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Quicksilver Resources Inc. (KWK - Analyst Report) posted a loss per share of 13 cents in the second quarter of 2012 versus earnings per share of 6 cents in the year-ago quarter. The loss in the reported quarter was wider than the Zacks Consensus Estimate of a loss of 6 cents.

The weak quarterly earnings performance stemmed from lower natural gas and natural gas liquids (NGL) prices as well as a decline in core production volumes.

On a GAAP basis, the company reported a loss of $3.96 per share compared with net income of 61 cents per share in the year-earlier quarter. The difference between GAAP and operating earnings of $3.83 per share during the quarter was due to a non-cash impairment charge.

Total Revenue

Total revenue at the end of the second quarter 2012 was $168.6 million, down 32.1% from $248.4 million in the year-ago quarter. The year-over-year decline in revenue was mainly due to lower production from the company’s Horn River Basin operation and slower completion activity at the Barnett Shale play. This was compounded by fall in natural gas output from ongoing wells and temporary shutdowns of inefficient facilities.

Reported quarter revenue also lagged the Zacks Consensus Estimate of $187 million.

Operational Update

Quicksilver Resources achieved average daily production of 359 million cubic feet of natural gas equivalent (MMcfe) in the second quarter 2012, down 14% from 417 MMcfe in the second quarter 2011. The production mix comprising roughly 80% natural gas and 20% NGL, crude oil and condensate remained unchanged over the sequentially preceding quarter.

Total realized prices during the second quarter 2012 declined 15.7% to $4.61 per thousand cubic feet equivalent (Mcfe) from $5.47 per Mcfe, resulting from lower natural gas, NGL and oil prices. The average realized oil, NGL and natural gas prices in the second quarter were a respective $85.73 per barrel (down 11%), $39.36 per barrel (down 0.05%) and $3.98 per thousand cubic feet (Mcf) (down 21.3%).

Total operating expenses incurred by the company during the reported quarter shot up 573.6% year over year to $1,143.2 million owing to an impairment cost of $992.0 million.

Excluding the impairment charge, operating expenses dropped 11% to 151.2 million year over year. The decrease in expenses was mainly due to lower lease expenses and cost of natural gas purchased partially offset by an increase in general and administrative expenses. Lease operating expenses fell due to closure of unproductive wells in the Barnett play resulting from decline in water hauling and gas costs and lower well workover activity in the US and Canada .

Interest expenses during the quarter were $40 million versus $48 million in the prior-year period. The year-over-year decrease in expenses was on account of lower amortization of deferred financing charges.

Financials

Cash and cash equivalents of the company as of June 30, 2012 were $14.0 million versus $13.1 million as of December 31, 2011.

Long-term debt at Quicksilver, as of June 30, 2012, was $2.1 billion versus $1.9 billion as of December 31, 2011.

Capital expenditure for the second quarter 2012 amounted to $155 million. Out of the total cost, $131 million was allocated for drilling and completion activities, $5 million for midstream activities, $11 million associated with acreage purchases and $8 million on corporate and other.

Guidance

The company anticipates production volumes in the third quarter 2012 in the range of 385–400 MMcfe per day. For 2012, the average output is expected in the range of 365–380 MMcfe per day as Quicksilver will further reduce its drilling activity in the upcoming quarters.

The company projects third quarter production taxes; gathering, processing, and transportation expenses; and lease operating expenses in the corresponding range of 21–23 cents per Mcfe, $1.16–$1.20 per Mcfe and 60–64 cents per Mcfe. General & administrative expenses and depreciation, deletion and amortization expenses are expected in the band of 43–47 cents per Mcfe and $1.30–$1.35 per Mcfe, respectively.

The company will continue its hedging of production capacities to safeguard against fluctuating prices. The company has hedged 272 MMcfe/d of output which translates to more than 70% of its expected total equivalent production for the remainder of 2012 and 160 MMcfe/d for 2013 at a weighted average price of $6.02 per Mcfe and $5.30 per Mcfe, respectively.

The company has plans to incur capital expenses of $70 million for the latter half of 2012 and roughly $360 million in oil and gas related activities in 2012.

Peer Comparison

A Quicksilver peer, Chesapeake Energy Corporation (CHK - Analyst Report), announced operating earnings for the second quarter 2012 of 6 cents per share, missing the Zacks Consensus Estimate of 8 cents, while falling significantly short of the year-ago earnings of  76 cents per share.

Total revenue of the company increased 2.1% year over year to $3,389 million and surpassed the Zacks Consensus Estimate of $1,891 million.

Our View

Quicksilver reported lackluster earnings outcome in the second quarter 2012 in the wake of sluggish production and weak prices. We are still encouraged by the company’s hardened focus on reducing its operating costs and capital expenses which will aid in generating profitable results. In addition, significant progress in Quicksilver’s negotiations regarding joint venture programs could also add to the top-line growth.

However, compliance with environmental regulations and disruption in transportation systems arising from weather conditions and pipeline accidents could hurt the company’s growth objectives in the long run.

Quicksilver Resources currently retains a Zacks #3 Rank, implying a short-term Hold rating.

Based in Fort Worth, Texas, independent exploration and production company, Quicksilver Resources, is primarily engaged in the development of long-lived, unconventional, onshore natural gas reserves in the North American continent.

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