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Quicksilver Resources Inc. (KWK)

Q3 2009 Earnings Call

November 9, 2009 11:00 am ET

Executives

Rick Buterbaugh - VP of IR

Glenn Darden - President and CEO

Phil Cook - SVP and CFO

Toby Darden - Chairman

Analysts

Ellen Hannan - Weeden & Co.

David Kistler - Simmons & Company

Brian Singer - Goldman Sachs

Adrayll Askew - Hartford Investment

Noel Parks - Ladenburg Thalmann

Michael Jacobs - Tudor, Pickering, Holt

Monroe Helm - CM Energy Partners

Manav Gupta - Canaccord Adams

Scott Hanold - RBC Capital Markets

Jeff Robertson - Barclays Capital

David Tameron - Wells Fargo

Jack Aydin - KeyBanc

Steven Karpel - Credit Suisse

David Snow - Energy Equities

David L. Neuhauser - Livermore Partners

Presentation

Operator

Good morning. Welcome to the Quicksilver third quarter 2009 Earnings Call. (Operator Instructions). I’d now like to turn the call over to our host Rick Buterbaugh, Vice President of Investor Relations and Corporate Planning. Thank you. Mr. Buterbaugh, you may begin your conference.

Rick Buterbaugh

Thank you and good morning. Joining me today are Glenn Darden, President and Chief Executive Officer; Toby Darden, Chairman; and Phil Cook, Senior Vice President and Chief Financial Officer. This morning the company issued a press release detailing Quicksilver Resources' results for the third quarter of 2009. If you do not have a copy of this release, you can retrieve a copy on the company's website at www.qrinc.com under the News and Updates tab.

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

Today's presentation will include information regarding adjusted net income and net cash from operating activities before changes in working capital, which are non-GAAP financial measures. As required by SEC rules, reconciliations of adjusted net income and net cash from operating activities before changes in working capital to their most directly comparable GAAP measures are available on the company's website under the Investor Relations tab.

At this time I will turn the call over to Glenn Darden to review our financial and operating results.

Glenn Darden

Thanks, Rick. Good morning. Quicksilver Resources had third quarter 2009 adjusted net income of $42.7 million or $0.25 per diluted share compared to $69.8 million or $0.40 per diluted share in the 2008 period. As projected, production volumes averaged 311 million cubit feet equivalent per day up 12% year-over-year. Our current volumes are in the 340 million cubit feet a day equivalent range and for the year we are projecting an average rate of over 325 million a day which would result in a 24% year-over-year growth for the company.

As I said in this morning’s earnings release, Quicksilver generated record cash flow through operating activities for the first nine months of the year. The company is on pace to have a record production year while driving production costs down nearly 30%. Our team has done this while keeping capital expenditures inside of cash inflows. We also have started to whittle down the company’s debt and anticipate making more progress on that by year end.

The company’s bank facility, borrowing base was affirmed at $1 billion, with roughly half of that amount drown under the facility. We anticipate maintaining that undrawn cushion throughout 2010. On the commodity pricing side Quicksilver will receive an average floor price of $8.75 per Mcf on approximately 75% of its estimated natural gas production for the fourth quarter of 2009.

In addition we have put in place collars of $7.40 to $9.88 per Mcf on 200 million cubic feet a day for 2010. Derivatives associated with natural gas liquids production covered 10,000 barrels per day or an additional 60 million cubic feet equivalent at a weighted swap price of $33.47 per barrel. Combination of this gas and liquids pricing gives us a well head price of almost $10 per Mcf equivalent for the company’s higher Btu gas in the Southern Barnett area.

On the operational side our Barnett program is really going well. Over the last several years we have put the infrastructure in place both in the field and with personnel to maximize the recovery and margins from our larger acreage position. You are now seeing the results on both the volume growth and cost sides. Having large contagious acreage blocks has enabled us to optimize well spacing, lateral links, and streamline the surface facility.

The importance of natural gas liquids in our Southern Fairway is becoming clearer to the investment community. Our economics are compelling and those higher equivalent prices I mentioned earlier will allow our operating team to begin to work down our uncompleted well inventory in the Barnett South area. We have locked in certain service costs for lease completions for 2010 to ensure very attractive margins. In Alliance and Lake Arlington, Barnett production continues to improve on a per well and total volume basis.

Moving to Canada, our Canadian team has done a great job this year. Horseshoe Canyon production has grown 9% year-over-year despite cutting that budget significantly. We are currently producing about 63 million cubic feet of gas a day from that Horseshoe Canyon project. The biggest news from up there of course is progress being made in our Horn River Basin play. One of Quicksilver's goals entering 2009 was to convert this prospect into our next big development project. We are well on our way to doing this.

The company's initial D-50A well averaged 10 million a day for the first month of production from a 3,300 foot lateral in the Muskwa shale. This is the upper member of a 500 foot thick section of over pressured Devonian shale. We begin completion operations later this month on a second well drilled three miles east of the initial well.

Read the rest of this transcript for free on seekingalpha.com