Will Quicksilver be Able to Make It?
Anirban is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Currently, the natural gas companies are facing a hard time maintaining their profits, and the performance of Quicksilver Resources (NYSE: KWK) has been no exception. Quicksilver Resources have posted a larger than expected net loss of $673 million for the second quarter of the current year, compared to a net income of $109 million for the same period a year earlier.
The Cause:
Quicksilver Resources, which is primarily a natural gas producing company, with 80% of its total production being natural gas, has been badly hit by the fall in natural gas prices. Prices of natural gas have witnessed a steep decline of 46% in the second quarter, compared to same period last year, which has badly affected almost all the companies acting in the sector, including biggies like Chesapeake (NYSE: CHK) and Canadian Natural Resources (NYSE: CNQ).
But Quicksilver's loss is the result of a non-cash impairment charge the company took on its oil and gas properties due to lower natural gas prices, exactly similar to what happened with Encana’s (NYSE: ECA) performance this quarter. Forced by the lower gas prices, natural gas producing companies are slowly moving towards natural gas liquids, leading to higher production of NGLs, which is ultimately narrowing the price premium available in that segment too. This has led companies with two choices; either shift to more lucrative crude oil or to cut cost and wait till prices improve.
Steps Taken:
Quicksilver has curtailed their full-year capital expenditure budget by $50 million to $360 million due to lower drilling activities taken up by the company. On the backdrop of declining prices, Quicksilver has decreased the production target for the year and has freezed investment in the Horn River natural gas assets in British Columbia for the rest of 2012. Also, Quicksilver has already invested in the acreage more than the planned for the current year, hence investments the company has decided to cut further expenses.
Quicksilver is very optimistic about the prospect of production from the eight wells that they are about to drill in the area and are hoping to partner a biggie in the field to export LNG. Given the prospect of LNG in the Asian countries, one can always be hopeful of securing a chance to reap those benefits.
The Bottom-line:
If Quicksilver is able to wear off the slump that the oil and natural gas sector is currently facing, and if regulations regarding export of natural becomes a bit leaner, then the stock has the potential to go places. Keep a close eye on the stock.
anirbandutta has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
