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KWK > SEC Filings for KWK > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for QUICKSILVER RESOURCES INC


13-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis ("MD&A") is intended to help readers of our financial statements understand our business, results of operations, financial condition, liquidity and capital resources. MD&A is provided as a supplement to, and should be read in conjunction with, the other sections of this Quarterly Report as well as our 2012 Annual Report on Form 10-K. We conduct our operations in two segments: (1) our more dominant exploration and production segment, and (2) our significantly smaller midstream segment. Except as otherwise specifically noted, or as the context requires otherwise, and except to the extent that differences between these segments or our geographic segments are material to an understanding of our business taken as a whole, we present this MD&A on a consolidated basis. Our MD&A includes the following sections:

        2013 Highlights - a summary of significant activities and events
         affecting Quicksilver


        2013 Capital Program - a summary of our planned capital expenditures
         during 2013


        Results of Operations - an analysis of our consolidated results of
         operations for the three-month periods presented in our financial
         statements


        Liquidity, Capital Resources and Financial Position - an analysis of our
         cash flows, sources and uses of cash, contractual obligations and
         commercial commitments

2013 HIGHLIGHTS
Joint Venture Update
In March 2013, we entered into a Purchase and Sale Agreement with TGBR, a subsidiary of Tokyo Gas Co., Ltd., to sell an undivided 25% of our Barnett Shale Asset for a cash purchase price of $485 million. The transaction closed in April 2013, but was effective as of September 1, 2012. The purchase price was subject to customary purchase price adjustments, which resulted in TGBR paying us $463.4 million. We expect to recognize a gain in excess of $300 million before consideration of income taxes as a result of this transaction.
We continue our efforts to achieve a joint venture in our Horn River Asset in Northeast British Columbia, with the downstream marketing of the gas a top priority. We plan minimal capital spending in our Horn River Asset pending completion of a joint venture.
Significant Contract Revisions
In April 2013, we amended our Combined Credit Agreements primarily to loosen the financial covenants through the second quarter of 2016 and to permit the incurrence of up to $800 million of second lien debt. Specific changes to the Combined Credit Agreements are outlined in Note 5 to the condensed consolidated financial statements.
In March 2013, NGTL agreed to reduce our letter of credit for the Komie North Project to $14 million subsequent to the NEB recommendation against the Komie North Project. Based on discussions with NGTL we believe that NGTL will re-submit its application within the allowed time period, and is not requiring the C$26.4 million termination payment at this time. In pursuing the application, NGTL will solicit the participation of other producers in the area to address the issues raised by the NEB. Accordingly, no amounts have been recognized on our consolidated balance sheet as of March 31, 2013. Upon completion of the project, all construction-related financial assurances will expire.
In light of having closed the Tokyo Gas Transaction and the persistence of challenging NGL pricing, Quicksilver Production Partners LP filed an application with the SEC for the withdrawal of its registration statement on Form S-1 in connection with our previously proposed master limited partnership.
2013 CAPITAL PROGRAM
We incurred costs related to our capital program of $24.3 million for the first three months of 2013. We continue to anticipate full year 2013 spending to approximate $120 million.


Table of Contents

RESULTS OF OPERATIONS
The following discussion compares the results of operations for the three months ended March 31, 2013 and 2012, or the 2013 quarter and 2012 quarter, respectively. "Other U.S." refers to the combined amounts for our Niobrara Asset, West Texas Asset and Southern Alberta Asset. Revenue
We aggregate production revenue and realized cash gains (losses) on derivatives not treated as hedges in measuring revenue from our oil and gas production. Historically, we have used hedge accounting and combining these items mirrors our views of the derivatives' usefulness and provides more comparability. Production Revenue and Realized Cash Gains (Losses) on derivatives by operating area:

                      Natural Gas                 NGL                     Oil                    Total
                   2013        2012        2013        2012        2013        2012        2013        2012

                                                         (In millions)
Barnett Shale    $  51.8     $  55.2     $  23.7     $  44.6     $   2.3     $   3.3     $  77.8     $ 103.1
Other U.S.           0.1         0.2         0.1         0.1         3.1         4.0         3.3         4.3
Hedging             15.3        39.6           -         0.3           -           -        15.3        39.9
U.S.                67.2        95.0        23.8        45.0         5.4         7.3        96.4       147.3
Horseshoe Canyon    15.2        13.4           -         0.1           -           -        15.2        13.5
Horn River          17.8         2.1           -           -           -           -        17.8         2.1
Hedging              3.2         3.6           -           -           -           -         3.2         3.6
Canada              36.2        19.1           -         0.1           -           -        36.2        19.2
Consolidated     $ 103.4     $ 114.1     $  23.8     $  45.1     $   5.4     $   7.3     $ 132.6     $ 166.5

U.S. realized
cash derivative
gains            $   5.5     $   3.6     $     -     $     -     $     -     $     -     $   5.5     $   3.6
Canada realized
cash derivative
gains                4.1         2.0           -           -           -           -         4.1         2.0
Consolidated
realized cash
derivative gains     9.6         5.6           -           -           -           -         9.6         5.6
Consolidated
production
revenue and
realized cash
derivative gains
(1)              $ 113.0     $ 119.7     $  23.8     $  45.1     $   5.4     $   7.3     $ 142.2     $ 172.1

(1) Realized cash derivative gains from derivatives not treated as hedges are included in net derivative gains (losses). Unrealized derivative gains and losses, non-cash loss in fair value from restructured natural gas derivatives and hedge ineffectiveness make up the remainder of net derivative gains (losses) as reported on our statement of income. A discussion of net derivative gains (losses) is found elsewhere in our discussion of our results of operation. Total revenue is comprised of production revenue, net derivative gains (losses), sales of purchased natural gas and other revenue.

Average Daily Production Volume:
                   Natural Gas           NGL               Oil           Equivalent Total
                  2013     2012     2013     2012     2013    2012         2013         2012

                     (MMcfd)            (Bbld)           (Bbld)              (MMcfed)
Barnett Shale    175.9    232.8    9,644    11,508     281     359       235.5         304.0
Other U.S.         0.1      0.8       24        10     407     486         2.7           3.8
Total U.S.       176.0    233.6    9,668    11,518     688     845       238.2         307.8
Horseshoe Canyon  51.3     57.9        6        13       -       -        51.3          57.9
Horn River        68.0     11.3        -         -       -       -        68.0          11.3
Total Canada     119.3     69.2        6        13       -       -       119.3          69.2
Total            295.3    302.8    9,674    11,531     688     845       357.5         377.0


Table of Contents

Average Realized Price:
                      Natural Gas                 NGL                     Oil                 Equivalent Total
                   2013        2012        2013        2012        2013        2012           2013           2012

                       (per Mcf)               (per Bbl)               (per Bbl)                 (per Mcfe)
Barnett Shale    $  3.27     $  2.60     $ 27.35     $ 42.62     $ 90.12     $ 98.59     $    3.67         $  3.72
Other U.S.          4.24        2.38       52.49       53.50       85.92       91.65         13.50           12.35
Hedging             0.96        1.86           -        0.31           -           -          0.71            1.43
Total U.S.          4.23        4.47       27.42       42.95       87.63       94.61          4.50            5.26
Horseshoe Canyon $  3.29     $  2.55     $ 66.68     $ 68.43     $     -     $     -     $    3.29         $  2.56
Horn River          2.91        2.07           -           -           -           -          2.91            2.07
Hedging             0.30        0.57           -           -           -           -          0.30            0.57
Total Canada     $  3.37     $  3.04     $ 66.68     $ 68.43     $     -     $     -     $    3.38         $  3.05
Total            $  3.89     $  4.14     $ 27.44     $ 42.98     $ 87.63     $ 94.61     $    4.12         $  4.85

U.S. realized
cash derivative
gains            $  0.35     $  0.17     $     -     $     -     $     -     $     -     $    0.26         $  0.13
Canada realized
cash derivative
gains               0.38        0.32           -           -           -           -          0.38            0.32
Consolidated
realized cash
derivative gains    0.36        0.20           -           -           -           -          0.30            0.16
Consolidated
production
revenue and
realized cash
derivative gains $  4.25     $  4.34     $ 27.44     $ 42.98     $ 87.63     $ 94.61     $    4.42         $  5.01

The following table summarizes the changes in our production revenue and realized cash gains (losses) on derivatives:

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