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QuicksilverResources Inc. (NYSE:KWK)

Q42007 Earnings Call

February 26, 2008, 11:00 am ET

Executives

ThomasF. “Toby” Darden – Chairman

GlennDarden – President, Chief Executive Officer

RichardC. Buterbaugh – Vice President, Investor Relations and Corporate Planning

PhilipW. Cook – Senior Vice President, Chief Financial Officer

Analysts

IreneHaas – Canaccord Adams

RichardTullis – Capital One Southcoast, Inc.

GilYang – Citigroup

DavidKistler – Simmons & Company International

MonroeHelm

DavidSnow

RonEisman – Primerica Financial Services

StephenBeck – Morgan Keegan

BrettBrunell

JackHayden

JohnRavasinio

StephenCarple

Operator

Good morning.My name is Rachel and I will be your conference operator today. At this time Iwould like to welcome everyone to the Quicksilver Resources fourth quarterearnings conference call. All lines have been placed on mute to prevent anybackground noise. After the speakers’ remarks there will be a question andanswer session. (Operator Instructions).

Thank you.Mr. Buterbaugh, you may begin your conference.

Richard C. Buterbaugh

Thank you,Rachel, and good morning. Joining me today are Glenn Darden, President andChief Executive Officer; Toby Darden, Chairman; andPhil Cook, Senior Vice President and Chief Financial Officer.

This morningthe company issued a press release detailing Quicksilver’s record results forthe fourth quarter of 2007. If you do not have a copy of the release you canretrieve a copy of it on the company’s website at ww.qrinc.com under the newsand updates tab.

Duringtoday’s call the company will be making forward-looking statements which aresubject to risk and uncertainties. Actual results may differ materially fromthose projected in these forward-looking statements. Additional informationconcerning risk factors that could cause such differences is detailed in thecompany’s filings with the SEC.

Today’spresentation will include information regarding adjusted net income, which is anon-GAAP financial measure. As required by SEC rules, a reconciliation ofadjusted net income to net income, the most directly comparable GAAP measure,is available on our website under the investor relations tab.

Please keepin mind that all references for share amounts reflect the impact of atwo-for-one stock split affected in the form of a stock dividend which occurredon January 31st, 2008.

For the fourthquarter of 2007 the company reported net income or $396.1 million or $2.25 perdiluted share. This included a net of $366.8 million of non-recurring itemsrelated to the divestment of our northeast operations in Michigan, Indiana, andKentucky to Breitburn Energy Partners as of November 1st, 2007.Excluding these items, adjusted net income was $29.3 million or $0.18 perdiluted share, which is an increase of nearly 50% from the prior year quarterand up slightly sequentially from the third quarter of 2007 adjusted net incomeof $0.17 per diluted share. And this is despite the sale of approximately 75million cubic feet of gas equivalent per day of production in November 1strelated to the Breitburn transaction.

Once again,the continued successful execution of our development program in the Fort WorthBasin Barnett resulted in a 30% increase in volumes of natural gas and naturalgas liquids relative to the third quarter 2007 levels.

Now I willturn the call over to Glenn Darden for some additional information on ourrecord operating results.

Glenn Darden

Thank you, Rick. Two-thousand-seven was a verygood year for Quicksilver Resources. The company had record production andearnings and we ended the year with approximately the same reserve numbers asyear-end 2006 despite the loss of 546 BSF equivalent in the sale of thecompany’s northeast operations to Breitburn Energy Partners. Approximately 75million cubic feet of gas per day was transferred in that sale. By next quarterwe expect to replace that production volume as well.

Most of thisgrowth is coming from Quicksilver’s operations in the Barnett Shale and theFort Worth Basin. Excluding the proceeds from the divestment of the northeast operations,Quicksilver’s net income for the fourth quarter of 2007, as Rick said, was$29.3 million or $0.18 per diluted share, an increase of 49% from the prioryear quarter.

The per-sharedata reflects the two-for-one stock split which was effective January 31st.This stock split was the third stock split in the last five years for thecompany.

Ourproduction for the fourth quarter averaged 220 million cubic feet equivalentper day, which was a 24% increase over the same period 2006. This productionnumber included October production from the northeast operations prior to theeffective date of sale. For the year, Quicksilver’s daily production average of213 million cubic feet equivalent per day was a 27% increase over 2006 volumes.The company replaced 780% of this production with the drill bit at a findingand development cost of $1.87 per MCF equivalent.

In the FortWorth Basin the company drilled 52 net Barnett wells and connected 50 net wellsinto sales in the quarter. For the full year Quicksilver drilled 219 net wellsand connected 163 net wells. In Canada the company drilled 161 net wells in theHorseshoe Canyon Coal area of Alberta and production grew over 10% for theyear.

In West Texasin the Delaware Basin the company is completing the last two of five initialBarnett wells. We’re also drilling a horizontal section of the Woodford Shalefrom a vertical well that penetrated both the Barnett and Woodford shalesections. We’re in the early stages of production testing and analysis, but thecompany has made improvements in frac effectiveness since the initial wells andwe believe we are on track to move this to commerciality. We will test theWoodford in a couple of additional wells and will evaluate both Barnett andWoodford sections prior to releasing results, but we hope to talk about this inmore detail later this year.

With the saleof the northeast operations and the company’s earlier initial public offeringof its KTS midstream subsidiary, Quicksilver has a strong capital structure andis well prepared to fund its high growth strategy. Our new ventures team iscontinuing to assess new basins in order to be early to capitalize on new,unconventional reservoirs.

We fight hardto be among the highest growth and lowest cost operators in the business. Ournumbers are showing we are winning that battle.

And now Iwill turn the call over to Phil Cook, our chief financial officer, to reviewthe financials. Phil?

Philip W. Cook

Thank you,Glenn, and good morning. Production volumes for the fourth quarter grew from178 million cubic feet a day in the fourth quarter of 2006 to 220 million cubicfeet a day in the current quarter, a 24% increase year over year. Keep in mindthat this increase ignores the fact that we sold our northeast operations and,therefore, the volumes for those assets were not included for the months ofNovember and December 2007.

For the year,average production volumes grew 27% when compared to 2006. If you consider thevolumes that have been sold and look at the performance of the remainingassets, volume grew by 95% from 100 million cubic feet a day to 195 millioncubic feet a day when comparing the fourth quarter of this year to the fourthquarter of 2006. Sequentially, if you pull the northeast operations out of thethird quarter of 2007 and compare the fourth quarter also without the northeastoperations the volume-to-growth rate is 20% sequentially.

Totalrevenues for the fourth quarter were approximately $149 million, a decrease ofapproximately $10 million from the 2007 third quarter which again includesvolumes from the northeast operations for the months of November and December.

Realized priceswere higher for the quarter, which increased revenue by $7 million over theprior year quarter. However, all this increase was more than offset by thevolume decrease resulting in a net decrease of $10 million in revenue. For theyear-end 2007 total revenues grew from $390.4 million in 2006 to $561.3million, a 43% increase, 70% of which is due to increase production volume.

Realizednatural gas prices for the quarter were $6.58 compared to $6.05 in the year-agoquarter. For the year, gas price realizations were $6.73 compared to $6.05 in2006.

Natural gasliquids realized prices were $49.44 a barrel in the current quarter compared to$34.49 a barrel in the year-ago quarter, up 43% year over year.

For the year,liquids prices were $43.23 a barrel in 2007 compared to $38.85 a barrel in theyear 2006, an 11% increase.

Realized oilprices were $78.25 a barrel in the current quarter, up from $54.22 a barrel inthe 2006 quarter, a 44% increase year over year. And for the year, oil averaged$63.87 a barrel compared with average prices in 2006 of approximately $60 abarrel, a 6.5% increase.

For the 2007quarter the company generated almost $72 million of cash flow from operationsas compared with $33 million in the previous year quarter, a 117% increase.Cash flow from operations for the year was a record $319 million compared with$242 million in 2006, a 32% increasefor the year.

One item thatI will note on cash from operations in the quarter, I noticed that some of theearlier reports that came out this morning that cash flow per share was beingcalculated without regard to changes in workingcapital. Keep in mind that we have an unusual item in the cash flow statementfor the quarter which is the gain from the divestiture of our northeastoperations and the cash taxes related to that transaction are getting addedback through changes in workingcapital. So to say that another way, the gain comes out of the deduct of netincome as well as the deferred taxes, however, the cash component of taxeswhich we’ll end up paying in the first quarter is down in changes to workingcapital. If you consider those cash taxes the cash flow from operations thatyou will get is $0.60 a share. Those cash taxes are $46.601 million on thedivestiture transaction.

Net incomefor the quarter excluding transaction related expenses and the gain recognizedfor the sale of our northeast operations was $29.3 million or $0.18 a dilutedshare as compared to net income of $19.7 million and $0.12 a diluted share inthe year-ago quarter. Net income for the year excluding special items wasapproximately $115 million or $0.70 a diluted share compared to $93.7 millionor $0.58 a diluted share in the year-ago period, a 21% increase in earnings pershare year over year.

Totaloperating expenses for the quarter excluding D&A were $36 million ascompared to $30.1 million in the prior year quarter and $49.2 million in thethird quarter of 2007. The sequential decrease of $13.2 million all relates tothe divestiture of our northeast operations. The increase year over year of$5.9 million is related to increasing operations in Texas.

With thisquarter I’m going to begin giving a bit more detail in our expense guidance, sosome of the amounts that I will discuss next have changed. I’llrecap when I’m finished and then answer questions after our prepared remarks.

Leaseoperating expense, which I’m defining as just lifting cost, for the quarter onan adjusted basis was $1.04 per MCFE compared to $1.26 in the third quarter of2007. These amounts exclude transportation, processing, and production taxexpense.

Transportationcost, which is the cost to get our gas from the tailgate of our facilities tomarket, was $0.29 on an MCFE basis during the fourth quarter compared to $0.25on an MCFE basis in the third quarter of 2007. This unit cost increase is theamount of gas delivered from Texas as increased as a percentage of totalcompany production.

Processingexpense, which is the cost to gather and process our gas from the wellhead upto the tailgate of our facilities and obviously through our facilities, for thefourth quarter was $0.20 on an MCFE basis compared to $0.27 in the thirdquarter of 2007.

So just as arecap, oil and gas expenses when broken into its components are as follows:total oil and gas expense is $1.53 for the fourth quarter of 2007;transportation component of that is $0.29 on an MCFE basis; processing expenseis $0.20; and the LOE component is $1.04. And I would just remind you that theguidance range for operating expenses was $2.10 to $2.30 for the fourth quarterand we came in at $2.31.

So on an LOEbasis we came in within the range. The range was $1.45 to $1.55 and we were at$1.53 on a clean basis, and we’re down $0.25 sequentially or about 14% from thethird quarter of 2007. Clearly we had a lot of noise in the quarter with thedivestiture of the northeast operations, but the trend on LOE is definitelydown.

As Idiscussed with you last quarter and as we continue to grow our Texas productionand gain efficiencies in our cryogenic facility, we’re reducing our unit basecost. Our cash operating margin as based on current prices continue to be inexcess of 50% across the company, even after considering our F&B costs of$1.37 for 2007.

The DD&Arun rate for the quarter was $1.78 per unit, an increase from the $1.47 perunit reported in the third quarter. The increase in the depletion rate from$1.21 in the third quarter to $1.38 in the fourth quarter is a result of ourfunding costs during the year and our future development costs.

Our DD&Arate changes during theyear as we add depreciable assets. Depreciation as a component of that rate was$0.30 compared with $0.25 in the previous quarter, which is primarily theresult of putting new midstream assets in service.

G&A was$0.63 on the unit basis for the quarter as compared to $0.47 in the year-agoquarter and $0.65 in the third quarter of this year. For the year, G&A is$0.60 on a unit basis, which includes approximately $0.12 of non-cash deferredequity compensation expenses lead to LTI plans for all employees. Therefore, ona cash run rate basis G&A is about $0.48 on a unit basis. Our head counthas increased 25% year over year due to our increased capital program anddrilling activity.

On thecapital and liquidity. Our revolving credit facility at year end wasapproximately $310 million, drawn on a borrowing basis $750 million. Total debtnet of cash at year end was $785 million, which translates to a total net debtto capital of approximately 42% and, more importantly, debt per proved MCFE is$0.51 on a unit basis.

Myexpectations are our borrowing base will grow by at least $150 million to $900million with our most recent reserve report giving us plenty of room on thatfacility to execute our 2008 drilling program.

Now I’ll makea few comments about what to expect in the first quarter of 2008. Productionvolumes for the first quarter should be in the range of 210 million to 220million a day on a gas equivalent basis. Keep in mind that volumes in thefourth quarter include one month of Michigan, Indiana, and Kentucky assets andwithout those assets included production was 195 million cubic feet a day.

With respectto commodity prices it should be noted further here that we have an average ofapproximately 132 million a day of natural gas hedged with collars and swaps.The collars have a weighted average floor of $7.83 per BDNA and a weightedaverage ceiling of about $10.05 per BDNA. These hedges are on approximately 75%of our expected gas production. For the remainder of the year we have collarson 1,000 barrels of oil a day with a floor of $65 and a ceiling of $75.68.Additionally for the remainder of the year we have swaps in place for 3,000barrels a day of NGLs with an average swap price of $43.82 a barrel.

Obviouslyunit costs are as much affected by volumes as they are absolute costs. With thevolume expectations that we’ve given the following run rate ranges should beexpected for the first quarter. Again, these expectations are in more detailthan we have issued in the past.

For LOE weexpect it to be in the range of $1.05 to $1.10 on a unit basis. Transportationexpense we expect to be $0.29 to $0.32. Processing expense we expect to be inthe range of $0.20 to $0.25. Production taxes should be in the range of $0.10to $0.15. G&A should be in the range of $0.55 to $0.60. And BDNA should bein the range of $1.78 to $1.80.

And thatconcludes my remarks. I’ll turn the call back over to Rick.

Richard C. Buterbaugh

Thanks, Phil.Rachel, at this time I’d like to open the call to any questions.

Question-and-Answer Session

Operator

(OperatorInstructions) Your first question is from David Kistler.

David Kistler – Simmons & CompanyInternational

Morning,guys. I wanted to explore the pipeline that you’re building for transport outof kind of the West Texas Barnett play. Can you talk a little bit about your thoughtprocess of putting that in place with only a couple wells drilled? Is itnecessary to be able to flow those wells, etcetera, or tie in and flow thosewells?

Thomas F. “Toby” Darden

Well, webelieve it’s strategic always in our plays to earn while we learn. That’s oneof the reasons for our decreased drilling activity until we got our pipeline inplace. It’s something we do in almost every basin we enter and this is a fairlyshort piece of pipe relative to the acreage position we hold. But it ties inour shallowest and thickest area of Barnett and Woodford to transport systems.So we can develop our technology at the lowest cost and not have to work in adeeper part of the basin until we get our technology refined. Our fractechnology.

David Kistler – Simmons & CompanyInternational

Okay. Andwhile you’re learning on that, if it takes a little longer is there gaselsewhere that will flow down that pipeline that you could benefit from?

Glenn Darden

Our team’stalking with a couple of other players out in the basin. So we anticipateperhaps third party volumes at a certain point.

David Kistler – Simmons & CompanyInternational

Okay. Andjumping real quick to Bosque and Erath County. On the lastcall you mentioned that you were slightly more optimistic on the North Bosque area. Canyou give us any additional colour there?

And that 2008drilling program that you laid out for us, two questions, is it net wells thatyou laid out for us, and does that include any activity in Bosque and Erath?

Glenn Darden

Well, as justan overarching statement, all the numbers we talk about are net, so those arenet wells. We will be drilling as part of the program this year wells outsidewhat we call our core area of 160,000 acres. Some of that includesthe northern portion of Bosque County, but we’llbe stretching out a little bit farther in that county as well as doing sometesting in Erath. So we haven’t given up on those areas. We’re certainly notincluding them in our proved reserves or possible at this time, I don’tbelieve. Or probable, excuse me.

David Kistler – Simmons & CompanyInternational

Okay. Andthen given sort of your hedging level, what could potentially cause you guys toadjust your capital budget this year? Obviously price will have an impact, butnot as large. I’d just be curious to get some colour there as your capitalbudget fluctuated pretty substantially this last year.

Philip W. Cook

It’s Phil.Outlying we do have a sizable hedge position, about 75% of our volume, so thattells you that we could ratch it up or down 20% to 25%. At the present timewe’re gearing up for our overall program. We have our production team andoperations team geared up for a fairly aggressive program, but it’s not quiteas aggressive as last year. One of the things we talked about was really tryingto determine the optimum spacing on which to develop this entire field on. Andthat’s probably the biggest focus we have other than bringing production on isto determine the optimum way to squeeze the most gas out of this reservoir.

David Kistler – Simmons & CompanyInternational

Okay. Great.Thanks for that colour. I’ll let somebody else jump on.

Operator

Your nextquestion is from Gil Yang.

Gil Yang – Citigroup

Hi. Goingback to West Texas for just a moment. Could you give a little bit more detailas to what makes you more confident that the region’s commercial versus whatyou saw a quarter ago?

Glenn Darden

Well, I thinkwe’re gaining on the frac side. We’re seeing some offset operators, starting tosee some success in both Woodford and Barnett. We’re at the very early stages.We haven’t production tested Woodford yet. We’ve been trying to get a handle onthe Barnett. But now we’ve got it running on kind of parallel tracks, bothWoodford and Barnett. So these projects take a while, as you know, Gil. Andwe’re in the early stages of probably a five-year program here, year two, twoand a half. I think we’re gaining on it. We’re certainly putting these fracsaway better and we’ll see if that results in better production. But it’s stilla bit early to talk about.

Gil Yang – Citigroup

It soundslike to get meaningful production out of the area, like 10 million a day,you’re still thinking of maybe middle of ’09 before you get there?

Glenn Darden

Well, we hopeto be able to talk about some of our results by later this year, but we’ll justsee. But ’09 we certainly will, we’ll need to be talking about it whether wehave success or not.

Gil Yang – Citigroup

Okay. Phil,can you talk about what the ongoing tax rates will be?

Philip W. Cook

Yeah, Ithink, you know, I think you should expect 33% to 35% roughly and all of thatis deferred, generally. We had some cash taxes obviously that we accrued in thefourth quarter that will get paid in the first quarter related to the sale. Butgenerally all of our taxes will be deferred.

Gil Yang – Citigroup

So, excludingthe sale you would not have had any cash taxes or essentially no cash taxes inthe quarter.

Philip W. Cook

That’scorrect.

Gil Yang – Citigroup

And whatwould the recurring tax rate have been excluding the sale and hedgingmark-to-market gains and losses.

Philip W. Cook

Probably 32%to 33%.

Gil Yang – Citigroup

Okay. AndPhil, what’s your debt to prove reserve ceiling?

Philip W. Cook

You mean oursort of target that we don’t want to go over?

Gil Yang – Citigroup

Yeah, well,target in the sense of the limit you can go to. Whether or not you target,well, maybe tell me what you’re targeting is what’s the limit.

Philip W. Cook

I don’t knowthat we have a limit, per se. I mean, certainly if we got it too high ourratings would change withS&P and Moody’s, but we don’t want to be really over $1 and we’re at about$0.51.

Gil Yang – Citigroup

So yourrating would get downgraded around $1?

Philip W. Cook

I don’t knowthat for certain, but when we talked to the rating agencies we talk about thatin terms of we don’t want to be over that metric.

Gil Yang – Citigroup

Okay. Allright. And last question on pricing is, let me refer to our model, I think thedifferential’s a little higher than we had expected. What do you expect tohappen going forward? Do you expect to see the kinds of basis versus anythingyou’ve seen in the past or has that changed?

Philip W. Cook

Well, I thinkon pricing one of the things that you may not have calculated in is that duringthe fourth quarter we had the full impact of that $2.49 contract. We weretrying during the quarter to move the delivery point of that Michigan gas. Asyou know, we sold the assets, so we were naked the underlying. We tried to movethe delivery point of that gas to Texas. We were unable to do that. During thequarter we delivered gas against that contract from Canada, thereforeit reduced our realized prices. As you know, we have marked that contract tomarket and it will no longer affect gas price realizations in 2008. But thatmay have been the piece that we weren’t real clear on how that was going toaffect realized gas prices.

Gil Yang – Citigroup

How much didthat affect prices in the quarter?

Philip W. Cook

I don’t knowwhat it was, but I’ll get back to you on it. I mean, it’s the differencebetween 25 million a day and $7 gas versus $2.29 gas.

Gil Yang – Citigroup

Okay. Allright. Thanks, Phil.

Richard C. Buterbaugh

Rachel, we’dask that all questions just be limited to one at a time to make sure thateverybody can get to ask their questions.

Operator

Okay. Yes,Sir. Your next question is from David Snow.

David Snow

Hi. I’m justwondering if you can give us an indication as to what spacing you’re now doingon the Barnett and what you’re expecting in average BSC per well on thosespacings and how far you may think about trying to go down.

Glenn Darden

Yes, David,we currently are drilling in basically Hood-Summerville-Hill County in the 500to 1,000 between well spacing, which probably calculates to roughly 50 to 100 acre spacing. Most of our drilling in 2007 was on 500 feet between wells, so we’re booking reserves onthat spacing at roughly 2.5 BCF equivalent. That includes a healthy componentof natural gas liquids. We have started to experiment on 250 feet between wells in certain areas in our LakeArlington project and in an area in Hood County and we’re seeing some promisingresults, early results in the Lake Arlington area on that. And we’re justbringing the wells on in Hood County.

So we’llcontinue to work on that, but as I said in the earlier question, that is afocus of ours this year to determine that optimum spacing. I’m not sure it’sgoing to be consistent all across the board of all of our acreage. In fact, Iwould say it will not be consistent, but in certain areas we think we can goinside of 500. In certainareas we’ll be a little bit wider, but overall the 500-foot spacing is going towork pretty well in the Hood and Summerville area, we believe.

David Snow

Are you simulfraccing?

Glenn Darden

We are.

David Snow

And that’sincluded in the two BCFs per well?

Glenn Darden

Two and ahalf BCFs per well.

David Snow

Two and ahalf, yes.

Glenn Darden

Two-two totwo-six.

David Snow

Okay. Thankyou very much.

Operator

Your nextquestion is from Ronnie Eisman.

Ron Eisman – Primerica Financial Services

Hi, guys. Ihad a question in terms of costs. What are the trends you’re seeing in yourdrilling completion costs in each of your operating areas?

Glenn Darden

Well, they’redown right now as far as drilling completion. We’re working on every aspect ofour development now that we’re in the manufacturing mode of the operation. StanPage, our new VP of operations, that’s one of his missions for the year is toreview and attack each of our areas of cost and work them down. I think he’sdoing a great job.

Ron Eisman – Primerica Financial Services

And they’restill trending now?

Glenn Darden

Slightly.

Philip W. Cook

Yeah, weproject it’s slight for the year, but we’re hammering hard and certainlydrilling costs have been down a bit. Fracing, we’ve saved costs on the fracingon a first stage, but we’ve added stages on a frac, so that’s about neutral.But they’re, water hauling, all sorts of costs that we believe we can controlbetter are starting to come down. We haven’t projected cost savings on aper-well basis in our budget, but we think we’ll see some.

Ron Eisman – Primerica Financial Services

Okay. Thanks.

Operator

Your nextquestion is from Irene Haas.

Irene Haas – Canaccord Adams

Hi, guys. Ijust wanted to check in and see what’s going on in Canada. How’s the Horseshoe Canyon coal doingand sort of any update on Manville. Are you guys ready to talk about it? Areyou still hopeful? Or are you going to pursue something else?

Glenn Darden

Well, the Horseshoe Canyon we had avery good year in Canada. We grewover 10%. It’s a nice bread-and-butter production from the Horseshoe Canyon. Wehave been pushing along at a slower rate at the Manville. We haven’t spent likeour competitors. We’ve tried to unlock that just by being close to the actionand having an acreage position. We have improved that. We were not atcommerciality and, as I’ve said before, I think that play takes a little highergas price to move it into commerciality. But we haven’t cracked the code on theManville. We haven’t given up on that.

I guessrelated to your last question, we’re always looking for new things and Canada’sone of the areas where we are looking and we’re starting to assemble someacreage up there and in a couple of new projects and we’ve got a very goodteam. So yes we are looking at new things.

Irene Haas – Canaccord Adams

WesternCanada?

Glenn Darden

In Canada.

Irene Haas – Canaccord Adams

Thank you.

Operator

Your nextquestion is from Stephen Beck.

Stephen Beck – Morgan Keegan

Good morning,guys. I was hoping that we could maybe talk about what your plans are in termsof drilling activity into the defined fairway of the Barnett and specificallyyour Lake Arlington project for’08?.

Glenn Darden

Well, I thinkwe’ve given guidance of roughly 220 wells in the total Barnett that wouldinclude Lake Arlington. We have tworigs running in Lake Arlington now, so we’ll bring our next production on fromthat project kind of mid-year, May-June time frame. That project’s going verywell. We’ve put in a lot of the infrastructure. That’s a dry gas area. So wedon’t have the processing aspect to it. As far as our overall game plan, we’removing full speed ahead, working on the spacing as I talked about, and perhapstweaking our fracs on the cost side and the overall well costs to drive thesecosts down as we’re in this development phase.

Stephen Beck – Morgan Keegan

In terms ofyour completed well costs on your latest well?

Glenn Darden

Completedwell costs, they’re probably in the $2.8 million to $3.1 million, justdepending on where we are. Arlington is a little bit more. Obviously we’redrilling longer laterals there to get under the lake. So those wells areprobably in the $4 million range, but the reserves warrant that because they’resignificantly higher.

Operator

Your nextquestion is from Brett Brunell.

Brett Brunell

Hey, guys. Ithink David just asked my question. So, thanks.

Operator

Your nextquestion is from Richard Tullis.

Richard Tullis – Capital One Southcoast, Inc.

Hey, good morning.Just going back to Lake Arlington real quick. Are you still looking at the EURsthere of say three to four BCFE?

Glenn Darden

We thinkthey’re going to be a bit higher than that.

Richard Tullis – Capital One Southcoast, Inc.

Okay. So yourpotential of 180 to 210 is going to be a bit higher as well?

Glenn Darden

Yes.

Richard Tullis – Capital One Southcoast, Inc.

Is youracreage still about 4,000 net?

Glenn Darden

Yes. I thinkso on a project basis.

Richard Tullis – Capital One Southcoast, Inc.

Okay. Andjust a last thing is how many rigs overall are you running in the Barnett rightnow?

Glenn Darden

We have 13rigs running today.

Richard Tullis – Capital One Southcoast, Inc.

Including thetwo in Lake Arlington?

Glenn Darden

Yes.

Richard Tullis – Capital One Southcoast, Inc.

Okay. Thanksa bunch. Appreciate it.

Operator

Your nextquestion is from Jack Hayden.

Jack Hayden

Hi, guys.Could you run for me how you arrive at that $0.60 in cash flow? Could you giveus the component of it? It was very confusing.

Philip W. Cook

Sure. This isPhil Cook. If you take cash flow from operations without working capital itemsfor the quarter it was $46.8 million. If you add back the cash taxes from thetransaction that was $46.6 million. Divide that by basic shares.

Jack Hayden

That I coulddo.

Philip W. Cook

Pardon me?

Jack Hayden

That I coulddo.

Philip W. Cook

And you get$0.60.

Jack Hayden

Okay. Now,next question I have, I think the question was asked about the pricerealization. Going forward, what kind of differential we should look at versus(inaudible) to your prices, what you’re realizing in the Barnett area.

Philip W. Cook

Yeah. Let mefirst answer Gil Yang’s question, which he asked what impact did the Michigancontract have on price realizations for the overall company. And that was,depending on what gas price you use, it’s $0.57 to $0.60. And then in additionto that I think you can use about $0.27 to $0.35 for differentials in Texas.

Jack Hayden

Okay. Andthat’s where we missed. The next question I have, I think the last time youwere in New York and you were talking about West Texas that you might have somecomments late in the year and then in the first quarter. What is holding you upfrom really coming through in saying what you have and what you don’t have?

Glenn Darden

Jack, webuilt our pipeline and it took a little longer to get it on line, so we slowedour operation there down until we got that in service. We are now gearing up andwe used a lot of our personnel at that time to complete Barnett wells in Texas,but we’ve moved full-time people on the ground there and have our pipeline inservice and are now proceeding ahead with our testing plan for ’08, which isfairly robust. And given the developments in the Woodford by our competitorswe’re pretty excited about that as an addition to our economics.

Jack Hayden

Thank you.

Operator

Your nextquestion is from John Ravasinio (sic).

John Ravasinio

Hi, guys.Good morning. I’m just looking at your (inaudible) for 2007 and I’m wonderingwhat those EURs were booked at on a gross basis.

Philip W. Cook

Two millionor so. Excuse me. Two billion or so BPF per well. Something like that.

Glenn Darden

Yeah. I think2.2.

John Ravasinio

All right.Thanks very much.

Operator

Your next questionis from Stephen Carple (sic).

Richard C. Buterbaugh

Good morning.

Operator

Stephen, yourline is open.

Stephen Carple

I just wantedto clarify on Canada, on some of the things you said on the opportunity thereand kind of what was driving some of the growth, if that was between internal growthand external growth.

Glenn Darden

That was allinternal growth. That was just our development, 100% by-the-drill-bit growth.

Stephen Carple

Have you seeadditional opportunities there for external growth?

Glenn Darden

We have andwe’re probably not in a position to be a big acquirer there. But we arecertainly seeing some opportunities on the acreage side that may play into ourunconventional development strategy.

Stephen Carple

I’m sorry,you’re seeing opportunities?

Glenn Darden

We areseeing, yes.

Stephen Carple

Havevaluations come down pretty dramatically or have they still held pretty well?

Glenn Darden

In certainsectors they have. Some of the public companies still have a ways to go to beon an MCF basis to be attractive, but I think maybe perhaps for the smallerjuniors there may be more opportunity there.

Stephen Carple

Okay. Thankyou.

Operator

Your nextquestion is from David Snow.

David Snow

Yes, I hadheard some mixed results on the Woodford Barnett by some of the others. Iwondered if you could just share with us where you’re, aren’t you in theshallower sections? Who is giving you the advice of great optimism out there inyour neighbours?

Glenn Darden

Well, we arein a shallower area and I’ll remind all the call that this basin is quite alarge basin and we have some competitors that are in a deeper portionoffsetting us to the north and northeast that are starting to get some results.I guess what else can I say, right? I probably should stop, David.

David Snow

All right.Well, I thought I’d try.

Glenn Darden

But we are ina shallower portion of the basin. We’re hitting the Barnett as shallow as 5,500to 6,000 feet in ourshallowest area. That means the Woodford is probably in the 7,000 to 7,500 foot range.

David Snow

Any chanceyou would co-mingle those?

Glenn Darden

There is thatchance, yes.

David Snow

I guess youdo verticals to do co-mingling, right?

Glenn Darden

Possibly acombination of the two, but it’s an early stage right now.

David Snow

Yeah. Okay.Thank you.

Operator

(OperatorInstructions). Your next question is from Monroe Helm.

Monroe Helm – Morgan Stanley

Greatresults, guys. Just a follow up on David Snow’s question about the West TexasBarnett. Can you talk a little bit about what you’ve done on the completionside there to give you m ore confidence about recovering? There’s obviously alot of gas in place there and the question is how do you crack it open? Are youdoing anything different than you did in the Fort Worth Barnett Shale and if socan you kind of share that with us?

Thomas F. “Toby” Darden

Well, we cantalk a little about it, Monroe. We’regetting more sand put away. That’s the biggest issue. And we’re attacking therock stresses that are the principal stresses in the rock. They are quite a bitdifferent than they are in the Fort Worth basin, so we’re attacking that from afracing standpoint differently than we do in the Fort Worth basin. But mostencouraging is the ability to put the fracs away and put a significant amountof sand in Woodford. So that’s about all I can say at this time.

Glenn Darden

Yeah, thefracs are significantly different that we initially started with and are quitea bit different that what we’re getting in the wells in the Fort Worth basin.

Monroe Helm – Morgan Stanley

Are theymulti-stage fracs or single-stage.

Glenn Darden

They’remulti-stage.

Monroe Helm – Morgan Stanley

Can you sayhow many stages and what you think the frac cost is on these wells?

Glenn Darden

It’s prettyearly, but it’s multiple stages and we’re actually increasing the cost a littlebit because of what we’re doing with sand content, etcetera. But overall wethink these wells, well, depending on just pure horizontal well bore in theBarnett, but those can be kind of sub-$4 million type wells, $3.5 million.

Thomas F. “Toby” Darden

And we havesome areas that have 600 to 700 feet of Barnett,which makes a pretty good vertical target as well.

Glenn Darden

But that wellwould be a lot less.

Monroe Helm – Morgan Stanley

Can you sayhow many horizontals you’ve completed?

Thomas F. “Toby” Darden

We’re incompletion of three horizontals and two verticals and we are taking ourhorizontal completions one stage at a time to learn as we go rather thandrilling a bunch of wells to learn the process. We think that’s more efficientfor our shareholders, use of the dollars, and it’s the way we’ve learned ineach of our basins going out. We really take our time with the completion partof the technology development of each basin.

Monroe Helm – Morgan Stanley

Once you geta little further along here are there any issues with holding the leases from atiming standpoint?

Glenn Darden

No, we’re ingood shape on those right now. Thanks.

Monroe Helm – Morgan Stanley

Can I ask onefollow up on, just for Phil Cook, on the boring base. Is the increase in theboring base based on year-end reserves or some update after the end of theyear?

Philip W. Cook

What I saidis that I think we’ll go from 750 million to about 900 million, so that will bebased on the year-end reserve report. And if you will recall, reserves areabout where they were at last year end and that boring base was 1.1 billion.There was a higher PDP component to that reserve base than there is today becauseMichigan was primarily PDP. So my anticipation is it will be less than 1.1billion, but it will be somewhere between there and probably that 900 million.

Monroe Helm – Morgan Stanley

Okay. Thanksa lot. Great call.

Operator

At this timewe have no further questions.

Richard C. Buterbaugh

Thank you,Rachel. Just as a reminder, a replay of this call will be available on thecompany’s web site for 30 days. Quicksilver will release first quarter 2008earnings on Wednesday, May 7th, 2008. The company will also host ananalyst and investor presentation at 2:00 p.m. Eastern Time on Wednesday, March5th, in New York. Details regarding this presentation are availableon our web site at www.qrinc.com. Otherinterested parties can listen to the conference through a webcast link thatwill also be available on our web site.

Thank you foryour time and interest in Quicksilver this morning. This concludes our call.

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Source: Quicksilver Resources Inc. Q4 2007 Earnings Call Transcript
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