On February 22, 2011, Quicksilver issued a press release announcing the following preliminary operating results for year-end 2010:
Preliminary Operating Results
Estimates of year-end 2010 proved reserves total more than 2.9 trillion cubic feet of natural gas equivalents (Tcfe), an increase of more than 20% from year-end 2009. Proved developed reserves continued to make up 68% of the total. By product, reserves were comprised 76% from natural gas, 23% from natural gas liquids and 1% from crude oil. Geographically, 91% of reserves were located in the U.S., primarily in the Fort Worth Basin of North Texas, and 9% were located in Canada.
During the five-year period ended December 31, 2010, the company has grown reserves and production at compound annual growth rates of more than 20%.
Reserve growth in 2010 was driven by a 22% increase in the company’s Fort Worth Basin Barnett Shale reserves that totaled more than 2.6 Tcfe at year-end 2010, representing approximately 90% of the company’s total reserves. Year-end 2010 reserves include just 16 billion cubic feet of natural gas equivalents (Bcfe) of reserves from the company’s four wells on its 130,000 net acres in the Horn River Basin of Northeast British Columbia. In addition, the company has assembled 150,000 net acres in the Greater Green River Basin in northern Colorado and southern Wyoming and 175,000 net acres in the Southern Alberta Basin in western Montana, which the company believes to be prospective for crude oil from the Niobrara and Bakken formations, respectively.
Preliminary 2010 average production increased 9% from the prior year to approximately 355 million cubic feet of natural gas equivalents (MMcfe) per day, resulting in record total production of approximately 130 Bcfe for the year. Organic reserve additions of 469 Bcfe represent replacement of 362% of production. From all sources, the company replaced 475% of the year’s record production.
A summary of preliminary 2010 reserves changes, in Bcfe, is as follows:
| Balance at December 31, 2009 | | | 2,415.9 | |
Extensions, discoveries and revisions | | | 469.0 | |
| | | 147.0 | |
| | | 0 | |
| | | (129.7 | ) |
| | | | | |
Balance at December 31, 2010 | | | 2,902.2 | |
The new Securities and Exchange Commission (SEC) reporting rule, applicable for year-end 2009 and later reporting, allows proved undeveloped (PUD) reserves to be booked beyond one offset location where reliable technology exists that establishes reasonable certainty of economic production at greater distances. In accordance with the new rule, the company recorded incremental PUD locations in the Fort Worth Basin. In the Fort Worth Basin Barnett, the company had 973 proved developed and 360 proved undeveloped gas well locations at year-end 2010. The new rule also suggests that five years is a reasonable timeframe to develop existing PUDs. The company removed 22 Bcfe of PUD reserves in 2010 which had not been developed within the five-year time frame. Quicksilver’s PUD reserves, which total approximately 940 Bcfe, are all scheduled to be drilled before the end of 2015. Based on current NYMEX strip prices and Quicksilver's commodity derivatives position, the company's currently forecasted cash flow during this period is expected to be more than sufficient to fund this drilling.
In addition to the above rule changes, the new SEC reporting rule requires that year-end proved reserve volumes be calculated using an average of the NYMEX spot prices for sales of gas and crude oil on the first calendar day of each month during 2010. On this basis, the prices for gas and crude oil for 2010 reserves reporting purposes were $4.38 per million British thermal units (MMBtu) and $79.43 per barrel, respectively. The prices used to calculate proved reserves for year-end 2009, when Quicksilver's proved reserves were last reported, were $3.87 per MMBtu of gas and $61.18 per barrel of crude oil. These prices represent the average of the NYMEX spot prices for sales of gas and crude oil on the first calendar day of each month during 2009 and 2010, as required by the SEC reporting rule.
Based upon the average 2010 AECO prices for natural gas in Canada, the company expects to record a non-cash impairment charge of approximately $19 million related to its Canadian full cost pool, primarily associated with activities in the Horn River Basin.
Hedging Summary
For 2011 and 2012, the company has hedged approximately 190 million cubic feet (Mmcf) and 130 Mmcf per day, respectively, of its anticipated future natural gas production at weighted-average floor prices of approximately $5.95 per thousand cubic feet (Mcf) and $5.92 per Mcf, respectively. For 2011, the company has basis hedges covering approximately 60% of its expected Canadian natural gas production at $0.39 per Mcf under NYMEX.
The company also has liquids swaps in place on 10,500 barrels per day for 2011 at an average swap price of $38.84 per barrel. The company uses its hedging program to underpin its expected $455 million capital program for 2011.
In addition, Quicksilver holds firm transportation from the Fort Worth Basin, which we believe provides sufficient takeaway capacity for all expected production for the next several years. The company’s firm transportation includes 100 Mmcf per day to Henry Hub and 50 Mmcf per day of firm transportation on the Mid Continent Express pipeline. This pipeline will enable gas from the Fort Worth Basin to go to Perryville in Mississippi and Transco Station 85 in Alabama. The remaining volumes can be delivered to hubs at Katy and Carthage, Texas and would receive Houston Ship Channel pricing.
Forward-Looking Statements
The statements in this current report regarding future events, occurrences, circumstances, activities, performance, outcomes and results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although these statements reflect the current views, assumptions and expectations of Quicksilver Resources’ management, the matters addressed herein are subject to numerous risks and uncertainties, which could cause actual activities, performance, outcomes and results to differ materially from those indicated. Factors that could result in such differences or otherwise materially affect Quicksilver Resources’ financial condition, results of operations and cash flows include: changes in general economic conditions; fluctuations in natural gas, natural gas liquids and crude oil prices; failure or delays in achieving expected production from exploration and development projects; uncertainties inherent in estimates of natural gas, natural gas liquids and crude oil reserves and predicting natural gas, natural gas liquids and crude oil reservoir performance; effects of hedging natural gas, natural gas liquids and crude 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; 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 to receive a proposal for a transaction to pursue strategic alternatives for us or that any transaction will be approved or consummated; costs and expenses associated with our consideration of potential strategic alternatives, including without limitation, any related litigation expense; as well as, other factors disclosed in Quicksilver Resources’ filings with the Securities and Exchange Commission. The forward-looking statements included in this news release are made only as of the date of this news release, 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.
