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, 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 August 10, 2001, the registrant had 18,632,776 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, 2001 (Unaudited) and December 31, 2000 4
Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended
June 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended
June 30, 2001 and 2000 6
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 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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, 2001, and the related
condensed consolidated statements of income and cash flows for the three and six
month periods ended June 30, 2001 and 2000. 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, 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
August 8, 2001
3
Quicksilver Resources Inc.
Condensed Consolidated Balance Sheets
In thousands, except share amounts
June 30, December 31,
2001 2000
--------------- --------------
Unaudited
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,617 $ 12,833
Accounts receivable, net of allowance for doubtful accounts 34,044 32,595
Inventories and other current assets 2,978 2,021
--------------- --------------
Total current assets 45,639 47,449
INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES 15,298 12,570
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 388,528 374,099
OTHER ASSETS 5,201 5,993
--------------- --------------
$454,666 $440,111
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 907 $ 4,149
Accounts payable 12,286 12,787
Accrued derivative losses 12,691 -
Accrued liabilities 31,050 29,578
--------------- --------------
Total current liabilities 56,934 46,514
LONG-TERM DEBT 238,077 239,986
UNEARNED REVENUE 14,217 18,958
DEFERRED DERIVATIVE LOSSES 37,401 -
OTHER LONG-TERM LIABILITIES 166 147
DEFERRED INCOME TAXES 38,316 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,
22,383,628 and 22,332,950 issued, respectively 224 223
Paid in capital in excess of par value 76,364 75,544
Treasury stock of 3,750,852 and 3,765,947 shares, respectively (14,616) (14,675)
Retained earnings 40,087 25,679
Accumulated other comprehensive loss (32,504) (13)
--------------- --------------
Total stockholders' equity 69,555 86,758
--------------- --------------
$454,666 $440,111
=============== ==============
The accompanying notes are an integral part of these financial statements.
4
Quicksilver Resources Inc.
Condensed Consolidated Statements of Income
In thousands, except per share data - Unaudited
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
----------- ------------ ----------- ------------
REVENUES
Oil, gas and related products
sales $33,418 $29,395 $71,910 $44,130
Other revenue 4,869 2,842 9,809 3,391
------- ------- ------- -------
Total revenues 38,287 32,237 81,719 47,521
------- ------- ------- -------
EXPENSES
Oil and gas production costs 15,351 10,648 28,635 16,640
Other operating costs 296 - 652 -
Depletion and depreciation 7,362 7,221 14,447 11,312
Provision for doubtful accounts (311) - (1,071) -
General and administrative 1,940 1,540 4,526 2,657
------- ------- ------- -------
Total expenses 24,638 19,409 47,189 30,609
------- ------- ------- -------
Operating income 13,649 12,828 34,530 16,912
Other income-net (188) (10) (414) (15)
Interest expense 6,082 6,772 12,542 8,887
------- ------- ------- -------
Income before income taxes 7,755 6,066 22,402 8,040
Income tax expense 2,751 2,288 7,994 2,993
------- ------- ------- -------
NET INCOME $ 5,004 $ 3,778 $14,408 $ 5,047
======= ======= ======= =======
Net income per share:
Basic $ 0.27 $ 0.21 $ 0.77 $ 0.28
Diluted $ 0.26 $ 0.21 $ 0.75 $ 0.27
Weighted average number of common shares:
Basic 18,610 18,283 18,592 18,283
Diluted 19,265 18,406 19,105 18,417
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,
------------------------------------------
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 14,408 $ 5,047
Charges and credits to net income not affecting cash
Depletion and depreciation 14,447 11,312
Deferred income taxes 7,822 3,589
Recognition of unearned revenue (4,741) (2,357)
Other 96 754
Changes in assets and liabilities, excluding the
effect of the acquisition
Accounts receivable (1,449) (7,764)
Inventory, prepaid expenses and other (737) 135
Accounts payable (501) (5,019)
Accrued liabilities 1,491 6,520
-------- ---------
NET CASH FROM OPERATING ACTIVITIES 30,836 12,217
-------- ---------
INVESTING ACTIVITIES
Acquisition of properties and equipment (29,062) (171,831)
Acquisition of pipeline and facilities - (2,469)
Advances to equity affiliates - net (1,089) -
Proceeds from sale of assets 40 -
-------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (30,111) (174,300)
-------- ---------
FINANCING ACTIVITIES
Notes payable, bank proceeds 8,000 250,118
Principal payments on long-term debt (13,151) (105,129)
Monetization of Section 29 tax credits - 25,000
Exercise of stock options 210 -
Deferred financing and stock registration costs - (6,037)
-------- ---------
NET CASH (USED FOR) FROM FINANCING ACTIVITIES (4,941) 163,952
-------- ---------
NET INCREASE (DECREASE) IN CASH (4,216) 1,869
CASH AT BEGINNING OF PERIOD 12,833 2,557
-------- ---------
CASH AT END OF PERIOD $ 8,617 $ 4,426
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 12,650 $ 6,177
======== =========
Income taxes paid $ 104 $ 60
======== =========
Treasury shares of 15,095 issued for payment of
directors' compensation $ 100 $ -
======== =========
Common stock of 93,773 shares issued for Unocal
acquisition $ - $ 696
======== =========
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 June 30, 2001, and
the results of operations for the six months ended June 30, 2001 and 2000 and
cash flows for the six months ended June 30, 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 six-month period
ended June 30, 2001 are not necessarily indicative of the operating results to
be expected for the full fiscal year.
Prior period reclassifications have been made for presentations adopted in 2001.
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 and six months ended June 30, 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 and six months ended June 30, 2001 and 2000.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------ ------------- ------------
(Unaudited, in thousands) (Unaudited, in thousands)
Weighted average common shares-basic 18,326 17,984 18,308 17,984
Unregistered shares issuable to MGV shareholders 284 - 284 -
Unregistered shares issuable to Unocal - 299 - 299
------ ------ ------ ------
Total weighted average common shares-basic 18,610 18,283 18,592 18,283
Potentially dilutive securities
Stock options 534 119 477 130
Stock warrants 121 4 36 4
------ ------ ------ ------
Weighted average common shares-diluted 19,265 18,406 19,105 18,417
====== ====== ====== ======
Warrants representing 550,000 shares of common stock were excluded from the 2001
diluted net income per share computations as the exercise price exceeded the
average market price of the Company's common stock. In 2000, approximately
225,000 shares under option and warrants representing 1,128,000 shares were
excluded from the diluted net income per share computation because exercise
prices exceeded the average market price of the Company's stock during the
period.
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 existing 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
included 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 and floating
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 June 30, 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 and floating price gas swaps,
which extend through April 2005 and interest rate swaps as of June 30 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.
June 30, January 1,
2001 2001
------------ ------------
(Unaudited, in thousands)
Derivative liabilities:
Fixed price natural gas financial swaps $46,861 $91,969
Floating price natural gas financial 168 -
swaps
Interest rate swaps 3,063 1,443
------- -------
$50,092 $93,412
======= =======
The fair value of natural gas financial swaps as of June 30 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 natural gas
financial swap values do 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
June 30, 2001 December 31, 2000
------------- ----------------
(Unaudited)
Long-term debt, in thousands, consists of:
Notes payable to banks-6.755% and 8.635%
interest at June 30, 2001 and December 31, 2000 $181,000 $180,000
Subordinated Notes-14.75% interest 53,000 53,000
Other 4,984 11,135
-------- --------
238,984 244,135
Less current maturities (907) (4,149)
-------- --------
$238,077 $239,986
======== ========
During the six months ended June 30, 2001, the Company reduced its total debt
outstanding through net principal repayments totaling $5,151,000. 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 other scheduled principal repayments. These repayments were partially
offset by $1,000,000 of additional net borrowings under the Company's credit
facility.
8
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 June 30, 2001,
the Company's borrowing base was $210 million of which $28.4 million was
available. On July 2, 2001, the Company's interest rate was set at 5.665%
through October 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
purchase 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 tax 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 $4,741,000 has been recognized in 2001 in other revenue.
5. STOCKHOLDERS' EQUITY
On February 1, 2001, the Company granted incentive stock options covering 46,100
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, which were held
as treasury stock, were issued to non-employee directors in payment of
compensation for 2000. During 2001, 50,678 shares of common stock have been
issued as a result of the exercise of stock options by Company employees. There
were stock options covering 122,913 shares of the Company's common stock
exercisable at June 30, 2001.
Comprehensive Income (Loss)
Three Months Ended Six Months Ended
June 30 June 30,
------------------------------ --------------------------------
2001 2000 2001 2000
------------- ------------ -------------- ------------
(Unaudited, in thousands) (Unaudited, in thousands)
Net income $ 5,004 $3,778 $ 14,408 $5,047
Other comprehensive loss, net of tax:
Adoption of SFAS No. 133 at January 1, 2001 - - (60,304) -
Reclassification adjustment - hedge settlements 4,451 - 14,404 -
Change in fixed-price derivative fair value 19,450 - 13,593 -
Change in foreign currency translation adjustment 327 - (184) -
------- ------ -------- ------
Comprehensive income (loss) $29,232 $3,778 $(18,083) $5,047
======= ====== ======== ======
6. 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 six
months of 2001, Quicksilver paid $1,232,937 of accounts payable associated with
the purchase of assets from Mercury effective July 1, 2000, $365,360 for rent
on the Company's headquarters building which is owned by an entity controlled by
the Darden Family, and $455,281 for principal and interest on the note payable
to Mercury associated with the acquisition of assets from Mercury effect July 1,
2000. At June 30, 2001, Mercury owed Quicksilver $232,210 of accounts
receivable and Quicksilver owed Mercury a $2,880,000 note payable.
9
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 June 30, 2001 and 2000
Three Months Ended June 30,
2001 2000
------------- -------------
(in thousands)
Total operating revenues $38,287 $32,237
Total operating expenses 24,638 19,409
Operating income 13,649 12,828
Net income 5,004 3,778
The Company recorded net income of $5,004,000 ($0.26 per diluted share) in the
three months ended June 30, 2001, compared to net income of $3,778,000 ($0.21
per diluted share) in the second quarter of 2000. The improvement was largely
due to higher product prices and results of operations for the Company's
marketing, gas processing and transportation operations acquired effective July
1, 2000 from Mercury Exploration Company ("Mercury Acquisition").
Operating Revenues
Total revenues for the three months ended June 30, 2001 were $38,287,000; an
increase of 19% from the $32,237,000 reported for the three months ended June
30, 2000. Higher volumes contributed $1,461,000 of the revenue increase while
increased prices added $2,562,000 to revenue. Other revenue increased
$2,027,000 from the prior year period primarily as a result of $1,244,000 of
revenue from the Company's marketing, gas processing and transportation
operations. The Company also recorded $580,000 of other revenue from the
settlement of the 1999 bankruptcy of one of its natural gas purchasers. Total
bankruptcy proceeds received were in excess of estimated uncollectible accounts
receivable charged to earnings in 1999.
10
Oil, Gas and Related Product Sales
The Company's production volumes, revenues and prices for the three months ended
June 30, 2001 and 2000 are detailed as shown below.
Three Months Ended June 30,
2001 2000
---------- -----------
Average daily sales volume
Gas - Mcf/d 90,847 88,951
Oil - Bbls/d 3,382 2,883
Natural gas liquid ("NGL") - Bbls/d 497 566
Product sale revenues (in thousands)
Natural gas sales $25,512 $22,990
Oil sales 7,081 5,516
NGL sales 825 889
------- -------
Total oil, gas and NGL sales $33,418 $29,395
======= =======
Unit prices-including impact of hedges
Gas price per Mcf $ 3.09 $ 2.84
Oil price per Bbl $ 23.01 $ 21.03
NGL price per Bbl $ 18.25 $ 17.27
Gas sales of $25,512,000 for the second quarter of 2001 were 11% higher than the
$22,990,000 for the comparable 2000 period. Additional volumes of 173,000 Mcf
contributed $532,000 of additional revenue over the second quarter of 2000.
During the second quarter, the Company received information identifying
properties where payouts occurred in prior periods. As a result, reported
natural gas volumes include 502,000 Mcf for these payouts. Excluding the prior
period volumes, second quarter production decreased 329,000 Mcf as a result of
delays in the Company's 2001 development drilling program. The delays are the
result of backlogged drilling permit processing and drilling rig availability.
Average gas prices were $3.09 per Mcf for 2001, $0.25 per Mcf higher than the
average price received in the 2000 three-month period. Increased prices added
$1,990,000 of revenue in the second quarter of 2001.
Oil sales grew 28% to $7,081,000 for the three months ended June 30, 2001
compared to $5,516,000 in the second quarter of 2000. Crude oil production for
the 2001 period increased 45,000 barrels over the second quarter of 2000 to
308,000 barrels. Additional sales volumes contributed revenue of $1,044,000
over the comparable 2000 period. Average oil sales prices for the second
quarter of 2001 were $23.01 per barrel compared to $21.03 per barrel in the
second quarter of 2000, increasing revenues $521,000.
Other Revenues
Other revenue of $4,869,000 increased $2,027,000 compared to $2,842,000 in the
second quarter of 2000. Revenue from the Company's marketing, gas processing
and transportation operations was $1,244,000. These entities were acquired in
the Mercury Acquisition effective July 1, 2000. Also, the Company recorded
$580,000 of revenue from proceeds received in settlement of the 1999 bankruptcy
of one of its natural gas purchasers. Total bankruptcy proceeds received were
in excess of estimated uncollectible accounts receivable charged to earnings in
1999.
Operating Expenses
Second quarter operating expenses for 2001 were $24,638,000 and 27% higher than
the $19,409,000 incurred in the second quarter of 2000. Second quarter 2001
expense increases included higher production expense of $4,703,000 due primarily
to increased workover and maintenance activity, expenses associated with prior
year sales volumes and increased well counts, as well as continued cost
inflation. The second quarter of 2001 also included expense for the Company's
marketing, gas processing and transportation operations and additional general
and administrative expense.
Oil and Gas Production Costs
Oil and gas production costs increased $4,703,000, or 44%, from second quarter
2000 expenses of $10,648,000. Second quarter 2001 lease operating expenses
increased 48%, or $4,380,000, to $13,499,000. The increase was primarily the
result of accelerated well workover and compressor maintenance costs of
$1,200,000 and costs of $810,000 associated with payout volumes recognized
currently. Increased expense also included additional overhead of $690,000 due
to higher well counts and additional headcount added in the second half of 2000
due to
11
activity associated with the CMS Acquisition, higher expenses of $310,000
resulting from increased Canadian operating activity and continued cost
inflation. Increased sales volumes and higher prices resulted in an increase of
$323,000, or 21%, in severance tax expense to $1,852,000 for the second quarter
of 2001.
Other Operating Costs
Other operating costs of $296,000 are associated with the marketing, gas
processing and transportation operations of Quicksilver. These operations were
acquired in the Mercury Acquisition.
Depletion and Depreciation
Three Months Ended June 30,
2001 2000
------------------- ------------------
(In thousands, except per unit amounts)
Depletion $6,618 $6,801
Depreciation of other fixed assets 744 420
------ ------
Total depletion and depreciation $7,362 $7,221
====== ======
Average depletion cost per Mcfe $ 0.64 $ 0.68
Second quarter 2001 depletion and depreciation increased to $7,362,000 from
$7,221,000 in the second quarter of 2000. Depletion decreased $183,000
primarily as a result of a decrease in the depletion rate partially offset by an
increase in sales volumes. 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 June 30,
2001 were $1,940,000, 26% higher than the expense incurred in the second quarter
of 2000. The increase is primarily the result of higher salaries and related
payroll expenses due to the addition of personnel attributable to the growth of
the Company through the CMS and Mercury Acquisitions.
Interest and Other Income/Expense
Interest expense for the second quarter of 2001 was $6,082,000, a decrease of
$690,000 from the comparable 2000 period. The decrease was the result of lower
debt levels resulting from debt repayments and a decrease in the interest rate
for the Company's credit facility. Other income for the second quarter of 2001
consisted primarily of interest income from invested operating cash balances.
Income Tax Expense
The income tax provision of $2,751,000 was established using an effective U.S.
Federal tax rate of 35% and also included a current portion for $60,000 of state
income tax expense. Income tax expense increased over the prior year period as a
result of increased pretax income over the second quarter of 2000.
Summary Financial Data
Six Month Periods Ended June 30, 2001 and 2000
\
Six Months Ended June 30,
2001 2000
------------ -------------
(in thousands)
Total operating revenues $81,719 $47,521
Total operating expenses 47,189 30,609
Operating income 34,530 16,912
Net income 14,408 5,047
The Company recorded net income of $14,408,000 ($0.75 per diluted share) in the
six months ended June 30, 2001, compared to net income of $5,047,000 ($0.27 per
diluted share) in the first half of 2000. The improvement was largely due to
the first quarter 2001 production from the CMS Properties acquired March 31,
2000 and higher product prices.
12
Operating Revenues
Total revenues for the six months ended June 30, 2001 were $81,719,000; an
increase of 72% from the $47,521,000 reported for the comparable 2000 period.
Higher volumes contributed $17,146,000 of the revenue increase while increased
prices added $10,634,000 to revenue. Volume increases were primarily the result
of first quarter 2001 production from the CMS Properties acquired March 31, 2000
(approximately 4,000,000 Mcf) and 502,000 Mcf earned from payouts. Other revenue
increased $6,418,000 from the prior year period primarily as a result of an
increase of $2,383,000 in deferred revenue recognition from the 2000 Section 29
tax credit monetization and revenue of $3,507,000 from the Company's marketing,
gas processing and transportation operations which were acquired in the Mercury
Acquisition.
Oil, Gas and Related Product Sales
The Company's production volumes, revenues and prices for the six months ended
June 30, 2001 and 2000 are detailed as shown below.
Six Months Ended June 30,
2001 2000
------------------ -----------------
Average daily sales volume
Gas - Mcf/d 90,383 66,950
Oil - Bbls/d 3,115 2,577
Natural gas liquid ("NGL") - Bbls/d 571 434
Product sale revenues (in thousands)
Natural gas sales $56,240 $33,528
Oil sales 13,297 9,074
NGL sales 2,373 1,528
------------------ -----------------
Total oil, gas and NGL sales $71,910 $44,130
================== =================
Unit prices-including impact of hedges
Gas price per Mcf $ 3.44 $ 2.75
Oil price per Bbl $ 23.59 $ 19.35
NGL price per Bbl $ 22.95 $ 19.34
Gas sales of $56,240,000 for the first half of 2001 were 68% higher than the
$33,528,000 for the comparable 2000 period. Additional volumes of 4,174,000 Mcf
contributed $14,351,000 of additional revenue over the first half of 2000.
Higher gas volumes were primarily the result of approximately 4,000,000 Mcf in
the first quarter 2001 from the CMS Properties acquired March 31, 2000. In
addition, 502,000 Mcf are attributable to properties where payouts were
identified during the second quarter. Excluding first quarter volumes from CMS
Properties and the payout volumes, 2001 sales volumes decreased 329,000 Mcf as a
result of delays in the Company's 2001 development drilling program. The delays
are the result of backlogged drilling permit processing and drilling rig
availability. Average gas prices were $3.44 per Mcf for 2001, $0.69 per Mcf
higher than the average price received in the comparable 2000 period. Increased
prices added $8,361,000 of revenue in 2001.
Oil sales grew 47% to $13,297,000 for the six months ended June 30, 2001
compared to $9,074,000 in the first six months of 2000. Crude oil production for
the 2001 period increased 95,000 barrels over the comparable 2000 period to
564,000 barrels primarily as a result of volumes from the CMS Properties.
Additional sales volumes contributed revenue of $2,235,000 over the comparable
2000 period. Average oil sales prices for the first half of 2001 were $23.59 per
barrel compared to $19.35 per barrel in the first half of 2000, increasing
revenues $1,988,000.
NGL sales of $2,373,000 for the first six months of 2001 increased $845,000 from
the comparable 2000 period. Additional NGL volumes, primarily from the CMS
Properties, added $561,000 of revenue. NGL prices increased from $19.34 to
$22.95 per Bbl and added revenue of $284,000.
Other Revenues
Other revenue of $9,809,000 increased $6,418,000 compared to $3,391,000 in the
first half of 2000. Deferred revenue recognition in 2001 from the 2000 Section
29 tax credit monetization was $2,383,000 higher than in the comparable 2000
period. Revenue from the Company's marketing, gas processing and
transportation operations was $3,507,000. These operations were acquired in the
Mercury Acquisition. Also, the Company recorded
13
$580,000 of revenue from proceeds received in settlement of the 1999 bankruptcy
of one of its natural gas purchasers. Total bankruptcy proceeds received were in
excess of estimated uncollectible accounts receivable charged to earnings in
1999.
Operating Expenses
Operating expenses for the first half of 2001 were $47,189,000 and 54% higher
than the $30,609,000 incurred in the comparable 2000 period. The increase
reflects first quarter 2001 volumes from the CMS Properties, expenses associated
with the marketing, gas processing and transportation operations added in the
Mercury Acquisition and additional Canadian activity during the first six months
of 2001. Also included in 2001 were payout expenses and additional general and
administrative expenses that were also the result of additional activity
associated with the acquisitions.
Oil and Gas Production Costs
Oil and gas production costs for the six month period ended June 30, 2001 were
$28,635,000; an increase of $11,995,000, or 72%, from 2000 oil and gas
production costs of $16,640,000. Lease operating expenses increased 64%, or
$9,176,000, to $23,437,000 reflecting an increase in sales volumes from the
comparable 2000 period due primarily to the CMS Properties acquired March 31,
2000, additional workover and compressor maintenance costs of $1,200,000
resulting from higher activity levels, expenses of $810,000 associated with
payout volumes, higher Canadian operating expenses of $520,000 due to increased
operating activity and cost inflation. Increased sales volumes and higher prices
resulted in an increase of $2,819,000, or 118%, in severance tax expense to
$5,198,000 for the first half of 2001.
Other Operating Costs
Other operating costs of $652,000 are associated with the marketing, gas
processing and transportation operations of Quicksilver. These operations were
acquired in the Mercury Acquisition.
Depletion and Depreciation
Six Months Ended June 30,
2001 2000
------------------- ------------------
(In thousands, except per unit amounts)
Depletion $12,982 $10,764
Depreciation of other fixed assets 1,465 548
------------------- ------------------
Total depletion and depreciation $14,447 $11,312
=================== ==================
Average depletion cost per Mcfe $ 0.64 $ 0.70
Depletion and depreciation for the first half of 2001 increased to $14,447,000
from $11,312,000 in the first half of 2000. Depletion increased $2,218,000
primarily as a result of sales volumes associated with the CMS Properties and
payout 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 first six months of 2001
were $4,526,000, 70% higher than the expense incurred in the first half of 2000.
Increases include higher salaries and related payroll expenses ($1,310,000),
office and building rent expense ($125,000), directors' fees ($150,000),
professional fees ($97,000). These increases are related primarily to the growth
of the Company through the CMS and Mercury Acquisitions.
Interest and Other Income/Expense
Interest expense for the first half of 2001 was $12,542,000, an increase of
$3,655,000 from the comparable 2000 period. The increase was the result of
higher debt levels resulting from the CMS Acquisition partially offset by a
decrease in the interest rate for the Company's debt under the credit facility.
Other income consisted primarily of interest income earned on invested operating
cash balances.
14
Income Tax Expense
The income tax provision of $7,994,000 was established using an effective U.S.
Federal tax rate of 35% and also included a current portion for $172,000 of
state income tax expense. Income tax expense increased over the prior year
period as a result of increased pretax income over the first half of 2000. As
of June 30, 2001, the Company had a deferred tax liability of $38,316,000. The
decrease in the deferred tax liability over the December 31, 2000 balance is the
result of the $17,561,000 deferred tax benefit associated with deferred losses
associated with hedge derivatives. The decrease is partially offset by deferred
income tax expense of $7,822,000 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 six months ended June 30,
2001 was $30,836,000, compared to $12,217,000 for the same period last year.
The increase resulted from higher earnings and the increase in working capital
required in 2000 from the CMS and Mercury Acquisitions.
The Company's net cash used for investing activities for the six months ended
June 30, 2001 was $30,111,000. 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 six months ended
June 30, 2001 was $4,941,000. The Company paid down various loans of $6,151,000
partially offset by $1,000,000 net borrowings under its credit facility during
2001.
Cash from operations for the remainder of 2001 is expected to be sufficient to
fund the remaining $25 million of the Company's million 2001 planned capital
expenditures.
15
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.
Additionally, Cinnabar Energy Services & Trading, LLC, Quicksilver's wholly
owned marketing company, enters into various financial contracts to hedge its
exposure to commodity price risk associated with future contractual natural gas
sales. These contracts typically include fixed price sales or purchases from
third parties. At June 30, 2001, approximately 85,000 Mcf of fixed price sales
are hedged using floating price swap agreements.
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 realized natural gas
and crude oil 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 six months of 2001 and 2000 were $22,237,949 and
$4,988,247, 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 June 30, 2001 related to natural gas production.
Weighted Ave
Product Type Contract Time Period Volume Price per Mcf Fair Value
- ---------- --------------- ------------------------ ------------------ ------------------- -----------------
(in thousands)
Gas Fixed Price Jul 2001-Apr 2004 7,500 Mcfd $2.40 $ (9,568)
Gas Fixed Price Jul 2001-Dec 2004 604 Mcfd $2.03 (1,107)
Gas Fixed Price Jul 2001-Apr 2005 10,000 Mcfd $2.79 (11,998)
Gas Fixed Price Jul 2001-Apr 2005 10,000 Mcfd $2.79 (12,094)
Gas Fixed Price Jul 2001-Apr 2005 10,000 Mcfd $2.79 (12,094)
Gas Floating Price Jul-Aug 2001 50,000 Mcf (104)
Gas Floating Price Jul-Aug 2001 35,000 Mcf (64)
--------
Total $(47,029)
========
The fair value of fixed price and floating price natural gas financial contracts
as of June 30 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 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.
16
Interest Rate Risk
The Company has interest rate swap agreements covering $75 million of its
variable-rate debt through March 31, 2003 that converts the debt floating LIBOR
base rate to a 6.72% fixed rate. The fair value of these swaps was a loss of
$3,063,377 as of June 29, 2001. Interest expense for the six months ended June
30, 2001 was $401,975 higher as a result of interest rate swaps.
17
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 5, 2001, the Company held its 2001 annual meeting of stockholders.
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 18,603,800 15,778,663
At the meeting, Ms. Anne Darden Self and Messrs. Thomas F. Darden, Glenn
Darden, D. Randall Kent, Steven M. Morris, W. Yandell Rogers, III and Mark
Warner were elected as directors of the Company to serve as a seven member board
of directors. 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 addition of a new article to the Company's
restated certificate of incorporation, and corresponding amendments to
its bylaws, to provide for the classification of the Company's board
of directors into three classes of directors with staggered terms of
office and for their removal only for cause and by two-thirds vote of
the stockholders;
. A proposal to approve the addition of a new article to the Company's
restated certificate of incorporation, and corresponding amendments to
its bylaws, to require that all stockholder action be taken at a
stockholders' meeting;
. A proposal to approve the addition of a new article to the Company's
restated certificate of incorporation to require a two-thirds
stockholder vote to amend or repeal certain provisions of the
Company's restated certificate of incorporation; and
. Ratification of the appointment by the board of directors of
independent public accountants of the Company for the fiscal year
ending December 31, 2001.
Concerning the proposal to approve a classified board of directors, all
shares represented at the meeting voted in favor of the proposal, with the
exception of 3,955,930 votes against the proposal and 8,545 abstentions.
Concerning the proposal to approve that all stockholder action be taken at a
stockholders' meeting, all shares represented at the meeting voted in favor of
the proposal, with the exception of 3,357,801 votes against the proposal and
9,305 abstentions. Concerning the proposal to approve the two-thirds stockholder
vote to amend or repeal certain provisions of the Company's restated certificate
of incorporation, all shares represented at the meeting voted in favor of the
proposal, with the exception of 3,917,503 votes against the proposal and 49,110
abstentions. All shares represented at the meeting were voted in favor of the
ratification of the appointment of the independent public accountants, with the
exception of 567,020 votes against the ratification of the appointment and 2,135
abstentions.
ITEM 5. Other Information
On July 24, 2001, the Company elected James A. Hughes as an eighth member
of its board of directors. Currently, Mr. Hughes is the President and Chief
Operating Officer of Enron Global Assets and Services and a member of the
Executive Committee of Enron Corp. Enron Global Assets and Services, a
wholly-owned subsidiary of Enron Corp., is responsible for all of Enron's
wholesale energy infrastructure business outside North America and Europe.
Prior to his present position, Mr. Hughes held a number of senior
management positions with the Enron organization. He also has experience with a
major Houston, Texas law firm where he specialized in corporate finance and
securities transactions.
Mr. Hughes received a Juris Doctor degree from the University of Texas at
Austin School of Law and obtained a Certificate of Completion in International
Business Law from Queen Mary's College, University of London. He holds a
Bachelor's of Business Administration degree from the Southern Methodist
University, Edwin L. Cox School of Business
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
* 3.1 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed June 7, 2001.
* 3.2 Amendments to the Bylaws of the Company, adopted June 5, 2001.
* 15 Awareness letter of Deloitte & Touche LLP.
* Filed herewith
(b) Reports on Form 8-K
None.
18
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 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
19