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 September 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 New York 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 November 9, 2001, the registrant had 18,783,023 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 September 30, 2001 (Unaudited) and December 31, 2000 4
Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended 5
September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended 6
September 30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
ITEM 1. Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Quicksilver Resources Inc. (the "Company") as of September 30, 2001, and the
related condensed consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 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
income, 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
November 7, 2001
3
Quicksilver Resources Inc.
Condensed Consolidated Balance Sheets
In thousands, except for share and per share amounts
September 30, December 31,
2001 2000
----------------- -----------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,718 $ 12,833
Accounts receivable, net of allowance for doubtful accounts 28,022 32,595
Inventories and other current assets 7,609 2,021
----------------- -----------------
Total current assets 40,349 47,449
INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES 14,871 12,570
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 399,031 374,099
OTHER ASSETS 4,995 5,993
----------------- -----------------
$ 459,246 $ 440,111
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 907 $ 4,149
Accounts payable 12,257 12,787
Accrued derivative losses 11,651 -
Accrued liabilities 27,669 29,578
----------------- -----------------
Total current liabilities 52,484 46,514
----------------- -----------------
LONG-TERM DEBT 238,801 239,986
UNEARNED REVENUE 11,871 18,958
DEFERRED DERIVATIVE LOSSES 12,182 -
OTHER LONG-TERM LIABILITIES 179 147
DEFERRED INCOME TAXES 50,387 47,748
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01; Authorized 10,000,000 shares,
1 share issued and outstanding - -
Common stock, $0.01 par value; Authorized 40,000,000 shares,
22,538,375 and 22,332,950 issued, respectively 225 223
Paid in capital in excess of par value 78,048 75,544
Treasury stock of 3,755,352 and 3,765,947 shares, respectively (14,694) (14,675)
Retained earnings 43,207 25,679
Accumulated other comprehensive loss (13,444) (13)
----------------- -----------------
Total stockholders' equity 93,342 86,758
----------------- -----------------
$ 459,246 $ 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 Nine Months Ended
September 30, September 30,
------------------------------------------ ----------------------------------------
2001 2000 2001 2000
------------------- ----------------- ----------------- -----------------
REVENUES
Oil, gas and related product sales $ 28,381 $ 28,140 $ 100,291 $ 72,270
Other revenue 3,847 2,644 13,656 6,035
Total revenues 32,228 30,784 113,947 78,305
------------------- ----------------- ----------------- -----------------
EXPENSES
Oil and gas production costs 11,941 9,618 40,576 26,258
Other operating costs 196 - 848 -
Depletion and depreciation 7,168 6,283 21,615 17,595
Provision for doubtful accounts - (279) (1,071) (279)
General and administrative 2,187 1,612 6,713 4,269
------------------- ----------------- ----------------- -----------------
Total expenses 21,492 17,234 68,681 47,843
------------------- ----------------- ----------------- -----------------
Operating income 10,736 13,550 45,266 30,462
Other income-net (171) (109) (585) (124)
Interest expense 6,002 6,526 18,544 15,413
------------------- ----------------- ----------------- -----------------
Income before income taxes 4,905 7,133 27,307 15,173
Income tax expense 1,785 2,366 9,779 5,359
------------------- ----------------- ----------------- -----------------
NET INCOME $ 3,120 $ 4,767 $ 17,528 $ 9,814
=================== ================= ================= =================
Net income per share:
Basic $ 0.17 $ 0.26 $ 0.94 $ 0.54
Diluted $ 0.16 $ 0.26 $ 0.91 $ 0.53
Weighted average common shares:
Basic 18,686 18,283 18,623 18,283
Diluted 19,284 18,528 19,170 18,473
The accompanying notes are an integral part of these financial statements.
5
Quicksilver Resources Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
In thousands
2001 2000
----------------- ------------------
OPERATING ACTIVITIES (unaudited)
Net income $ 17,528 $ 9,814
Charges and credits to net income not affecting cash
Depletion and depreciation 21,615 17,595
Deferred income taxes 9,362 5,873
Recognition of unearned revenue (7,087) (4,533)
Other 326 1,190
Change in assets and liabilities, excluding the effect of the acquisition
Accounts receivable 4,573 (5,719)
Inventory, prepaid expenses and other (1,917) (710)
Accounts payable 13 (5,822)
Accrued and other liabilities (1,877) 11,200
------------ --------------
NET CASH FROM OPERATING ACTIVITIES 42,536 28,888
------------ --------------
INVESTING ACTIVITIES
Acquisition of properties and equipment (46,959) (173,913)
Acquisition of pipeline and facilities - (2,469)
Advances to affiliates (1,122) (5,221)
Proceeds from sale of properties 40 175
------------ --------------
NET CASH USED FOR INVESTING ACTIVITIES (48,041) (181,428)
------------ --------------
FINANCING ACTIVITIES
Notes payable, bank proceeds 10,000 250,324
Principal payments on long-term debt (14,427) (105,129)
Monetization of Section 29 tax credits - 25,000
Exercise of stock options and warrants 1,895 -
Purchase of treasury stock (78) -
Deferred financing and stock registration costs - (5,589)
------------ --------------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (2,610) 164,606
------------ --------------
NET INCREASE (DECREASE) IN CASH (8,115) 12,066
CASH AT BEGINNING OF PERIOD 12,833 2,557
------------ --------------
CASH AT END OF PERIOD $ 4,718 $ 14,623
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 18,457 $ 12,545
============ ==============
Income taxes paid $ 297 $ 140
============ ==============
Treasury shares of 15,095 issued for payment of directors' compensation $ 100 $ -
============ ==============
Common stock of 299,242 shares used for acquisition of Unocal $ - $ 2,220
============ ==============
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 September 30, 2001,
and the results of operations for the three and nine months ended September 30,
2001 and 2000 and cash flows for the nine months ended September 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 nine-month period
ended September 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.
The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 gives direction for accounting for goodwill and intangible assets.
The Company believes the adoption of this statement will have no impact on its
financial statements.
The FASB also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 gives guidance for accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company is in the process of evaluating the impact
of the provisions of SFAS No. 143.
The FASB also issued SFAS No.144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after December
15, 2001. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.
144 provides a single method of accounting for long-lived assets to be disposed
of and retains requirements found in SFAS No. 121 with regards to the impairment
of long-lived assets. The Company is in the process of evaluating the impact of
the provisions of SFAS No. 144.
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 nine months ended September 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 nine months ended September 30, 2001 and 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------ ------------- ------------
(Unaudited, in thousands) (Unaudited, in thousands)
Weighted average common shares-basic 18,404 17,984 18,340 17,984
Unregistered shares issuable to MGV shareholders 282 - 283 -
Unregistered shares issuable to Unocal - 299 - 299
------ ------ ------ ------
Total weighted average common shares-basic 18,686 18,283 18,623 18,283
Potentially dilutive securities
Stock options 495 241 486 186
Stock warrants 103 4 61 4
------ ------ ------ ------
Weighted average common shares-diluted 19,284 18,528 19,170 18,473
====== ====== ====== ======
7
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 SFAS 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.
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
2Company's financial fixed price gas swaps which extend through April 2005 and
interest rate swaps which extend through March 2003. 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.
During the third quarter of 2001, Cinnabar Energy Services & Trading LLC, the
Company's wholly owned marketing subsidiary, entered into fixed price firm sales
commitments and associated financial floating price swaps which extend through
March 2002. The derivative transactions have qualified as fair value hedges and
are currently 100% effective in hedging the sales commitments. As a result, the
Company recorded an asset of $3,517,000 for the fair value of the firm sales
commitments. Additionally, the Company has recorded current assets of $234,000
and current liabilities of $3,751,000 associated with the fair value of the
financial floating price swaps.
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 assets and
liabilities reflected as current in the September 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 all hedge derivatives and the associated fixed
price firm sales commitments as of September 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.
September 30, January 1,
2001 2001
-------------- ---------------
(Unaudited, in thousands)
Derivative assets:
Fixed price firm sales commitments $ 3,517 $ -
Floating price natural gas financial swaps 234 -
--------- ----------
$ 3,751 $ -
========= ==========
Derivative liabilities:
Fixed price natural gas financial swaps $ 15,913 $ 91,969
Floating price natural gas financial swaps 3,751 -
Interest rate swaps 4,169 1,443
--------- ----------
$ 23,833 $ 93,412
========= ==========
The fair value of natural gas financial swaps and firm sales commitments as of
September 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 and firm sales commitment fair values
do not necessarily represent the value a third party would pay to assume the
Company's contract positions.
8
The fair value of interest rate swaps was based upon third-party estimates of
the fair value of such swaps.
3. LONG-TERM DEBT
September 30, 2001 December 31, 2000
------------------- ------------------
(Unaudited)
Long-term debt, in thousands, consists of:
Notes payable to banks-5.665% and 8.635%
interest at September 30, 2001 and December 31, 2000 $ 182,000 $180,000
Subordinated Notes-14.75% interest 53,000 53,000
Other 4,708 11,135
---------- --------
239,708 244,135
Less current maturities (907) (4,149)
---------- --------
$ 238,801 $239,986
========== ========
During the nine months ended September 30, 2001, the Company reduced its total
debt outstanding through net principal repayments of $4,427,000. 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 totaling $6,427,000. These repayments
were partially offset by $2,000,000 of additional net borrowings 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 September 30,
2001, the Company's borrowing base was $210 million of which $27.4 million was
available. On October 2, 2001, the Company's interest rate was set at 4.475%
through January 2, 2002. 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 $7,087,000 has been recognized in 2001 in
other revenue. Revenue of $2,346,000 was recognized in the third quarter of
2001.
5. STOCKHOLDERS' EQUITY
On February 1, 2001, the Company granted incentive stock options covering 46,100
shares of common stock to all eligible 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, the Company has issued 85,425 shares of
common stock as a result of the exercise of stock options by Company employees.
There were stock options covering 196,499 shares of the Company's common stock
exercisable at September 30, 2001. During the third quarter of 2001, 120,000
shares of common stock were issued as a result of the exercise of warrants.
9
Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- ------------ -------------- ------------
(Unaudited, in thousands) (Unaudited, in thousands)
Net income $ 3,120 $4,767 $ 17,528 $9,814
Other comprehensive loss, net of tax:
Adoption of SFAS No. 133 at January 1, 2001 - - (60,304) -
Reclassification adjustment - hedge settlements 1,012 - 15,416 -
Change in fixed-price derivative fair value 18,403 - 31,996 -
Change in foreign currency translation adjustment (355) - (539) -
-------- ------ -------- ------
Comprehensive income $ 22,180 $4,767 $ 4,097 $9,814
======== ====== ======== ======
6. RELATED PARTY TRANSACTIONS
The Darden Family has effective beneficial ownership of 52.5% 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 nine
months of 2001, Quicksilver paid $1,232,937 of accounts payable associated with
the purchase of assets from Mercury effective July 1, 2000, $608,933 for rent
on the Company's headquarters building which is owned by an entity controlled by
the Darden Family, and $684,243 for principal and interest on the note payable
to Mercury associated with the acquisition of assets from Mercury effective July
1, 2000. At September 30, 2001, Mercury owed Quicksilver $331,317 of accounts
receivable and Quicksilver owed Mercury a $2,720,000 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 September 30, 2001 and 2000
Three Months Ended September 30,
2001 2000
------------- -------------
(in thousands)
Total operating revenues $32,228 $30,784
Total operating expenses 21,492 17,234
Operating income 10,736 13,550
Net income 3,120 4,767
The Company recorded net income of $3,120,000 ($0.16 per diluted share) in the
three months ended September 30, 2001, compared to net income of $4,767,000
($0.26 per diluted share) in the third quarter of 2000. The reduction was
largely due to lower product prices and increased operating expenses.
Operating Revenues
Total revenues for the three months ended September 30, 2001 were $32,228,000;
an increase of 5% from the $30,784,000 reported for the three months ended
September 30, 2000. Higher volumes contributed a $2,091,000 revenue increase
partially offset by a $1,850,000 revenue decrease due to lower prices. Other
revenue increased $1,203,000 from the prior year period primarily as a result of
revenue from the Company's marketing, gas processing and transportation
operations.
Oil, Gas and Related Product Sales
The Company's production volumes, revenues and prices for the three months ended
September 30, 2001 and 2000 are detailed as shown below.
11
Three Months Ended September 30,
2001 2000
-------------- -------------
Average daily sales volume
Gas - Mcf/d 89,161 75,841
Oil - Bbls/d 2,787 3,311
Natural gas liquid ("NGL") - Bbls/d 379 462
Product sale revenues (in thousands)
Natural gas sales $22,069 $20,343
Oil sales 5,672 6,840
NGL sales 640 957
------- -------
Total oil, gas and NGL sales $28,381 $28,140
======= =======
Unit prices-including impact of hedges
Gas price per Mcf $ 2.69 $ 2.92
Oil price per Bbl $ 22.12 $ 22.45
NGL price per Bbl $ 18.37 $ 22.53
Gas sales of $22,069,000 for the third quarter of 2001 were 8% higher than the
$20,343,000 for the comparable 2000 period. Additional volumes of 1,225,000 Mcf
contributed $3,297,000 of additional revenue over the third quarter of 2000.
Increased gas volumes include approximately 122,000 Mcf from Indiana properties
acquired from Mercury Exploration Company ("Mercury") and from Dominion
Reserves-Indiana Inc. ("Dominion") in the fourth quarter of 2000. Approximately
61,000 Mcf were added from the Bindloss area acquired in early 2001 by MGV
Energy Inc. ("MGV"), Quicksilver's wholly owned Canadian subsidiary. Additional
production of approximately 814,000 Mcf are the result of the Company's 2001
capital expenditures and includes adjustments for new production from previous
periods not quantified as of June 30, 2001. These production increases were
partially offset by natural production declines on existing production. Average
gas prices were $2.69 per Mcf for 2001, $0.23 per Mcf lower than the average
price received in the 2000 three-month period. Decreased prices reduced revenue
by $1,571,000 in the third quarter of 2001.
Oil sales decreased 17% to $5,672,000 for the three months ended September 30,
2001 compared to $6,840,000 in the third quarter of 2000. Crude oil production
for the 2001 period decreased 48,000 barrels over the third quarter of 2000 to
256,000 barrels due to natural production declines. The decrease reduced
revenue by $1,066,000 over the comparable 2000 period. Average oil prices for
the third quarter of 2001 were $22.12 per barrel compared to $22.45 per barrel
in the prior year period.
Other Revenues
Other revenue of $3,847,000 increased $1,203,000 compared to $2,644,000 in the
third quarter of 2000. The increase was attributable to $1,191,000 of revenue
from the Company's marketing, gas processing and transportation activities.
These operations were acquired in the Mercury acquisition.
Operating Expenses
Third quarter operating expenses for 2001 were $21,492,000 and 25% higher than
the $17,234,000 incurred in the third quarter of 2000. Third quarter 2001
expense increase was partially due to higher sales volumes, increased well
counts and increased field and production office personnel and associated costs.
Higher general and administrative expenses were the result of additional
personnel required for the acquisitions.
Oil and Gas Production Costs
Oil and gas production costs increased $2,323,000, or 24%, from third quarter
2000 expenses of $9,618,000. Third quarter 2001 lease operating expenses
increased 36%, or $2,741,000, to $10,374,000. Higher sales volumes contributed
approximately $875,000 additional expense over 2000. The remainder of the
increase is the result of a higher well counts and an increase in field and
production office personnel and associated costs. Lower prices partially offset
by higher production volumes resulted in a $418,000 decrease, or 21%, in
severance tax expense to $1,567,000 for the third quarter of 2001.
12
Other Operating Costs
Other operating costs of $196,000 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 September 30,
2001 2000
--------------- ------------
(In thousands, except per unit amounts)
Depletion $6,382 $5,990
Depreciation of other fixed assets 786 293
--------------- -------------
Total depletion and depreciation $7,168 $6,283
=============== =============
Average depletion cost per Mcfe $ 0.64 $ 0.66
Third quarter 2001 depletion and depreciation increased to $7,168,000 from
$6,283,000 in the third quarter of 2000. Depletion increased $571,000 as a
result of increased sales volumes partially offset by a $179,000 decrease due to
lower depletion rates. 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
September 30, 2001 were $2,187,000, 36% higher than the expense incurred in the
third quarter of 2000. The increase is primarily the result of personnel costs
for 2001 bonus and 401-K contributions of approximately $286,000. Contract labor
expense was approximately $112,000 higher than the 2000 period. The remainder is
the result of annual salary increases and additional personnel headcount.
Interest and Other Income/Expense
Interest expense for the third quarter of 2001 was $6,002,000, a decrease of
$524,000 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.
Income Tax Expense
The income tax provision of $1,785,000 was established using an effective U.S.
Federal tax rate of 35% and also included a current portion for $249,000 for
federal alternative minimum tax ("AMT") and state income tax expense. Income tax
expense decreased over the prior year period as a result of decreased pretax
income.
Summary Financial Data
Nine Month Periods Ended September 30, 2001 and 2000
Nine Months Ended September 30,
2001 2000
------------ ------------
(in thousands)
Total operating revenues $113,947 $78,305
Total operating expenses 68,681 47,843
Operating income 45,266 30,462
Net income 17,528 9,814
The Company recorded net income of $17,528,000 ($0.91 per diluted share) in the
nine months ended September 30, 2001, compared to net income of $9,814,000
($0.53 per diluted share) in the comparable 2000 period. The improvement was
largely due to the production volumes from acquisitions in 2000 and early-2001
and higher product prices.
Operating Revenues
Total revenues for the nine months ended September 30, 2001 were $113,947,000;
an increase of 46% from the $78,305,000 reported for the comparable 2000 period.
Higher volumes contributed $18,664,000 of the revenue
13
increase while increased prices added $9,357,000 to revenue. Volume increases
were primarily the result of production from properties acquired during 2000 and
early 2001 (approximately 4,802,000 Mcfe), 540,000 Mcfe earned from payouts and
related to prior years' production and 1,119,000 Mcfe associated with 2001
capital expenditures partially offset by production declines on existing
production. Other revenue increased $7,621,000 from the 2000 period primarily as
a result of an increase of $2,554,000 in deferred revenue recognition from the
2000 Section 29 tax credit monetization and revenue of $4,800,000 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 nine months ended
September 30, 2001 and 2000 are detailed as shown below.
Nine Months Ended September 30,
2001 2000
------------- ------------
Average daily sales volume
Gas - Mcf/d 89,971 69,935
Oil - Bbls/d 3,004 2,823
Natural gas liquid ("NGL") - Bbls/d 506 443
Product sale revenues (in thousands)
Natural gas sales $ 78,309 $53,871
Oil sales 18,969 15,914
NGL sales 3,013 2,485
--------- --------
Total oil, gas and NGL sales $100,291 $72,270
========= ========
Unit prices-including impact of hedges
Gas price per Mcf $ 3.19 $ 2.81
Oil price per Bbl $ 23.13 $ 20.57
NGL price per Bbl $ 21.79 $ 20.46
Gas sales of $78,309,000 for the first nine months of 2001 were 45% higher than
the $53,871,000 for the comparable 2000 period. Additional volumes of 5,400,000
Mcf contributed $17,216,000 of additional revenue over the 2000 period. Higher
gas volumes were primarily the result of approximately 3,994,000 Mcf in the
first quarter 2001 from the CMS properties acquired March 31, 2000,
approximately 354,000 Mcf from the Indiana properties acquired in the fourth
quarter of 2000 and 106,000 Mcf from the MGV Bindloss properties acquired in
early 2001. An additional 540,000 Mcf are attributable to prior year production
on properties where payouts were identified during the second quarter. Capital
expenditures for drilling, recompletions and workovers in 2001 resulted in a
1,035,000 Mcf increase in sales volumes. These increases are offset by natural
production declines on existing production. Through September 30, 2001, the
Company has drilled 80.9 net Antrim wells and 1 net Prairie du Chien well in
Michigan, 13 net Indiana wells and 13.6 net Canadian wells in existing producing
areas. Additionally, the Company successfully recompleted 80.2 net wells during
2001. Average gas prices were $3.19 per Mcf for 2001, $0.38 per Mcf higher
than the average price received in 2000. Increased prices added $7,222,000 of
revenue in 2001.
Oil sales grew 19% to $18,969,000 for the nine months ended September 30, 2001
compared to $15,914,000 in the first nine months of 2000. Crude oil production
for the 2001 period increased 47,000 barrels over the 2000 period to 820,000
barrels primarily as a result of 58,000 barrels from the CMS properties
partially offset by production declines on existing production. Additional sales
volumes contributed revenue of $1,080,000 over the comparable 2000 period.
Average oil sales prices for the 2001 period were $23.13 per barrel compared to
$20.57 per barrel in 2000, increasing revenues $1,975,000.
NGL sales of $3,013,000 for the first nine months of 2001 increased $528,000
from the 2000 period primarily as a result of additional NGL volumes from the
CMS properties.
Other Revenues
Other revenue of $13,656,000 increased $7,621,000 compared to $6,035,000 in the
first nine months of 2000. Deferred revenue recognition in 2001 from the 2000
Section 29 tax credit monetization was $2,554,000 higher than in 2000. Revenue
from the Company's marketing, gas processing and transportation operations was
$4,800,000. These operations were acquired in the Mercury acquisition. Also,
the Company recorded $580,000 of revenue from
14
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 nine months of 2001 were $68,681,000 and 44% higher
than the $47,843,000 incurred in 2000. The increase reflects additional volumes
from the acquisition properties, prior period payout expenses, additional
Canadian activity and expenses associated with the marketing, gas processing and
transportation operations added in the Mercury acquisition. Also included in
the 2001 increase was additional general and administrative expense that was the
result of higher activity levels associated with the acquisitions.
Oil and Gas Production Costs
Oil and gas production costs for the nine month period ended September 30, 2001
were $40,576,000; an increase of $14,318,000, or 55%, from 2000 oil and gas
production costs of $26,258,000. Lease operating expenses increased 54%, or
$11,918,000, to $33,811,000. Increased sales volumes from 2000 acquisitions,
prior year payouts and other production increases resulted in approximately
$6,360,000 of additional production expense. Higher levels of compressor
maintenance and well workovers, increased well counts and additional field and
production office personnel accounted for the balance of the increase.
Increased sales volumes and higher prices resulted in an increase of $2,400,000,
or 55%, in severance tax expense to $6,765,000 for the first nine months of
2001.
Other Operating Costs
Other operating costs of $848,000 are associated with the marketing, gas
processing and transportation operations of Quicksilver. These operations were
acquired in the Mercury acquisition.
Depletion and Depreciation
Nine Months Ended September 30,
2001 2000
----------- ------------
(In thousands, except per unit amounts)
Depletion $19,364 $16,754
Depreciation of other fixed assets 2,251 841
------- -------
Total depletion and depreciation $21,615 $17,595
======= =======
Average depletion cost per Mcfe $ 0.64 $ 0.68
Depletion and depreciation for the nine months of 2001 increased to $21,615,000
from $17,595,000 in 2000. Depletion increased $3,692,000 as a result of
increased sales volumes, partially offset by a $1,082,000 decrease due to lower
depletion rates. 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 nine months of 2001
were $6,713,000, which was $2,444,000 higher than the 2000 period. The increase
was primarily the result of higher bonus and 401-K contribution amounts of
$1,509,000 and additional contract labor expense of $235,000. The Company also
incurred expense associated with stock exchange fees relating to the Company's
listing on the New York Stock Exchange of approximately $124,000. Annual salary
increases and increased personnel headcount account for the remaining expense
increase.
Interest and Other Income/Expense
Interest expense for the nine months ended September 30, 2001 was $18,544,000,
an increase of $3,131,000 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.
Income Tax Expense
The income tax provision of $9,779,000 was established using an effective U.S.
Federal tax rate of 35% and also included a current portion for $417,000 for
federal AMT and state income tax expense. Income tax expense increased over the
prior year period as a result of increased pretax income. As of September 30,
2001, the Company
15
had a deferred tax liability of $50,387,000. The increase in the deferred tax
liability over the December 31, 2000 balance is the result of deferred income
tax expense of $9,362,000 incurred for 2001. The increase is partially offset by
the $7,029,000 deferred tax benefit related to deferred losses associated with
hedge derivatives.
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 nine months ended
September 30, 2001 was $42,536,000, compared to $28,888,000 for the same period
last year. The increase resulted from higher earnings and changes in working
capital.
The Company's net cash used for investing activities for the nine months ended
September 30, 2001 was $48,041,000. 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 nine months ended
September 30, 2001 was $2,610,000. The Company reduced its debt by $4,427,000
through the repayment of various loans of $6,427,000 partially offset by
$2,000,000 of net borrowings under its credit facility during 2001 and
$1,895,000 received from the exercise of stock options and warrants during 2001.
Cash from operations and additional borrowings under the Company's credit
facility during the remainder of 2001 will fund the remaining $13 million of the
Company's million 2001 planned capital expenditures.
16
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 production is 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.
Cinnabar Energy Services & Trading, LLC, Quicksilver's wholly owned marketing
company, also 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 September 30, 2001, approximately 20,000 Mcfd of fixed price sales
through March 2002 and an additional 20,000 Mcfd of October 2001 fixed price
sales are hedged using NYMEX price and Michigan basis swap agreements. As a
result of these firm sales commitments and associated financial floating price
swaps, the hedge derivatives have qualified as fair value hedges and are
currently 100% effective in hedging the sales commitments. The Company recorded
an asset of $3,517,000 for the fair value of the firm sales commitments.
Additionally, the Company has recorded current assets of $234,000 and current
liabilities of $3,751,000 associated with the fair value of the financial
floating price swaps.
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, oil and gas revenues in the first nine months of 2001 and 2000 were
$22,948,001 and $12,343,627, respectively, lower than if the hedging program had
not been in effect. Marketing revenues were $590,780 lower than if the hedging
program had not been in effect.
The following table summarizes the Company's open financial hedge positions and
associated firm sales commitment as of September 30, 2001 related to natural gas
production and marketing.
Weighted Ave
Product Type Contract Time Period Volume Price per Mcf Fair Value
- ---------- --------------- ------------------------ ------------------ ------------------- -----------------
(in thousands)
Gas Fixed Price Oct 2001-Apr 2004 7,500 Mcfd $2.40 $ (4,149)
Gas Fixed Price Oct 2001-Dec 2004 604 Mcfd $2.03 (582)
Gas Fixed Price Oct 2001-Apr 2005 10,000 Mcfd $2.79 (3,666)
Gas Fixed Price Oct 2001-Apr 2005 10,000 Mcfd $2.79 (3,758)
Gas Fixed Price Oct 2001-Apr 2005 10,000 Mcfd $2.79 (3,758)
--------
Total fixed price swaps $(15,913)
Gas Fixed Price Oct 2001 20,000 Mcfd $3.05 654
Gas Fixed Price Oct 2001-Mar 2002 20,000 Mcfd $3.52 2,863
Gas Floating Price Oct 2001 20,000 Mcfd (744)
Gas Floating Price Oct 2001-Mar 2002 20,000 Mcfd (3,007)
Gas Floating Basis Oct 2001 20,000 Mcfd 90
Gas Floating Basis Oct 2001-Mar 2002 20,000 Mcfd 144
--------
Total floating price swaps and associated firm sales commitments $ -
--------
Grand total $(15,913)
========
The fair value of fixed price and floating price natural gas financial contracts
and associated firm sales commitments as of September 30, 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
17
judgment and estimation. As a result, the natural gas financial swap and firm
sales commitment fair 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 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
$4,168,906 as of September 28, 2001. Interest expense for the nine months ended
September 30, 2001 was $963,845 higher as a result of interest rate swaps.
18
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On August 31, 2001, the Company issued 120,000 shares of its common
stock for total cash consideration of $1,500,000, or $12.50 per share. The
shares were issued as a result of the exercise of warrants to purchase common
stock held by Mercury Exploration Company, Lucy Darden and Anne Darden Self.
Mercury purchased 100,000 of the shares and Ms. Darden and Ms. Self each
purchased 10,000 of the shares. The issuances were deemed exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
such act.
ITEM 5. Other Information
The Company's common stock commenced trading on the New York Stock
Exchange on October 22, 2001, under the same ticker symbol as previously
utilized on the American Stock Exchange "KWK". The Company's common stock is no
longer traded on the American Stock Exchange.
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.
19
Quicksilver Resources Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 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
20