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We reiterate our Neutral recommendation on Texas-based exploration and production company, Quicksilver Resources Inc. (KWK - Analyst Report). Quicksilver Resources posted lackluster top- and bottom- line performance in the second quarter 2012 due to decline in natural gas and natural gas liquids prices as well as lower core production volumes.

In view of the growing priority on ecological protection, the US and Canadian governments have adopted environmental regulations and permits to keep a check on a company’s resource use as well as emission, which could lead to generation of lower margins by Quicksilver. In addition, seasonal variations in demand for oil and natural gas could lead to revenue volatility.

We believe the company’s aggressive stance on managing a solid hedging profile will contribute to positive results. For the second half of 2012, the company has hedged a total of 230 million cubic feet per day of natural gas at an average price of $5.75 and natural gas liquids volume of 7,000 barrels per day at $45. For its Canadian portfolio, the company hedged 60 million cubic feet per day at an average price of $5.82.

Quicksilver’s hardened focus on its various investment projects will expand its growth options. The company’s successful negotiations on its joint venture programs and steady progress in the Horn River as well as Niobrara play will warrant enhanced profitability in the future.

Going forward, Quicksilver’s maintenance of a strong financial profile will support its multiple long-term growth programs. Nonetheless, cyclical risks like accidents and unexpected outages in pipeline or gathering system could severely impact the company’s ability to market, fractionate and deliver production.

For 2012, the average output is expected in the range of 365-380 million cubic feet per day. 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. The Zacks Consensus Estimates for the third quarter and full year 2012 are presently pegged at a loss of 2 cents per share and a loss of 22 cents per share, respectively.

The company’s closest competitor is Denbury Resources Inc. (DNR - Analyst Report). Quicksilver currently has a Zacks #3 Rank (Hold Rating).

Quicksilver Resources engages in the acquisition, exploration, development, and production of onshore oil and gas in North America. The company focuses primarily on unconventional reservoirs, such as fractured shales, coal beds, and tight sands.

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