Quicksilver Target Adjusted
We are maintaining our Buy recommendation on Quicksilver Resources, Inc. (KWK - Analyst Report) but decreasing our target price to $40 from $42 per share. The company’s growth story remains strong and with the recent accretive Alliance acquisition, the company looks to further increase its growth prospects in the prolific Barnett Shale.
The Texas Barnett Shale play now represents over 5.5 Tcfe of low risk reserve potential for KWK. The near 45% pullback since mid-July in the company’s stock price is near historically low levels from a valuation stand point, further solidifies our recommendation.
Lastly, the company should have no problem paying back the $1 billion of debt it took on for the Alliance acquisition as it has a sufficient amount of excess liquidity from its credit facility as well as more than $600 MM of non-producing assets.
On September 2, the board of directors of Quicksilver Resources approved a $270 MM increase in the company’s 2008 capital budget. The budget increase is tied to the Barnett Shale acquisition in Tarrant and Denton counties. Approximately 20 of the 35 additional wells will be drilled in relation to the Alliance acquisition.
Quicksilver typically trades at a premium to its peers due to its large near-term growth potential and low risk, low cost operating strategy. When valuing Quicksilver we look at forward price to earnings (P/E) and enterprise (EV/EBITDA) multiples. Quicksilver s forward looking P/E multiple has historically averaged around 20x earnings and its EV/EBITDA multiple has traded between 8x-10x.
With our 2009 net earnings and EBITDA estimates of $2.01 per share and $975 MM, a price object of $40 yields a forward P/E and an enterprise multiple of 20x and 8.7x. These multiples are both within historical and appropriate ranges.