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KWK > SEC Filings for KWK > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for QUICKSILVER RESOURCES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for QUICKSILVER RESOURCES INC


8-Aug-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- and six-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 to sell an undivided 25% of our Barnett Shale Asset for a 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 $464.0 million, including an estimated final adjustment of $0.6 million in the third quarter of 2013. We recognized a gain of $333.2 million before consideration of income taxes as a result of this transaction.
In July 2013, we executed an agreement to sell all of our interest in approximately 143,000 acres and 2.6 MMBbl of reserves located in our Southern Alberta Asset. The sale is expected to close in the third quarter and is subject to customary closing conditions.
We are running an integrated joint venture process in our Horn River Asset with a select group of potential partners. The process is currently in the formal bidding stage.
We are progressing with the effort to attract outside capital for our West Texas Asset and expect a minimal drilling program until a joint venture partner is secured.
Significant Contract Revisions
In the second quarter of 2013, we refinanced a portion of our debt to extend maturities and reduce the weighted average interest costs on outstanding debt. We also 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 $825 million of second lien debt. Specific refinancing activities and changes to the Combined Credit Agreements are outlined in Note 5 to the condensed consolidated financial statements in Item 1 of this Quarterly Report. In July 2013, in light of the Canadian Governor in Council's failure to approve NGTL's construction of the Komie North Project, NGTL terminated the Project and Expenditure Authorization (PEA), which authorized NGTL to construct the Komie North Project and the related meter station. The PEA necessitated the construction of a treatment facility and required financial guarantees to cover NGTL's costs for the Komie North Project. We have provided C$14 million in letters of credit to support this obligation. NGTL will release the letters of credit in connection with our paying NGTL an amount equal to actual costs incurred by NGTL, which is estimated to be approximately $12.8 million and is reflected in other income (expense) in our consolidated financial statements. With this termination of the PEA as described above, our agreement to deliver gas to the Komie North Project, has also terminated. We maintain our ability to sell gas at the Station 2 and AECO hubs, as our current production is served by existing treating facilities and pipelines.
2013 CAPITAL PROGRAM
We incurred costs related to our capital program of $51.7 million for the first six 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 June 30, 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    $  50.3     $  41.7     $  17.5     $  34.3     $   1.7     $   3.0     $  69.5     $  79.0
Other U.S.             -         0.1           -         0.1         2.9         3.3         2.9         3.5
Hedging             14.4        45.4           -         6.3           -           -        14.4        51.7
U.S.                64.7        87.2        17.5        40.7         4.6         6.3        86.8       134.2
Horseshoe Canyon    14.7         8.9           -           -           -           -        14.7         8.9
Horn River          16.8         2.6           -           -           -           -        16.8         2.6
Hedging              2.8         4.6           -           -           -           -         2.8         4.6
Canada              34.3        16.1           -           -           -           -        34.3        16.1
Consolidated
production
revenue          $  99.0     $ 103.3     $  17.5     $  40.7     $   4.6     $   6.3     $ 121.1     $ 150.3

U.S. realized
cash derivative
gains (losses)   $  (4.0 )   $   8.9     $     -     $     -     $     -     $     -     $  (4.0 )   $   8.9
Canada realized
cash derivative
gains                0.5         8.2           -           -           -           -         0.5         8.2
Consolidated
realized cash
derivative gains
(losses)            (3.5 )      17.1           -           -           -           -        (3.5 )      17.1
Consolidated
production
revenue and
realized cash
derivative gains
(1)              $  95.5     $ 120.4     $  17.5     $  40.7     $   4.6     $   6.3     $ 117.6     $ 167.4

(1) Realized cash derivative gains from derivatives not treated as hedges are included in net derivative gains. 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 as reported on our statement of income. A discussion of net derivative gains is found elsewhere in our discussion of our results of operations. Total revenue is comprised of production revenue, net derivative gains , 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    137.7    216.8    7,069    11,339     207     366       181.4         287.1
Other U.S.           -      0.7       21        26     377     441         2.4           3.5
Total U.S.       137.7    217.5    7,090    11,365     584     807       183.8         290.6
Horseshoe Canyon  48.9     53.2        7         -       -       -        48.9          53.2
Horn River        54.6     14.9        -         -       -       -        54.6          14.9
Total Canada     103.5     68.1        7         -       -       -       103.5          68.1
Total            241.2    285.6    7,097    11,365     584     807       287.3         358.7


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    $  4.01     $  2.11     $ 27.14     $ 33.23     $ 88.85     $ 89.73     $     4.21     $  3.02
Other U.S.          3.94        2.04       50.05       55.18       83.80       82.42          13.70       11.26
Hedging             1.15        2.29           -        6.08           -           -           0.86        1.95
Total U.S.          5.16        4.40       27.21       39.36       85.59       85.73           5.19        5.07
Horseshoe Canyon $  3.30     $  1.84     $ 57.84     $     -     $     -     $     -     $     3.31     $  1.84
Horn River          3.38        1.91           -           -           -           -           3.38        1.91
Hedging             0.29        0.75           -           -           -           -           0.29        0.75
Total Canada     $  3.64     $  2.61     $ 57.84     $     -     $     -     $     -     $     3.64     $  2.61
Consolidated
production
revenue          $  4.51     $  3.97     $ 27.24     $ 39.36     $ 85.61     $ 85.73     $     4.63     $  4.60

U.S. realized
cash derivative
gains (losses)   $ (0.32 )   $  0.45     $     -     $     -     $     -     $     -     $    (0.24 )   $  0.34
Canada realized
cash derivative
gains               0.06        1.33           -           -           -           -           0.06        1.33
Consolidated
realized cash
derivative gains
(losses)           (0.16 )      0.66           -           -           -           -          (0.13 )      0.52
Consolidated
production
revenue and
realized cash
derivative gains $  4.35     $  4.63     $ 27.24     $ 39.36     $ 85.61     $ 85.73     $     4.50     $  5.12

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

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