Quicksilver Resources Inc. (KWK)

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Quicksilver Resources (KWK)

Q2 2011 Earnings Call

August 08, 2011 11:00 am ET

Executives

Philip Cook - Chief Financial Officer and Senior Vice President

John Hinton - Vice President of Finance

Glenn Darden - Chief Executive Officer, President and Director

Analysts

Jeffrey Robertson - Barclays Capital

Brian Singer - Goldman Sachs Group Inc.

David Kistler - Simmons & Company International

Subash Chandra - Jefferies & Company, Inc.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Gil Yang - BofA Merrill Lynch

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Good morning. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2011 earnings conference call. [Operator Instructions] I would now like to turn the call over to Vice President of Finance, John Hinton, to begin.

John Hinton

Thank you, Patrick, and good morning. Joining me today are Toby Darden, Chairman; Glenn Darden, President and Chief Executive Officer; Phil Cook, Senior Vice President and Chief Financial Officer; and Chris Cirone, Senior Vice President and General Counsel. This morning, the company issued a press release detailing Quicksilver's results for the second quarter of 2011. If you do not have a copy of the release, you can retrieve a copy of it 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 are detailed in the company's filings with the SEC.

Today's presentation will include information regarding adjusted net income, which is a non-GAAP financial measure. As required by SEC rules, reconciliation of adjusted net income to the most directly comparable GAAP measures are available on our website under the Investor Relations tab.

I will now turn the call over to Glenn Darden to review our financial and operating activities in detail.

Glenn Darden

Thank you, John. Quicksilver Resources reported this morning net income of $109 million or $0.61 per diluted share for the second quarter of 2011, as compared to net income of $87 million or $0.49 per diluted share in the prior-year period. Financial results were affected by a noncash gain of $19 million related to mark-to-market impact from certain natural gas hedges, a noncash loss of $31 million associated with the company's interest in BreitBurn Energy Partners, first quarter 2011 derivative fair value adjustment and a $122 million gain on the sale of BreitBurn units. Production averaged 417 million cubic feet equivalent per day for the second quarter, a 6% increase from the first quarter and up 20% over the same period last year. Natural gas liquids, and to a lesser extent, oil comprised 20% of the production stream.

Company production is ramping up and currently is in excess of 435 million cubic feet equivalent per day. And Quicksilver maintains its production guidance for the year, a growth rate of over 20% over 2010 volumes. Our team is doing an excellent job of reducing unit costs in a rising service cost environment. Our costs have declined year-over-year across the board. Phil Cook, our Chief Financial Officer, will give you the details on this after my remarks.

Quicksilver's board recently approved a $240 million increase in the company's capital budget for 2011. This added capital will accelerate infrastructure and drilling and completions in our Horn River basin project in Northeast British Colombia, and fund acreage acquisition and drilling in 2 new oil projects we're pursuing. Quicksilver is still firmly committed to living within cash inflows. We have monetized roughly half of our BreitBurn units and anticipate bringing in additional outside dollars through other asset sales and joint ventures to bridge the funding gap.

We have followed the strategy of not selling natural gas properties to buy into oil production at these commodity price levels. Instead, we redeployed proceeds for the BreitBurn sale to a higher growth in Horn River Basin and to new grassroots growth opportunities on the oil side.

By the end of the year to first half of 2012, Quicksilver will have converted its exploratory licenses on 130,000 acres in the Horn River into 10-year development leases. We will have tested a horizontal Exshaw/Bakken oil well in that Horn River play, and we will have drilled and tested wells across over 300,000 acres of highly prospective oil projects. While we would not consider that fully evaluating these new projects, we should have a clear picture of our growth path ahead.

Specifically, on the Horn River project, the company put into operation in May its 20-mile, 20-inch gathering line, which will be the backbone of a midstream system the company will be building out over the next several years. In addition, we executed an agreement with TransCanada to build a 70-mile extension of their Alberta system. Quicksilver is providing certain letters of credit, which will help backstop the building of this line, which will provide a lower-cost option to move and market our natural gas from this project. As we have previously disclosed, we have been in discussions to bring in a partner to help us build not only this system, but an overall midstream business that we project will be significantly larger than the Quicksilver Gas Services business we monetized last year. We anticipate closing a joint venture transaction in the third quarter.

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