Quicksilver Resources Inc. (KWK)

KWK 
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Quicksilver Resources (KWK)

Q3 2011 Earnings Call

November 07, 2011 11:00 am ET

Executives

Philip W. Cook - Chief Financial Officer and Senior Vice President

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

John E. Hinton - Vice President of Finance

Analysts

Pearce W. Hammond - Simmons & Company International, Research Division

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

James Spicer

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

David Snow - Energy Equities

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

John C. Nelson - Macquarie Research

Marshall H. Carver - Capital One Southcoast, Inc., Research Division

Patrick Melia

Gil Yang - BofA Merrill Lynch, Research Division

Brian M. Corales - Howard Weil Incorporated, Research Division

Unknown Analyst -

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

Presentation

Operator

Good morning, and welcome to the Quicksilver Quarter 3 2011 Earnings Conference Call. [Operator Instructions] I will now like to turn the conference call over to John Hinton, Vice President of Investor Relations. Thank you, Mr. Hinton, you may begin the conference.

John E. 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 third 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 risks may 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, 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 M. Darden

Thank you, John. Good morning. Quicksilver Resources reported net income for the third quarter of 2011 of $29 million or $0.17 per diluted share compared to net income of $22 million or $0.13 per diluted share in the prior period. Third quarter 2011 adjusted net income was $6 million or $0.03 per diluted share. Financial results for the current quarter were impacted by noncash gain of $30 million related to mark-to-market impact of long-term derivatives, a noncash gain of $12 million associated with the company's equity interest in BreitBurn Energy Partners' second quarter 2011 derivative adjustments, a gain of $10 million from the sale of BreitBurn units and a loss of $15 million for the acceleration of unamortized debt insurance costs, professional services in connection with strategic transactions, and to settle pending claims associated with the previously disclosed legal litigation. We've made progress on several fronts on the operational and transaction projects, and our investments are beginning to bear fruit.

Starting with the Barnett. Our production continues to grow and this area has the most impact on overall company growth at this point, which will be approximately 18% year-over-year. We had some frac-ing delays in Lake Arlington which reduced our projected production number, but overall, our Barnett operation is running efficiently. As we recently disclosed, Quicksilver's putting certain of the Barnett assets into a newly formed master limited partnership.

The company is on track to file an S-1 registration document with the SEC in the coming weeks which will outline the details of the MLP. In Canada, most of our efforts and budget have been directed to the Horn River Basin project, where we now have drilled a total of 8 horizontal wells into the Muskwa and Klua formations. We have 4 wells online, which are exceeding our early projections, with the best well projected to have an EUR of close to 20 Bcf. Quicksilver will be drilling an additional 4 wells this year before the year end and will plan to complete these by the end of the first quarter of 2012.

These 4 wells will be drilled on 1 central pad and connected to sales. At this point, it looks like we have a high BTU gas well in the 1 Exshaw well we have completed. But we have only completed approximately 30% of the lateral. The well is shut in currently and we intend to complete the remaining lateral section after winter operation. We have recovered just 20% of the frac load, thus far, so we don't yet have a clear picture of what this well can do.

We continue to make progress on the infrastructure side of the Horn River, and recently, we executed a memorandum of understanding with KKR, to team up on a joint venture to develop and build a Midstream business in the basin. The proposed deal structure, which is scheduled to close in the next several weeks, provides for a $125 million upfront payment to Quicksilver and financing for build-out of processing and gathering assets in the initial stages of the business. Quicksilver will contribute its midstream assets that are already in place, which comprised a 20-mile, 20-inch pipeline and compression. The JV expects to complete the first train of processing facilities in 2014, which will require approximately $120 million of capital. Each party will own a 50% interest in the entity and Quicksilver will operate.

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