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    Quicksilver Resources to create MLP with Barnett assets to reduce debt

    By Oil & Gas Financial Journal staff 

    Forth Worth, TX-based natural gas and crude oil exploration and production company Quicksilver Resources Inc. (NYSE: KWK) announced its intent October 19 to create a master limited partnership (MLP) with a portion of its Barnett Shale assets. 

    The company will retain significant ownership and 100% of the general partner. 

    Shale assets as MLP-suitable assets may evolve into another realm of opportunities as shale plays begin to mature. In as little as five years after a well is drilled, shale assets may be deemed MLP-suitable. The earliest Barnett wells may already be MLP-suitable from a year-over-year decline standpoint. 

    In a prepared statement, Quicksilver president and CEO Glenn Darden commented: "We believe we will be able to monetize a large maturing asset base at attractive prices which can eliminate all of Quicksilver’s existing public debt over the next few years. At the same time, the MLP will be growing organically and looking for new opportunities that will provide further upside for all of our shareholders.” 

    The company intends to raise $400 million to pay down debt. Approximately $940 million of public debt that is callable between now and the end of 2012 which the company expects to eliminate over the next two years with cash generated from the drop downs to the MLP. As of 2Q11, Quicksilver carried roughly $1.98 billion of outstanding debt, or a total debt to EV ratio of 55%, according to calculations presented by Dahlman Rose & Co. in a note to investors October 20. 

    Assets in the initial sale to the MLP are expected to be made up of 18% of the company’s current Barnett production (approximately 330-340 MMcfe/d) and 15% of the company’s year-end 2010 Barnett proved reserves (approximately 400 bcfe). 

    The metrics imply $6,633 per flowing Mcfed and $6.67 per Mcfe of proved reserves, according to calculations by Global Hunter Securities. 

    In a note to investors October 20, Global Hunter Securities analysts expect the MLP to eliminate roughly 5% from the company’s net debt-to-cap ratio from 65% to 60% assuming the debt is paid off immediately from the proceeds. “The MLP is a viable option as the company looks to lower its leverage, which has hampered investor sentiment in the stock recently, coupled with a failed privatization of the company several months ago. With low interest rates, we see the MLP as being a better option than raising equity, which could further dilute equity holders’ ownership and adversely affect the value of shares,” the analysts continued. 

    Dahlman Rose analysts generally agree. “While we do not tend to favor the MLP structure, we do acknowledge the transaction will help the company raise the cash needed to pay off some of its outstanding debt and prepare the company for future investments in better growth opportunities (Horn River, and Permian).”

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