Quicksilver Resources, Inc. (KWK): Guidance slightly better than expected; continue to rate as Buy - Goldman Sachs - 12/18/07
News
Quicksilver announced 2008 production guidance of 255 MMcfe/d, up 20% versus 2007 despite the sale of the company's core Michigan producing asset. Guidance for capital expenditures is $885 million.
Analysis
The guidance announcement is slightly better than expected. We were assuming production of 250 MMcfe/d and capital expenditures of $900 million. With Barnett Shale growth more than offsetting the impact of asset sales, Quicksilver continues to show that its position in Johnson, eastern Hood, and northeastern Somervell counties is of better-than-expected quality. The key area of criticism, in our view, remains the company's free-cash deficits. Quicksilver is not alone in meaningfully outspending cash flow to fund greater than or around 20% growth--Southwestern Energy, SandRidge Energy, and Bill Barrett each screen poorly on free-cash metrics. With Quicksilver's balance sheet improved following asset sale proceeds and an expected one-time gain on sale, we believe the company's free-cash deficit will be at least temporarily forgiven if the Street continues to have confidence in the company's Barnett Shale resource base.
Implications
Quicksilver shares have been weak recently, and we believe the pullback is overdone. Quicksilver trades at 10.3X 2008E EV/debt-adjusted cash flow, in the midpoint of the 8.5X-14.0X range of repeatable mid-cap and small-cap growth E&Ps. We see 42% upside potential to a $70 12-month discounted-cash-flow-based price target versus 28% upside potential for peers. The stock is levered to our out-of-consensus bullish view on natural gas, which we expect will be a key theme in 2008 and 2009. |
