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 March 31, 2001
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, Suite 300, 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 May 11, 2001, the registrant had 18,603,793 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 March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 5
and 2000
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 6
and 2000
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
ITEM 1. Financial Statements
INDEPENDENT AUDITORS' 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 March 31, 2001, and the related
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews 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 reviews, 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, 2000, 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 February 26, 2001, 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, 2000, 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
May 11, 2001
3
Quicksilver Resources Inc.
Condensed Consolidated Balance Sheets
In thousands, except share amounts-Unaudited
March 31, December 31,
ASSETS 2001 2000
--------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 8,266 $ 12,833
Accounts receivable, net of allowances for
doubtful accounts 32,347 32,595
Inventories and other current assets 3,293 2,021
--------- ------------
Total current assets 43,906 47,449
INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES 14,190 12,570
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 375,056 374,099
OTHER ASSETS 6,129 5,993
--------- ------------
$ 439,281 $ 440,111
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 907 $ 4,149
Accounts payable 8,330 12,787
Accrued derivative losses 24,432 -
Accrued liabilities 28,977 29,578
--------- ------------
Total current liabilities 62,646 46,514
LONG-TERM DEBT 234,333 239,986
UNEARNED REVENUE 16,709 18,958
DEFERRED DERIVATIVE LOSSES 62,585 -
OTHER LONG-TERM LIABILITIES 150 147
DEFERRED INCOME TAXES 22,664 47,748
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
Authorized 10,000,000 shares, 1 share
issued and outstanding - -
Common stock, $0.01 par value
Authorized 40,000,000 shares, 22,354,645
and 22,332,950 issued, respectively 224 223
Paid in capital in excess of par value 76,235 75,544
Treasury stock of 3,750,852 and 3,765,947
shares, respectively (14,616) (14,675)
Retained earnings 35,083 25,679
Accumulated other comprehensive loss (56,732) (13)
--------- ------------
Total stockholders' equity 40,194 86,758
--------- ------------
$ 439,281 $ 440,111
========= ============
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
March 31,
--------------------------
2001 2000
------------ ------------
REVENUE
Oil, gas and related product sales $ 38,492 $ 14,735
Other revenue 4,940 549
------------ ------------
Total revenues 43,432 15,284
------------ ------------
EXPENSES
Oil and gas production costs 13,284 5,992
Other operating costs 356 -
Depletion and depreciation 7,085 4,091
Provision for doubtful accounts (760) -
General and administrative 2,586 1,117
------------ ------------
Total expenses 22,551 11,200
------------ ------------
Operating income 20,881 4,084
Other (income) expense-net (226) (5)
Interest expense 6,460 2,115
------------ ------------
Income before income taxes 14,647 1,974
Income tax expense 5,243 705
------------ ------------
NET INCOME $ 9,404 $ 1,269
============ ============
Net income per share:
Basic $ 0.51 $ 0.07
Diluted $ 0.50 $ 0.07
Weighted average number of common shares:
Basic 18,574 18,267
Diluted 18,966 18,436
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 Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 9,404 $ 1,269
Charge and credits to net income not affecting cash
Depletion and depreciation 7,085 4,091
Deferred income taxes 5,135 554
Recognition of unearned revenue (2,249) -
Other (73) 179
Changes in assets and liabilities, excluding the effect of the acquisition
Accounts receivable 207 3,237
Inventory, prepaid expenses and other (1,455) (35)
Accounts payable (4,457) (4,654)
Accrued liabilities (549) 2,200
---------- ----------
NET CASH FROM OPERATING ACTIVITIES 13,048 6,841
---------- ----------
INVESTING ACTIVITIES
Acquisition of properties and equipment (6,466) (168,380)
Acquisition of pipeline and facilities (1,958) (2,469)
Advances to equity affiliates - net (377) -
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (8,801) (170,849)
---------- ----------
FINANCING ACTIVITIES
Notes payable, bank proceeds 3,000 236,000
Principal payments on long-term debt (11,895) (94,853)
Monetization of Section 29 tax credits - 25,000
Exercise of stock options 81 -
Deferred financing and stock registration costs - (2,446)
---------- ----------
NET CASH (USED FOR) FROM FINANCING ACTIVITIES (8,814) 163,701
---------- ----------
NET DECREASE IN CASH (4,567) (307)
CASH AT BEGINNING OF PERIOD 12,833 2,557
---------- ----------
CASH AT END OF PERIOD $ 8,266 $ 2,250
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 6,329 $ 2,709
========== ==========
Income taxes paid $ 130 $ -
========== ==========
Treasury shares issued for payment of directors' compensation $ 100 $ -
========== ==========
The accompanying notes are an integral part of these financial statements.
6
Quicksilver Resources Inc.
NOTES TO CONDENSED 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 March 31, 2001, and
the results of operations for the three months ended March 31, 2001 and 2000 and
cash flows for the three months ended March 31, 2001 and 2000.
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, 2000. The results of operations for the three-month period
ended March 31, 2001 are not necessarily indicative of the operating results to
be expected for the full fiscal year.
Reclassifications have been made for presentations adopted in 2001. The prior
period has been reclassified.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income 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 three months ended March 31, 2001 and 2000 there were no
adjustments to net income for purposes of calculating diluted net income per
common share. The following is a reconciliation of the weighted average common
shares used in the basic and diluted net income per common share calculations
for the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
-------------------------
2001 2000
---------- ----------
(Unaudited, in thousands)
Weighted average common shares-basic 18,574 17,984
Unregistered shares issuable to Unocal - 283
------ ------
Total weighted average common shares-basic 18,574 18,267
Potentially dilutive securities
Stock options 386 165
Stock warrants 6 4
------ ------
Total weighted average common shares-diluted 18,966 18,436
====== ======
Approximately 25,000 shares under option were excluded from the diluted net
income per share calculations as the exercise price exceeded the average market
price of the Company's common stock. Warrants representing 1,105,750 shares of
common stock were also excluded from the diluted net income per share
computations as the exercise price exceeded the average market price of the
Company's common stock.
2. CHANGE IN ACCOUNTING PRINCIPLE - HEDGING
On January 1, 2001, the Company adopted Statement of Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". It requires
that every derivative instrument be recorded on the balance sheet as either an
asset or liability measured at fair value. The statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. If hedge criteria are met, the
change in a derivative's fair value (for a cash flow hedge) is deferred in
stockholder's equity as a component of other comprehensive income. These
deferred gains and losses are recognized in income in the period in which the
hedged transaction is recognized in revenues to the extent the hedge is
effective. The ineffective portions of hedge returns are recognized currently in
earnings.
7
All derivatives within the Company were identified prior to January 1, 2001. The
Company designated, documented and assessed the hedging relationships, all of
which are cash flow hedges. These cash flow hedges include all of the Company's
financial fixed price gas swaps and interest rate swaps. Adoption by the Company
of the accounting standard as of January 1, 2001 resulted in the recognition of
$93.4 million of derivative liabilities with a cumulative effect of $60.3
million after tax as a decrease to other comprehensive income, a component of
stockholders' equity.
The change in carrying value of the Company's financial fixed price gas swaps
and interest rate swaps in the Company's balance sheet since January 1, 2001
resulted from a decrease in market prices for natural gas and interest rates.
This change in fair value was reflected in accumulated other comprehensive
income, net of deferred tax effects. Derivative liabilities reflected as current
in the March 31, 2001 balance sheet represent the estimated fair value of
contract settlements scheduled to occur over the subsequent twelve-month period
based on market prices for natural gas as of the balance sheet date. Because
present accounting rules do not provide for the accrual of the future cash flow
transactions the swaps were designed to hedge, an apparent working capital
deficit is created which does not, in management's opinion, accurately depict
the Company's true working capital position or its liquidity. These settlement
amounts are not due and payable until the monthly period that the related
underlying hedged transaction occurs. Settlement of the underlying hedged
transaction occurs in the following month.
The estimated fair values of financial fixed price gas swaps which extend
through April 2005 and interest rate swaps as of March 31 and January 1, 2001
are provided below. The associated carrying values of these swaps are equal to
the estimated fair values for each period presented.
March 31, January 1,
2001 2001
--------- ----------
(Unaudited, in thousands)
Derivative liabilities:
Fixed price natural gas financial swaps $84,072 $91,969
Interest rate swaps 2,945 1,443
------- -------
$87,017 $93,412
======= =======
The fair value of fixed price natural gas financial swaps as of March 31 and
January 1, 2001 was estimated based on market prices of natural gas for the
periods covered by the swaps. The net differential between the prices in each
swap and market prices for future periods, as adjusted for estimated basis, has
been applied to the volumes stipulated in each contract to arrive at an
estimated future value. This estimated future value was discounted on each swap
at rates commensurate with federal treasury instruments with similar contractual
lives. The determination of market prices for natural gas beyond a two-year
horizon is subject to significant judgment and estimation. As a result, the
fixed price natural gas financial swap value does not necessarily represent the
value a third party would pay to assume the Company's contract positions.
The fair value of interest rate swaps was based upon third-party estimates of
the fair value of such swaps.
3. LONG-TERM DEBT
March 31, 2001 December 31, 2000
-------------- -----------------
(Unaudited)
Long-term debt, in thousands, consists of:
Notes payable to banks-8.635% interest
at March 31, 2001 and December 31, 2000 $177,000 $180,000
Subordinated Notes-14.75% interest 53,000 53,000
Other loans 5,240 11,135
-------- --------
235,240 244,135
Less current maturities (907) (4,149)
-------- --------
$234,333 $239,986
======== ========
During the three months ended March 31, 2001, the Company reduced its total debt
outstanding through net principal repayments totaling $8,895,000. These
principal repayments included payment in full of the Company's note payable to
Compass Bank and MGV Energy Inc.'s note payable to Canadian Imperial Bank of
Commerce and a $3,000,000 reduction to the debt outstanding under the Company's
credit facility.
Quicksilver's credit facility is a three-year revolving credit facility that
matures on March 31, 2003 and 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 million. As of March 31, 2001,
the Company's borrowing base
8
was $210 million of which $32.6 million was available. On April 2, 2001, the
Company's interest rate was set at 6.755% through July 2, 2001. The loan
agreements for the credit facility contain certain dividend restrictions and
restrictive covenants, which, among other things, require the maintenance of a
minimum current ratio. Additionally, the purchaser agreement relating to the
Company's subordinated notes contains restrictive covenants, which, among other
things, require maintenance of working capital, a collateral coverage ratio and
an earnings ratio. The Company currently is in compliance with all such
restrictions.
4. UNEARNED REVENUE
On March 31, 2000, the Company conveyed to a bank Section 29 credits for 99.5%
of the interests acquired from CMS Oil and Gas Company, including the interests
in Terra Energy Ltd., in Devonian shale gas production from certain wells
located in Michigan. Cash proceeds received from the sale were $25 million and
were recorded as unearned revenue. Revenue is recognized as reserves are
produced. Revenue of $2,249,000 has been recognized in 2001 in other revenue.
5. STOCKHOLDERS' EQUITY
On February 1, 2001, the Company granted incentive stock options covering 44,100
shares of common stock to certain employees. These options were granted at an
exercise price of $9.80 and vest one year from the date of grant. No
compensation expense was recognized at the date of grant as the exercise price
was equal to the fair value of the common stock at the date of grant.
On March 8, 2001, 15,095 shares of the Company's common stock, that were held as
treasury stock, were issued to non-employee directors in payment of compensation
for 2000 and 21,695 shares of common stock were issued as a result of the
exercise of stock options by Company employees. There were 147,229 stock options
exercisable at March 31, 2001.
The allocation of the assets acquired and liabilities assumed in an acquisition
of assets from Mercury Exploration Company ("Mercury Acquisition") effective
July 1, 2000 was updated in March 2001. The update increased paid in capital by
$570,000. Because the transaction was accounted for as an acquisition of
companies under common control, the excess of the purchase price over book value
(Mercury's historical book value) was accounted for as a reduction of paid in
capital.
Comprehensive Loss
Three Months Ended
March 31,
-------------------------
2001 2000
-------- ------
(Unaudited, in thousands)
Net income $ 9,404 $1,269
Other comprehensive loss, net of tax:
Adoption of SFAS No. 133 at January 1, 2001 (60,304)
Reclassification adjustments - hedge settlements 9,953 -
Change in fixed-price derivative fair value (5,857) -
Change in foreign currency translation adjustment (511) -
-------- ------
Comprehensive loss $(47,315) $1,269
======== ======
6. CONTINGENCIES
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 recovered $1,629,000 in the second and third quarters of
2000 and $279,000 was recorded as a recovery of the 1999 provision for doubtful
accounts in 2000. In the first quarter of 2001, the Company recorded $760,000 of
additional recovery received in March 2001. The Company anticipates that
additional amounts will be recovered within the next six months.
7. RELATED PARTY TRANSACTIONS
The Darden Family has effective beneficial ownership of 56.6.% of Quicksilver's
shares outstanding including shares owned by Mercury Exploration Company
("Mercury") and Quicksilver Energy L.C. Thomas Darden, Glenn Darden and Anne
Darden Self are officers and directors of the Company. During the first quarter
of 2001, Quicksilver paid $1,232,937 of accounts payable associated with the
purchase of assets from Mercury effective July
9
1, 2000, $243,573 for rent on the Company's headquarters building which is owned
by an entity controlled by the Darden Family, and $227,068 for principal and
interest on the note payable to Mercury associated with the acquisition of
assets from Mercury effect July 1, 2000. At March 31, 2001, Quicksilver owed
Mercury $377,000 of accounts payable and a $3,040,000 note payable.
10
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,
2000, 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 risks, 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.
RESULTS OF OPERATIONS
Summary Financial Data
Three Month Periods Ended March 31, 2001 and 2000
Three Months Ended March 31,
2001 2000
---------- ----------
(in thousands)
Total operating revenues $43,432 $15,284
Total operating expenses 22,551 11,200
Operating income 20,881 4,084
Net income 9,404 1,269
The Company recorded net income of $9,404,000 ($0.50 per diluted share) in the
three months ended March 31, 2001, compared to net income of $1,269,000 ($0.07
per diluted share) in the first quarter of 2000. The improvement was largely due
to the increase in production resulting from the March 31, 2000 acquisition of
properties from CMS Oil and Gas Company ("CMS Acquisition" or "CMS Properties")
and higher product prices.
Operating Revenues
Total revenues for the three months ended March 31, 2001 were $43,432,000; an
increase of 184% from the $15,284,000 reported for the three months ended March
31, 2000. Higher volumes contributed $17,212,000 of the revenue increase while
increased prices added $6,545,000 to revenue. Volume increases were primarily
the result of production from the CMS Properties acquired March 31, 2000. Other
revenue increased $4,391,000 from the prior year period primarily as a result of
deferred revenue recognition of $2,249,000 from the 2000 Section 29 tax credit
monetization and revenue from the Company's marketing and gas processing and
transportation operations of $2,335,000 which were acquired effective July 1,
2000.
11
Oil, Gas and Related Product Sales
The Company's production revenues for the three months ended March 31, 2001
increased significantly over the 2000 period as further shown below.
Three Months Ended March 31,
2001 2000
---------- ----------
Average daily production volume
Gas - Mcf/d 89,913 44,949
Oil - Bbls/d 2,845 2,271
Natural gas liquid ("NGL") - Bbls/d 647 302
Product sale revenues (in thousands)
Natural gas sales $30,728 $10,538
Oil sales 6,216 3,558
NGL sales 1,548 639
---------- ----------
Total oil, gas and NGL sales $38,492 $14,735
========== ==========
Unit prices-including impact of hedges
Gas price per Mcf $ 3.80 $ 2.58
Oil price per Bbl $ 24.28 $ 17.22
NGL price per Bbl $ 26.58 $ 23.22
Gas sales of $30,728,000 for the first quarter of 2001 were 192% higher than the
$10,538,000 for the comparable 2000 period. Gas volumes increased 98% in the
current period as a result of the CMS Acquisition. Additional volumes of
4,002,000 Mcf contributed $15,196,000 of additional revenue over the first
quarter of 2000. Average gas prices were $3.80 per Mcf for 2001, $1.22 per Mcf
higher than the average price received in the 2000 three-month period. Increased
prices added $4,994,000 of revenue in the 2001 first quarter.
Oil sales grew 75% to $6,216,000 for the three months ended March 31, 2001
compared to $3,558,000 in the first quarter of 2000. Crude oil production for
the 2001 period increased 49,000 barrels over the first quarter of 2000 to
256,000 barrels primarily as a result of volumes from the CMS Properties.
Additional sales volumes contributed revenue of $1,199,000 over the comparable
2000 period. Average oil sales prices for the first quarter of 2001 were $24.28
per barrel compared to $17.22 per barrel in the first quarter of 2000,
increasing revenues $1,459,000.
NGL sales of $1,548,000 for the first quarter of 2001 increased $909,000 as
compared to the first quarter of 2000. Additional NGL volumes, primarily from
the CMS Properties, added $817,000 of revenue. NGL prices increased from $23.22
to $26.58 per Bbl and added revenue of $92,000.
Other Revenues
Other revenue of $4,940,000 increased $4,391,000 compared to $549,000 in the
first quarter of 2000. Deferred revenue recognition from the 2000 Section 29 tax
credit monetization was $2,249,000. Revenue from the Company's marketing and gas
processing subsidiaries and affiliates was $2,335,000 which were acquired
through the acquisition of assets from Mercury Exploration Company ("Mercury
Acquisition") effective July 1, 2000.
Operating Expenses
First quarter operating expenses for 2001 were $22,551,000, 101% higher than the
$11,200,000 incurred in the first quarter of 2000. The increase reflects the
addition of the CMS Properties, marketing and gas processing subsidiaries and
additional activity associated with MGV Energy Inc. ("MGV"), the Company's
Canadian subsidiary, during the first three months of 2001.
Oil and Gas Production Costs
Oil and gas production costs increased $7,292,000, or 122%, from first quarter
2000 oil and gas production costs of $5,992,000. Lease operating expenses
increased 93%, or $4,796,000, to $9,938,000 reflecting an increase of 82% in
sales volumes from the comparable 2000 period and a $633,000 increase in
production overhead as a result of additional operated wells associated with the
CMS Acquisition and increased Canadian activity. Increased sales volumes and
higher prices resulted in an increase of $2,496,000, or 294%, in severance tax
expense to $3,346,000 for the first quarter of 2001.
12
Other Operating Costs
Other operating costs of $356,000 are associated with the marketing and gas
processing and transportation subsidiaries of Quicksilver. These subsidiaries
became wholly-owned subsidiaries of Quicksilver upon completion of the Mercury
Acquisition.
Depletion and Depreciation
Three Months Ended March 31,
2001 2000
------------ ------------
(In thousands, except per unit amounts)
Depletion $6,364 $3,963
Depreciation of other fixed assets 721 128
------------ ------------
Total depletion and depreciation $7,085 $4,091
------------ ------------
Average depletion cost per Mcfe $ 0.64 $ 0.72
First quarter 2001 depletion and depreciation increased to $7,085,000 from
$4,091,000 in the first quarter of 2000. Depletion increased $2,401,000
primarily as a result of production volumes associated with the CMS Properties.
The increase was partially offset by a decrease in the depletion rate.
Depreciation increased primarily as a result of the gas processing and
transportation assets acquired in the Mercury Acquisition.
General and Administrative Expenses
General and administrative costs incurred during the three months ended March
31, 2001 were $2,586,000, 132% higher than the expense incurred in the first
quarter of 2000. Increases include higher salaries and related payroll expenses
($830,000), office and building rent expense ($281,000), directors' fees
($125,000), professional fees ($90,000) and shareholder and stock exchange costs
($65,000). These increases are related to the growth of the Company through the
CMS Acquisition, the Mercury Acquisition and increased activity associated with
MGV.
Interest and Other Income/Expense
Interest expense for the first quarter of 2001 was $6,460,000 an increase of
$4,345,000 from the comparable 2000 period. The increase was the result of
higher debt levels resulting from the CMS and Mercury acquisitions.
Income Tax Expense
The income tax provision of $5,243,000 was established using an effective U.S.
Federal tax rate of 35% and also included a current portion for $108,000 of
state income tax expense. Income tax expense increased over the prior year
period as a result of increased pretax income over the first quarter of 2000.
As of March 31, 2001, the Company had a deferred tax liability of $22,664,000.
The decrease in the deferred tax liability over the December 31, 2000 balance is
the result of the $30,623,000 deferred tax benefit associated with deferred
losses associated with hedge derivatives. The decrease is partially offset by
deferred tax expense $5,135,000 incurred for 2001.
CAPITAL RESOURCES AND LIQUIDITY
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 27% of its natural gas production under fixed-price long-
term contracts and an additional 42% of natural gas production is sold under
fixed-price swap agreements. As a result, the Company benefits from significant
predictability of its natural gas revenues. Commodity market prices affect cash
flows 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 three months ended March
31, 2001 was $13,048,000, compared to $6,841,000 for the same period last year.
The increase resulted from higher earnings partially offset by changes in
working capital.
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The Company's net cash used for investing activities for the three months ended
March 31, 2001 was $8,801,000. Investing activities were comprised primarily of
additions to oil and gas properties and, to a lesser extent, exploration and
additions of field service assets. The Company's activities have been financed
through operating cash flow.
The Company's net cash used for financing activities for the three months ended
March 31, 2001 was $8,814,000. The Company paid down various loans of $5,898,000
and $3,000,000 under its credit facility during the first quarter of 2001.
Cash from operations for the remainder of 2001 are expected to be sufficient to
fund the remainder of the Company's $54 million 2001 planned capital
expenditures and to repay a portion of the long-term debt.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has established policies and procedures for managing risk within its
organization, including internal controls. The level of risk assumed by the
Company is based on its objectives and capacity to manage risk.
Quicksilver's primary risk exposure is related to natural gas commodity prices.
The Company has mitigated the downside risk of adverse price movements through
the use of swaps, futures and forward contracts; however, it has also limited
future gains from favorable movements.
Commodity Price Risk
The Company enters into various financial contracts to hedge its exposure to
commodity price risk associated with anticipated future natural gas production.
These contracts have included price ceilings and floors, no-cost collars and
fixed price swaps. Quicksilver sells approximately 35,000 Mcf/day of natural
gas under long-term fixed price contracts at $2.48/Mcf through March 2009.
Approximately 25% of the volumes sold under these contracts are third-party
volumes controlled by the Company. Approximately 38,104 Mcf/day of its equity
natural gas are hedged using fixed price swap agreements. As a result, the
Company benefits from significant predictability of its natural gas revenues.
Commodity price fluctuations affect the remaining natural gas volumes as well as
the Company's crude oil and NGL volumes. Up to 4,500 Mcf/day of natural gas is
committed at market price through May 2004. Additional gas volumes of 16,500
Mcf/day are committed at market price through September 2008. Approximately 25%
of the natural gas volumes sold under these contracts are third-party volumes
controlled by Quicksilver.
Utilization of the Company's hedging program may result in natural gas and crude
oil realized prices varying from market prices that the Company receives from
the sale of natural gas and crude oil. As a result of the financial hedging
programs, revenues in the first quarter of 2001 and 2000 were $15,302,000 and
$1,487,000, respectively, lower than if the hedging program had not been in
effect.
The following table summarizes the Company's open financial hedge positions as
of March 31, 2001 related to natural gas production.
Weighted Ave
Product Type Contract Time Period Volume Price per Mcf Fair Value
- --------- --------------- ------------------------ ------------------ ------------------- -----------------
(in thousands)
Gas Fixed Price Apr 2001-2004 7,500 Mcfd $2.40 $(16,936)
Gas Fixed Price Apr 2001-Oct 2004 604 Mcfd $1.96 (1,718)
Gas Fixed Price Apr 2001-2005 10,000 Mcfd $2.79 (21,738)
Gas Fixed Price Apr 2001-2005 10,000 Mcfd $2.79 (21,840)
Gas Fixed Price Apr 2001-2005 10,000 Mcfd $2.79 (21,840)
--------
Total $(84,072)
========
The fair value of fixed price natural gas financial contracts as of March 31 and
January 1, 2001 was estimated based on market prices of natural gas for the
periods covered by the contracts. The net differential between the prices in
each contract and market prices for future periods, as adjusted for estimated
basis, has been applied to the volumes stipulated in each contract to arrive at
an estimated future value. This estimated future value was discounted on each
contract at rates commensurate with federal treasury instruments with similar
contractual lives. The
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determination of market prices for natural gas beyond a two-year horizon is
subject to significant judgment and estimation. As a result, the fixed price
natural gas financial contract value does not necessarily represent the value a
third party would pay to assume the Company's contract positions.
Interest Rate Risk
The Company has an interest rate swap agreement covering $25 million of its
variable-rate debt through June 17, 2002 that converts the debt floating LIBOR
base rate to a 6.86% fixed rate. The fair value of this swap was a loss of
$1,015,671 as of March 30, 2001. On October 2, 2000, the Company entered into an
additional interest rate swap agreement covering $50 million of its variable-
rate debt through March 31, 2003, which converts the debt floating LIBOR base
rate to a 6.78% fixed rate. The fair value of this swap was a loss of $1,928,774
as of March 30, 2001. Interest expense for the quarter ended March 31, 2001 was
$57,580 higher as a result of interest rate swaps.
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PART II - OTHER INFORMATION
On June 5, 2000, the Board of Directors of the Company approved the issuance of
$20,000 of the Company's common stock to each of Messrs. Steven M. Morris, D.
Randall Kent, W. Yandell Rogers, III, Mark Warner and Frank Darden as
compensation for their services as directors during 2000. Based upon the average
of the high and low closing prices of the Company's common stock on June 5,
2000, formal resolutions in respect of the year 2000 director compensation were
adopted by the Board of Directors on March 8, 2001 authorizing issuance of 3,019
shares of the Company's common stock to each of the individuals. The issuance of
the shares of common stock to the Company's directors is exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of such act.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
* 15 Awareness letter of Deloitte & Touche LLP.
* Filed herewith
(b) Reports on Form 8-K
None.
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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: May 14, 2001
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
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