KWK's Shell Deal & Update

Zacks

Oil and gas entity, Quicksilver Resources Inc. (KWK) concluded its Acquisition and Exploration Agreement as announced on December 2012 with Royal Dutch Shell plc.’s (RDS.A) business wing – SWEPI LP and unveiled the operations update of its Horn River, Sand Wash Basin and Midland Basin prospects.

With the closure of this deal, Quicksilver will be the owner of a 50% stake in the Sand Wash Basin, which stretches about 320,000 net acres in Northwest Colorado. The Agreement established an Area of Mutual Interest in excess of 850,000 acres in the basin.

Shell paid an undisclosed amount to Quicksilver for its greater share in the acreage contribution. The latter intends to utilize the proceeds from this agreement to lower debt under its credit facility and for financing its future projects.

Operational Update

The company ended 2012 on a high, by pumping up natural gas production in the Horn River Basin in Northeast British Columbia to 100 million cubic feet per day (MMcf/d). Subsequent to the d-50 pad, which was wrapped up in the third quarter of 2012, the company brought five more wells into service in addition to the existing four wells. Quicksilver forecasts to register 80 MMcf/d net sales against a gross output level of 100 MMcf/d.

In the West Texas play, the company completed its second well in Upton County and has revealed oil production in the flowback. Its short lateral well – Price Ranch #1 in the Pecos County holds promise, clocking an average production level of 120 barrels of oil equivalent per day (Boe/d) in the first 100 days from the Bone Springs formation.  

Another major resource churner – Sand Wash Basin, recently finished its vertical well, which recorded initial production volume of 400 Boe/d with an average output of 210 Boe/d in the first month. However, the well was unable to reach maximum capacity owing to surface facility limitations. The well bore unexpected fruit with the company finding the oil-rich Niobrara across a distance of 35 miles on its leased properties in the Moffat and Routt counties.

Upcoming 2013 Potential Ventures

Quicksilver is currently in talks with a buyer to divest its non-operated minor interest in the Barnett Shale formation in North Texas. It is also negotiating a prospective joint venture program in the Horn River Basin with the downstream marketing of the gas being the main concern.

We believe the still recovering natural gas prices and moderate oil prices along with a decline in drilling activity could hinder Quicksilver‘s growth prospects. The Zacks Consensus Estimates for the fourth quarter and full year 2012 are presently pegged at 2 cents per share and at a loss of 23 cents per share, respectively.

However, we believe the Sand Wash and Horn River prospects could generate favorable returns for Quicksilver. It currently retains a short-term Zacks #3 Rank (Hold).

DNR Denbury Resources Inc. (DNR) being another Zacks #3 Ranked operator in the exploration and production block with its unique profile is expected to deliver sustainable growth.

With a market capitalization of $480.69 million, Texas-based Quicksilver Resources engages in the acquisition, exploration, development, and production of onshore oil and gas in North America.

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