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Quicksilver Resources (NYSE:KWK)

Q3 2012 Earnings Call

November 06, 2012 11:00 am ET

Executives

David Erdman

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

John C. Regan - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Controller

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

Analysts

Brian Singer - Goldman Sachs Group Inc., Research Division

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

David W. Kistler - Simmons & Company International, Research Division

Subash Chandra - Jefferies & Company, Inc., Research Division

Joseph Patrick Magner - Macquarie Research

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

Hubert Van der Heijden - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Steven Karpel - Crédit Suisse AG, Research Division

Brian M. Corales - Howard Weil Incorporated, Research Division

Operator

Good morning, my name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quicksilver Resources Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. David Erdman, Manager of Investor Relations, you may begin your conference.

David Erdman

Thank you, Tamika, and good morning, everyone. I'm joined this morning by Toby Darden, Chairman; Glenn Darden, President and Chief Executive Officer; and John Regan, Chief Financial Officer. This morning, the company issued a press release detailing our preliminary results for the third quarter of 2012. A copy of the release was available on the Investor Relations page of our website at qrinc.com, under the News and Updates tab. First, let's cover the Safe Harbor provisions.

During this morning’s call, the company will be making forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning risk factors, which could cause such differences, will be detailed in the company’s filings with the SEC.

This morning's conference will include information regarding adjusted net income, which is a non-GAAP financial measure. As required by SEC rules, a reconciliation of adjusted net income to the most directly comparable GAAP measure is available with the press release we issued this morning. So with that, I'll turn the call over to Glenn.

Glenn M. Darden

Thank you, David. Good morning. Quicksilver had an adjusted net loss of $8 million, or $0.04 per diluted share, for the third quarter of 2012. This compares to adjusted net income of $6 million, or $0.03 per diluted share, in the 2011 period. Third quarter 2012 results were impacted by a $547 million noncash impairment of properties due to lower average natural gas and natural gas liquids prices compared to the 12 months ended June 30, 2012, and a $284 million noncash valuation allowance of U.S. deferred tax assets related to impaired recoverability of future tax assets. John Regan will discuss this in greater detail in a moment.

Over the last few months, we have made very good progress on reducing capital commitments, securing hedges over $5 per MCF for a majority of Quicksilver's gas production in 2013 and 2014, improving debt covenants with our bank group and attracting partners in our key development areas. In September, Quicksilver announced a joint development agreement with Shell in the Sand Wash Basin in Northwest Colorado. Together, we will develop our combined 330,000 net acres in the Niobrara oil trend.

Quicksilver is also nearing the end of our process to bring in a partner in the Barnett. The objective is to sell a minority position to significantly reduce company debt and have a development partner going forward to fully maximize our position in the Barnett Shale. We continue to have the option of bringing a partner in combination with the launching of an upstream MLP.

In the Horn River Basin, we are in negotiations with international companies regarding integrating our significant upstream reserves with downstream projects, including potentially exporting gas from the West Coast of British Columbia. We are targeting to conclude those negotiations shortly.

On the production side, we were under guidance for the third quarter production due primarily to a delay in third-party plant startup in the Horn River. Our production there was geared to deliver 75 million cubic feet a day beginning in May and is actually capable of producing double that amount. It now appears this delay will be extended beyond year-end, so we're implementing plans to utilize other transportation and treating agreements on an interruptible basis beginning December 1 to begin selling up to an additional 50 million cubic feet a day.

We have also slowed drilling in our dry gas areas of the Barnett Shale and Horseshoe Canyon coals in Canada. We will increase activity as gas prices improve, and in the case of the Barnett, when we complete our partner selection process.

Quicksilver has continued to lower costs and reduce capital commitments. Our team has been very successful on both fronts and we'll keep pushing. As I said earlier, we are closing in on bringing partners in and outside capital to de-lever Quicksilver's balance sheet and to solidify our longer-term development plans. We are advancing the company's oil projects in Colorado and West Texas. And these projects have the size and scale to make a big impact for Quicksilver. We have high-quality assets and a team of talented managers and employees who are dedicated to ensure that we realize a long-term value for our shareholders.

And now, I'll turn the call over to John to discuss the numbers, and we'll be available for questions following his remarks. John?

John C. Regan

Thank you, Glenn. Good morning, everyone. Low commodity prices continue to define the theme of our earnings. For the third quarter, we posted a net loss of $652 million, or $3.83 a share, as Glenn mentioned. This compares with net income of $29 million, or $0.17 per share, in the 2011 quarter.

At the heart of the loss is $547 million of noncash impairment and a $284 million noncash deferred tax valuation allowance, which itself is related to the diminished likelihood of our realizing U.S. net operating loss carryforwards. The recognition of a valuation allowance in no way impacts our ability to use the NOLs in the future if we generate taxable income in the U.S., for example, if we have a taxable gain resulting from our ongoing JV process.

Our adjusted net loss for the third quarter of 2012, excluding these items, which I point out is a non-GAAP measure, was $8 million, or $0.04 per diluted share, versus net income of $6 million, or $0.03 per diluted share, in the 2011 quarter. Our adjustments derived at adjusted net income are outlined in the tables of our earnings release from earlier today.

With respect to the full cost ceiling test, we computed the current quarter ceiling using a trailing 12-month average Henry Hub price of $2.83 per MMBtu, which is 10% lower than what we used in the second quarter. We also used an AECO price of $2.48 per MMBtu in the third quarter, which is 9% lower than the second quarter figure. Average NGL pricing was flat quarter-over-quarter.

Our production averaged 362 million cubic feet of natural gas equivalent a day in the third quarter, an increase of just less than 1% from the second quarter and down 15% from the prior year quarter. This was 23 million cubic feet per day lower than the bottom end of guidance we provided for this quarter.

Let me first address this miss on guidance. As you are likely aware, we believe our wells in the Horn River have productive capability in excess of 150 million cubic feet per day. We can deliver up to 100 million cubic feet per day with our existing service equipment and the existing gathering infrastructure. But during the third quarter, we restricted the flow of gas to match the contractual treating commitment at an existing third-party natural gas treating facility because the second third-party facility was not commissioned as we'd expected at the time we provided guidance.

This new facility has yet to be commissioned as of today, and so as Glenn mentioned, we are securing alternative channels to treat our gas. This will enable us to ramp-up Horn River production, perhaps as much as an incremental 50 million cubic feet per day beginning in the December. We estimate that using this alternate path every 10 million cubic feet per day of production will provide approximately $2 million of incremental cash generation per quarter. So this is clearly an attractive proposition for us.

We had an average realized price of $4.23 per MCF in the third quarter, which is $0.25 higher than the second quarter, but $0.73 lower than the 2011 quarter. The average NGL realized price in the third quarter was $37.75, which is about 4% lower compared to the second quarter and 2% lower than the 2011 quarter.

On an unhedged basis compared to the 2011 quarter, average realized natural gas prices were 36% lower and average realized NGL prices were 42% lower. On an equivalent basis, we averaged $4.73 per Mcfe, which includes settlements on current hedges, but excludes approximately $18 million of cash collected during Q3 from commodity hedges that were not recognized in production revenue, which equates to an uplift of approximately $0.54 per Mcfe.

As a reminder, this stems because the value of the hedges that were restructured will be amortized into revenue over their original contract term, even though we receive the cash today from the new shorter-term contracts. We expect that this disconnect between the cash benefit of the hedges and their income statement impact will remain with us until the last of the restructured 10-year contracts expire in 2021.

Production revenue was $158 million for the quarter, which is $7 million higher compared to the second quarter, but $50 million lower than the 2011 quarter. Compared to the second quarter, higher prices accounted for $6 million of the $7 million increase, and higher volumes accounted for $1 million.

The $50 million decline compared to the prior year quarter is virtually evenly split between pricing and volume declines, which itself is driven by our capital spending pattern in the Barnett.

Moving to expenses. LOE was $0.66 on an equivalent unit basis for Q3, which is essentially flat to Q2 but -- and was $0.70 for the 2011 quarter. Third quarter LOE per unit was higher than the upper end of guidance due to our restricting Horn River flow, as I covered a few moments ago. The reduction in LOE compared to the 2011 quarter is primarily the result of our cost containment efforts and lower saltwater disposal volumes, gas lifts and compression expense in the Barnett, as we continue to shut in certain higher-cost wells.

LOE per unit in the Horn River declined by almost 75% compared to the 2011 quarter due to the economies of scale as the introduction of higher volumes from the new pad were spread across that asset's fixed cost base.

Gathering, processing and transportation was $1.24 in the third quarter, or $0.07 lower compared to the second quarter and $0.06 lower than the 2011 quarter. This results largely from the interplay between higher production volumes and our midstream commitments in the Horn River.

Unit cash expenses for LOE, GPT, production and ad valorem taxes and recurring G&A in the third quarter totaled $2.37 compared to $2.54 in the second quarter.

At our average realized prices for the quarter and including the impact of the cash derivative settlements I discussed earlier, our cash margin was $2.90 on an unlevered basis. On a levered basis, recurring cash interest expense was $1.13 per Mcfe. So cash margin was $1.77, or 34% on revenue.

Turning to hedging. We continue to expand our hedge portfolio, and as of today, we have a total of 225 million cubic feet per day of gas hedged at a weighted average price of $5.74 for the remainder of 2012. And we have 7,000 barrels per day of NGLs hedged at $45 for that same period.

For 2013, we have a total of 200 million per day of gas hedged at a weighted average price of $5.10, and 170 million per day of gas hedged at a weighted average price of $5.08 for 2014.

The natural gas hedges in '13 and '14 cover a majority of our expected production in those years. Our Canadian hedges included in the foregoing cover 60 million cubic feet per day for the remainder of 2012 at a weighted average price of $5.82, 50 million per day for 2013 at a weighted average price of $5.31 and 40 million per day for 2014 at $5.38.

In the aggregate, the fair value of our hedge portfolio was approaching $200 million at September 30, which is less than the previous quarter due to settlements and the elevation in the forward price curve since June 30.

A schedule reflecting our detailed hedge book is available to you on the Investor Relations portion of our website. And we intend to post the schedule of the amounts related to restructured hedges that are frozen in OCI, and thus, excluded from production revenue. We expect to post that schedule to the Investor Relations page in the next day or so after we file our 10-Q.

Turning to capital spending. We incurred $68 million of capital in the third quarter, bringing the year-to-date spend to $359 million. On our second quarter earnings call, I talked about reducing capital by $50 million for the remainder of 2012 for a full year spending estimate of $360 million. While we intend to finish the year below our original capital budget of $410 million, we're adding back about $23 million into our projections to fund additional drilling and completions activity in West Texas and in Colorado following our joint venture announcement there.

We also expect to recognize additional capitalized overhead for interest and back-office costs related to this expansion of our exploration programs. So our revised full year capital spending estimate is now $389 million. We expect to fund this increase in capital with the cash that we generate during the fourth quarter.

We're well under way with our 2013 budgeting process and expect to release that information to you after we receive Board approval, which we expect in December or in early 2013.

To recap my statements from the last quarter, capital spending levels next year are expected to be less than in 2012 as we continue to align the budget with commodity prices and take into account the deferred commitments and the productive capability in the Horn River and the flexibility that we have in Barnett.

Our ultimate objective, however, will be to spend within the cash we generate for 2013. Operating cash flow in the third quarter was $42 million. Borrowings increased to $87 million as a substantial portion of the second quarter's Horn River capital activity was paid in the third quarter. Total debt at September 30 was just under $2.2 billion. We have roughly $552 million utilized under our combined credit agreements.

To recap my comments from the second quarter regarding the credit facility, in August, we amended the credit facility to relax the interest coverage covenant. As part of that amendment process, the borrowing base was reset at $850 million with no change in the global letter of credit capacity, which is $200 million. The revised interest coverage requirement, which had been 2.5x, was reduced to 1.5x, where it remains through March 2014 before stepping up to 2x in June of 2014, and back to the original 2.5x in September of 2014.

The lenders also added a senior secured leverage covenant of 2.5x, which began in September 2012. The facility continues to be redetermined on a semi-annual basis with the next review scheduled for April of 2013. The reduction in the interest coverage ratio affords Quicksilver flexibility to manage the balance sheet and additional time to execute on our plans to complete joint ventures and benefit from the projected commodity price increases suggested by the forward gas curve.

Despite the reduction in the borrowing base, we don't foresee any liquidity issues based on our reduced capital program, the reduced near-term LC commitments in Canada and the high potential for asset sale proceeds.

Before concluding my comments, I'd like to take a moment to discuss how we believe we've remediated the control weaknesses that we've noted in our recent SEC filings. Our 2011 10-K referenced the material weakness and 2 significant deficiencies, the material weakness related to our computation of impairment for non-oil and gas assets. In response to this deficiency, we enhanced the process for documenting identification of impairment indicators and the preparation and review of undiscounted recovery tests and discounted cash flow analyses, and applied the enhanced process to each of the 3 quarters in 2012, which we believe remediates this deficiency.

The significant deficiencies related to our calculation of the asset retirement obligation and the exclusion of certain future development costs from our depletion calculation. In response to these deficiencies, we enhanced the process for preparation and review of the inputs to these calculations and applied the enhanced processed to each of the 3 quarters in 2012, which we believe also remediates these deficiencies.

Our first quarter 10-Q noted a material weakness related to the operating effectiveness of the controls surrounding the computation of derivative value, particularly with respect to our 10-year derivatives that we entered into during that quarter.

In response to this weakness, we enhanced our process to value derivatives with an emphasis on long-dated derivatives, and applied the enhanced process to the second and third quarters, which we believe remediate the deficiency. I'm happy to report that our new auditors, Ernst & Young, smoothly transitioned into their role in mid-August, and we have our new controller in place, who is committed and focused on the ongoing effort to improve our accounting procedures and internal controls.

I'll now turn the call back over to David to cover fourth quarter guidance.

David Erdman

Thank you, John. Fourth quarter 2012 production volume is expected to be 330 million to 340 million cubic feet equivalent per day. Full year production volume is expected to be 350 million to 365 million cubic feet equivalent per day. With that average unit cost on an Mcfe basis are expected as follows: Lease operating expense between $0.70 and $0.75; gathering, processing and transportation between $1.22 and $1.26; production taxes between $0.20 and $0.22; G&A between $0.50 and $0.53; and finally, DD&A between $1.10 and $1.14.

With that, I'd like to remind everyone that this guidance does not account for potential incremental volumes in the Horn River Basin as we secure alternative treating capacity, as was discussed by management earlier on the call. So with that, Tamika, let's open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

You indicated confidence in your opening remarks that you could reach agreement soon for a downstream solution, potentially to get Horn River Basin gas towards export markets. Can you just add some more color on what type of role Quiksilver versus a partner would have, and whether you see the various reviews impacting some of the larger, already-announced acquisitions in Northwest Canada, potentially delaying the timing of your announcement?

Glenn M. Darden

Well, first of all, Brian, we're not going to comment on our negotiations. But I would say as an overview, we're not looking at selling the company, and those governmental reviews are dealing with actual sale of Canadian companies. So we're dealing with bringing in a working interest partner. So I would say, it's kind of apples and oranges in that regard.

Brian Singer - Goldman Sachs Group Inc., Research Division

Got you, okay. And is this something you would expect would be -- we'd get some more details on toward by the end of the year or is it too early to tell?

Glenn M. Darden

I would say we would, yes.

Operator

Your next question comes from the line of Curtis Trimble of Global Hunter Securities.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Just looking at the impairment charge in relation to the MLP potential. Is there any transfer of or implications from the impairment on the NGL side with a potential drop-down into MLP?

John C. Regan

Yes. So the impairments, as I mentioned, were almost entirely driven by the decrease in the gas price. And so, really, the holdup on the MLP side, as we've highlighted, at various times relates to market conditions, inclusive of NGL pricing. So I guess, the short answer to your question is there's probably no interplay between the impairments we're recognizing and the ability to move forward with the MLP.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

And then maybe you can comment on the status of joint venture negotiations across the various asset bases. Obviously, the Delaware, I think, it was pending. In the past conference call commentary it was kind of elevated. And then maybe a number of potential partners that you had interested in the Barnett and then anything in terms of generalities on the HRB.

Glenn M. Darden

Yes, what we can say on that is we're focused on the Barnett and the Horn River. And that's where we're in the most advanced stages. We have delayed the Delaware to get more data from well completions, which we're doing now. But we haven't taken that off the table. We just need to get some more production results out there. But we're progressing significantly on the first 2.

Operator

Your next question comes from the line of Dave Kistler of Simmons.

David W. Kistler - Simmons & Company International, Research Division

On the Sand Wash Basin JV, can you give us the estimated equalization payment or give us some sort of guidance to that for the 50% of the differential acreage, I guess, that 45,000 net acres you contributed to the JV?

John C. Regan

Yes. For that incremental acreage, there will be an equalization payment, we have announced that. But we are under confidentiality with respect to the actual amount of that settlement payment. So at this time, we can't comment on it, other than to say that we do expect that the transaction will close in the fourth quarter and we'll have the use of those proceeds in the fourth quarter.

David W. Kistler - Simmons & Company International, Research Division

Okay. And as you think about activity in that area going forward, you've set up an AMI of about 850,000 net acres. How do you think about participating on any additional acreage purchases under that JV agreement given kind of your current liquidity?

Thomas F. Darden

Well, Dave, this is Toby, and I'll give you a pretty good rundown of how we see that. We see that as developing methodically with Shell. We have met for the first time to start establishing budgets for next year to determine what the levels are. I think both companies are taking a fairly methodical approach to how we go after a new acreage, as well as hold the acreage we have. There's a large effort toward unitization of existing acreage, which will bring in new acreage to solidify those units and will be most effective at holding acreage with the least number of wells. So I think that is our primary focus. We are also working with Shell's prior experience in the basin and Quicksilver's prior experience in the basin to determine just the best method for development of these assets. So there's a lot of planning going on, but not a lot of spending at this time. We'll be developing that budget, and it will be integrated into our overall capital budget. We do have interest from other parties to potentially participate on our share of that and are discussing the possibility of that with those parties at this time.

David W. Kistler - Simmons & Company International, Research Division

Okay, appreciate that clarification. And then maybe flipping over to the Barnett for a second. How do you guys think about balancing drilling activity going forward versus working down your inventory of drilled uncompleted wells, and how those 2 things would relate to, you mentioned adding a JV partner or entering into the MLP?

Glenn M. Darden

Yes, I think, number one, Dave, this is Glenn. We have kind of minimal inventory by the end of the year. We've worked it down to kind of single-digit well numbers. And so our focus on the joint venture side of bringing in a partner is to not only help us de-lever our balance sheet, but also provide a partner that will allow us to grow the asset, because we have significant proved undeveloped locations to drill. We have a lot of -- a lot of those locations are in the liquids-rich window. And so it's -- we're sensitive to price, but we're also sensitive to bringing in a partner who has the same vision to develop. And fortunately, we're negotiating with those type players.

David W. Kistler - Simmons & Company International, Research Division

Okay, appreciate that. And then just one last one, if I might. With respect to the noncash price-related revision, was any of that associated with 5-year puds falling off the book or was it all strictly price-related?

John C. Regan

Yes, it was -- I would say, almost strictly price-related.

Operator

Your next question comes from the line of Subash Chandra of Jefferies.

Subash Chandra - Jefferies & Company, Inc., Research Division

Yes, Glenn, keep hounding on this, but when you talked about nearing the end of the process on the Barnett and Horn River, I think you gave some expectations for an -- I'm sorry, a midstream. But as far as Barnett upstream, are you thinking year-end resolution as well?

Glenn M. Darden

No, it's Barnett upstream that we're referring to, Subash.

Subash Chandra - Jefferies & Company, Inc., Research Division

You were, okay. So you would expect that, as well as Horn River, by year-end?

Glenn M. Darden

Well, yes. We think they will be, yes. And we're getting pretty close, but I really don't want to talk about an exact date. But I would say it's very close, yes.

Subash Chandra - Jefferies & Company, Inc., Research Division

Okay. And I'm going to try this, and you may not want to discuss this, but are you in the stage of negotiating with a single party? Or are you still sort of sifting through the various folks showing interest?

Glenn M. Darden

I would say it's a no comment on that.

Subash Chandra - Jefferies & Company, Inc., Research Division

Okay, all right. I thought I'd try. Yes, the -- I was also thinking about the NGL hedges. They don't -- looking at your hedge sheet data, they don't show up yet for 2013, probably for all the right reasons. But what are you thinking about that being a precondition to the MLP launch?

Glenn M. Darden

Well, I guess, we're -- well, the way I think about the hedges for the NGLs, right now we kind of are getting quoted prices in a range between kind of mid-32s and high 33s, depending on the day. At those levels, it doesn't really make much sense to lock in the pricing from an MLP perspective, although we are cognizant of what the certainties of the cash flows in an MLP environment mean in terms of the viability of a launch. I think at this point, we are -- we continue to evaluate and monitor the markets for NGL pricing. We will opportunistically layer hedges if they get a little bit more tailwind behind them. But at this point, we just -- they haven't risen to a price that compels us to want to lock those in.

Subash Chandra - Jefferies & Company, Inc., Research Division

Okay. So we should really think about NGL prices around 40 minimally as a precondition to the MLP launch?

Glenn M. Darden

I think it's probably a little lower than that, but certainly north of where we are today.

Subash Chandra - Jefferies & Company, Inc., Research Division

Got it, okay. And one final one for me. I think the direction you gave on 2013 CapEx, I didn't get the complete language, but something about your goal is to spend within cash flow. So I was just curious, is that operating cash flows or will that -- or is it all cash flows even those sourced from a potential JV or transaction?

Glenn M. Darden

Yes. So I think of the cash that we generate as inclusive of joint-venture-type proceeds in addition to operating cash flow.

Subash Chandra - Jefferies & Company, Inc., Research Division

Okay. So these JVs are going to be much more than just a carry on future spending? You expect to see a meaningful de-levering event occur?

Glenn M. Darden

Certainly, in the Barnett, yes.

Operator

Your next question comes from the line of Joe Magner with Macquarie.

Joseph Patrick Magner - Macquarie Research

Just curious if you could maybe provide us with an update on what you think your breakeven gas prices required, given some of the moving pieces in the Horn River Basin with improved well performance, as well as maybe any change in the cost of the new treating and processing agreements that you're pursuing?

Glenn M. Darden

Yes, so we've kind of talked about on flowing production, that number is kind of in the high $3, low $4 rate to cover the capital costs and generate at an acceptable level of return. And it's probably a little lower than that in the Barnett.

Joseph Patrick Magner - Macquarie Research

Okay. And then while the fourth quarter guidance does not include any impact from the new Horn River agreements, when do you think you'll be in a position to, I guess, finalize up in there? And when might we expect kind of an update on the fourth quarter with that included?

Glenn M. Darden

Yes, so we've been moving down that path or we continue to move in that path now. I assume you mean on the elevated production level that we mentioned in our prepared remarks?

Joseph Patrick Magner - Macquarie Research

Yes, the $50 million that you're looking to add in.

Glenn M. Darden

Yes, so there's a fairly appreciable lead time of up to a month to lock those in. And so we've been moving down that path. And I think that we're in pretty good shape to elevate our flow level in beginning of December.

Joseph Patrick Magner - Macquarie Research

Okay. And then while you're not providing much of an update in terms of the JV process, can you discuss -- I think on the second quarter call or certainly thereafter, there was some, I guess, enhanced discussion about the consideration for maybe an outright sale. We have seen a lot of gas assets trading hands in the kind of upstream MLP markets. Curious where the trade-off is, whether you are considering an MLP, JV or a prospect outright sale in the Barnett?

Glenn M. Darden

Well, we're focused on bringing a partner into the Barnett, but we have the optionality of the MLP with that partner at our side. So it's going to be a de-levering event with the sale of certain assets, a certain percentage, but we still view that as a minority sale. And I think an outright sale to another MLP is certainly a potential outcome, but not our preferred outcome, yes.

Joseph Patrick Magner - Macquarie Research

Okay. And just one last one for me. There were some hedges that were going to go with any of the volumes that were maybe dropped into the MLP. How does the restructuring of the hedges affect that consideration or...

Glenn M. Darden

The restructuring activity had no impact on the hedges proposed to be dropped into the MLP.

Operator

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

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

A couple of things. The additional $29 million of CapEx, how much of that is land and how much of that is going to be drill bit?

Glenn M. Darden

The majority of it's drill bit. It's probably 60-40, 2/3, 1/3.

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

Okay, great. And in the Pecos County area, just wondering if you had any updates based on activity near where you're operating?

Glenn M. Darden

Where did you say, Noel?

Thomas F. Darden

In Pecos County?

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

Yes.

Thomas F. Darden

So, yes, just to the south of us, XTO and Exxon have a project that's ongoing, and they've had good results south of us. That's the nearest activity. We're very pleased with the results from our first well. And as mentioned, it was a 1,500-foot lateral. We expect those lateral links to increase over time, Noel. And based on what we see in the first well, it's a great start to our effort in West Texas.

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

Great. And the Vande Ranch, is that a long lateral or is that a shorter lateral up and coming?

Thomas F. Darden

It's about a 2,500-foot lateral. And we decided to make that a shorter lateral just from a capital and time standpoint. We wanted to get some results there, but at any rate, we expect those laterals to get longer, too. The offset operators are drilling as much as 7,000- to 8,000-foot laterals offsetting us. So we expect those lateral links to increase. We've just completed the first well in that Eastern block, and we're flowing back frac water at this point.

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

Okay. And about when would you think you'd have that online and have results, either you know the results or results that you might announce?

Thomas F. Darden

Well, I think we'll wait a little while and see what it stabilizes at before announcing anything, Noel, as we always do. But it will come when it comes, Noel.

John C. Regan

Probably 30 to 60 days of watching it before we have any real definitive results.

Glenn M. Darden

Yes, it could be as soon as when we announce capital.

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

Okay. And sorry if this is something you've touched on, on earlier topics, because I got on a little late. So looking at your portfolio and sort of the status of the JVs you have in place now, what -- which of your areas is the one that has the most pressure as far as HBT-ing acreage? Will you still need -- sort of have the most inventory you have to go through before you're more or less set?

Glenn M. Darden

Okay. We're fortunate, Noel, that we don't have a lot of pressure in any of our areas. So we certainly don't in the Barnett, the Horn River, West Texas with new leases and Colorado, we've been addressing, obviously, with our Shell venture. So we are -- which one has the most pressure? I guess, maybe, it's 2.5 years with West Texas and a couple of areas maybe in the Barnett, but very, very few commitments there.

Operator

Your next question comes from the line of Hubert Van der Heijden with Tudor, Pickering, Holt.

Hubert Van der Heijden - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I wanted to try to get a little bit more on the Barnett deal. And are you guys currently thinking of selling volumes with that? Or would it purely be a JV on future developments?

Glenn M. Darden

There would be -- we would sell volumes. We'd sell a working interest in that is what's contemplated.

Hubert Van der Heijden - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, perfect. And I guess the other thing that I was hoping to get a little more color on was kind of the relative capital allocation, like where do you see your, relatively, the budget going for next year, and are you expecting any spending in the Horn River, for that matter?

Glenn M. Darden

Well, to give you a little color on that, we, as you can tell, the situation is somewhat dynamic as the joint ventures will drive what we establish as our capital budgets for next year. I would expect with a JV partner, there may be some development in Horn River. I think more of that will be infrastructure-related. And in the Barnett, we see, with a partner, having a fairly moderate drilling program in the next few years, but ramping up over time.

Operator

Your next question comes from the line of Chance Needen [ph] Of Oppenheimer.

Unknown Analyst

Just thinking about the Barnett JV or working at interest sell that you guys are contemplating, I imagine you guys saw the announcement that EXCO had yesterday with Harbinger. And I'm just kind of wondering, have you guys contemplated a similar sort of structure as a private MLP?

Glenn M. Darden

I'm not so sure we looked at the private MLP side. We've obviously looked at the MLP side and are teed-up on that. This might be a bit of a hybrid in combination with a working interest sale and MLP, but on the public side. So we really haven't looked at the private MLP side like the EXCO announcement.

Unknown Analyst

Okay, that's fair. And I guess, just to be clear, then what you guys are suggesting in the sense of selling a working interest, is the -- would the MLP be contingent or be part or be somewhat mandatory on your part if you do this JV?

Glenn M. Darden

Well, we're not going to get into details on that. But we're -- that process is coming to conclusion and you'll be able to see it fairly shortly, the results.

Unknown Analyst

Okay, that's fair enough. And then just thinking about the Horn River, it sounds like you guys are expecting a decent portion of cash upfront. Is that how we should be thinking about the -- that potential JV?

Glenn M. Darden

No. Again, we're not going to go into details as we're negotiating at this stage. So we -- it's a competitive situation.

Unknown Analyst

Okay. And then I guess, just one housekeeping item for John. Could you help me, I guess, just reconcile your $389 million of CapEx guidance for this year? Is that a cash CapEx number, meaning is that what we should be expecting or thinking about for the cash flow statement?

John C. Regan

No, the cash flow statement will actually be a little bit higher than that. So the $389 million, as we've talked about, is the actual capital incurred. So one of the things that we're seeing in the cash flow statement, in the investing section is a lot of the drilling that was taking place in Horn River in November and December of 2011, that cash -- so we recognized the cost on our balance sheet, but we did not physically pay the cash until the first quarter of this year. So you've got a kind of sizable bleed over of 2011 cash capital into 2012. So I don't think you're-- since we don't have that same level of activity in the fourth quarter of '12, I have to live with that overall decrease in activity in the cash flow statement in '12.

Unknown Analyst

Okay. And do you know the size or magnitude of the current bleed over into -- from last year into Q1 of this year?

John C. Regan

Yes, it's probably in the order of $80 million.

Operator

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

Steven Karpel - Crédit Suisse AG, Research Division

I almost feel obligated to start with a Barnett one, so on the JV ordeal. And if -- the second quarter, you talked about looking at a number of different things and to get it done by year-end. If I'm listening to your comments right now, you're still talking about doing a number of different things, and a number of different things are still on the table, whether it's MLP, an outright sale or whatnot. So I guess, I just wonder how close you really are on something and trying to understand if you still have a multitude of options that are actually on the table or is that you just, quite frankly and to be succinct, being vague because of where you are in the negotiations?

John C. Regan

Well, we're certainly not going to talk about the negotiations, Steven. And then we've had a lot of questions on this. We have gone down the same path. We've had a process conducted by bankers, and it's coming to conclusion. So as I said in a previous question and answer, we'll be talking about this shortly, more detail.

Steven Karpel - Crédit Suisse AG, Research Division

Right. And you talked about it, I think, in the press release about using the proceeds to de-lever the balance sheet. Can you elaborate more as things are a little bit different from when the process began because, quite frankly, we're closer to your first maturity? So does that change at all what the use of proceeds will be for this? And you probably have a little bit more now drawn on the credit facility than maybe you would have thought with some of the increased capital spending. Can you give some thoughts to what the use of the proceeds would be and how important this first maturity is for you?

Glenn M. Darden

Well, the first maturity is not until 2015. So we are going to pay down debt and we are not going to signal which debt we're attacking. But we are going to lower the leverage in this company.

Steven Karpel - Crédit Suisse AG, Research Division

And then an operations question. I don't have all the numbers in front of me, so I apologize. But it looks like there was a pretty decent decline of, I want to say, 8% or 9% maybe in the Barnett production and -- on the quarter-over-quarter. And I think you had completed a number of wells. Can you talk about what the decline looks like and how consistent this is and what this represents in terms of what we should think about going forward? And maybe there were some other issues in the quarter on it.

Glenn M. Darden

No, no. Well, there are -- there is probably one other issue impacting it, but as you know, we slowed down the Barnett machine probably going back 18 months ago. So what you've seen is that steepest part of the decline curve coming to the forefront here, kind of over that last 18 months. So as we think about what Barnett production does on the existing base, we think that it is going -- that decline curve should flatten out a bit. Also during the quarter, we've had the impact, a little bit of that, of the ENI completion program that we talked about in the second quarter. And that caused some adjacent wells to be shut in. And then the impact, just the overall impact of that ENI completion program had a little bit of a negative impact to production. And, of course, that will not recur in future quarters. But the biggest impact is probably the -- as we see it, the flattening out of the decline curve across the base.

Steven Karpel - Crédit Suisse AG, Research Division

Maybe 2 follow-ups to that is, one, can you give us a sense on what the natural decline looks like now and where we are in this hyperbolic curve? And then, two, I think there's an implied number then for Q4 of somewhere around 240 million a day, which just seems to be pretty decent decline for Q4 based on your guidance as well versus Q3. So maybe comment on both of those.

Glenn M. Darden

Well, I think when we start talking about decline curves, that's something we try to stay clear of in the call, so there are specifics around the decline curve. So perhaps, that's something that we can pick up with you offline.

Steven Karpel - Crédit Suisse AG, Research Division

Well, maybe just a general sense of are we at 20, are we at 25, are we at 30 if you look at the year-over-year, where -- a sense of where we are on that curve. Just let me get more details later.

Glenn M. Darden

Yes. I, again, don't want to give too much detail, but I think it's probably lower than the levels you quote there.

Steven Karpel - Crédit Suisse AG, Research Division

Right. And then how about on a sequential basis, does that mean -- is that the same point then? Maybe -- are my numbers too high then from Q3 to Q4 on the decline?

Glenn M. Darden

If you're using 25%, then, yes.

Steven Karpel - Crédit Suisse AG, Research Division

Well, I guess I was looking at 240 million for the fourth quarter. Is that not an appropriate number?

Glenn M. Darden

Well, I guess, when we talk about guidance, I'll just point out that we talk about overall production and not within each of the individual operating areas. So, again, we'll have to come back to you on that.

Operator

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

Brian M. Corales - Howard Weil Incorporated, Research Division

Just a -- and most of my questions have been answered, I missed the early part of your comments, Glenn, but can you maybe just discuss, is there a total dollar amount of goal of -- to trying to reduce debt or to raise via asset sales?

Glenn M. Darden

Well, we have an internal target, Brian, and it's a significant amount, which will make a big difference in the improvement of our balance sheet. So what we've targeted all along via MLP and/or asset sale, and now we wanted to do a little bit bigger on the asset sale, is still a minority position, and -- but a significant amount that improves us going forward, and just as important, brings in a partner who helps us develop this over time. And that partner may be -- the public as well in the MLP, but that's our target. We're not going to -- we haven't ever talked about a number specifically.

Brian M. Corales - Howard Weil Incorporated, Research Division

Okay. And then, again, you all may have said this before I hopped on, but the -- just looking at West Texas, can you talk about kind of how many frac stages you all used in that 1,500-foot lateral? And is that as simple as extrapolating that out as it gets extended?

Thomas F. Darden

It is proportional. We have not announced our completion procedure for that well yet, and we'll be glad to publish it here shortly. But it's in keeping with the industry standards around us, I'll put it that way.

Brian M. Corales - Howard Weil Incorporated, Research Division

Okay. And if we look at 2013, would we -- is it safe to assume that you can start going longer with those laterals?

Thomas F. Darden

I think that's a safe assumption. These were our first 2 test wells and we wanted to go into them cautiously.

Brian M. Corales - Howard Weil Incorporated, Research Division

And I'll do one last one just on the Pecos well, the 300 barrels a day. Is that -- can you maybe talk about the performance over, I don't know how long it's been on, but since it's been online?

Thomas F. Darden

We're pleased with the performance. We'll probably publish more information on it later in the year in conjunction with the other -- the results from the other wells.

John C. Regan

They're very steady producers.

Thomas F. Darden

Very good producer wells.

Operator

And there are no further questions at this time. I would like to turn the conference back to your leader, David Erdman, for any closing remarks.

David Erdman

Thank you, everyone, for joining us this morning. We appreciate your interest in Quicksilver Resources and welcome any follow-up questions you may have. This now concludes our call.

Operator

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

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