Quicksilver Resources Inc’s (KWK) second quarter results on August 9, 2010, came in above expectations primarily on record volumes produced during the quarter. During the quarter, Quicksilver made tremendous progress in strengthening its operations and adding growth opportunities for the future. However, analysts’ sentiments on future earnings remain slightly negative due to expectations of higher unit costs, resulting from the company’s decision to sell all of its interest in Quicksilver Gas Services L.P. (KGS).
Turning to the Quarter
Quicksilver Resources’ second quarter 2010 earnings of 18 cents per share climbed compared with the Zacks Consensus Estimate of 16 cents but slipped 25% from last year’s earnings of 24 cents.
Total revenues of $228.6 million rose 11% over the Zacks Consensus Estimate and year-ago revenues of $206 million. Net natural gas, natural gas liquids (NGL) and oil sales in the quarter improved 6.2% to $211.7 million. The 6.2% increase was driven by greater production volumes of natural gas and higher realized prices for natural gas, NGLs and crude oil.
We have discussed the quarterly results at length here: Volumes Buoy Quicksilver
Following the second quarter earnings release, the estimate revisions of analysts are following a downward trend. In the last 7 days, two (out of 23) analysts have slashed their earnings estimates for fiscal 2010, while only 1 (out of 21) analyst has lowered his estimates for fiscal 2011. None of the analysts have showed any upward estimate revisions for 2010 in the past 7 days, while 1 analyst raised his estimates for 2011.
Annual estimate revisions, over the last 30-day period, also were mostly negative, though there were a few disagreements. The visible downward trend, with 11 analysts lowering fiscal 2010 estimates and 12 analysts lowering fiscal 2011 estimates, was counteracted by upward estimate movement by 4 and 5 analysts, respectively, for fiscal 2010 and 2011.
Based on the number of estimate revisions over the last 7 days, annual estimates went down by a penny for both 2010 and 2011. Over the one-month period, estimate revisions point to a 2-cent decline in the 2010 estimate while figures for 2011 slipped by 5 cents.
Quicksilver’s growth story remains strong and the company looks to further increase its growth prospects in the prolific Barnett Shale (Fort Worth Basin), its major growth area. The company is currently operating four rigs in the region and expects to drill and complete roughly 80 wells in the basin in 2010. The company expects to derive about 80% of its 2010 production from its Texas properties.
The company’s other growth areas consist of Alberta in Canada, the Delaware Basin in west Texas and the Horn River Basin in British Columbia. The company continues to progress well on various projects in these regions.
In addition, Quicksilver continues to be keen on initiatives to de-leverage its balance sheet. The latest in a series of steps taken this quarter to improve the financial strength of Quicksilver is the idea to sell its interest in Quicksilver Gas Services to Crestwood Midstream Partners II, a portfolio company for First Reserve Corporation. The sale of Quicksilver Gas Services is expected to improve the company’s liquidity by more than $1 billion, enabling it to pay down its senior secured credit facility and eliminate $228 million of debt associated with Quicksilver Gas Services.
Furthermore, during the second quarter the company embarked upon other moves to strengthen its balance sheet, which include – refinancing its long-term debt and selling its 27.5% working interest in the Alliance project to Eni spA (E). In all, these transactions have helped Quicksilver reduce its debt on a pro forma basis by 28% over the last year without selling any reserves on a net basis and without selling any equity.
On a pro forma basis, Quicksilver’s net debt to proved reserves is $0.63 per Mcf equivalent as compared to $17 per Mcf equivalent 12 months ago.
We believe Quicksilver’s efforts to strengthen its balance sheet will make it more appealing to investors and enable it to pursue more aggressive growth initiatives in the right environment.
However, we remain skeptical on the company’s decision to sell its Quicksilver Gas business, as we expect this to cause cost escalations, at least in the near term. Further, we believe the uncertain commodity and credit environments will prevent a significant upside movement in its stock price.
Quicksilver currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining the long-term Neutral recommendation on the stock.