Quicksilver Resources' Barnett Shale Gamble

Includes: CHK, DVN, KWK, XTO
by: Bruce Vanderveen

No, Quicksilver Resources (NYSE:KWK) is not a silver or mercury mining outfit. Nor is it to be confused with Quiksilver Corp. (NYSE:ZQK), an apparel company. Rather, it is a $900 million market cap., independent energy company. Quicksilver acquires, explores for, drills for and produces natural gas.

Quicksilver’s big story in 2008 has been its foray into Barnett shale gas of the Fort Worth basin of Texas. Here it competes with much larger companies such as Devon Energy (NYSE:DVN), Chesapeake Energy (NYSE:CHK) and XTO Energy (XTO).

In August, 2008 Quicksilver spent $1.3 billion for Barnett Shale assets in Denton and Tarrant counties, just as natural gas prices were peaking. For a billion dollars in cash plus 10,400,468 shares of common stock the company picked up 13,000 net acres potentially “containing more than 1 trillion cubic feet of recoverable natural gas resources including approximately 350 billion cubic feet of proved reserves” (see report here). At the time, natural gas was around $13 per 1000 cubic feet. Now, the price is only a little above $4 per 1000 cubic feet. Not surprisingly, Quicksilver, in the 4th quarter, took an impairment charge totaling $633.5 million on its oil and gas properties and lost $2,79 per diluted share (see conference call transcript).

This ill timed foray into the Barnett has in all likelihood contributed to the severely impacted the stock price. Currently, at $5.20/share, the stock is down almost 90% from its 52 week high of $44.98. Total debt of $2.61 billion dwarfs total cash of $2.85 million. Quicksilver was downgraded by Jefferies and Co. from buy to hold on February 26 of this year.

The Barnett shale is composed of sea deposits laid down in the Mississippian age, some 350 million years ago. New technology ,such as horizontal drilling, has opened up the Barnett shale to production in recent years. The “tight” structure of the shale has trapped a plentiful supplies of gas, but with the shale’s structure and 7,000 depth, it can be difficult and costly to tap.

Some of the most plentiful gas reserves in the Barnett shale are found directly under the city of Fort Worth. Churches, parks, the American Cancer Society, golf courses, residential areas and even the girl scouts have participated in the bonanza. Since the bust in natural gas prices in the last half of 2008, however, much of the bloom has come off the boom.

Drilling in the Barnett, as elsewhere, is down considerably. Companies like Quicksilver, with heavy investments in natural gas, may be just hanging on, waiting for higher prices to improve their balance sheets. The gas has been there hundreds of million years, it can afford to wait. The question is: can Quicksilver afford to wait?

Disclosure: No positions