XNYS:KWK Quicksilver Resources Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)     
þ      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
or
¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission file number: 001-14837

Quicksilver Resources Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   75-2756163
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)  
801 Cherry Street, Suite 3700, Unit 19, Fort Worth, Texas   76102
(Address of principal executive offices)   (Zip Code)

(817) 665-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

    Large accelerated filer þ   Accelerated filer ¨    Non-accelerated filer ¨   Smaller reporting company ¨
     (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Title of Class    Outstanding as of April 30, 2012
Common Stock, $0.01 par value   

173,210,889 shares

 

 

 


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DEFINITIONS

As used in this Quarterly Report unless the context otherwise requires:

ABR” means alternate base rate

AOCI” means accumulated other comprehensive income

Bbl” or “Bbls” means barrel or barrels

Bbld” means barrel or barrels per day

Bcf” means billion cubic feet

Bcfe” means Bcf of natural gas equivalents

Canada” means our oil and natural gas operations located principally in British Columbia and Alberta, Canada

C$” means Canadian dollars

DD&A” means Depletion, Depreciation and Accretion

GPT” means gathering, processing and transportation expense

LIBOR” means London Interbank Offered Rate

MBbl” or “MBbls” means thousand barrels

MBbld” means MBbl per day

Mcf” means thousand cubic feet

Mcfe” means Mcf natural gas equivalents, calculated as one Bbl of oil or NGLs equaling six Mcf of gas

MMcf” means million cubic feet

MMcfd” means million cubic feet per day

MMcfe” means MMcf of natural gas equivalents

MMcfed” means MMcfe per day

NGL” or “NGLs” means natural gas liquids

OCI” means other comprehensive income

Oil” includes crude oil and condensate

RSU” means restricted stock unit

COMMONLY USED TERMS

Other commonly used terms and abbreviations include:

2007 Senior Secured Credit Facility” means collectively our U.S. senior secured revolving credit facility and our Canadian senior secured revolving credit facility, each dated as of February 9, 2007, which were terminated September 6, 2011 and replaced at that time by the Initial U.S. Credit Facility and the Initial Canadian Credit Facility

Amended and Restated Canadian Credit Facility” means our new Canadian senior secured revolving credit facility which was amended and restated, effective December 22, 2011

Amended and Restated U.S. Credit Facility” means our new U.S. senior secured revolving credit facility which was amended and restated, effective December 22, 2011

Bakken Asset” means our operations and our assets in the Southern Alberta basin in the Bakken formation of northern Wyoming and Montana, including our Cutbank field operations and assets

Barnett Shale Asset” means our operations and our assets in the Barnett Shale located in the Fort Worth basin of North Texas

BBEP” means BreitBurn Energy Partners L.P.

BBEP Unit” means BBEP limited partner unit

CMLP” means Crestwood Midstream Partners LP

Combined Credit Agreements” means collectively our Amended and Restated U.S. Credit Facility and our Amended and Restated Canadian Credit Facility

Crestwood” means Crestwood Holdings LLC

Crestwood Transaction” means the sale to Crestwood of all our interests in KGS, including general partner interests and incentive distribution rights

FASB” means the Financial Accounting Standards Board, which promulgates accounting standards in the U.S.

 

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Fortune Creek” means Fortune Creek Gathering and Processing Partnership, a midstream partnership formed in December 2011 with KKR dedicated to the construction and operation of natural gas midstream services within Horn River

GAAP” means accounting principles generally accepted in the U.S.

Horn River Asset” means our operations and our assets in the Horn River basin of Northeast British Columbia

Horseshoe Canyon Asset” means our operations and our assets in Horseshoe Canyon, the coalbed methane fields of southern and central Alberta

Initial Canadian Credit Facility” means our initial Canadian senior secured revolving credit facility, dated as of September 6, 2011, which was amended and restated by the Amended and Restated Canadian Credit Facility on December 22, 2011

Initial U.S. Credit Facility” means our initial U.S. senior secured revolving credit facility, dated as of September 6, 2011, which was amended and restated by the Amended and Restated U.S. Credit Facility on December 22, 2011

KGS” means Quicksilver Gas Services LP, a publicly-traded partnership, which we formerly owned that traded under the ticker symbol of “KGS” and subsequent to the Crestwood Transaction renamed itself Crestwood Midstream Partners LP and trades under the ticker symbol “CMLP”

KKR” means the Kohlberg Kravis Roberts & Co. L.P. with whom we formed Fortune Creek

Mercury” means Mercury Exploration Company, which is owned by members of the Darden family

NGTL” means NOVA Gas Transmission Ltd., a subsidiary of TransCanada PipeLines Limited

NGTL Project” means the series of contracts with NGTL for the construction of a pipeline and meter station, which will serve our and others’ operations in the Horn River basin

Sand Wash Asset” means our operations and our assets in the Sand Wash basin located in Colorado and southern Wyoming

SEC” means the U.S. Securities and Exchange Commission

VIE” means variable interest entity

West Texas Asset” means our operations and our assets in the Midland and Delaware basins in West Texas prospective in the Bone Springs and Wolfcamp formations, principally concentrated in four areas: Jeff Davis and Reeves Counties, Upton and Crockett Counties, Pecos County and Presidio County

 

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INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2012

 

PART I. FINANCIAL INFORMATION

  

Item 1. Condensed Consolidated Interim Financial Statements (Unaudited)

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 4. Controls and Procedures

     39   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     40   

Item 1A. Risk Factors

     40   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     40   

Item 3. Defaults Upon Senior Securities

     41   

Item 4. Mine Safety Disclosures

     41   

Item 5. Other Information

     41   

Item 6. Exhibits

     42   

Signature

     43   

Except as otherwise specified and unless the context otherwise requires, references to the “Company,” “Quicksilver,” “we,” “us,” and “our” refer to Quicksilver Resources Inc. and its subsidiaries.

 

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Forward-Looking Information

Certain statements contained in this Quarterly Report and other materials we file with the SEC, or in other written or oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

 

   

changes in general economic conditions;

   

fluctuations in natural gas, NGL and oil prices;

   

failure or delays in achieving expected production from exploration and development projects;

   

uncertainties inherent in estimates of natural gas, NGL and oil reserves and predicting natural gas, NGL and oil reservoir performance;

   

effects of hedging natural gas, NGL and oil prices;

   

fluctuations in the value of certain of our assets and liabilities;

   

competitive conditions in our industry;

   

actions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters, customers and counterparties;

   

changes in the availability and cost of capital;

   

delays in obtaining oilfield equipment and increases in drilling and other service costs;

   

delays in construction of transportation pipelines and gathering, processing and treating facilities;

   

operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;

   

the effects of existing and future laws and governmental regulations, including environmental and climate change requirements;

   

the effects of existing or future litigation;

   

failure or delays in completing Quicksilver’s proposed initial public offering of common units representing limited partner interests in a master limited partnership holding portions of our Barnett Shale Asset; and

   

additional factors described elsewhere in this Quarterly Report.

This list of factors is not exhaustive, and new factors may emerge or changes to these factors may occur that would impact our business. Additional information regarding these and other factors may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. All such risk factors are difficult to predict, and are subject to material uncertainties that may affect actual results and may be beyond our control. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report, and we undertake no obligation to update any of these forward-looking statements to reflect subsequent events or circumstances except to the extent required by applicable law.

All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

 

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PART I    FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Interim Financial Statements (Unaudited)

QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

In thousands, except for per share data – Unaudited

 

      For the Three Months Ended
March 31,
 
      2012      2011  

Revenue

     

Production

   $         171,820          $         190,301      

Sales of purchased natural gas

     12,086            20,426      

Other

     (38,437)          1,460      
  

 

 

    

 

 

 

Total revenue

     145,469            212,187      
  

 

 

    

 

 

 

Operating expense

     

Lease operating

     28,691            21,557      

Gathering, processing and transportation

     43,077            44,014      

Production and ad valorem taxes

     6,763            7,581      

Costs of purchased natural gas

     11,937            19,743      

Other operating

     18            160      

Depletion, depreciation and accretion

     54,439            52,471      

Impairment

     62,746            49,063      

General and administrative

     19,095            18,391      
  

 

 

    

 

 

 

Total expense

     226,766            212,980      

Crestwood earn-out

     41,097            -      
  

 

 

    

 

 

 

Operating loss

     (40,200)          (793)    

Loss from earnings of BBEP

     -            (20,884)    

Other income - net

     93            1,121      

Fortune Creek accretion

     (4,741)          -      

Interest expense

     (40,170)          (46,178)    
  

 

 

    

 

 

 

Loss before income taxes

     (85,018)          (66,734)    

Income tax expense (benefit)

     (25,094)          4,024      
  

 

 

    

 

 

 

Net loss

   $ (59,924)        $ (70,758)    
  

 

 

    

 

 

 

Other comprehensive income (loss)

     

Reclassification adjustments related to settlements of derivative contracts - net of income tax

     (32,534)          (16,219)    

Net change in derivative fair value - net of income tax

     91,789            (17,195)    

Foreign currency translation adjustment

     7,928            12,004      
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 7,259          $ (92,168)    
  

 

 

    

 

 

 

Loss per common share - basic

   $ (0.35)        $ (0.42)    

Loss per common share - diluted

   $ (0.35)        $ (0.42)    

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except for share data – Unaudited

 

      March 31,
2012
     December 31,
2011
 
ASSETS  

Current assets

     

Cash and cash equivalents

   $ 13,032          $ 13,146      

Accounts receivable - net of allowance for doubtful accounts

     62,686            95,282      

Derivative assets at fair value

     227,591            162,845      

Other current assets

     29,790            29,154      
  

 

 

    

 

 

 

Total current assets

     333,099            300,427      

Property, plant and equipment - net

     

Oil and gas properties, full cost method (including unevaluated costs of $477,434 and $433,341, respectively)

     3,258,975            3,226,476      

Other property and equipment

     240,703            234,043      
  

 

 

    

 

 

 

Property, plant and equipment - net

     3,499,678            3,460,519      

Derivative assets at fair value

     170,274            183,982      

Other assets

     51,680            50,534      
  

 

 

    

 

 

 
   $     4,054,731          $     3,995,462      
  

 

 

    

 

 

 
LIABILITIES AND EQUITY  

Current liabilities

     

Current portion of long-term debt

   $ -          $ 18      

Accounts payable

     88,750            142,672      

Accrued liabilities

     106,885            142,193      

Derivative liabilities at fair value

     -            4,028      

Current deferred tax liability

     63,636            45,262      
  

 

 

    

 

 

 

Total current liabilities

     259,271            334,173      

Long-term debt

     2,012,936            1,903,431      

Partnership liability

     130,071            122,913      

Asset retirement obligations

     93,945            85,568      

Derivative liabilities at fair value

     24,398            -      

Other liabilities

     28,461            28,461      

Deferred income taxes

     233,172            258,997      

Commitments and contingencies (Note 8)

     

Stockholders’ equity

     

Preferred stock, par value $0.01, 10,000,000 shares authorized, none outstanding

     -            -      

Common stock, $0.01 par value, 400,000,000 shares authorized, and 179,011,812 and 176,980,483 shares issued, respectively

     1,790            1,770      

Paid in capital in excess of par value

     742,635            737,015      

Treasury stock of 5,730,587 and 5,379,702 shares, respectively

     (48,692)          (46,351)    

Accumulated other comprehensive income

     282,041            214,858      

Retained earnings

     294,703            354,627      
  

 

 

    

 

 

 

Total stockholders’ equity

     1,272,477            1,261,919      
  

 

 

    

 

 

 
   $ 4,054,731          $ 3,995,462      
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

In thousands – Unaudited

 

      Quicksilver Resources Inc. Stockholders’ Equity  
      Common
Stock
     Additional
Paid-in
Capital
     Treasury
Stock
     Accumulated
Other
Comprehensive
Income
     Retained
Earnings
     Total  

Balances at December 31, 2010

   $ 1,755         $ 714,869         $ (41,487)        $ 130,187          $ 264,581          $ 1,069,905      

Net loss

     -           -           -            -            (70,758)          (70,758)    

Hedge derivative contract settlements reclassified into earnings from AOCI, net of income tax of $7,781

     -           -           -            (16,219)          -            (16,219)    

Net change in derivative fair value, net of income tax of $9,311

     -           -           -            (17,195)          -            (17,195)    

Currency translation adjustment

     -           -           -            12,004            -            12,004      

Issuance & vesting of stock compensation

     11           5,467           (4,797)          -            -            681      

Stock option exercises

     1           367           -            -            -            368      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at March 31, 2011, restated (1)

   $ 1,767         $ 720,703         $ (46,284)        $ 108,777          $ 193,823          $ 978,786      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at December 31, 2011

   $ 1,770         $ 737,015         $ (46,351)        $ 214,858          $ 354,627          $ 1,261,919      

Net loss

     -           -           -            -            (59,924)          (59,924)    

Hedge derivative contract settlements reclassified into earnings from AOCI, net of income tax of $16,350

     -           -           -            (32,534)          -            (32,534)    

Net change in derivative fair value, net of income tax of $31,632

     -           -           -            91,789            -            91,789      

Currency translation adjustment

     -           -           -            7,928            -            7,928      

Issuance & vesting of stock compensation

     19           5,610           (2,341)          -            -            3,288      

Stock option exercises

     1           10           -            -            -            11      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at March 31, 2012

   $     1,790         $     742,635         $   (48,692)        $   282,041          $   294,703          $   1,272,477      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Note 1 contains additional information.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands – Unaudited

 

      For the Three Months Ended
March 31,
 
      2012      2011  

Operating activities:

     

Net loss

   $     (59,924)        $     (70,758)    

Adjustments to reconcile net loss to net cash provided by operating activities:

     

Depletion, depreciation and accretion

     54,439            52,471      

Impairment expense

     62,746            49,063      

Crestwood earn-out

     (41,097)          -      

Deferred income tax expense (benefit)

     (25,443)          4,024      

Non-cash loss from hedging and derivative activities

     45,649            54      

Stock-based compensation

     5,630            5,478      

Non-cash interest expense

     1,742            3,880      

Fortune Creek accretion

     4,741            -      

Gain on disposition of BBEP units

     -            (1,289)    

Loss from BBEP in excess of cash distributions

     -            27,253      

Other

     (29)          89      

Changes in assets and liabilities

     

Accounts receivable

     32,612            (13,256)    

Prepaid expenses and other assets

     (1,874)          (3,451)    

Accounts payable

     (16,319)          (24,711)    

Accrued and other liabilities

     (35,503)          (17,134)    
  

 

 

    

 

 

 

Net cash provided by operating activities

     27,370            11,713      
  

 

 

    

 

 

 

Investing activities:

     

Purchases of property, plant and equipment

     (174,922)          (196,547)    

Proceeds from Crestwood earn-out

     41,097            -      

Proceeds from sale of BBEP units

     -            1,703      

Proceeds from sale of properties and equipment

     460            507      
  

 

 

    

 

 

 

Net cash used by investing activities

     (133,365)          (194,337)    
  

 

 

    

 

 

 

Financing activities:

     

Issuance of debt

     161,658            147,983      

Repayments of debt

     (53,115)          (15,145)    

Debt issuance costs paid

     (191)          -      

Proceeds from exercise of stock options

     10            368      

Purchase of treasury stock

     (2,341)          (4,797)    
  

 

 

    

 

 

 

Net cash provided by financing activities

     106,021            128,409      
  

 

 

    

 

 

 

Effect of exchange rate changes in cash

     (140)          (720)    
  

 

 

    

 

 

 

Net decrease in cash

     (114)          (54,935)    

Cash and cash equivalents at beginning of period

     13,146            54,937      
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 13,032          $ 2      
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. ACCOUNTING POLICIES AND DISCLOSURES

The accompanying condensed consolidated interim financial statements have not been audited. In management’s opinion, the accompanying condensed consolidated interim financial statements contain all adjustments necessary to fairly present our financial position as of March 31, 2012 and our results of operations and cash flows for the three months ended March 31, 2011 and 2012. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of annual results.

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during each reporting period. Management believes its estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from management’s estimates.

Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2011 Annual Report on Form 10-K.

Immaterial Restatement

The consolidated financial statements as of and for the year ended December 31, 2010 were restated as disclosed within Item 8, Note 2 in the 2011 Annual Report on Form 10-K to increase the previously recognized gain related to the sale of our interests in KGS by $20.7 million and to provide additional deferred taxes on the increased gain. The previously reported gain excluded certain liabilities for intercompany transactions related to services performed by KGS for our U.S. exploration and production segment, which should have been included in the gain calculation. Additional depletion expense was recognized due to the inclusion of additional future development costs in the 2010 depletion calculation. The results of this restatement, which had no impact on our total cash flow from operations, investing and financing activities as reported, impacted the retained earnings and the total stockholder’s equity as of March 31, 2011. Previously, retained earnings and total stockholder’s equity were reported as $183.3 million and $968.3 million, respectively, in the Form 10-Q for the quarter ended March 31, 2011. These balances have been restated to $193.8 million and $978.8 million, respectively, within the Condensed Consolidated Statement of Equity as of March 31, 2011.

Recently Issued Accounting Standards

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements.

In June 2011, the FASB issued an amendment to accounting guidance to update the presentation of comprehensive income in consolidated financial statements. Under the amended guidance, the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income may be made either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance became effective for us beginning with the quarter ended March 31, 2012, and requires retrospective application to earlier periods presented. Our condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2012 and 2011 contain the required disclosure. The implementation of this accounting pronouncement resulted in increased disclosure in Note 12.

In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurement and disclosure. Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair

 

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value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity. This guidance became effective for us beginning with the quarter ended March 31, 2012. The adoption of this accounting pronouncement did not have an effect on the fair value measurement, but rather expanded upon existing disclosures.

In December 2011, the FASB issued an amendment to the accounting guidance for disclosure of arrangements that permit offsetting assets and liabilities. The amendment expands the disclosure requirements to require both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendment is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013, and shall be applied retrospectively. We do not expect the adoption of this accounting pronouncement to have a material impact on our financial statements when implemented.

No other pronouncements materially affecting our financial statements have been issued since the filing of our 2011 Annual Report on Form 10-K.

2. CRESTWOOD EARN-OUT

In October 2010, we completed the sale of all of our interests in KGS to Crestwood. As part of the sale, we have the right to collect future earn-out payments through 2013. In February 2012, we collected $41 million of these earn-out payments which is presented as Crestwood earn-out in the condensed consolidated statement of income for the quarter ended March 31, 2012. We have the right to collect up to an additional $31 million in future earn-out payments in 2013, although we have recognized no assets related to these opportunities.

Note 3 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains additional information regarding the Crestwood Transaction.

3. DERIVATIVES AND FAIR VALUE MEASUREMENTS

The following table categorizes our commodity derivative instruments based upon the use of input levels:

 

     Asset Derivatives      Liability Derivatives  
      March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 
     (in thousands)      (in thousands)  

Level 2 inputs

   $ 348,880         $ 195,838         $ -         $ 4,028     

Level 3 inputs

     48,985           150,989           24,398           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   397,865         $   346,827         $   24,398         $   4,028     
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of “Level 2” derivative instruments included in these disclosures was estimated using prices quoted in active market for the periods covered by the derivatives and the value reported by counterparties. The fair value of derivative instruments designated “Level 3” was estimated using prices quoted in markets where there is insufficient market activity for consideration as “Level 2” instruments. Currently, only our natural gas hedges with an original tenure of 10 years utilize “Level 3” inputs, primarily due to comparatively less market data available for the later portion of their term compared with our other shorter term hedges. The fair value of both the “Level 2” and the “Level 3” assets and liabilities are determined using discounted cash flow model based on the terms of the derivative instrument, market prices for the periods covered by the derivatives, and the risk-free interest rates. The “Level 3” unobservable inputs are the market prices for the latter half of the 10-year term as there is not an active market for that period of time. These unobservable inputs included within the fair value calculation range from $3.66 to $5.94 and are calculated using prices quoted in active markets for the period of time available and applying the differential from this period of time to the markets prices for the later years in the term. Changes in the “Level 3” inputs are correlated to the changes in the quoted market prices for the period of time available. Estimates were

 

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determined by applying the net differential between the prices in each derivative and market prices for future periods to the amounts stipulated in each contract to arrive at an estimated future value. This estimated future value was discounted on each contract at the risk free rate.

The following table identifies the changes in “Level 3” net asset derivative fair values for the periods indicated:

 

     2012      2011  
     (In thousands)  

Balance at beginning of period

   $     150,989         $ -     

Total gains (losses) for the period:

     

Unrealized loss on commodity hedges

     (21,670)          -     

Realized loss on hedge restructure

     (14,555)          -     

Loss from hedge ineffectiveness

     (610)          -     

Transfers

     (109,685)          -     

Settlements

     (6,574)          -     

Included in OCI

     26,962           -     
  

 

 

    

 

 

 

Balance at end of period

   $ 24,587         $ -     
  

 

 

    

 

 

 

Total losses for the period included in other revenue attributable to the change in unrealized losses related to assets held at the reporting date

   $ (21,966)        $         -     
  

 

 

    

 

 

 

Commodity Price Derivatives

As of March 31, 2012, we had price collars and swaps hedging our anticipated natural gas and NGL production as follows:

 

Production

Year

   Daily Production
   Gas    NGL
   MMcfd    MBbld

2012

   230    7

2013

   150    -

2014—2015

   110    -

2016—2021

   45    -

Interest Rate Derivatives

In 2010, we executed early settlements of our interest rate swaps that were designated as fair value hedges of our senior notes due 2015 and our senior subordinated notes. We received cash of $41.5 million in the settlements, including $10.7 million for interest previously accrued and earned. Upon the early settlements, we recorded the resulting gain as a fair value adjustment to our debt and began to recognize the deferred gain of $30.8 million as a reduction of interest expense over the lives of our senior notes due 2015 and our senior subordinated notes.

During both the 2012 quarter and the 2011 quarter, we recognized $1.2 million of those deferred gains as a reduction of interest expense. The remaining $20.7 million deferral of the 2010 early settlements from all interest rate swaps will continue to be recognized as a reduction of interest expense over the life of the associated underlying debt instruments currently scheduled as follows:

 

(In thousands)

 

Remainder of 2012

   $ 3,868     

2013

     5,539     

2014

     6,012     

2015

     4,669     

2016

     569     
  

 

 

 
   $ 20,657     
  

 

 

 

 

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Fair Value Disclosures

The estimated fair value of our derivative instruments at March 31, 2012 and December 31, 2011 were as follows:

 

     Asset Derivatives     Liability Derivatives  
      March 31,
2012
     December 31,
2011
    March 31,
2012
     December 31,
2011
 
     (In thousands)     (In thousands)  

Derivatives designated as hedges:

    

Commodity contracts reported in:

          

Current derivative assets

   $     227,591         $     165,484        $ -         $     2,639     

Noncurrent derivative assets

     172,715           183,982          2,441           -     

Current derivative liabilities

     -           -          -           4,028     

Noncurrent derivative liabilities

     -           -          24,398           -     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivatives designated as hedges

   $ 400,306         $ 349,466        $     26,839         $ 6,667     
  

 

 

    

 

 

   

 

 

    

 

 

 

Derivatives not designated as hedges:

   $ -         $ -        $ -         $ -     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivatives

   $ 400,306         $ 349,466        $ 26,839         $ 6,667     
  

 

 

    

 

 

   

 

 

    

 

 

 

The increase in carrying value of our commodity price derivatives since December 31, 2011 principally resulted from the overall decrease in market prices for natural gas relative to the prices in our open derivative instruments as well as additional derivative instruments entered into during the three months ended March 31, 2012.

The changes in the carrying value of our derivatives for the three months ended March 31, 2012 and 2011 are presented below:

 

     For the Three Months
Ended March 31,
 
     2012      2011  
      Cash Flow
Derivatives
     Cash Flow
Derivatives
 
     (In thousands)  

Derivative fair value at beginning of period

   $ 342,799         $     146,762     

Change in amounts receivable/payable-net

     (4,443)          (218)    

Net settlements reported in revenue

     (48,884)          (23,782)    

Ineffectiveness reported in other revenue

     (3,201)          (53)    

Realized losses reported in other revenue

     (14,555)          -     

Unrealized losses reported in other revenue

     (21,670)          -     

Unrealized gains (losses) reported in OCI

     123,421           (26,506)    
  

 

 

    

 

 

 

Derivative fair value at end of period

   $     373,467         $ 96,203     
  

 

 

    

 

 

 

Gains and losses from the effective portion of derivative assets and liabilities held in AOCI expected to be reclassified into earnings during the following twelve months would result in a gain of $142.6 million net of income taxes. Hedge derivative ineffectiveness resulted in net losses of $3.2 million and $0.1 million for the three months ended March 31, 2012 and 2011, respectively. In January and February 2012, we terminated a number of our ten-year derivative instruments in exchange for derivative instruments with shorter durations at above market terms. The decrease in the fair value between the terminated ten-year instrument and the new shorter-term instrument was recognized in the current period as a realized loss. Unrealized losses recognized in 2012 is the difference between the estimated fair value at the inception date and transaction cost for ten-year derivative instruments entered into during the period.

 

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4. INVESTMENT IN BBEP

At March 31, 2011, we owned 15.6 million BBEP Units, or 26%, of BBEP, whose price closed at $21.73 per unit as of that date. During the fourth quarter of 2011, we sold all of our remaining BBEP Units.

Changes in the balance of our investment in BBEP for the three months ended March 31, 2011 were as follows:

 

(In thousands)

 

Balance at December 31, 2010

   $ 83,341     

Equity loss in BBEP

     (20,884)    

Distributions from BBEP

     (6,369)    

Disposal of BBEP Units

     (414)    
  

 

 

 

Ending investment balance

   $ 55,674     
  

 

 

 

We accounted for our investment in BBEP Units using the equity method, utilizing a one-quarter lag from BBEP’s publicly available information. Summarized estimated financial information for BBEP is as follows:

 

      For the Three Months Ended
December 31,
 
     2010  
     (In thousands)  

Revenue (1)

   $ 18,165     

Operating expense

     79,483     
  

 

 

 

Operating loss

     (61,318)    

Interest and other (2)

     9,989     

Income tax benefit

     (439)    

Noncontrolling interests

     35     
  

 

 

 

Net loss available to BBEP

   $     (70,903)    
  

 

 

 

 

  (1) 

For the three months ended December 31, 2010, unrealized losses of $82.3 million on commodity derivatives were recognized.

 

  (2) 

The three months ended December 31, 2010 unrealized gains of $3.1 million from interest rate swaps.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

      March 31,
2012
     December 31,
2011
 
     (In thousands)  

Oil and gas properties

     

Subject to depletion

   $ 5,420,217         $ 5,309,330     

Unevaluated costs

     477,434           433,341     

Accumulated depletion

     (2,638,676)          (2,516,195)    
  

 

 

    

 

 

 

Net oil and gas properties

     3,258,975           3,226,476     

Other plant and equipment

     

Pipelines and processing facilities

     348,451           340,242     

General properties

     74,820           71,297     

Accumulated depreciation

     (182,568)          (177,496)    
  

 

 

    

 

 

 

Net other property and equipment

     240,703           234,043    
  

 

 

    

 

 

 

Property, plant and equipment, net of accumulated depletion and depreciation

   $ 3,499,678         $ 3,460,519     
  

 

 

    

 

 

 

 

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Ceiling Test Analysis

We recorded impairment expense of $62.3 million and $0.4 million for our U.S. and Canadian oil and gas properties, respectively, at March 31, 2012. For our U.S. oil and gas properties, we computed the March 31, 2012 ceiling amount using a Henry Hub price of $3.73 MMBtu of natural gas, calculated as the unweighted average of the preceding 12-month first-day-of-the-month prices. The Henry Hub natural gas price used to compute the ceiling amount at March 31, 2012 was 9.5% lower than the comparable price used at December 31, 2011. For our Canadian oil and gas properties, we computed the March 31, 2012 ceiling amount using an AECO price of $3.64 MMBtu of natural gas, calculated as the unweighted average of the preceding 12-month first-day-of-the-month prices. The AECO natural gas price used to compute the ceiling amount at March 31, 2012 was 1% lower than the comparable price used at December 31, 2011.

As of March 31, 2012, our U.S. and Canadian ceiling tests included $252 million and $103 million, respectively, in value for our derivatives treated as hedges. Absent this recognition, after tax we would have recognized $164 million of additional impairment expense for our U.S. oil and gas properties and $78 million for our Canadian oil and gas properties. Because of the volatility of oil and natural gas prices and prevailing prices subsequent to March 31, 2012, it is reasonably possible we may experience additional impairment in future periods.

Notes 2 and 8 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contain additional information regarding our property, plant and equipment and our quarterly ceiling test analysis.

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Combined Credit Agreements

   $ 337,200         $ 227,482     

Senior notes due 2015, net of unamortized discount

     435,228           435,020     

Senior notes due 2016, net of unamortized discount

     577,660           576,977     

Senior notes due 2019, net of unamortized discount

     292,192           292,055     

Senior subordinated notes due 2016

     350,000           350,000     

Convertible debentures, net of unamortized discount

     -           18     
  

 

 

    

 

 

 

Total debt

     1,992,280           1,881,552     

Unamortized deferred gain—terminated interest rate swaps

     20,656           21,897     

Current portion of long-term debt

     -           (18)    
  

 

 

    

 

 

 

Long-term debt

   $ 2,012,936         $ 1,903,431     
  

 

 

    

 

 

 

Credit Facilities

The Combined Credit Agreements’ global borrowing base remained at $1.075 billion and the global letter of credit capacity was $175 million. At March 31, 2012, we had $679 million available under the facility.

Summary of All Outstanding Debt

As of March 31, 2012, the following subsidiaries are guarantors under our indentures for our senior notes and senior subordinated notes: Cowtown Pipeline Management, Inc., Cowtown Pipeline Funding, Inc., Cowtown Gas Processing L.P., Cowtown Pipeline L.P.,

 

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Silver Stream Pipeline Company LLC and Barnett Shale Operating LLC. The following table summarizes other significant aspects of our long-term debt outstanding at March 31, 2012:

 

     Priority on Collateral and Structural Seniority (1)
     Highest priority   LOGO   Lowest priority
     Equal priority   Equal Priority    
     Combined Credit
Agreements
 

2015

Senior Notes

 

2016

Senior Notes

 

2019

Senior Notes

 

Senior

Subordinated Notes

Principal amount

   $1.075 billion (2)   $438 million   $591 million   $298 million   $350 million

Scheduled maturity date

   September 6, 2016   August 1, 2015   January 1, 2016   August 15, 2019   April 1, 2016

Interest rate on outstanding

borrowings at

March 31, 2012 (3)

   2.25%   8.25%   11.75%   9.125%   7.125%

Base interest rate options

   LIBOR, ABR,

CDOR (4) (5)

  N/A   N/A   N/A   N/A

Financial covenants (6)

   - Minimum current
ratio of 1.0

- Minimum EBITDA to
cash interest expense
ratio of 2.5

  N/A   N/A   N/A   N/A

Significant restrictive

covenants (6)

   - Incurrence of debt

- Incurrence of liens

- Payment of dividends
- Equity purchases

- Asset sales

- Affiliate transactions
- Limitations on
derivatives

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends
- Equity purchases
- Asset sales

- Affiliate transactions

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends
- Equity purchases

- Asset sales

- Affiliate transactions

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends
- Equity purchases

- Asset sales

- Affiliate transactions

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends
- Equity purchases

- Asset sales

- Affiliate transactions

Optional redemption (6)

   Any time   August 1,

2012: 103.875

2013: 101.938

2014: par

  July 1,

2013: 105.875

2014: 102.938

2015: par

  August 15,

2014: 104.563

2015: 103.042

2016: 101.521

2017: par

  April 1,

2012: 102.375

2013: 101.188

2014: par

Make-whole redemption (6)

   N/A   Callable prior to
August 1, 2012 at
make-whole call price
of Treasury + 50 bps
  Callable prior to
July 1, 2013 at make-
whole call price of
Treasury + 50 bps
  Callable prior to
August 15, 2014 at
make-whole call price
of Treasury + 50 bps
  N/A

Change of control (6)

   Event of default   Put at 101% of

principal plus

accrued interest

  Put at 101% of

principal plus

accrued interest

  Put at 101% of

principal plus

accrued interest

  Put at 101% of

principal plus

accrued interest

Equity clawback (6)

   N/A   N/A   Redeemable until

July 1, 2012 at

111.75%,

plus accrued

interest for up

to 35%

  Redeemable until
August 15, 2012 at

109.125%,

plus accrued interest
for up to 35%

  N/A

Estimated fair value (7)

   $337.2 million   $433.1 million   $623.1 million   $289.4 million   $322.0 million

 

  (1) 

Borrowings under the Amended and Restated U.S. Credit Facility are guaranteed by certain of Quicksilver’s domestic subsidiaries and are secured by 100% of the equity interests of each of Cowtown Pipeline Management, Inc., Cowtown Pipeline Funding, Inc., Cowtown Gas Processing L.P., Cowtown Pipeline L.P., Barnett Shale Operating LLC, Silver Stream Pipeline Company LLC and Quicksilver Resources Partners Operating Ltd., and 65% of the equity interest of QRCI and certain oil and gas properties and related assets of Quicksilver. Borrowings under the Amended and Restated Canadian Credit Facility are guaranteed by Quicksilver and certain of its domestic subsidiaries and are secured by 65% of the equity interests of Quicksilver Resources Canada Inc. and its oil and gas properties and related assets, and certain oil and gas properties and related assets of Quicksilver. The other debt presented is based upon structural seniority and priority of payment.

 

  (2) 

The principal amount for the Combined Credit Agreements represents the global borrowing base as of March 31, 2012.

 

  (3) 

Represents the weighted average borrowing rate payable to lenders.

 

  (4) 

Amounts outstanding under the Amended and Restated U.S. Credit Facility bear interest, at our election, at (i) adjusted LIBOR (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50%, (ii) ABR (as defined in the credit agreement), which is the greatest of (a) the prime rate announced by JPMorgan, (b) the federal funds rate plus 0.50% and (c) adjusted LIBOR (as defined in the credit agreement) plus 1.0%, plus, in each case under scenario (ii), an applicable margin between 0.50% to 1.50%. We also pay a per annum fee on all letters of credit issued under the Amended and Restated U.S. Credit Facility equal to the applicable margin and a commitment fee on the unused availability under

 

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  the Amended and Restated U.S. Credit Facility of 0.375% to 0.50%, in each case, based on global borrowing base usage.

 

  (5) 

Amounts outstanding under the Amended and Restated Canadian Credit Facility bear interest, at our election, at (i) the CDOR Rate (as defined in the credit agreement) plus an applicable margin between 1.50% and 2.50%, (ii) the Canadian Prime Rate (as defined in the credit agreement) plus an applicable margin between 0.50% and 1.50%, (iii) the U.S. Prime Rate (as defined in the credit agreement) plus an applicable margin between 0.50% and 1.50% and (iv) eurodollar loans (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50%. We pay a per annum fee on all letters of credit issued under the Amended and Restated Canadian Credit Facility equal to the applicable margin and a commitment fee on the unused availability under the Amended and Restated Canadian Credit Facility of 0.375% to 0.50%, in each case, based on global borrowing base usage.

 

  (6) 

The information presented in this table is qualified in all respects by reference to the full text of the covenants, provisions and related definitions contained in the documents governing the various components of our debt.

 

  (7) 

The estimated fair value is determined using market quotations based on recent trade activity for fixed rate obligations (“Level 2” inputs). We consider debt with variable interest rates to have a fair value equal to its carrying value (“Level 1” input).

Note 11 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains a more complete description of our long-term debt.

7. ASSET RETIREMENT OBLIGATIONS

The following table provides a reconciliation of the changes in the estimated asset retirement obligation for the three months ended March 31, 2012.

 

(In thousands)

 

Beginning asset retirement obligations

   $ 85,822     

Additional liability incurred

     1,338     

Change in estimates

     4,665     

Accretion expense

     944     

Asset retirement costs incurred

     (195)    

Settlement of liability

     701     

Currency translation adjustment

     924     
  

 

 

 

Ending asset retirement obligations

     94,199     

Less current portion

     (254)    
  

 

 

 

Long-term asset retirement obligation

   $     93,945     
  

 

 

 

8. COMMITMENTS AND CONTINGENCIES

Contractual Obligations, Commitments and Contingencies

On July 26, 2011, we received a subpoena duces tecum from the SEC requesting certain documents. The SEC has informed us that their investigation arises out of press releases in 2011 questioning the projected decline curves and economics of shale gas wells.

There have been no significant changes to our contractual obligations and commitments as reported in our 2011 Annual Report on Form 10-K which contains a more complete description of our contractual obligations, commitments and contingencies.

9. FORTUNE CREEK

In December 2011, we entered into an agreement to form a midstream partnership, Fortune Creek, dedicated to the construction and operation of midstream assets to support natural gas producers primarily in British Columbia.

 

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The partnership established an area of mutual interest for the midstream business covering approximately 30 million potential acres which includes transportation and processing infrastructure and agreements.

In connection with the partnership formation, we contributed an existing 20-mile, 20-inch gathering line, its related compression facilities, we committed to minimum annual capital expenditures of $100 million for drilling and completion activities in our Horn River Asset for 2012, 2013 and 2014, and we dedicated for ten years beginning 2012 gas production from our Horn River Asset, as more fully described below. KKR contributed $125 million cash in exchange for a 50% interest in the partnership. Our Canadian subsidiary has responsibility for the day-to-day operations of Fortune Creek.

Our Canadian subsidiary entered into a firm gathering agreement with Fortune Creek which is guaranteed by us. At our election, KKR has the responsibility to fund all of the capital contributions associated with the development of the new gas treatment facility in exchange for preferential cash flow distributions. If our subsidiary does not meet its obligations under the gathering agreement, KKR has the right to liquidate the partnership and consequently we have recorded the funds contributed by KKR as a liability in our consolidated financial statements. We recognize accretion expense to reflect the rate of return earned by KKR via its investment.

Based on an analysis of the entities equity at risk, we have determined the partnership to be a VIE. Further, based on our ability to direct the activities surrounding the production of natural gas and our direct management of the operations of the facilities, we have determined we are the primary beneficiary and therefore, we consolidate Fortune Creek.

Note 12 contains financial information for Fortune Creek in our condensed consolidating financial statements.

10. QUICKSILVER STOCKHOLDERS’ EQUITY

Common Stock, Preferred Stock and Treasury Stock

We are authorized to issue 400 million shares of common stock with a $0.01 par value per share and 10 million shares of preferred stock with a $0.01 par value per share. At March 31, 2012 and December 31, 2011, we had 173.3 million and 171.6 million shares of common stock outstanding, respectively.

Note 17 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains additional information about our equity-based compensation plan.

Stock Options

Options to purchase shares of common stock were granted in 2012 with an estimated fair value of $8.4 million. The following summarizes the values from and assumptions for the Black-Scholes option pricing model for stock options issued during the three months ended March 31, 2012:

 

     2012

Wtd avg grant date fair value

   $4.25

Wtd avg grant date

   Jan 3, 2012

Wtd avg risk-free interest rate

   1.15%

Expected life (in years)

   6.0

Wtd avg volatility

   68.2%

Expected dividends

   -

 

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The following table summarizes our stock option activity for the three months ended March 31, 2012:

 

     Shares      Wtd Avg
Exercise
Price
     Wtd Avg Remaining
Contractual Life
     Aggregate Intrinsic
Value
 
                   (In years)      (In thousands)  

Outstanding at January 1, 2012

     3,760,696         $ 12.01         

Granted

     1,980,705           6.96         

Exercised

     (1,572)          6.21         

Cancelled

     (206,692)          8.00         
  

 

 

          

Outstanding at March 31, 2012

     5,533,137         $ 10.36         7.9       $         -   
  

 

 

          

Exercisable at March 31, 2012

     2,978,210         $   11.18         6.7       $ -   
  

 

 

          

As of March 31, 2012 we estimate that a total of 5.5 million stock options will become vested including those options already exercisable. Compensation expense related to stock options of $1.9 million was recognized for each of the three months ended March 31, 2012 and 2011. Cash received from the exercise of stock options totaled less than $0.1 million for the three months ended March 31, 2012. The total intrinsic value of those options exercised was less than $0.1 million.

Restricted Stock

The following table summarizes our restricted stock and stock unit activity for the three months ended March 31, 2012:

 

     Payable in shares      Payable in cash  
     Shares      Wtd Avg
Grant Date
Fair Value
     Shares      Wtd Avg
Grant Date
Fair Value
 

Outstanding at January 1, 2012

     2,460,300         $     12.29         369,846         $     13.12   

Granted

     2,461,675           6.93         486,583           6.80   

Vested

     (1,241,128)          10.72         (186,026)          11.22   

Cancelled

     (431,918)          8.82         (101,827)          9.63   
  

 

 

       

 

 

    

Outstanding at March 31, 2012

     3,248,929         $ 9.29         568,576         $ 8.95   
  

 

 

       

 

 

    

As of December 31, 2011, the unrecognized compensation cost related to outstanding unvested restricted stock was $17.3 million, which is expected to be recognized in expense through March 2014. Grants of restricted stock and RSUs during the three months ended March 31, 2012 had an estimated grant date fair value of $20.4 million. The fair value of RSUs settled in cash was $2.9 million at March 31, 2012. For the three months ended March 31, 2012 and 2011, compensation expense of $4.0 million and $3.6 million, respectively, was recognized. The total fair value of shares vested during the three months ended March 31, 2012 was $9.5 million.

 

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11. EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator used for the computation of basic and diluted net income per common share.

 

     For the Three Months Ended  
     March 31,  
     2012        2011  
     (In thousands, except per share data)  

Net loss attributable to Quicksilver

   $ (59,924)          $ (70,758)    

Basic income allocable to participating securities (1)

     -             -     
  

 

 

      

 

 

 

Loss available to stockholders

   $ (59,924)          $ (70,758)    
  

 

 

      

 

 

 

Weighted average common shares – basic

     169,939             168,872     

Effect of dilutive securities (2)

     -             -     
  

 

 

      

 

 

 

Weighted average common shares – diluted

     169,939             168,872     
  

 

 

      

 

 

 

Loss per common share – basic

   $ (0.35)          $ (0.42)    

Loss per common share – diluted

   $ (0.35)          $ (0.42)    

 

  (1)

Restricted share awards that contain nonforfeitable rights to dividends are participating securities and, therefore, should be included in computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net losses.

 

  (2)

For the three months ended March 31, 2012, we had the following antidilutive shares excluded from the dilution calculation: 5.5 million shares associated with our stock options and 0.3 million shares associated with our unvested restricted stock units. For the three months ended March 31, 2011, we had the following antidilutive shares excluded from the dilution calculation: 9.8 million shares associated with our contingently convertible debt, 2.8 million shares associated with our stock options and 1.3 million shares associated with our unvested restricted stock units.

 

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12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Note 19 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains a more complete description of our guarantor, non-guarantor, restricted and unrestricted subsidiaries.

The following tables present financial information about Quicksilver and our restricted subsidiaries for the three-month periods covered by the consolidated financial statements. Under the indentures for our senior notes and senior subordinated notes, Fortune Creek is not considered to be a subsidiary and therefore it is presented separately from the other subsidiaries for these purposes.

Condensed Consolidating Balance Sheets

 

    March 31, 2012  
  Quicksilver
Resources  Inc.
    Restricted
Guarantor
Subsidiaries
    Restricted
Non-Guarantor
Subsidiaries
    Restricted
Subsidiary
Eliminations
    Quicksilver
and
Restricted
Subsidiaries
    Unrestricted
Non-Guarantor
Subsidiaries
    Fortune
Creek
    Consolidating
Eliminations
    Quicksilver
Resources  Inc.
Consolidated
 
                 
                 
                 
    (In thousands)  

ASSETS

                 

Current assets

  $ 359,221        $ 88,564        $ 77,076        $ (203,441)       $ 321,420        $ 1,438        $ 13,973        $ (3,732)       $ 333,099     

Property and equipment

    2,718,125          37,973          656,761          -          3,412,859          -          86,819          -          3,499,678     

Investment in subsidiaries (equity method)

    254,829          -          (33,648)         (254,829)         (33,648)         (33,648)         -          67,296          -     

Other assets

    403,744          -          61,830          (243,620)         221,954          -          -          -          221,954     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,735,919        $ 126,537        $ 762,019        $ (701,890)       $ 3,922,585        $ (32,210)       $ 100,792        $ 63,564        $ 4,054,731     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

                 

Current liabilities

  $ 285,644        $ 110,518        $ 64,557        $ (203,441)       $ 257,278        $ 1,438        $ 4,287        $ (3,732)       $ 259,271     

Long-term liabilities

    2,177,798          21,936          436,716          (243,620)         2,392,830          -          82          130,071          2,522,983     

Stockholders' equity

    1,272,477          (5,917)         260,746          (254,829)         1,272,477          (33,648)         96,423          (62,775)         1,272,477     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 3,735,919        $ 126,537        $ 762,019        $ (701,890)       $ 3,922,585        $ (32,210)       $ 100,792        $ 63,564        $ 4,054,731     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2011  
  Quicksilver
Resources  Inc.
    Restricted
Guarantor
Subsidiaries
    Restricted
Non-Guarantor
Subsidiaries
    Restricted
Subsidiary
Eliminations
    Quicksilver
and
Restricted
Subsidiaries
    Unrestricted
Non-Guarantor
Subsidiaries
    Fortune
Creek
    Consolidating
Eliminations
    Quicksilver
Resources  Inc.
Consolidated
 
                 
                 
                 
    (In thousands)  

ASSETS

                 

Current assets

  $ 336,893        $ 87,767        $ 63,711        $ (200,727)       $ 287,644        $ -        $ 27,533        $ (14,750)       $ 300,427     

Property and equipment

    2,743,379          37,936          598,443          -          3,379,758          -          80,761          -          3,460,519     

Investment in subsidiaries (equity method)

    241,680          -          (29,449)         (241,680)         (29,449)         (29,449)         -          58,898          -     

Other assets

    401,279          -          76,857          (243,620)         234,516          -          -          -          234,516     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,723,231        $ 125,703        $ 709,562        $ (686,027)       $ 3,872,469        $ (29,449)       $ 108,294        $ 44,148        $ 3,995,462     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

                 

Current liabilities

  $ 348,512        $ 109,938        $ 76,450        $ (200,727)       $ 334,173        $ -        $ 14,750        $ (14,750)       $ 334,173     

Long-term liabilities

    2,112,800          21,903          385,294          (243,620)         2,276,377          -          80          122,913          2,399,370     

Stockholders' equity

    1,261,919          (6,138)         247,818          (241,680)         1,261,919          (29,449)         93,464          (64,015)         1,261,919     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 3,723,231        $ 125,703        $ 709,562        $ (686,027)       $ 3,872,469        $ (29,449)       $ 108,294        $ 44,148        $ 3,995,462     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Income

 

    For the Three Months Ended March 31, 2012  
     Quicksilver
Resources  Inc.
    Restricted
Guarantor
Subsidiaries
    Restricted
Non-Guarantor
Subsidiaries
    Restricted
Subsidiary
Eliminations
    Quicksilver
and
Restricted

Subsidiaries
    Unrestricted
Non-Guarantor
Subsidiaries
    Fortune
Creek
    Consolidated
Eliminations
    Quicksilver
Resources  Inc.
Consolidated
 
                 
                 
    (In thousands)  

Revenue

  $ 131,462        $ 1,130        $ 13,780        $ (903)       $ 145,469        $ -        $ 2,397        $ (2,397)       $ 145,469     

Operating expenses

    199,915          909          27,975          (903)         227,896          -          1,267          (2,397)         226,766     

Crestwood earn-out

    41,097          -          -          -          41,097          -          -          -          41,097     

Equity in net earnings of subsidiaries

    (15,333)         -          (3,611)         15,333          (3,611)         1,130         -          2,481          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (42,689)         221          (17,806)         15,333          (44,941)         1,130         1,130          7,222          (40,200)    

Fortune Creek Accretion

    -          -          -          -          -          -          -          (4,741)         (4,741)    

Interest expense and other

    (38,643)         -          (1,434)         -          (40,077)         -          -          -          (40,077)    

Income tax (expense) benefit

    21,408          (77)         3,763          -          25,094          -          -          -          25,094     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ (59,924)       $ 144        $ (15,477)       $ 15,333        $ (59,924)       $ 1,130       $ 1,130        $ (2,260)        $ (59,924)    

Other comprehensive income

    38,807          -          28,376          (28,376)         38,807          -          -          -          38,807     

Equity in OCI of subsidiaries

    28,376          -          -          -          28,376        -          -          -          28,376   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 7,259        $ 144        $ 12,899        $ (13,043)        $ 7,259        $ 1,130       $ 1,130        $ (2,260)        $ 7,259     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Three Months Ended March 31, 2011  
                   Restricted      Restricted      Quicksilver  
     Quicksilver      Guarantor      Non-Guarantor      Subsidiary      Resources Inc.  
     Resources Inc.      Subsidiaries      Subsidiaries      Eliminations      Consolidated  
     (In thousands)  

Revenue

   $ 179,571         $ 1,510         $ 32,341         $ (1,235)        $ 212,187     

Operating expenses

     137,169           2,266           74,780           (1,235)          212,980     

Equity in net earnings of subsidiaries

     (33,808)          -           -           33,808           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     8,594           (756)          (42,439)          33,808           (793)    

Loss from earnings of BBEP

     (20,884)          -           -           -           (20,884)    

Interest expense and other

     (43,270)          -           (1,787)          -           (45,057)    

Income tax (expense) benefit

     (15,198)          265           10,909           -           (4,024)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ (70,758)        $ (491)        $ (33,317)        $ 33,808         $ (70,758)    

Other comprehensive income

     (28,245)          -           6,835           (6,835)          28,245     

Equity in OCI of subsidiaries

     6,835           -           -           -           6,835     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ (92,168)       $ (491)        $ (26,482)        $ 26,973         $ (92,168)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Condensed Consolidating Statements of Cash Flows

 

    For the Three Months Ended March 31, 2012  
    Quicksilver
Resources  Inc.
    Restricted
Guarantor
Subsidiaries
    Restricted
Non-Guarantor
Subsidiaries
    Quicksilver
and  Restricted
Subsidiaries
    Fortune
Creek
    Quicksilver
Resources  Inc.
Consolidated
 
    (In thousands)  

Net cash flow provided (used) by operating activities

  $     (3,195)        $     438          $     27,099          $ 24,342          $ 3,028          $ 27,370       

Purchases of property, plant and equipment

    (95,994)          (438)          (77,304)              (173,736)              (1,186)          (174,922)     

Proceeds from Crestwood earn-out

    41,097            -            -            41,097            -            41,097       

Proceeds from sale of properties and equipment

    269            -            191            460            -            460       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flow used by investing activities

    (54,628)          (438)          (77,113)          (132,179)          (1,186)          (133,365)     

Issuance of debt

    100,000            -            61,658            161,658            -            161,658       

Repayments of debt

    (40,018)          -            (13,097)          (53,115)          -            (53,115)     

Debt issuance costs

    (191)          -            -            (191)          -            (191)     

Proceeds from exercise of stock options

    10            -            -            10            -            10       

Purchase of treasury stock

    (2,341)          -            -            (2,341)          -            (2,341)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flow provided (used) by financing activities

    57,460            -            48,561            106,021            -            106,021       

Effect of exchange rates on cash

    -            -            1,453            1,453            (1,593)          (140)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and equivalents

    (363)          -            -            (363)          249            (114)     

Cash and equivalents at beginning of period

    363            -            -            363            12,783            13,146       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and equivalents at end of period

  $ -          $ -          $ -          $ -          $ 13,032          $ 13,032       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the Three Months Ended March 31, 2011  
            Restricted      Restricted      Restricted      Quicksilver  
     Quicksilver      Guarantor      Non-Guarantor      Subsidiary      Resources Inc.  
     Resources Inc.      Subsidiaries      Subsidiaries      Eliminations      Consolidated  
     (In thousands)  

Net cash flow provided (used) by operating activities

   $ (805)         $ 417           $ 12,101           $         -         $ 11,713       

Purchases of property, plant and equipment

         (128,911)               (417)               (67,219)           -               (196,547)     

Proceeds from sale of BBEP units

     1,703             -             -             -           1,703       

Proceeds from sale of properties and equipment

     507             -             -             -           507       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash flow used by investing activities

     (126,701)           (417)           (67,219)           -           (194,337)     

Issuance of debt

     87,000             -             60,983             -           147,983       

Repayments of debt

     (10,000)           -             (5,145)           -           (15,145)     

Proceeds from exercise of stock options

     368                   -           368       

Purchase of treasury stock

     (4,797)                 -           (4,797)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash flow provided by financing activities

     72,571             -             55,838             -           128,409       

Effect of exchange rates on cash

     -             -             (720)           -           (720)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net decrease in cash and equivalents

     (54,935)           -             -             -           (54,935)     

Cash and equivalents at beginning of period

     54,937             -             -             -           54,937       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and equivalents at end of period

   $ 2           $ -           $ -           $ -         $ 2       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

13. SEGMENT INFORMATION

We operate in two geographic segments, the U.S. and Canada, where we are engaged in the exploration and production segment of the oil and gas industry. Additionally, we operate a significantly smaller midstream segment in the U.S. and Canada, where we provide natural gas gathering and processing services. Following our announced partnership with KKR, beginning in January 2012, we have additional midstream operations in Canada through Fortune Creek. Based on the immateriality of our midstream segment, we have combined U.S. and Canadian information. We evaluate performance based on operating income and property and equipment costs incurred.

 

    Exploration &
Production
                     

Quicksilver

Consolidated

 
    U.S.     Canada     Midstream     Corporate     Elimination    

For the Three Months Ended March 31:

    (In thousands)   

2012

           

Revenue

  $ 131,462        $ 13,780        $ 3,527        $ -          $    (3,300)       $ 145,469     

DD&A

    41,823          10,815          1,201          600          -          54,439     

Impairment expense

    62,342          404          -          -          -          62,746     

Operating income (loss)

    (8,742)         (13,115)         1,352          (19,695)         -          (40,200)    

Property and equipment costs incurred

    72,431          53,623          5,980          3,533          -          135,567     

2011

           

Revenue

  $ 179,571        $ 32,341        $ 1,510        $ -        $ (1,235)       $ 212,187     

DD&A

    38,756          11,424          1,713          578          -          52,471     

Impairment expense

    -          49,063          -          -          -          49,063     

Operating income (loss)

    60,245          (41,314)         (755)         (18,969)         -          (793)    

Property and equipment costs incurred

    116,591          74,004          5,236          829          -          196,660     

Property, plant and equipment - net

           

March 31, 2012

    2,726,751          655,223          108,333          9,371          -          3,499,678     

December 31, 2011

    2,752,101          596,935          102,237          9,246          -          3,460,519     

 

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14. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid (received) for interest and income taxes was as follows:

 

     For the
Three Months
Ended
 
     March 31,  
     2012     2011  
     (In thousands)  

Interest

   $ 66,020      $ 70,490   

Income taxes

     (2,839     (57

Other significant non-cash transactions were as follows:

 

     For the
Three  Months
Ended

March 31,
 
     2012      2011  
     (In thousands)  

Working capital related to capital expenditures

   $ 69,983       $ 98,973   

15. TRANSACTIONS WITH RELATED PARTIES

As of March 31, 2012, members of the Darden family and entities controlled by them beneficially own approximately 30% of our outstanding common stock. Thomas Darden, Glenn Darden and Anne Darden Self are officers and directors of Quicksilver.

During the first three months of 2012 and 2011, we paid $0.1 million and $0.2 million, respectively, for use of an airplane owned by an entity controlled by members of the Darden family. Usage rates were determined based upon comparable rates charged by third parties.

Payments received from Mercury for sublease rentals, employee insurance coverage and administrative services were negligible for the first three months of 2012 and 2011.

 

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Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) is intended to help readers of our financial statements understand our business, results of operations, financial condition, liquidity and capital resources. MD&A is provided as a supplement to, and should be read in conjunction with, the other sections of this Quarterly Report as well as our 2011 Annual Report on Form 10-K. We conduct our operations in two segments: (1) our more dominant exploration and production segment, and (2) our significantly smaller midstream segment. Except as otherwise specifically noted, or as the context requires otherwise, and except to the extent that differences between these segments or our geographic segments are material to an understanding of our business taken as a whole, we present this MD&A on a consolidated basis.

Our MD&A includes the following sections:

 

   

2012 Highlights — a summary of significant activities and events affecting Quicksilver

   

2012 Capital Program — a summary of our planned capital expenditures during 2012

   

Results of Operations — an analysis of our consolidated results of operations for the three-month periods presented in our financial statements

   

Liquidity, Capital Resources and Financial Position — an analysis of our cash flows, sources and uses of cash, contractual obligations and commercial commitments

2012 HIGHLIGHTS

Master Limited Partnership

On February 10, 2012, we filed a Form S-1 with the SEC to begin the registration and sale of limited partnership interests in a master limited partnership holding certain of our mature properties in our Barnett Shale Asset. We expect to amend the registration statement in late May to include financial statements for 2011 and to address comments received from the SEC. We expect this registration statement to become effective in the second or third quarter of 2012.

Emerging Basins

We deployed a rig in March 2012 to commence drilling operations on our West Texas Asset. Our plan for 2012 is to drill and complete up to five wells. We hold a position of approximately 155,000 net acres in the Delaware and Midland basins, at least 2/3 of which we believe is prospective for oil, including from the Wolfcamp and Bone Springs formations. In the first quarter of 2012, we retained an investment bank to help evaluate the opportunities for a joint venture partner to acquire an interest in and participate in the development of our West Texas acreage.

We set surface pipe on one well during the first quarter in our Sand Wash Asset, however wildlife stipulations prevent us from finishing the drilling process until September 2012. We expect to begin drilling operations on additional wells in May 2012. We plan to drill a mix of four to seven vertical and horizontal wells in 2012. We hold approximately 260,000 net acres in the Sand Wash Basin, at least 200,000 of which are prospective of oil. At December 31, 2011, we had recognized no proved oil reserves in our Sand Wash Asset.

Crestwood Earn-Out

In October 2010, we completed the sale of all of our interests in KGS to Crestwood. As part of the sale, we have the right to collect future earn-out payments through 2013. In February 2012, we collected $41 million of these earn-out payments, which is presented as Crestwood earn-out in the condensed consolidated statement of income for the quarter ended March 31, 2012. We have the right to collect up to an additional $31 million in future earn-out payments in 2013, although we have recognized no assets related to these opportunities.

2012 CAPITAL PROGRAM

We had capital expenditures of $174.9 million for the first three months of 2012. We expect our capital spending for the remainder of 2012 to be in line with the 2012 capital program as presented in the 2011 Annual Report on Form 10-K.

 

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Average production for the second quarter of 2012 is expected to be flat with first quarter 2012.

RESULTS OF OPERATIONS

The following discussion compares the results of operations for the three months ended March 31, 2012 and 2011, or the 2012 quarter and 2011 quarter, respectively. “Other U.S.” refers to the combined amounts for our Sand Wash Asset and Bakken Asset.

Revenue

Natural Gas, NGL and Oil

Production Revenue:

 

    Natural Gas     NGL     Oil     Total  
    2012     2011     2012     2011     2012     2011     2012     2011  
    (In millions)  

Barnett Shale

  $ 55.2        $ 89.4        $     44.6        $ 46.4          $ 3.3        $ 2.7        $ 103.1        $ 138.5     

Other U.S.

    0.2          0.3          0.1          0.2            4.0          2.9          4.3          3.4     

Hedging

    39.6          23.9          0.3          (7.2)          -          -          39.9          16.7     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S.

    95.0          113.6          45.0          39.4            7.3          5.6          147.3          158.6     

Horseshoe Canyon

    13.4          20.9          0.1          -            -          -          13.5          20.9     

Horn River

    2.1          3.5          -          -            -          -          2.1          3.5     

Hedging

    8.9          7.3          -          -            -          -          8.9          7.3     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Canada

    24.4          31.7          0.1          -            -          -          24.5          31.7     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $     119.4        $     145.3        $ 45.1        $     39.4          $     7.3        $     5.6        $     171.8        $     190.3     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Daily Production Volume:

 

    Natural Gas     NGL     Oil     Equivalent Total  
    2012     2011     2012     2011     2012     2011     2012     2011  
    (MMcfd)     (Bbld)     (Bbld)     (MMcfed)  

Barnett Shale

        232.8              247.4              11,508              11,531              359              335              304.0              318.6     

Other U.S.

    0.8          0.8          10          23          486          381          3.8          3.2     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S.

    233.6          248.2          11,518          11,554          845          716          307.8          321.8     

Horseshoe Canyon

    57.9          59.4          13          6          -          -          57.9          59.4     

Horn River

    11.3          11.1          -          -          -          -          11.3          11.1     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Canada

    69.2          70.5          13          6          -          -          69.2          70.5     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    302.8          318.7          11,531          11,560          845          716          377.0          392.3     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Average Realized Price:

 

    Natural Gas     NGL     Oil     Equivalent Total  
    2012     2011     2012     2011     2012     2011     2012     2011  
    (per Mcf)     (per Bbl)     (per Bbl)     (per Mcfe)  

Barnett Shale

  $     2.60        $     4.02        $     42.62        $     44.68          $     98.59        $     90.72        $     3.72        $     4.83     

Other U.S.

    2.38          4.43          53.50          77.55            91.65          83.80          12.35          11.51     

Hedging

    1.86          1.07          0.31          (6.93)          -          -          1.43          0.58     

Total U.S.

  $ 4.47        $ 5.09        $ 42.95        $ 37.82          $ 94.61        $ 87.05        $ 5.26        $ 5.48     

Horseshoe Canyon

  $ 2.55        $ 3.90        $ 68.43        $ 73.64          $ -        $ -        $ 2.56        $ 3.91     

Horn River

    2.07          3.53          -          -            -          -          2.07          3.53     

Hedging

    1.42          1.15          -          -            -          -          1.42          1.15     

Total Canada

  $ 3.89        $ 4.99        $ 68.07        $ 73.64          $ -        $ -        $ 3.90        $ 4.99     

Total

  $ 4.34        $ 5.07        $ 42.98        $ 37.84          $ 94.61        $ 87.05        $ 5.01        $ 5.39     

The following table summarizes the changes in our natural gas, NGL and oil revenue:

 

     Natural
Gas
                      
        NGL      Oil      Total  
     (In thousands)  

Revenue for the 2011 quarter

   $     145,325           $     39,372           $     5,604         $     190,301       

Volume variances

     (4,511)           397             1,094           (3,020)     

Hedge revenue variances

     17,358             7,526             -           24,884       

Price variances

     (38,731)           (2,195)           581           (40,345)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue for the 2012 quarter

   $ 119,441           $ 45,100           $ 7,279         $ 171,820       
  

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas revenue for the 2012 quarter decreased from the 2011 quarter despite the increase in hedge revenue. Realized prices, without hedge gains, were 35% lower for the 2012 quarter as compared to the 2011 quarter. The 5% decrease in natural gas volume from our Barnett Shale Asset was primarily due to production decline resulting from the aging of existing wells and our capital spending pattern.

NGL revenue for the 2012 quarter was higher than the 2011 quarter as a result of hedge losses recognized in the 2011 quarter of $7.2 million.

Utilization of derivatives to hedge our sales of natural gas and NGL may result in realized prices varying from market prices that we receive from the sale of our production. Our production revenue for the 2012 quarter and 2011 quarter was higher by $48.8 million and $24.0 million, respectively, because of our hedging activities.

We are engaged in the process of reviewing the economic impact of continuing to produce from certain of our wells in the current price environment. As a result, we may shut-in wells. However, we believe these shut-ins would result in increases to operating income and operating cash flows, and have only an immaterial impact on our production volumes.

 

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Table of Contents

Sales of Purchased Natural Gas and Costs of Purchased Natural Gas

 

     Three Months Ended
March 31,
 
     2012      2011  
     (In thousands)  

Sales of purchased natural gas:

  

Purchases from Eni

   $     11,145         $     13,917     

Purchases from others

     941           6,509     
  

 

 

    

 

 

 

Total

     12,086           20,426     

Costs of purchased natural gas sold:

     

Purchases from Eni

     11,183           13,794     

Purchases from others

     754           5,949     
  

 

 

    

 

 

 

Total

     11,937           19,743     
  

 

 

    

 

 

 

Net sales and purchases of natural gas

   $ 149         $ 683     
  

 

 

    

 

 

 

Other Revenue

 

     Three Months Ended
March 31,
 
     2012      2011  
     (In thousands)  

Midstream revenue:

  

Canada

   $ 731           $ 844       

Other Texas

     227             275       
  

 

 

    

 

 

 

Total midstream revenue

     958             1,119       

Loss from hedge ineffectiveness

     (3,201)           (53)     

Realized loss from hedge restructure

     (14,555)           -       

Unrealized loss on commodity derivatives

     (21,670)           -       

Other

     31             394       
  

 

 

    

 

 

 

Total

   $     (38,437)         $     1,460       
  

 

 

    

 

 

 

Other revenue for the three months ended March 31, 2012 decreased from the 2011 quarter due to the recognition of realized losses in 2012 from our restructuring of our hedge platform. In January and February 2012, we terminated a number of our ten-year derivative instruments in exchange for derivative instruments with shorter durations at above market terms. The decrease in the fair value between the terminated ten-year instrument and the new shorter-term instrument was recognized in the current period as a realized loss. Losses from hedge ineffectiveness were $3.2 million for the 2012 quarter as compared to less than $0.1 million for the 2011 quarter as our derivative instruments are based on NYMEX pricing and our production is sold at market prices other than NYMEX. At March 31, 2012, we do not have any basis swaps to offset the price differential. Unrealized losses recognized in 2012 is the difference between the estimated fair value at the inception date and transaction cost for ten-year derivative instruments entered into during the period.

 

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Table of Contents

Operating Expense

Lease Operating

 

     Three Months Ended March 31,  
     2012      2011  
     (In thousands, except per unit amounts)  
            Per             Per  
            Mcfe             Mcfe  

Barnett Shale

           

Cash expense

   $ 17,233       $ 0.62       $ 11,106       $ 0.39   

Equity compensation

     415         0.02         269         0.01   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,648       $ 0.64       $ 11,375       $ 0.40   

Other U.S.

           

Cash expense

   $ 2,159       $ 6.14       $ 1,246       $ 4.27   

Equity compensation

     48         0.14         55         0.19   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,207       $ 6.28       $ 1,301       $ 4.46   

Total U.S.

           

Cash expense

   $ 19,392       $ 0.69       $ 12,352       $ 0.43   

Equity compensation

     463         0.02         324         0.01   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,855       $ 0.71       $ 12,676       $ 0.44   

Horseshoe Canyon

           

Cash expense

   $ 7,756       $ 1.47       $ 7,739       $ 1.45   

Equity compensation

     126         0.01         164         0.03   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,882       $ 1.48       $ 7,903       $ 1.48   

Horn River

           

Cash expense

   $ 954       $ 0.93       $ 978       $ 0.98   

Equity compensation

     -         -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 954       $ 0.93       $ 978       $ 0.98   

Total Canada

           

Cash expense

   $ 8,710       $ 1.38       $ 8,717       $ 1.37   

Equity compensation

     126         0.02         164         0.03   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,836       $ 1.40       $ 8,881       $ 1.40   

Total Company

           

Cash expense

   $ 28,102       $ 0.82       $ 21,069       $ 0.60   

Equity compensation

     589         0.02         488         0.01   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,691       $ 0.84       $ 21,557       $ 0.61   
  

 

 

       

 

 

    

The Barnett Shale Asset experienced higher gas lift costs, workover expense and saltwater disposal costs compared to prior year due to the aging of existing wells and costs to maintain production. Other U.S. lease operating costs were impacted on a gross and unit basis by increased production and costs for our Sand Wash Asset.

Lease operating expense for the 2012 quarter in Canada was flat compared to the 2011 quarter.

 

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Gathering, Processing and Transportation

 

     Three Months Ended March 31,  
     2012      2011  
     (In thousands, except per unit amounts)  
            Per Mcfe             Per Mcfe  

Barnett Shale

   $ 38,638         $ 1.40         $ 40,377         $ 1.41     

Other U.S.

     3           0.01           16           0.05     
  

 

 

       

 

 

    

Total U.S.

     38,641           1.38           40,393           1.39     

Horseshoe Canyon

     1,069           0.20           1,019           0.19     

Horn River

     3,367           3.30           2,602           2.61     
  

 

 

       

 

 

    

Total Canada

     4,436           0.70           3,621           0.57     
  

 

 

       

 

 

    

Total

   $     43,077         $     1.26         $     44,014         $     1.25     
  

 

 

       

 

 

    

Canadian GPT increased for the 2012 quarter as compared to 2011 quarter both in total dollars and on a per Mcfe basis primarily as a result of fixed costs under our firm agreements with third parties. GPT per Mcfe was flat in the U.S.

Production and Ad Valorem Taxes

 

     Three Months Ended March 31,  
     2012      2011  
     (In thousands, except per unit amounts)  
            Per
Mcfe
            Per
Mcfe
 

Production taxes

           

U.S.

   $ 1,551         $ 0.06       $ 1,684         $ 0.06   

Canada

     3           0.02         14           -   
  

 

 

       

 

 

    

Total production taxes

     1,554           0.05         1,698           0.04   

Ad valorem taxes

           

U.S.

   $ 4,711           0.17       $ 5,231           0.18   

Canada

     498           0.08         652           0.10   
  

 

 

       

 

 

    

Total ad valorem taxes

     5,209           0.15         5,883           0.17   
  

 

 

       

 

 

    

Total

   $     6,763         $     0.20       $     7,581         $     0.21   
  

 

 

       

 

 

    

 

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Depletion, Depreciation and Accretion

 

     Three Months Ended March 31,  
      2012      2011  
     (In thousands, except per unit amounts)  
            Per
Mcfe
            Per
Mcfe
 

Depletion

           

U.S.

   $ 39,990         $ 1.43         $ 37,145         $ 1.28     

Canada

     8,955         1.42           9,855           1.55     
  

 

 

       

 

 

    

Total depletion

     48,945           1.43           47,000           1.33     

Depreciation of other fixed assets:

           

U.S.

   $ 2,380         $ 0.08         $ 3,622         $ 0.13     

Canada

     2,170           0.34           1,219           0.19     
  

 

 

       

 

 

    

Total depreciation

     4,550           0.13           4,841           0.14     

Accretion

     944           0.03           630           0.02     
  

 

 

       

 

 

    

Total

   $ 54,439         $ 1.59         $ 52,471         $ 1.49     
  

 

 

       

 

 

    

U.S. depletion for the 2012 quarter reflected a 12% increase in the U.S. depletion rate partially offset by a 4% decrease in U.S. production when compared to the 2011 quarter. Canadian depletion decreased in 2012 due to a reduction in the carrying value of the Canadian oil and gas properties in the 2011 quarter. Following the impairment recognized in the 2012 quarter, we expect U.S. and Canadian depletion rates will be relatively unchanged.

U.S. depreciation for the 2012 quarter was lower than the 2011 quarter primarily because of reduced carrying value of our midstream assets following their impairment in late 2011. Canada depreciation was higher due to the increased capital spending on the Fortune Creek non-oil and gas properties in the second half of 2011.

Impairment Expense

As required under GAAP, we perform quarterly ceiling tests to assess impairment of our oil and gas properties. We also assess our fixed assets reported outside the full-cost pool when circumstances indicate impairment may have occurred. The calculation of impairment expense is more fully described in Note 5 to the condensed consolidated financial statements in Item 1 of this Quarterly Report.

In the 2012 quarter, we recognized $62.3 million and $0.4 million in non-cash charges for impairment of our U.S. and Canadian oil and gas properties, respectively, as of March 31, 2012.

In performing our quarterly ceiling tests, we utilize first of month prices for the preceding 12 months. Due to the decrease in natural gas prices in the second quarter 2012 compared to the second quarter 2011, there is a significant likelihood of impairment of oil and ga