SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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
(State or other jurisdiction of incorporation or organization)
75-2756163 (I.R.S. Employer Identification No.)
777 West Rosedale, Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 665-5000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value American Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12 (g) of the Act: None
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 [X] No [ ]
As of August 10, 2000, the registrant had 18,077,865 outstanding shares
of its common stock, $0.01 par value.
Quicksilver Resources Inc.
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2000
and 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000
and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
ITEM 1. Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Quicksilver Resources Inc. (the Company) as of June 30, 2000, and the related
condensed consolidated statements of operations for the three and six month
periods ended June 30, 2000 and 1999, and condensed consolidated statements of
cash flows for the six month periods ended June 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 1999, and the related consolidated statement of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated March 10, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
August 10, 2000
3
Quicksilver Resources Inc.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts
June 30, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,426 $ 2,557
Accounts receivable, net of allowance for doubtful accounts
of $1,350 29,104 15,555
Inventories and other current assets 1,394 780
----------- ------------
Total current assets 34,924 18,892
INVESTMENTS IN EQUITY AFFILIATES 2,880 3,100
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 357,196 170,800
DEFERRED FINANCING COSTS 6,683 1,203
OTHER ASSETS 719 307
----------- ------------
$402,402 $194,302
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,973 $ 2,134
Accounts payable 5,692 7,234
Accrued liabilities 14,106 2,356
----------- ------------
Total current liabilities 21,771 11,724
LONG-TERM DEBT 240,102 94,952
UNEARNED REVENUE 23,443 800
OTHER LONG-TERM LIABILITIES 1,127 2,000
DEFERRED INCOME TAXES 40,526 15,088
MINORITY INTEREST 180 187
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
Authorized 10,000,000 shares, issued and outstanding-none - -
Common stock, $0.01 par value
Authorized 40,000,000 shares, 21,738,673 issued and 18,077,865
outstanding at June 30, 2000, and 17,994,900 issued and 217 180
17,984,092 outstanding at December 31, 1999
Paid in capital in excess of par value 76,600 61,383
Treasury stock of 3,660,808 and 10,808 shares (14,672) (73)
Retained earnings 13,108 8,061
----------- ------------
Total stockholders' equity 75,253 69,551
----------- ------------
$402,402 $194,302
=========== ============
The accompanying notes are an integral part of these financial statements.
4
Quicksilver Resources Inc.
Condensed Consolidated Statements of Operations
In thousands, except per share data - Unaudited
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
2000 1999 2000 1999
------- ------- ------- -------
REVENUE
Oil, gas and related product sales $29,395 $10,957 $44,130 $19,747
Other income 2,341 649 3,585 1,158
------- ------- ------- -------
Total revenues 31,736 11,606 47,715 20,905
------- ------- ------- -------
EXPENSES
Operating expenses 9,980 4,894 16,521 8,389
Depletion and depreciation 7,221 3,314 11,312 6,129
Provision for doubtful accounts - - - 1,350
General and administrative 1,697 1,016 2,955 1,836
Interest 6,772 2,043 8,887 3,738
------- ------- ------- -------
Total expenses 25,670 11,267 39,675 21,442
------- ------- ------- -------
Income (loss) before income taxes
and minority interest 6,066 339 8,040 (537)
Minority interest in net loss
of MSR Exploration Ltd. - - - 141
------- ------- ------- -------
Income (loss) before income taxes 6,066 339 8,040 (396)
Income tax expense (benefit) 2,288 115 2,993 (135)
------- ------- ------- -------
NET INCOME (LOSS) $ 3,778 $ 224 $ 5,047 $ (261)
======= ======= ======= =======
Basic earnings per share $ 0.21 $ 0.02 $ 0.28 $ (0.02)
======= ======= ======= =======
Diluted earnings per share $ 0.21 $ 0.02 $ 0.27 $ (0.02)
======= ======= ======= =======
Basic weighted average number
of shares outstanding for the periods 18,283 12,889 18,283 12,417
======= ======= ======= =======
Diluted weighted average number
of shares outstanding for the periods 18,406 12,889 18,417 12,417
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
5
Quicksilver Resources Inc.
Condensed Consolidated Statements of Cash Flows
In thousands - Unaudited
For the Six Months Ended
June 30,
-----------------------------------
2000 1999
--------- --------
OPERATING ACTIVITIES
Net income (loss) $ 5,047 $ (261)
Charges and credits to net income not affecting cash
Depletion and depreciation 11,312 6,129
Deferred income taxes 3,589 (135)
Recognition of unearned revenue (2,357) (446)
Amortization of deferred loan costs 547 182
Provision for doubtful accounts - 1,350
Equity interest in loss of affiliate 193 -
Other 14 (141)
Changes in assets and liabilities, excluding the effect of the acquisition
Accounts receivable (7,764) (1,183)
Inventory and other current assets 135 18
Accounts payable (5,019) (3,107)
Accrued liabilities 6,520 (215)
--------- --------
NET CASH FROM OPERATING ACTIVITIES 12,217 2,191
--------- --------
INVESTING ACTIVITIES
Acquisition of properties and equipment (171,831) (31,097)
Acquisition of pipeline and facilities (2,469) -
--------- --------
NET CASH USED FOR INVESTING ACTIVITIES (174,300) (31,097)
--------- --------
FINANCING ACTIVITIES
Notes payable, bank proceeds 250,118 33,231
Principal payments on long-term debt (105,129) (3,295)
Monetization of Section 29 tax credits 25,000 -
Deferred financing costs (6,027) (871)
Stock registration fees (10) (296)
--------- --------
NET CASH FROM FINANCING ACTIVITIES 163,952 28,769
--------- --------
NET INCREASE (DECREASE) IN CASH 1,869 (137)
CASH AT BEGINNING OF PERIOD 2,557 294
--------- --------
CASH AT END OF PERIOD $ 4,426 $ 157
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $ 6,177 $ 3,547
========= ========
Cash payments for income taxes $ 60 $ -
========= ========
Common stock of 1,377,000 shares used for acquisition of
minority interest in MSR $ - $ 10,327
========= ========
Common stock of 93,773 shares used for acquisition of Unocal $ 696 $ -
========= ========
The accompanying notes are an integral part of these financial statements.
6
Quicksilver Resources Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of Quicksilver Resources Inc. ("Quicksilver"
or the "Company"), the Company's Condensed Consolidated Financial Statements
contain all adjustments (consisting of only normal, recurring accruals)
necessary to present fairly the financial position of the Company as of June 30,
2000, and the results of operations for the three and six months ended June 30,
2000 and 1999 and cash flows for the six months ended June 30, 2000 and 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1999. The results of operations for the three and six month
periods ended June 30, 2000 are not necessarily indicative of the operating
results to be expected for the full fiscal year.
In June 1999, the Company reclassified marketing and processing costs to
operating expense. These costs were previously reported as deductions from
revenue. All prior periods have been reclassified.
In May 2000, the Company reclassified transportation and processing fees to
operating expense. The revenues were previously reported as other income. All
prior periods have been reclassified.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" which
summarized the application of generally accepted accounting principles to
revenue recognition in financial statements. The Company does not believe the
adoption of Staff Accounting Bulletin 101 will have any impact on its
consolidated financial position or results of operations since it already
recognizes revenue when the earnings process is complete.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income
or loss by the weighted average number of shares of common stock outstanding
during the period. Diluted net income (loss) per common share is calculated in
the same manner but also considers the impact on net income and common shares
for the potential dilution from stock options, stock warrants, and any other
convertible securities outstanding. For the six months ended June 30, 2000 and
1999 there were no adjustments to net income for purposes of calculating diluted
net income (loss) per common share. The following is a reconciliation of the
weighted average common shares used in the basic and diluted net income (loss)
per common share calculations for the six months ended June 30, 2000 and 1999.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------------------------- ------------------------------
(Unaudited, in thousands) (Unaudited, in thousands)
Weighted average common shares-basic 17,984 12,889 17,984 12,417
Unregistered shares issuable to Unocal 299 - 299 -
-------------- ------------ ------------ ------------
Total weighted average common shares-basic 18,283 12,889 18,283 12,417
Potentially dilutive securities
Stock options 119 - 130 -
Stock warrants 4 - 4 -
-------------- ------------ ------------ ------------
Weighted average common shares-diluted 18,406 12,889 18,417 12,417
============== ============ ============ ============
7
In connection with the Company's acquisition of properties from Unocal
Corporation's Spirit Energy 76 Unit in May of 1999, 310,608 of the original
404,381 contingently issuable unregistered shares of common stock are held in
escrow. The Company released 93,773 shares in the second quarter of 2000. Of the
remaining 310,608 shares, 205,469 shares are expected to be released from escrow
and 105,139 shares are expected to be returned to the Company. Accordingly a
total of 299,242 shares are included in the basic and diluted net income per
share computation (see note 2, Unocal). Approximately 225,000 shares under
option have been excluded from the diluted net income per share calculation
because exercise prices exceed the average market price of the Company's common
stock. Warrants representing 1,128,000 shares of common stock have also been
excluded from the diluted net income per share computation because exercise
prices exceed the average market price of the Company's common stock. For the
six month period ended June 30, 1999, all potentially dilutive securities were
excluded from the calculation of diluted loss per share, as their effect would
have been anti-dilutive.
2. ACQUISITIONS
CMS Acquisition
On March 31, 2000, the Company completed the previously announced
acquisition from CMS Oil and Gas Company, a subsidiary of CMS Energy
Corporation, of CMS properties located primarily in Michigan for approximately
$164,000,000, subject to subsequent adjustments. The CMS properties consist of
interests in approximately 3,050 gross (650 net) producing oil and gas wells
located on approximately 512,000 gross (450,000 net) acres. Holditch-Reservoir
Technologies Consulting Services, a Schlumberger company, estimated proved
reserves attributable to the CMS acquisition of 315.1 Bcf of natural gas and
747.8 Mbbls of crude oil and condensate, and 143.9 Mbbls of natural gas liquids,
or a total of 320.4 Bcfe with an estimated SEC PV-10 value as of January 1, 2000
of approximately $184,000,000. Approximately 81% of the proved reserve volumes
is classified as proved developed. Current daily production from the CMS
properties is estimated to be 49 Mmcfe.
Financing for the acquisition was accomplished through restructuring
Quicksilver's senior bank facility, the sale of $43,000,000 in Subordinated
Notes, and the monetization of a portion of the accompanying Section 29 tax
credits to a major financial institution (see notes 4 and 5).
The acquisition was accounted for under the purchase accounting method, and
consists of both CMS producing properties as well as common stock of Terra
Energy Ltd.
Unocal Acquisition
On May 17, 1999, the Company completed a purchase from Unocal Corporation's
Spirit Energy 76 Unit of substantially all of Unocal's natural gas and crude oil
assets in Michigan. The purchase price consisted of $25,800,000 in cash and
404,381 unregistered shares of the Company's common stock. The stock component
of the purchase price totaling $3,000,000 was placed in escrow. The Company
currently estimates that 299,242 shares will be distributed to Unocal, subject
to adjustment pending the resolution of certain contingencies. The Company
released 93,773 shares in the second quarter of 2000 (see note 7).
3. DEFERRED FINANCING COSTS
The Company amended its credit facility agreement (see note 4) on March 31,
2000 and incurred additional deferred loan costs to be amortized over the
remainder of the agreement terminating March 21, 2003.
June 30, 2000 December 31, 1999
------------------ -----------------------
(In thousands)
(Unaudited)
Deferred financing costs $7,537 $1,510
Less accumulated amortization (854) (307)
------------------ -----------------------
Net deferred financing costs $6,683 $1,203
================== =======================
8
4. LONG-TERM DEBT
June 30, 2000 December 31, 1999
-------------------- -----------------------
(Unaudited)
Long-term debt, in thousands, consists of:
Notes payable to banks
(8.78% at June 30, 2000 and 8.315% at December 31, 1999) $180,000 $84,850
(9.16% at June 30, 2000 and 8.465% at December 31, 1999) 4,000 8,000
(8.99% at June 30, 2000 and 8.5% at December 31, 1999) 3,000 2,000
Subordinated Notes (14.75%, second mortgage note) 53,000 -
Other loans 2,075 2,236
-------- -------
242,075 97,086
Less current maturities (1,973) (2,134)
-------- -------
$240,102 $94,952
======== =======
Maturities are as follows, in thousands of dollars:
Periods Ending June 30, 2000
-------------- -------------
(Unaudited)
2000 $ 1,973
2001 -
2002 -
2003 187,000
2004 -
Thereafter 53,102
--------
$242,075
========
As part of the acquisition of the CMS properties and Terra Energy Ltd, the
Company amended the agreement setting forth the terms of its credit facility
("Credit Facility"). The Credit Facility permits the Company to obtain revolving
credit loans and to issue letters of credit for the account of the Company from
time to time in an aggregate amount not to exceed $225,000,000. The Borrowing
Base is $195,000,000 and is subject to semi-annual determination and certain
other redeterminations based upon a variety of factors, including the discounted
present value of estimated future net cash flow from the Company's natural gas
and crude oil production. At the Company's option, loans may be prepaid, and
revolving credit commitments may be reduced in whole or in part at any time in
certain minimum amounts. The interest rate is determined by the ratio of
outstanding credit to the borrowing base with a margin for Eurodollar Tranches.
The collateral for the Credit Facility consists of substantially all of the
existing assets of the Company and any future reserves acquired. The loan
agreements contain certain dividend restrictions and restrictive covenants,
which, among other things, require the maintenance of a minimum current ratio.
The Company currently is in compliance with all such restrictions. The Credit
Facility terminates March 31, 2003.
The Company also sold $43,000,000 of 14.75% Second Mortgage Notes
("Subordinated Notes") on March 31, 2000 and an additional $10,000,000 on April
24, 2000. The Company may not prepay the Subordinated Notes, in whole or any
part, until after March 28, 2003. Prepayments will require a premium payment
ranging from 3% to 6%. Quarterly interest payments to the note holders may be
paid in kind with respect to all or any portion of interest in excess of 10% by
issuing additional notes. The collateral for the Subordinated Notes consists of
substantially all of the existing assets of the Company and any future reserves
acquired. The Subordinated Notes contain certain restrictive covenants, which,
among other things, require maintenance of working capital, collateral coverage
ratio and an earnings ratio before interest, taxes, depreciation and
amortization, costs associated with seismic geological and geophysical services
in connection and attributable to oil and gas exploration ("EBITDAX"). The
Subordinated Notes are due and payable in full on March 30, 2009.
MGV Energy Inc., a 97% owned subsidiary, has a balance of US$1,972,755 as
of June 30, 2000, in debt related to the August 1999 acquisition of the Monogram
Unit, a Canadian property. The interest rate is 0.75% over Canadian Imperial
Bank of Commerce ("CIBC") prime. CIBC's prime was 7.5% and 6.5%, respectively,
as of June 30, 2000 and December 31, 1999.
9
5. UNEARNED REVENUE
Quicksilver's properties include certain properties, which carry IRS Code
Section 29 income tax benefits. Code Section 29 allows a credit against regular
federal income tax liability for certain eligible gas production. During 1997,
tax credits were conveyed through the sale of working interests to a bank. The
purchase and sale agreement and ancillary agreements with the bank provide that
the Company will receive cash, payment for future production on the properties,
and payment for a portion of the tax credits taken by the bank. A portion of the
initial cash payment made by the bank represented an advance payment for the
first eighteen months of tax benefits. As of June 30, 2000, and December 31,
1999, a balance of $800,000 remained in unearned revenue as a result of the cash
consideration received in excess of the tax benefit earned. The balance of
$800,000 will be applied towards the repurchase of the properties after the tax
benefits of the IRS Code Section 29 expire at December 31, 2002.
Additionally, on March 31, 2000, the Company conveyed to a bank Section 29
credits for 99.5% of the interests acquired from CMS and the Terra interests in
Devonian shale gas production from certain wells located in Michigan. Cash
proceeds received from the sale were $25,000,000. The purchase and sale
agreement and ancillary agreements with the bank include a production payment in
favor of Quicksilver burdening future production on the properties. As of June
30, 2000, the $25,000,000 liability had decreased to $22,644,000. Revenue is
recognized as reserves are produced.
6. OTHER LONG-TERM LIABILITIES
Long-term liabilities include $1,000,000 of the non-current portion of the
Unocal property acquisition discussed in note 2 at June 30, 2000. The balance
was $2,000,000 at December 31, 1999.
7. STOCKHOLDERS' EQUITY
The Company is authorized to issue 40,000,000 shares of common stock with a
par value per share of one cent ($0.01) and 10,000,000 shares of preferred stock
with a par value per share of one cent ($0.01). At June 30, 2000, the Company
had 18,283,334 shares of common stock outstanding, including 299,242 of the
404,381 unregistered shares contingently issuable to Unocal (see note 2), and no
shares of preferred stock outstanding. Pursuant to a Purchase and Sale Agreement
between the Company and CMS Oil and Gas Company, dated March 4, 2000, the
Company issued 3,650,000 shares of its common stock to CMS as a portion of an
earnest money performance deposit. Such shares, which were valued on the date of
issuance at $4.00 per share, were returned to the Company at closing of the
acquisition and are now held as treasury shares.
Warrants and Options
The Company has warrants outstanding to purchase 550,000 shares of common
stock at $12.50 per share, 550,000 shares of common stock at $20.00 per share,
28,000 shares of common stock at $33.75 per share, and 5,750 shares of common
stock at $0.10 per share (exercisable only after the market price of the
Company's common stock reaches $10.00 per share), and options outstanding to
purchase 24,857 shares of common stock at $8.75 per share, 432,203 shares of
common stock at $3.6875 per share and 200,000 shares of common stock at $7.125
per share.
On October 4, 1999, the Board of Directors adopted the 1999 Stock Option
and Stock Retention Plan (`the Plan"), which was approved by the stockholders on
June 6, 2000. There are 1,300,000 shares of common stock reserved for issuance
under the Plan, which provides for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights and retention stock awards.
No employee of the Company or subsidiary may receive options or awards
aggregating more than 20% of the shares of common stock available under the
Plan.
On February 10, 2000, the Company granted incentive stock options under the
plan covering 459,203 shares of common stock to nine of its employees. One of
these options, covering 27,000 shares, has expired due to an employee
resignation. These options were granted at an exercise price of $3.6875 and vest
equally in three annual installments beginning one year from the date of grant.
On June 30, 2000, the Company granted options covering an additional 200,000
shares at an exercise price of $7.125, and vesting requirements of the June
options are identical to those of the February options. No compensation cost was
recognized at date of grant because the exercise price at date of grant was
equal to the fair value of the common stock at date of grant. There were no
options exercisable at June 30, 2000.
10
8. CONTINGENCIES
The Company's customers are large natural gas and crude oil purchasers. The
Company does not generally require collateral, and receivables are usually due
and collected in 30 to 60 days. On March 10, 1999, one of the Company's natural
gas purchasers filed for protection under Chapter 11 of the Federal Bankruptcy
Code. At that time the Company estimated it would ultimately collect $1,100,000
of the $2,450,000 accounts receivable balance and established a $1,350,000
allowance for doubtful accounts. The Company has recovered the net receivable.
In connection with the purchase of certain properties from Unocal (see note
2), the Company placed 404,381 unregistered shares of Company common stock in
escrow. The Company released 93,773 of these shares in the second quarter of
2000 and expects to release an additional 205,469 shares in the near future.
Accordingly, shares considered outstanding for purposes of earnings per share
calculation include the 299,242 shares the Company anticipates issuing as the
contingent purchase price.
9. RELATED PARTY TRANSACTIONS
The Darden family has effective beneficial ownership of approximately 56%
of Quicksilver's shares outstanding including shares owned by Mercury
Exploration Company and Quicksilver Energy L.C. Frank Darden, Thomas Darden,
Glenn Darden and Anne Darden Self are also Directors of the Company. Mercury
operated the Company's oil and gas properties, and until April 1, 2000, provided
most of the Company's accounting, treasury and administrative functions. On
April 1, 2000 accounting employees were transferred from Mercury to Quicksilver.
On July 1, 2000, employees involved in operating Quicksilver's oil and gas
properties were transferred to the Company. As a result, Quicksilver's
dependence on Mercury has been substantially eliminated. All transactions with
any affiliates are at arms length and require approval of a majority of the
disinterested members of the Board of Directors. During the first six months of
2000, Quicksilver paid $1,204,801 for services rendered by affiliated companies.
In August 2000, the Company expects to enter into a non-binding agreement
in principle to purchase all of the oil and gas related assets currently owned
by Mercury. This transaction will be subject to approval by the disinterested
members of the Company's Board of Directors. This acquisition will complete the
transfer of oil and gas properties from Mercury to Quicksilver, which began in
1999 as part of the formation of the Company. Independent appraisers retained by
the disinterested members of the Company's Board of Directors will determine the
value of the last of Mercury's oil and gas related assets to be transferred to
the Company. Payment for these assets will be made in cash, by issuance of note
payable to Mercury bearing a current market interest rate, and through
application of a $7,000,000 account receivable at June 30, 2000 owed to
Quicksilver by Mercury or any combination thereof. The account receivable is
related to revenue and expense activity previously performed by Mercury on
behalf of Quicksilver under the Management Agreement which was terminated July
1, 2000.
11
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following should be read in conjunction with the Company's financial
statements contained herein and in its Form 10-K for the year ended December 31,
1999, along with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in such Form 10-K. Any capitalized terms used
but not defined in the following discussion have the same meaning given to them
in the Form 10-K.
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such forward-
looking statements generally are accompanied by words such as "plan,"
"estimate," "budgeted," "expect," "predict," "anticipate," "projected,"
"should," "assume," "believe" or other words that convey the uncertainty of
future events or outcomes. Such forward-looking information is based upon
management's current plans, expectations, estimates and assumptions and is
subject to a number of risks and uncertainties that could significantly affect
current plans, anticipated actions, the timing of such actions and the Company's
financial condition and results of operations. As a consequence, actual results
may differ materially from expectations, estimates or assumptions expressed in
or implied by any forward-looking statements made by or on behalf of the
Company. Among the factors that could cause actual results to differ materially
are: fluctuations of the prices received or demand for the Company's oil and
natural gas, the uncertainty of drilling results and reserve estimates,
operating hazards, acquisition risk, requirements for capital, general economic
conditions, competition and government regulations, as well as the risks and
uncertainties discussed in this Quarterly Report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to time
in the Company's other public reports, filings and public statements.
CAPITAL RESOURCES AND LIQUIDITY
General
The following discussion compares the Company's financial condition at June
30, 2000, to its financial condition at December 31, 1999. The discussions of
cash flow and results of operations also compare the three and six-month periods
ended June 30, 2000, with the comparable periods of 1999. For the twelve months
ended December 31, 1999 and the six months ended June 30, 2000, the Company
spent approximately $43,500,000 and $174,300,000, respectively, on acquisition
and development activities. The capital program was financed from operations,
additional borrowings, restructured bank facility, monetization of a portion of
acquired Section 29 tax credits, sale of Subordinated Notes and sale of the
Company's common stock.
Cash Flow
The Company believes that its capital resources are adequate to meet the
requirements of its business. However, future cash flows are subject to a number
of variables including the level of production and oil and gas prices, and there
can be no assurance that operations and other capital resources will provide
cash in sufficient amounts to maintain planned levels of capital expenditures.
The Company's principal operating sources of cash include sales of natural
gas and crude oil and revenues from transportation and processing. The Company
sells approximately 73% of its natural gas production under long- term, fixed
price contracts, and swap agreements. As a result, the Company benefits from
significant predictability of its natural gas revenues. Commodity market prices
affect cash flow for that portion of natural gas not under contract as well as
most of the Company's crude oil sales.
The Company's net cash provided by operations for the six months ended June
30, 2000 was $12,217,000, compared to $2,191,000 for the same period last year.
The increase resulted from higher earnings, primarily as a result of the
acquisition of CMS properties, somewhat offset by an increase in working
capital, and a $2,450,000 account receivable not collected in the first quarter
of 1999.
12
The Company's net cash used in investing for the six months ended June 30,
2000 was $174,300,000. Investing activities were comprised primarily of
additions to oil and gas properties through the acquisition of CMS properties
and development and, to a lesser extent, exploration of oil and gas properties
and additions of field service assets.
The Company's activities have been financed through a combination of
operating cash flow, bank borrowings, Subordinated Notes and monetization of a
portion of acquired Section 29 tax credits ("2000 Section 29 Tax Credit
Monetization"). The Company's net cash from financing activities for the six
months ended June 30, 2000 was $163,952,000. Sources of financing used by the
Company have been borrowings under its Credit Facility, Subordinated Notes and
monetization of a portion of Section 29 tax credits.
RESULTS OF OPERATIONS
Primarily as a result of the increased production and product prices, net
income and cash flow from operations increased between the six months of 1999
and the six months of 2000 as shown below.
Six Months Ended
June 30,
---------------------------------
(Per Mcfe data)
2000 1999
------------ -------------
Revenue $ 3.08 $ 2.29
Production taxes (0.16) (0.15)
Lease operating expenses (0.91) (0.77)
------------ -------------
Production netback 2.01 1.37
General and administrative expenses (0.19) (0.20)
Net cash interest expense (0.57) (0.41)
Other (0.46) (0.52)
------------ -------------
Cash flow from operations (a) 0.79 0.24
Depletion and depreciation (0.73) (0.67)
Other non-cash items 0.27 0.40
------------ -------------
Net income (loss) $ 0.33 $(0.03)
============ =============
(a) Represents cash flow provided by operations, exclusive of depletion,
depreciation and amortization and the net change in non-cash working capital
balances.
Three Months Ended June 30, 2000 Compared with the Three Months Ended June 30,
1999
The acquisition of oil and gas properties in Michigan from CMS Oil and Gas
Company on March 31, 2000, significantly increased Quicksilver's results of
operations for the quarter ended June 30, 2000.
For the Three Months Ended
June 30, 2000
---------------------------------------------------------------
QRI, excluding
CMS CMS TOTAL
-------------------- ----------------- -----------------
(In thousands, except volumes)
REVENUE
Production $ 14,773 $ 14,622 $ 29,395
Other income 2,339 2 2,341
-------------------- ----------------- -----------------
Total revenue 17,112 14,624 31,736
==================== ================= =================
EXPENSES
Operating expenses 5,015 4,965 9,980
Depletion and depreciation 4,039 3,182 7,221
General and administrative 1,684 13 1,697
Interest 2,805 3,967 6,772
-------------------- ----------------- -----------------
Total expenses 13,543 12,127 25,670
-------------------- ----------------- -----------------
Income before income taxes $ 3,569 $ 2,497 $ 6,066
==================== ================= =================
Gas volume in Mcf 4,110,698 3,983,871 8,094,569
==================== ================= =================
13
Revenues: Total revenues for the three months ended June 30, 2000 were
$31,736,000; an increase of 173.4% from the $11,606,000 reported in the three
months ended June 30, 1999. The increase was primarily due to higher volumes
from the acquisition of oil and gas properties from CMS.
The Company's revenues for the second quarter of 2000 increased
significantly over the comparable quarter last year as further shown below.
Three Months Ended
June 30,
---------------------------------------
2000 1999
--------------- ---------------
Average daily production volume
Gas - Mcf/d 88,951 42,464
Oil - Bbls/d 2,883 2,044
Natural gas liquid ("NGL") - Bbls/d 566 300
Product sale revenues (in thousands)
Natural gas sales $22,990 $ 8,168
Oil sales 5,516 2,535
NGL sales 889 254
--------------- ---------------
Total oil, gas and related product sales $29,395 $10,957
=============== ===============
Unit prices-including impact of hedges
Gas price per thousand cubic feet ("Mcf") $ 2.84 $ 2.11
Oil price per barrel ("Bbls") $ 21.03 $ 13.44
NGL per barrel ("Bbls") $ 17.27 $ 9.31
Gas sales of $22,990,000 in the second quarter of 2000 were 181.5% higher
than the $8,168,000 for the second quarter 1999. Gas volumes increased 109.5% to
8,094,569 Mcf in 2000 reflecting the additional production from the interests
purchased from Unocal in May 1999, and CMS in March 2000. Average gas prices
were $2.84 per Mcf in the second quarter ended June 30, 2000, $0.73 per Mcf
higher than the average price received in the 1999 period.
Oil sales grew 117.6% to $5,516,000 in the second quarter period ended June
30, 2000 compared to $2,535,000 in the 1999 period as a result of higher volumes
due to the CMS acquisition and higher prices. Crude oil production for the
second quarter 2000 was 262,351 barrels compared to 186,000 barrels in 1999.
Average oil sales prices in the second quarter were $21.03 per barrel compared
to $13.44 per barrel in 1999.
NGL sales increased 250% for the 2000-second quarter compared to the 1999-
second quarter. NGL price increases from $9.31 to $17.27 per Bbl and volumes
increased due to the CMS acquisition. Both contributed to the higher revenue.
Other income, which primarily consists of the recognition of deferred
income associated with the monetization of Section 29 tax credits, increased by
$1,692,000 to $2,341,000 in the second quarter of 2000 compared to $649,000 in
the comparable 1999 period as a result of production on the properties related
to the Section 29 tax credits monetization.
Expenses: Total expenses of $25,670,000 in the second quarter of 2000 were
127.8% higher than the $11,267,000 incurred in the second quarter of 1999.
Operating expenses of $9,980,000 increased 103.9% from the 1999 quarter
reflecting higher production. The increases were in compressor charges,
chemicals, transportation fees, field payroll, material and supplies, repairs,
maintenance, gas compression and property taxes. Most of the increases were
primarily a result of additional volumes produced from the Unocal and CMS
properties.
14
Depletion and Depreciation
Three Months Ended
(In thousands, except per unit amounts) June 30,
---------------------------------------------
2000 1999
------------------- ------------------
Depletion $6,801 $3,112
Depreciation of other fixed assets 420 202
------ ------
Total depletion and depreciation $7,221 $3,314
====== ======
Average DD&A cost per Mcfe $ 0.72 $ 0.64
====== ======
Depletion and depreciation increased to $7,221,000 in the second quarter of
2000 from $3,314,000 in the same period of 1999, as a result of production
volumes associated with the CMS properties, and an increase in the depletion
rate.
General and Administrative Expenses
General and administrative costs incurred during the second quarter of 2000
of $1,697,000 were 67% higher than in the 1999 period, reflecting higher
salaries, professional fees and franchise taxes due to the acquisitions of CMS
and Unocal properties.
Interest Expense
Interest expense of $6,772,000 in the second quarter increased 231.5% from
the comparable 1999 period reflecting higher debt levels due to the CMS
acquisition and higher effective interest rates in 2000.
Six Months Ended June 30, 2000 Compared with the Six Months Ended June 30, 1999
The acquisition of oil and gas properties in Michigan from CMS Oil and Gas
Company on March 31, 2000, significantly increased Quicksilver's results of
operations for the six months ended June 30, 2000.
For the Six Months Ended
June 30, 2000
---------------------------------------------------------------
QRI, excluding
CMS CMS TOTAL
-------------------- ----------------- -----------------
(In thousands, except volumes)
REVENUE
Production $ 29,508 $ 14,622 $ 44,130
Other income 3,583 2 3,585
-------------------- ----------------- -----------------
Total revenue 33,091 14,624 47,715
-------------------- ----------------- -----------------
EXPENSES
Operating expenses 11,556 4,965 16,521
Depletion and depreciation 8,130 3,182 11,312
General and administrative 2,942 13 2,955
Interest 4,920 3,967 8,887
-------------------- ----------------- -----------------
Total expenses 27,813 12,127 39,675
-------------------- ----------------- -----------------
Income before income taxes $ 5,543 $ 2,497 $ 8,040
==================== ================= =================
Gas volume in Mcf 8,201,094 3,983,871 12,184,965
==================== ================= =================
Revenues: Total revenues for the six months ended June 30, 2000 were
$47,715,000; an increase of 128.2% from the $20,905,000 reported in the six
months ended June 30, 1999.
15
The Company's revenues for the first half of 2000 increased significantly
over the comparable period last year as further shown below.
Six Months Ended
June 30,
---------------------------------------
2000 1999
--------------- ---------------
Average daily production volume
Gas - Mcf/d 66,950 39,026
Oil - Bbls/d 2,577 1,591
NGL - Bbls/d 434 293
Product sale revenues (in thousands)
Natural gas sales $33,528 $15,755
Oil sales 9,074 3,483
NGL sales 1,528 509
--------------- ---------------
Total oil, gas and related product sales $44,130 $19,747
=============== ===============
Unit prices-including impact of hedges
Gas price per thousand cubic feet ("Mcf") $ 2.75 $ 2.23
Oil price per barrel ("Bbls") $ 19.35 $ 12.09
NGL per barrel ("Bbls") $ 19.34 $ 9.61
Gas sales of $33,528,000 in the first six months of 2000 were 112.8% higher
than the $15,755,000 for the same period in 1999 as gas volumes increased 72.5%
to 12,184,965 Mcf in 2000 reflecting the additional production from the
interests purchased from Unocal in May 1999, and CMS in March 2000 and increased
prices. Average gas prices were $2.75 per Mcf in the six months ended June 30,
2000, $0.52 per Mcf higher than the average received in the 1999 period.
Oil sales grew 160.5% to $9,074,000 in the six months ended June 30, 2000
compared to $3,483,000 in the 1999 comparable period as a result of higher
volumes from the CMS acquisition and higher prices. Crude oil production for the
six months ended June 30, 2000 was 468,981 barrels compared to 288,000 barrels
for same period in 1999. Average oil sales prices in the first six months of
2000 were $19.35 per barrel compared to $12.09 per barrel for the first half of
1999.
NGL sales increased 200.2% for the first half of 2000 compared to the first
half of 1999. NGL prices increased from $9.61 to $19.34 per Bbl.
Other income, which primarily consists of the recognition of deferred
income associated with the monetization of Section 29 tax credits, increased by
$2,427,000 to $3,585,000 in the first six months of 2000 compared to $1,158,000
in the comparable 1999 period as a result of production on the properties
related to the 2000 Section 29 tax credits monetization.
Expenses: Total expenses of $39,675,000 in the first half of 2000 were 85%
higher than the $21,442,000 incurred in the first and second quarters of 1999.
Operating expenses of $16,521,000 increased 96.9% from the 1999 first and second
quarters reflecting higher production. The increases were in compressor charges,
chemicals, transportation fees, field payroll, material and supplies, repairs,
maintenance, gas compression and property taxes and were primarily the result of
operating the acquired Unocal and CMS properties.
Depletion and Depreciation
Six Months Ended
(In thousands, except per unit amounts) June 30,
---------------------------------------------
2000 1999
------------------- ------------------
Depletion $10,764 $5,819
Depreciation of other fixed assets 548 310
------- ------
Total depletion and depreciation $11,312 $6,129
======= ======
Average DD&A cost per Mcfe $ 0.73 $ 0.67
======= ======
16
Depletion and depreciation increased to $11,312,000 in the first half of
2000 from $6,129,000 in the same period of 1999, as a result of higher
production volumes and a higher depletion rate.
General and Administrative Expenses
General and administrative costs incurred during the first six months of
2000 totaled $2,955,000 and were 60.9% higher than in the 1999 period,
reflecting higher salaries, professional fees and franchise taxes required of a
larger public company due to the acquisitions of CMS and Unocal.
Interest Expense
Interest expense of $8,887,000 in the first six months of 2000 increased
137.7% from the comparable 1999 period reflecting higher debt levels in 2000 due
to the CMS acquisition and higher effective interest rates in 2000.
Income Taxes Six Months Ended
June 30,
----------------------------------------------
2000 1999
------------------- ------------------
Income tax provision (benefit) (in thousands) $2,993 $ (135)
Average income tax expense (benefit) per Mcfe $ 0.19 $(0.01)
Effective tax rate 37.22% 34%
Based on the Company's pre-tax income of $8,040,000 for the six months
ended June 30, 2000, the income tax provision for the six month period was
established using an effective tax rate of 37.22%. As of June 30, 2000, the
Company had a deferred tax liability of $40,526,000. The increase in the
deferred tax liability over the previous year is primarily the result of the
acquisition of the Terra stock.
17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company uses derivative financial instruments in limited instances and
for other trading purposes to manage risk as it relates to gas and oil sales and
interest rates. Where the Company has fixed interest rates or gas and oil sales
through the use of swaps, futures or forward contracts, the Company has
mitigated the downside risk of adverse price and rate movements: however, it has
also limited future gains from favorable movements.
Market and Credit Risk
The Company addresses market risk related to these instruments by selecting
instruments whose value fluctuations highly correlate with the underlying item
being hedged. Credit risk related to derivative financial instruments, which is
minimal, is managed by requiring high credit standards for counter parties and
monthly settlements.
Commodity Price Risk
The Company enters into various financial contracts to hedge its exposure
to commodity price risk associated with anticipated future oil and gas
production. These contracts consist of price ceilings and floors, no-cost
collars and fixed price swaps.
The Company sells approximately 73% of its natural gas under long-term,
fixed price contracts, and swap agreements and therefore, benefits from
significant predictability of its natural gas revenues. Commodity market price
fluctuations affect those natural gas volumes that are not sold under contract,
and also affect crude oil sales that are not hedged.
As of June 30, 2000, the Company had zero-cost financial contracts
("collars") in place that hedged a total of 1,000 barrels of oil per day
("MBbls/d") through July 2000 and 500 barrels of oil per day through November
2000. The first set of contracts had a weighted average ceiling price of
approximately $20.65 per barrel and the second set of contracts had a ceiling
price of $25.85 per barrel. These contracts had a floor price of $18.50 and
$21.00 per barrel, respectively.
The Company also has fixed price swaps for 500 barrels per day at $19.35
per barrel through July 2000 and 7,500 mcf per day at $2.40 per mcf through
April 2004. MGV Energy Inc. has a fixed price swap for an average of 20,852 Giga
Joules (which approximates 20,800 mcf) per month at $3.09 Canadian through
October 2004.
Gain or loss on these derivative commodity contracts would be offset by a
corresponding gain or loss on the hedged commodity positions. Based on the
future market prices at June 30, 2000 the Company would expect to pay
approximately $32,000,000 on the natural gas contracts, and $1,700,000 on crude
oil contracts.
As a result of these hedging activities for the six months ended June 30,
2000, gas revenues were decreased by $2,417,480 and oil revenues were decreased
by $2,570,767.
Interest Rate Risk
The Company has an interest rate swap agreement covering $25,000,000 of its
debt through June 17, 2002, which converts the debt floating LIBOR base rate to
a 5.70% fixed rate. The Company had another agreement covering $25,000,000
through May 8, 2000, which converted the debt floating LIBOR base rate to a
5.75% fixed rate. Interest expense for the six months ended June 30, 2000 was
$167,145 lower as a result of interest rate swaps.
18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 6, 2000, the Company held its 2000 annual meeting of shareholders.
The number of shares outstanding on the record date of the meeting and the
number of shares represented in person or by proxy at the meeting, were as
follows:
Class of Stock Number of Shares Outstanding Number of Shares Present
- ------------------------------------------------------------------------
Common 17,984,092 14,132,176
At the meeting, Ms. Anne Darden Self and Messrs. Mark Warner, Steven
Morris, Randall Kent, Yandell Rogers, Frank Darden, Thomas Darden and Glenn
Darden were elected as directors of the Company. Proxies for the meeting were
solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934,
as amended, and there was no solicitation in opposition to the management's
nominees as listed in the proxy statement.
The remaining matters acted upon at the annual meeting were:
. A proposal to approve the Company's 1999 Stock Option and Retention Stock
Plan; and
. Ratification of the appointment by the Board of Directors of independent
public accountants of the Company for the fiscal year ending December 31,
2000.
All shares represented at the meeting were voted in favor of the proposal
to approve the plan and the ratification of the appointment, with the exception
of 422,128 votes against the proposal to approve the plan and 43,423 abstentions
and 812,538 votes against the ratification of the appointment and 47,370
abstentions.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
15 Awareness letter of Deloitte & Touche LLP.
23 Consent of Holditch-Reservoir Technologies Consulting
Services
27 Financial Data Schedule
(b) Reports on Form 8-K:
On April 14, 2000, the Company filed a current report on SEC Form 8-K
announcing the acquisition from CMS Oil and Gas Company. The Company filed an
amendment to the Form 8-K on SEC Form 8-K/A on June 15, 2000, containing
financial statements of the assets acquired.
19
Quicksilver Resources Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 10, 2000
Quicksilver Resources Inc.
By: /s/ Glenn Darden
-----------------------------------
Glenn Darden
President and Chief Executive
Officer
By: /s/ Bill Lamkin
-----------------------------------
Bill Lamkin,
Executive Vice President, Chief
Financial Official and Secretary
20