August 27, 2012 / 3:36 PM / 5 years ago

TEXT-S&P revises Quiksilver Resources outlook to stable

     -- We are revising our outlook on U.S. exploration and production company 
Quicksilver Resources Inc. to stable from negative to reflect an
improved assessment of the company's liquidity position.
     -- We are affirming our 'B-' corporate credit rating on Quicksilver.
     -- The stable outlook reflects our estimate that liquidity will remain 
adequate for the next 12-18 months.
Rating Action
On Aug. 27, 2012, Standard & Poor's Ratings Services revised its outlook on 
Quicksilver Resources Inc. to stable from negative. We also affirmed our 'B-' 
corporate credit rating on the company.
The outlook revision reflects our updated assessment of Quicksilver's 
liquidity, following the company's receipt of a covenant amendment from its 
banks, a near-term expected reduction in Canadian letters of credit 
obligations, a $50 million cut in capital expenditures for the remainder of 
2012, and the assumption of a lower capital expenditure run rate for 2013. Our 
outlook revision also incorporates the company's reduced borrowing base ($850 
million versus $1,075 million at the end of June). As of June 30, 2012, pro 
forma for the borrowing base reduction and expected letters of credit 
reduction, Quicksilver's liquidity was $454 million, consisting of $14 million 
in cash and $440 million available on its credit facility. We project 
liquidity will improve to more than $500 million at year-end 2012 and be close 
to $350 million at year-end 2013, assuming no further reductions in the 
company's borrowing base and a one-year deferral on letters of credit 

Our ratings on Ft. Worth, Texas-based Quicksilver reflect the company's 
"vulnerable" business risk, "highly leveraged" financial risk, and "adequate" 
liquidity. Our assessment of the company's business risk is based on its 
participation in the cyclical and capital-intensive exploration and production 
(E&P) industry and its vulnerability to the currently weak natural gas and 
natural gas liquids (NGLs) markets (given that natural gas and NGLs account 
for about 80% and 18%, respectively, of its total current production and 
proven reserve base). Based on actual second-quarter realized prices and 
costs, Quicksilver's unhedged operating income (EBIT) is negative, while it 
still carries relatively high debt given acquisition activity over the past 
few years. The ratings also reflect the company's relatively large proven 
reserve base for the rating category, low cost structure, and above 
market-priced hedges in 2012 (although these begin to roll off in 2013).

As is the case with most E&P companies, Quicksilver's cash flows can fluctuate 
significantly depending on volatile oil, natural gas, and NGL prices. Our 
base-case assumption is for natural gas and oil prices to average $2.50/mmBtu 
and $85/bbl, respectively, for the remainder of 2012, $3.00/mmBtu and $80/bbl 
in 2013, and $3.50/mmBtu and $75/bbl thereafter, with NGL prices at 42% of WTI 
in 2012, 50% in 2013, and 57% thereafter. Under these pricing assumptions, 
many in the industry, including Quicksilver, have natural gas production that 
is uneconomic (notwithstanding hedges) when considering total costs, including 
operating and finding and development (F&D) costs. Excluding the impact of 
hedges, Quicksilver's operating income (EBIT) per unit of production is 
negative. However, Quicksilver does benefit from favorable natural gas hedges 
in 2012 and 2013. The company has about 70% of this year's estimated natural 
gas production hedged at an average price of $5.78/mcf and about 65% of next 
year's estimated natural gas production hedged at an average price of 
$5.25/mcf. Including the impact of hedges, we estimate Quicksilver's operating 
income (EBIT) per thousand cubic feet equivalent (mcfe) was about $0.65 in the 
first quarter of 2012. However, after cash interest expense of $1.23/mcfe, 
pre-tax income was negative.

As of year-end 2011, Quicksilver's proven reserve base was 2.8 trillion cubic 
feet equivalent (tcfe), consisting of 77% natural gas and 22% NGLs. Of its 
total reserves, 70% proved is developed. Nearly 90% of the company's reserves 
are located in the mature Barnett Shale in Texas, and the remainder is in 
Canada and the Rockies. The company's reserve life is healthy at 20 years (15 
years on a proved developed basis) considering average daily production in the 
second quarter of 2012 was 359 million cubic feet equivalent per day 
(mmcfe/d). Also, the company's all-in unlevered cost structure (lease 
operating expense, production taxes, cash general and administrative expenses, 
and three-year average finding and developing {F&D} costs) of $3.65/mcfe in 
the second quarter, is at the lower-end of the range for its peers. However, 
with the forward-year natural gas futures price at about $3.30/mcf today, 
Quicksilver's business generates returns below many of its more oil-weighted 

We classify Quicksilver's financial risk as highly leveraged, given the 
company's aggressive debt levels and the volatility in its cash flows. We 
estimate the company will generate about $400 million in EBITDA this year, 
based on our price deck, incorporating the company's hedges and assuming 
production declines about 10% year-over-year to 366 mmcfe/d. We expect 
debt-to-EBITDA to exceed 5.0x at year-end 2012, given our projection that the 
company's debt balance will be about $2.0 billion. We anticipate that 
profitability and cash flows will erode further in 2013, given lower levels of 
hedged production and likely further production declines, such that EBITDA 
could approximate $250 million, resulting in debt-to-EBITDA approaching 8x at 
year-end 2013. We believe some combination of asset sales, joint ventures, 
capital spending reductions, and equity issuance will likely be necessary to 
prevent further deterioration of the company's credit protection measures. 
Quicksilver has announced plans to form and IPO an upstream master limited 
partnership (MLP), as well as its intention to enter into joint ventures to 
develop assets in its emerging basins which include the Horn River, Permian, 
and Sandwash basins. We do not factor in any potential proceeds from the MLP 
or joint ventures into our model; if implemented, however, they could improve 
Quicksilver's credit measures and liquidity, depending on how they are 

We view Quicksilver's liquidity position as adequate. Key elements of 
Quicksilver's liquidity profile include:
     -- As of June 30, 2012, Quicksilver had $14 million in cash on its 
balance sheet.
     -- Pro forma for the borrowing base reduction to $850 million and 
assuming a reduction in its Canadian letters of credit obligations, as of June 
30, 2012, the company had $440 million of availability on its credit facility 
maturing in 2016. 
     -- Recently amended covenants on the credit facility require Quicksilver 
to maintain a minimum EBITDA-to-cash interest expense ratio of 1.5x through 
March 31, 2014, which steps up to 2.0x as of June 30, 2014, and to 2.5x 
thereafter; and to maintain a maximum senior debt-to-EBITDA ratio of 2.5x 
beginning Sept. 30, 2012. We expect Quicksilver to remain in compliance with 
these covenants through the end of 2013.
     -- Quicksilver recently reduced its capital expenditures for the second 
half of 2012 by $50 million to an annual run rate of $140 million, and we 
assume the company will spend at a similar level in 2013. This is below our 
estimate of Quicksilver's maintenance cap-ex (about $200 million).
     -- Under our price deck assumptions, we estimate the company will 
generate funds from operations (FFO) of $230 million in 2012 and $80 million 
in 2013. We expect Quicksilver to fund the cap-ex overspend in both years by 
drawing down its credit facility. 
     -- The company is actively pursuing joint ventures for its emerging 
plays, which include the Horn River Basin (Canada), Permian Basin (Texas), and 
Sandwash Basin (Colorado) which, if successful, would likely enhance liquidity.
Recovery analysis
Our rating on Quicksilver's senior unsecured debt is 'CCC+' (one notch lower 
than the corporate credit rating). The recovery rating on this debt is '5', 
indicating our expectation of modest (10% to 30%) recovery for lenders in the 
event of a default. The issue rating on Quicksilver's subordinated debt is 
'CCC' (two notches lower than the corporate credit rating). The recovery 
rating on this debt is '6', indicating our expectation of negligible (0% to 
10%) recovery for lenders in the event of a default. For the complete recovery 
analysis, see our recovery report on Quicksilver published Feb. 14, 2012, on 
RatingsDirect on the Global Credit Portal.
Our stable outlook reflects our expectations that Quicksilver will maintain 
liquidity above $200 million over the next 12-18 months, driven by a reduced 
capital expenditure program and lower Canadian letters of credit obligations.

We could lower the rating if liquidity drops below $200 million, which would 
most likely occur if the company ramps up capital spending or if its borrowing 
base is further reduced. We could raise the rating if the company maintains 
debt-to-EBITDA below 5.25x for a sustained period, which would most likely 
require a significant joint venture or MLP.

Related Criteria And Research
     -- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil 
Price Assumptions Are Unchanged, July 24, 2012
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 
Exploration And Production Industry, Jan. 20, 2012
     -- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price 
Assumptions Unchanged, March 22, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Outlook Action; Rating Affirmed
                                        To                 From
Quicksilver Resources Inc.
 Corporate Credit Rating                B-/Stable/--       B-/Negative/--

Ratings Affirmed

Quicksilver Resources Inc.
 Senior Unsecured                      CCC+               
   Recovery Rating                     5                  
 Subordinated                          CCC                
  Recovery Rating                      6
0 : 0
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