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Earnings Preview: Quicksilver Resources

KWK CHK

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Quicksilver Resources Inc. (KWK - Analyst Report), an independent exploration and production company, is scheduled to report its second-quarter 2012 financial results before the market opens on August 7, 2012.

First Quarter Highlights

Quicksilver reported a loss per share of 9 cents in the first quarter of 2012 compared with earnings per share of 2 cents in the previous year's quarter. The loss primarily resulted from a non-cash impairment of oil and gas assets related to lower average natural gas prices and a non-cash loss associated with restructuring of hedge platform. The loss in the reported quarter was wider than the Zacks Consensus Estimate of a loss of 4 cents.

Total revenue in first-quarter 2012 was down 31.4% to $145.5 million from $212.2 million in the year-ago quarter. The decline was primarily due to lower realized gas prices and lower natural gas volumes from Barnett Shale. The reported quarter revenue fell short of the Zacks Consensus Estimate of $191 million.

Second-Quarter & Full-Year 2012 Guidance

The company expects production volumes in second-quarter 2012 to be in the range of 375 – 385 million cubic feet of natural gas equivalent (“MMcfe”) per day.

The company estimates second-quarter 2012 production taxes; gathering, processing, and transportation expenses; lease operating expenses; General & administrative expenses; and depreciation, deletion and amortization expenses to be in the range of 20–22 cents per thousand cubic feet of natural gas equivalent (“Mcfe”), $1.26–$1.30 per Mcfe and 80–84 cents per Mcfe, 52–55 cents per Mcfe and $1.56–$1.58 per Mcfe, respectively.

The company continues to hedge a substantial amount of its production to safeguard against fluctuating prices. The company has hedged 65% of its expected total equivalent production for the remainder of 2012 at a weighted average price of $6.02 per Mcfe.

The company has plans to invest $370 million in oil and gas-related activities in 2012.

Zacks Consensus  

The Zacks Consensus Estimate for second-quarter 2012 is a loss per share of 6 cents, substantially lower than earnings of 7 cents reported in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges from a loss of 14 cents to earnings of 4 cents a share.

For full-year 2012, the Zacks Consensus Estimate stands at a loss of 24 cents per share, lower than its full-year 2011 earnings of 12 cents per share. The current Zacks Consensus Estimate for full-year 2012 ranges from a loss of 52 cents to earnings of 4 cents.

Estimate Revisions Trend

Agreement

We have observed a few estimate revisions at this point. Of the 16 estimates for the second quarter, 2 were revised upward while 5 moved in the opposite direction in the last 30 days. There was no movement in estimates in the last 7 days.

For full-year 2012, out of the 17 estimates, 1 was revised upward while 8 were lowered in the last 30 days. In the last 7 days, estimates remained unchanged.

Some analysts believe that stringent environmental obligations, lower energy prices owing to a sensitive macro environment and supply disruption may negatively impact the financial performance of the company in second-quarter and full-year 2012.

Magnitude

The Zacks Consensus Estimate for the upcoming quarter remained unchanged in the last 7 days and 30 days.

The Zacks Consensus Estimate for full-year 2012 inched down by 2 cents over the last 30 days. In the last 7 days, the Zacks Consensus Estimate for second-quarter losses remained unchanged.

Surprise History

With respect to earnings surprises, Quicksilver has reported unfavorable earnings performance in the previous three quarters, and also missed the Zacks Consensus Estimates. However, second-quarter 2011 earnings of the company beat the Zacks Consensus Estimate.

The earnings surprise in the last four quarter ranges from (125.0%) to 16.7%. The average surprise over the last four quarters remained at negative 62.1%.  

Our Recommendation

We believe Quicksilver‘s core strength lies in its ability to recognize and acquire large resource targets at low cost per acre, which makes its future growth promising. The company’s ability to find new assets, longevity of the resources and continuous investments in its existing projects give a clear indication of its steady revenue generation in the long term.

However, we are concerned about stringent ecological protection regulations adopted by U.S. and Canadian governments, over-dependence on pipeline systems owned by third parties, operating exposure in limited geographic areas, failure to replace proved reserves as well as volatility in commodity prices. These factors may negatively impact the company’s future performance.

Currently, we are maintaining a long-term Neutral recommendation on Quicksilver Resources Inc. The company retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Fort Worth, Texas-based Quicksilver Resources Inc. is primarily engaged in the development of long-lived, unconventional, onshore natural gas reserves in the North American continent. The company competes with Chesapeake Energy Corporation (CHK - Analyst Report).

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