Quicksilver Bolsters Confidence

On improving fundamentals, Quicksilver Resources (KWK) sees its stock rally 35% in the last 30 days.

One issue that has plagued Quicksilver has been its balance sheet. As a result of acquiring its Fort Worth-based Alliance properties, the company took on an additional $1.0 billion of debt, which effectively doubled its long-term debt position and brought its debt-to-market capitalization ratio to .7, notably above the industry average.

However, recent efforts by management to de-lever the company’s balance sheet will likely prove to bolster investor confidence as well as its stock price. The most recent transaction brought in $280 MM in cash, which will be used to pay down its secured second lien facility (a costly source of capital). We believe the company will continue to monetize its high quality assets to shore up its balance sheet in the near term.

Quicksilver also has a 41% stake in BreitBurn Energy Partners, another potential source of near-term capital. BBEP has underperformed relative to its peers and does not fit KWK’s portfolio of assets. Management will likely sell its position when BBEP units reach more attractive levels. We estimate this would generate at least $160 MM of cash flow, based on the last 5 days of trading.

We believe Quicksilver could reduce its debt burden by approximately $600 MM by the end of 2009. This will have future benefits, giving it flexibility to pursue growth projects in a more aggressive fashion, markets permitting. Concurrently, we believe that addressing the company’s balance sheet issues will give credence to more favorable multiples for valuation purposes given its improving fundamentals.

Read the full analyst report on KWK