1Q Misses; Lowers 2013 Outlook
1Q EPS misses on higher costs and slight production miss
KWK reported adjusted 1Q EPS/CFPS of ($0.04)/$0.06 vs. UBSe of ($0.02)/$0.04 and consensus of ($0.01)/$0.15. 1Q highlights include: a 5% YoY decline in production to 357.5 MMcfed (below the 360-365 MMcfed guidance range), 12% YoY decline in price realizations (5% above our estimate), and a 16% YoY decline in per unit costs to $4.66/Mcfe (7% above UBSe).
Reduced 2013-14 estimates on lower production and higher cost guidance
KWK lowered ‘13 guidance to 290-300 MMcfed to reflect the Barnett JV, below UBSe 314 MMcfed and implying an 18% YoY volume decline. We forecast 2013-14 production declines of 19% and 14%, and reduced our 2013-14 CFPS estimates to $0.20/$0.30 from $0.30/$0.40 before 1Q results (net of the impact of estimate changes made in a note prior to the conference call). We forecast 2013 production
& CF per debt adjusted share declines of -86% & -43% vs. peers’ +17% & +15%.
Notable financial highlights from 1Q results:
1) borrowing base revised to $350MM ($850MM prior) but minimum coverage ratio was relaxed from 1.5x (through 3/14) to 1.25x in 2013, declining to 1.1x by 3Q14 before rising to 2.0x (by mid-2016); 2) now permitted to direct asset sale proceeds to debt reduction assuming credit facility is less than 75% utilized (vs. previous stricter threshold of 25%); 3) paid down ~$250MM of debt with Barnett proceeds while retaining $200MM in cash; combined with expected operating cash flow, KWK believes this is a sufficient level to fund 2013-14 capex.
Valuation: trading well above NAV
Our $2 PT assumes 9.5x (near its historical average) 2013E normalized EBITDX.