarding the debt is that we've got $940 million that is callable and that our intention is to pay that down within 2 years.

Steven Karpel - Credit Suisse

And then finally, you alluded to it a bit with sort of the debt -- the pay down, is the $940 million the total debt reduction? Or is $940 million the plan to -- what's callable and you potentially replace it with other forms of financing? I suppose, is the -- how do you look at this on total levels of debt that are ideal?

Philip W. Cook

We don't plan on replacing it with other financing. We plan on cleaning up the balance sheet and having a stronger balance sheet as we move forward.

Steven Karpel - Credit Suisse

And then finally, on the terms of the focus of kind of the drilling going forward, obviously, there's a lot to do in the Horn River. But can you talk about a bit just qualitatively on where the focus will be on the drilling side and what it means for the legacy Quicksilver Resources?

Glenn M. Darden

Well we have several new projects as we've talked about publicly. The Niobrara is moving along. Horn River is farthest along with our development wells starting to be drilled up there. We have a West Texas project, and then we still have significant growth in the Barnett. So this transaction, this MLP is designed to reduce our debt, get us on better financial footing to move forward. And as Phil said, we'll be bringing in outside dollars to fund these newer exploration projects, if they're outside of cash flow.

Operator

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

Brian M. Corales - Howard Weil Incorporated, Research Division

Can you maybe talk about your 2012 capital budget? And would this defer or offset any potential capital spend for the Barnett?

Glenn M. Darden

We are working on our capital budget currently, and we'll be talking about that later this year. So I don't know that it impacts our game plan in the Barnett there, Brian.

Brian M. Corales - Howard Weil Incorporated, Research Division

Okay. And maybe can we assume that there should be more dollars spent towards the Niobrara based on what you're seeing thus far?

Glenn M. Darden

I would say we'll be spending dollars certainly in 2012 on the Niobrara. We just haven't arrived at what the dollar number is, but we're making progress there.

Operator

Your next question comes from the line of James Spicer [ph] With Wells Fargo.

Unknown Analyst -

You said that you're target is to pay down all of your public debt within the next several years, and I'm not quite sure I understand this comment. Does this mean that you don't anticipate having any debt at KWK and transfer all of it down to the midstream entity? Or maybe alternatively, what's the longer term cap structure and leverage metrics that you envision in having at Quicksilver?

Philip W. Cook

So this is Phil Cook. We did said that in our comments. I will remind you that once we get past the $940 million, the next 2 tranches of debt that are outstanding are pretty high interest rates. And so our goal would be to take out that existing public debt as well. That being said, we won't have a company that has no debt in it. But it will have a different debt structure and capital structure than you see today. So our anticipation, I think, would be that, that debt will be refinanced over time, and that we'll have appropriate levels of debt.

Glenn M. Darden

But appropriately lower.

Philip W. Cook

Appropriately lower. And then now and again, I'll say the $940 million that we've planned on paying down will not be refinanced.

Unknown Analyst -

Okay. And do you have any guidance as to long-term leverage metrics, debt to EBITDA, debt to cap targets that will make sense to you there?

Philip W. Cook

We haven't gone public with that. I will tell you that if you just kind of back of the envelope look at our last 12 months and think about debt to capital, and debt to EBITDA and EBITDA to interest, those numbers are roughly -- and again, these aren't with adjustments, it's just taking it off of what I expect the financial statements to look like at the end of September, debt to capital is about 65%. And on a pro forma basis with this transaction, it's 60% and going south. And as I would say, take the $940 million out and recalculate yourself, and you can come to the conclusion of where we think we want to be. On the debt-to-EBITDA basis at $930 million, we would be about 4.4x and that goes to 3.7x on a pro forma basis, again, reducing as we go through time. And EBITDA-to-interest coverage was at 2.8x at $930 million and that would have -- on a pro forma basis be 3.2x. So again, getting better as we go through time.

Operator

Your next question comes from the line of Pearce Hammond with Simmons & Company.

Pearce W. Hammond - Simmons & Company International, Research Division

On the $400 million of anticipated proceeds from the MLP both between the IPO and from the drawdown on the credit facility, what portion or what percentage of that $400 million do you think will be met by the IPO and then what percentage by the pull-down on the credit facility?

Glenn M. Darden

I'm not sure if I can really give you the details on that without getting myself in trouble.

Pearce W. Hammond - Simmons & Company International, Research Division

Okay. And then begs another question, which is just curious on the timing of this press release here, why did you decide to announce this before you actually filed a registration statement?

Glenn M. Darden

Yes. we have, as John said in his introductory comments, we have some convertible debentures that have a put that is exercisable right now. And upon advice of securities counsel, their view was that we needed to get this information into the hands of those bondholders, and this is the forum to do that. They have the expiration of their put decision is next Friday, and so we needed to make sure they have this information.

Pearce W. Hammond - Simmons & Company International, Research Division

And then what's your anticipated timing of the filing of the registration statement?

Glenn M. Darden

Before year end.

Pearce W. Hammond - Simmons & Company International, Research Division

And do you think that's like in the next few weeks or December 31?

Glenn M. Darden

It's probably not December 31 and it's probably not in the next few weeks. Somewhere in between there.

Pearce W. Hammond - Simmons & Company International, Research Division

Okay. And then I understand your consolidating everything, but how should we think about the hedges that you currently have and how that will transfer essentially to the MLP?

Glenn M. Darden

We'll transfer assets and hedges into the MLP, and it will be appropriately hedged for the liquids portion as well as the gas portion. The remaining hedges, obviously, will remain at what I'll call, for a lack of a better word, the GP, which is for the rest of the Barnett assets.

Pearce W. Hammond - Simmons & Company International, Research Division

Great. And then I've got 2 quick ones. One, you mentioned Horn River is still on track, but it dragged a little bit. Any specific color as to why it's dragged?

Glenn M. Darden

No, just making sure we've got the appropriate deal structure.

Pearce W. Hammond - Simmons & Company International, Research Division

And then finally, what's your current production in the Barnett right now?

Glenn M. Darden

About $350 million a day.

Operator

Your next question comes from the line of Ravi Kamath with Global Hunter Securities.

Ravi S. Kamath - Global Hunter Securities, LLC, Research Division

Yes, quick question on the bond pay-downs, just wondering if you could sort of give the order of the pay-downs with respect to the bank debt that converged, the 8 1/4% of '15 and the 7 1/8% of '16?

Glenn M. Darden

Well, I think you can look in our 10-K and see what's callable first. And so I'd use that as a guide.

Ravi S. Kamath - Global Hunter Securities, LLC, Research Division

Okay. And is -- will you be looking at dollar price to make the decision or higher coupon? How do you think about that?

Glenn M. Darden

Again, I'd guide you to what's callable first.

Operator

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

Jeffrey W. Robertson - Barclays Capital, Research Division

Glenn, in the context of the MLP, well you mentioned looking at acquisition opportunities to supplement what you can do with Barnett drop-downs. Would you also look then at acquisition opportunities at the parent level to supplement what you are all doing with new ventures and maybe use the MLP to help with those types of deals.

Glenn M. Darden

I don't think so. That's probably not our first priority, Jeff. I think we have such growth opportunities at the parent level that would probably push the acquisition side to the MLP. That's the more appropriate vehicle. Now acreage, those types of things that fit well within projects that we're working on, those are always on the table but probably not big grassroots acquisitions.

Jeffrey W. Robertson - Barclays Capital, Research Division

Okay. And, Phil, I don't know if you can answer this, but the hedges that you all would have in place with the MLP, are those all at KWK now? Or are you all still putting those positions together?

Glenn M. Darden

Everything that's going into the MLP exists today.

Operator

[Operator Instructions] And your next question comes from the line of Brian Kuzma with Weiss Multi-Strategy.

Unknown Analyst -

What's the current decline rate on the Barnett right now, just the asset base that you have?

Glenn M. Darden

It varies across the asset base. But if you look at it for next year, it's about 12% across the asset base, and then that changes over time as we drill more wells.

Unknown Analyst -

Okay. And what's your 2011 capital budget for the Barnett? Do you guys have that split out like Texas?

Glenn M. Darden

Yes. It's in our last Q that we filed, what we expect to spend by area. I don't have it right in front of me. But just a second, Brian.

Unknown Analyst -

And I guess, while you're looking that up, is there a number that you guys use when you think about long-term cost at production on your Barnett assets?

Glenn M. Darden

Yes, I think it's at around $1. And our drilling and completion budget this year for the Barnett was about $240 million. And as you probably know, that asset has grown 20% this year.

Unknown Analyst -

I got you. So $240 million gets me 20% growth plus the 12%, offsetting a 12% decline.

Glenn M. Darden

Yes. Maybe the CapEx for the whole company is probably $115 million, $120 million. So for the Barnett, it's a bit lower.

Unknown Analyst -

Okay. And that maintenance number, is that the '11 number? Or is that a long -- because I know you guys -- a long-term number?

Glenn M. Darden

That's the number to keep it flat from '11 to '12.

Unknown Analyst -

I got you. And then '13 and beyond, do you think that, that's the same number? Or do you think it...

Glenn M. Darden

The decline rate changes. But I'd say over a 5-year period of time, that's pretty close given if cost didn't change.

Operator

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

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

Another question on the hedges. Obviously the gas markets have been very weak, can you tell me looking out into, I guess, the end of 2012 and 2013, I know you've said that you'd like to increase your hedge position for those periods. Where would you pull the trigger on additional hedges in those periods?

Glenn M. Darden

I would say...

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

Sorry, and if you could just tell us what the -- if you've added -- if you've been able to layer anything in since the last call?

Glenn M. Darden

Well we layered in some longer term hedges. I'm not sure if that was prior to our last call. I think it was. And we'll, again, look longer dated hedges certainly in the MLP to lock in cash flow. But we haven't pulled the trigger on any yet, but we certainty will look very closely.

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

And is there just a price point that you could talk about that you'd be a little bit more aggressive about?

Glenn M. Darden

I think what we can talk about is that the hedges that we have in place gives us the ability to hedge gas in the MLP at about a $6 floor. And then the rest of the Barnett asset, we've got some long-dated hedges. Those hedges are about $100 million in the money, so we're talking -- and then they've got floors of $6.20 in some of them. So we're talking about do we want to keep that hedge position in place for the rest of the Barnett or refigure it a bit and put some floors that may be, might be a bit lower than that in place or unlock the volume.

Operator

Your next question comes from the line of Mark Caruso with Millennium Partners.

Mark Caruso - Millennium Partners

Just a quick follow-up. You talked about the proceeds for this being used for debt pay-down and you have some other things in the hopper. Can you just talk about the priorities that you use cash for that? I know in the past you talked about using the revolver for the cash flow gap. I just want to get a better sense on the bridge going forward, the use of the cash on the next couple of things.

Glenn M. Darden

Yes, I think if you think about the cash flow gap in terms of capital, we filled that part of that with the sale of our BreitBurn units earlier in the year, and we can close that gap with the sale of the rest of them. Specifically though, this $400 million is intended to pay down public debt. And so I would include in that the $150 million convert that is currently puttable.

Mark Caruso - Millennium Partners

Okay. And then the JVs or other upstream things in the Horn River JV, those proceeds, can you just talk about priority use for those? Are you gonna make further proceeds down ? Or...

Glenn M. Darden

The proceeds in Canada, for example, and of course we try not to move money back and forth across the border because it's tax inefficient. The proceeds from transactions in Canada would go first to pay down the credit facility in Canada and then second, to develop the assets.

Operator

Your next question comes from the line of Gary Stromberg with Barclays Capital.

Gary Stromberg - Barclays Capital, Research Division

Two quick questions. First, I assume this new MLP will be formed as an unrestricted subsidiary. What is your restricted payments basket available in the notes?

Philip W. Cook

Yes our restricted payments basket is about $670 million, and it will be formed as an unrestricted subsidiary.

Gary Stromberg - Barclays Capital, Research Division

Okay. And is that $670 million the same for seniors and subs?

Philip W. Cook

Yes.

Gary Stromberg - Barclays Capital, Research Division

Okay. And then the question -- the second question is, what is the basis today in the Barnett? And what's the basis on a 5-year strip, roughly?

Glenn M. Darden

Are you talking about the differential?

Gary Stromberg - Barclays Capital, Research Division

Yes.

Glenn M. Darden

Gas price differential?

Gary Stromberg - Barclays Capital, Research Division

Correct.

Glenn M. Darden

I would say it's about $0.15 under Henry Hub, $0.10 to $0.15 where we are today.

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

And that's similar on the strip?

Glenn M. Darden

Yes.

Operator

Your next question comes from the line of Marshall Carver with Capital One South.

Marshall H. Carver - Capital One Southcoast, Inc., Research Division

Just a question on what exactly changed over the last couple of months since your last conference call that make -- you announced the MLP now. I mean is it attractive MLP pricing, or is it that you haven't done -- announced the JV yet? If you had announced the JV, would this not be happening? I'm just trying to see what shifted over the last couple of months.

Glenn M. Darden

Well, Marhsall, we'll restate this but any JV proceeds will be used to fund those projects on the upstream side or midstream side in the case of the Horn River. We have been working on, a game plan for the last 6 months, and we looked at royalty trust. We looked at various other strategies. We've looked at asset sales. And this is what we believe is the best avenue to follow and the best path and the highest margins that we can make off our assets. So we have a great asset base. We don't feel that it's being valued properly in its current form. And in looking at, studying the MLP, the public MLPs, they are trading, you can see that they're trading better than the E&P -- similar E&P companies. So we have a good asset base, and we think it fits well with the MLP structure.

Philip W. Cook

And Marshall, I'd say it further, this is Phil, nothing has shifted. We've been working on some strategic alternatives but as Glenn said for the last 6 months. And clearly, we can't tell you everything we're working on all the time. We tell you things when they've become baked and complete. So that's kind of where we are with this particular vehicle.

Operator

[Operator Instructions] And there are no further questions at this time.

John E. Hinton

Thank you, LaTonya. Just so you know, a replay of this call will be available on the company's website for 30 days. I want to thank you for your time and interest in Quicksilver this morning, and that concludes our call.

Operator

Thank you for your participation in today's Quicksilver's Strategy Discussion Conference Call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Quicksilver Resources Inc. - Special Call
This Transcript
All Transcripts