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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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
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QUICKSILVER RESOURCES INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2756163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 West Rosedale Suite 300,
Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (817) 665-5000
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value
$0.01 per share American Stock Exchange
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Documents incorporated by reference: Proxy statement of Quicksilver
Resources Inc. relating to the annual meeting of stockholders to be held on
June 5, 2001, which is incorporated into Part III of this Form 10-K.
As of March 9, 2001, 18,567,010 shares of common stock of Quicksilver
Resources Inc. were outstanding, and the aggregate market value of the voting
stock held by non-affiliates of Quicksilver Resources Inc. was approximately
$102,977,912 based on the American Stock Exchange composite trading closing
price of $11.98 on March 9, 2001, and using the definition of beneficial
ownership contained in Rule 16a-1(a) (2) promulgated pursuant to the
Securities Exchange Act of 1934.
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INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2000
Page
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Part I
Item 1. Description of Business................................................................ 3
Item 2. Description of Properties.............................................................. 9
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 15
Item 6. Selected Financial Data................................................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 25
Item 8. Financial Statements and Supplementary Data............................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 53
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 53
Item 11. Executive Compensation................................................................. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 55
Item 13. Certain Relationships and Related Transactions......................................... 55
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 55
SIGNATURES............................................................................. 57
2
PART I
ITEM 1. Description of Business
Formation of Quicksilver
Quicksilver Resources Inc. (the "Company" or "Quicksilver") was formed as a
Delaware corporation in December 1997 for the purpose of combining certain oil
and gas properties owned by Mercury Exploration Company ("Mercury"),
Quicksilver Energy, L.C. ("QELC") and Michigan Gas Partners Limited
Partnership ("Michigan Gas Partners"). On January 1, 1998 Mercury, QELC,
Michigan Gas Partners, Trust Company of the West, Joint Energy Development
Investments Limited Partnership and Quicksilver entered into an agreement and
a plan of reorganization and merger. Michigan Gas Partners was merged into
Quicksilver and Mercury and QELC transferred certain assets, principally
natural gas and crude oil producing properties, and liabilities to
Quicksilver.
On March 4, 1999, the stockholders of MSR Exploration Ltd. ("MSR") approved
the merger of MSR into Quicksilver pursuant to the terms of an Agreement and
Plan of Merger, dated September 1, 1998, by and among Quicksilver and MSR. As
a result of the MSR merger, the separate corporate existence of MSR ceased and
all of the properties, rights, privileges, powers and franchises of MSR vested
in Quicksilver, the surviving corporation of the merger. All the debts,
liabilities and duties of MSR were transferred to Quicksilver. Each share of
common stock of MSR outstanding immediately prior to the effective time of the
merger was converted into the right to receive one tenth of one share of
common stock of Quicksilver. Quicksilver became a publicly traded corporation
and shares of Quicksilver common stock became listed for trading on the
American Stock Exchange under the symbol "KWK".
Business of Quicksilver
Quicksilver is an independent energy company engaged in the acquisition,
development, exploration, production and sale of natural gas, crude oil and
condensate and the gathering, processing and transmission of natural gas.
Quicksilver pursues its business through the acquisition and development of
oil and gas mineral leases, gas gathering systems and producing natural gas
and crude oil properties. Based upon the specifics of each mineral lease, as
well as geological and engineering interpretations, Quicksilver develops its
inventory of leases by drilling wells, redrilling wells or recompleting
existing wells located on those leases for the recovery of the reserves
located there. Quicksilver currently has an interest in natural gas and crude
oil mineral leases, a pipeline transmission system, gas gathering and
processing facilities and wells producing hydrocarbons that are located
principally in the states of Michigan, Wyoming, Montana, and Indiana as well
as Canada. Quicksilver evaluates other opportunities for the development of
reserves and related assets as they become available and, under certain
circumstances, may explore opportunities in regions other than those in which
Quicksilver is currently involved.
As part of its formation, Quicksilver entered into a management agreement
with Mercury to act as operator of Quicksilver's oil and gas properties. In
this capacity, Mercury was responsible for the daily activities of producing
natural gas and crude oil from Quicksilver's individual wells and leases.
Mercury supervised its field employees and managed Quicksilver's properties
with a view toward maximizing profitability. For some wells, Mercury also
contracted with individuals doing business in proximity to the wells (who are
more commonly referred to as "pumpers") for performance of various tasks that
are required to maintain production from the wells. Upon completion of the MSR
merger on March 4, 1999, the management agreement with Mercury terminated and
Quicksilver and Mercury entered into a new management agreement. Under this
new management agreement, Mercury provided administrative and accounting
services, and continued to provide operations services under existing
operating agreements. In July 2000, Quicksilver terminated the management
agreement with Mercury and now performs all of its own administrative,
finance, and operating functions.
Quicksilver is not a user or refiner of the natural gas or crude oil it
produces, except when related to the operation of wells that produce natural
gas. Once extracted from the ground, Quicksilver either connects the
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production to a pipeline gathering system, in the case of natural gas and
condensate, or stores the crude oil in storage tanks located close to the
producing field for collection by oil purchasers.
Quicksilver owns or holds interests in over 4,814 producing wells.
Quicksilver also holds interests in properties that contain proved undeveloped
natural gas and crude oil reserves that require additional drilling,
workovers, water flooding or other forms of enhancement in order to become
productive.
The Company controls capital expenditures and timing of all field activities
and strives to manage its producing properties to maximize economic production
over the life of the properties through a combination of development well
drilling, existing well recompletions and workovers and enhanced recovery
operations. Quicksilver uses advanced drilling technologies to minimize costs
and performs regular operational reviews to minimize operating expenses.
Quicksilver continually evaluates producing property acquisition
opportunities and may increase its total annual capital expenditures depending
upon its success in identifying and completing attractive acquisitions.
Business Strategy
Quicksilver's business strategy focuses on achieving growth in value per
share while maintaining profitability. The Company accomplishes this by (i)
pursuing low-cost development projects within its existing property base, (ii)
pursuing selective complementary acquisitions of high-quality, long-lived
producing properties with the potential for operating cost reductions, (iii)
focusing on the Company's expertise developed in production from
unconventional natural gas resources, (iv) managing exposure to commodity
price volatility through an aggressive hedging program, and (v) pursuing
limited low-risk exploration drilling projects.
Low-cost Development of Existing Property Base
A principal component of Quicksilver's strategy is to increase production
and reserves through aggressive management of operations and low-risk
development drilling. The Company's principal properties possess geological
and reservoir characteristics that make them well-suited for production
increases through exploitation activity and development drilling. The Company
initiates projects to reduce operating costs and increase production through
the repair and upgrading of lifting equipment; the redesigning of equipment to
improve production from different zones; the modification of gathering and
other surface facilities; and the conducting of restimulations and
recompletions. Through these and other techniques, the Company regularly
reviews operations and mechanical data on operated properties to determine if
actions can be taken to profitably increase reserves and production.
Pursuit of Selective Complementary Acquisitions
Quicksilver seeks to acquire operated, long-lived producing properties that
present opportunities to profitably increase reserves and production levels
through the implementation of technically advanced reservoir management
techniques and the reduction of expenses through the consolidation and active
management of field operations. Quicksilver targets acreage that would expose
the Company to high potential prospects located in areas that are geologically
similar to neighboring areas with large developed fields. Quicksilver believes
that the Company will be able to continue this cost-effective acquisition
strategy over the long term as larger oil and gas companies continue to divest
domestic onshore properties in order to focus on projects in offshore and
international areas; however, current commodity prices have reduced the number
of economically acceptable acquisition opportunities.
Focus on Unconventional Gas Reserves
Conventional or traditional reservoirs produce gas at commercial flow rates
with minimal stimulation requirements. Unconventional reservoirs, the opposite
of traditional, will not produce at commercial flow rates unless the formation
is successfully stimulated. The most successful form of stimulation is usually
hydraulic
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fracturing. Unconventional gas resources play an important role in the
production of natural gas and are the largest remaining natural gas resources
in North America. Natural gas produced from shale, coal beds, and tight gas
sands are included in the unconventional gas resource category. The majority
of the Company's Michigan production is from the Antrim shale where
Quicksilver or its predecessors have been an active driller and producer for
over ten years. The Company's Antrim shale activity has allowed it to develop
a technical and operational expertise in the acquisition, development and
production of unconventional natural gas reserves. Quicksilver will continue
to focus on unconventional natural gas resources in order to use its developed
expertise.
Management of Product Price Risk
Quicksilver is focused on growing its oil and gas operations while
minimizing the effect of commodity price swings on net income and cash flow
from operations. To help ensure a level of predictability in the prices
received for the Company's natural gas and crude oil production and,
therefore, the resulting cash flow, Quicksilver has entered into natural gas
sales contracts with up to eight years remaining as well as financial hedges
for approximately 83% of its natural gas production, or 65% of its total
production. The Company's commodity risk management strategy helps to ensure a
predictable, base level of cash flow which allows the Company to execute its
drilling and exploitation program, meet debt service requirements, and pursue
acquisition opportunities, even in times of weakness in the prices of natural
gas and crude oil.
Participation in Exploratory Drilling Projects
Quicksilver will continue to focus the bulk of its activities on lower risk
exploitation activity and development drilling. Quicksilver may, however,
allocate future capital expenditures to target high potential exploratory
projects with low financial risk. In particular, Quicksilver anticipates
pursuing exploratory and follow-on development and exploitation drilling in
areas which are believed to be attractive prospects for unconventional gas
projects including shales, coal bed methane and tight sands gas, to which the
Company's technical and operational expertise is well suited. Whenever
possible, the Company will seek to fund the initial higher-risk portion of
capital expenditures associated with the exploration phase of these projects
through farmouts to larger, better capitalized industry participants while
maintaining the ability to participate in any subsequent lower risk
development and exploitation activities.
Recent Events
During the year 2000, Quicksilver advanced toward its goal of becoming a
significant independent oil and gas producing company through acquisitions,
exploration agreements, and assumption of administrative and operational
functions.
CMS Acquisition
On March 31, 2000, the Company acquired from CMS Oil and Gas Company, a
subsidiary of CMS Energy Corporation, oil and gas properties located primarily
in Michigan ("CMS Properties" or "CMS Acquisition") for $164 million. The CMS
Properties consist of interests in approximately 3,050 (650 net) producing oil
and gas wells on approximately 512,000 gross (450,000 net) acres. Estimated
proved reserves attributable to the CMS Properties include 315.1 Bcf of
natural gas, 747.8 Mbbls of crude oil and condensate and 143.9 Mbbls of
natural gas liquids, or a total of 320.4 Bcfe. Approximately 80% of the proved
reserve volumes are classified as proved developed. This acquisition doubled
the Company's revenues, and was financed through additional borrowings and a
monetization of tax credits.
Mercury Acquisition
Effective July 31, 2000, Quicksilver purchased substantially all of the oil
and gas-related assets of, and 65% of a gas compression company from, Mercury
Exploration Company ("Mercury"), a related party. The assets purchased
included all the capital stock of Mercury Michigan, Inc. ("MMI"), 65% of the
capital stock of
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Mechanical Technology Services, LLC ("MTS"), and gas and oil properties
located in Indiana and Kentucky (See Dominion Indiana Acquisition below). MMI
is a gas processing company, which gathers and processes approximately 75
million cubic feet of natural gas per day, and which owns fifty percent each
of Beaver Creek Pipeline, LLC and Cinnabar Energy Services & Trading, LLC.
Quicksilver now owns 100% of Beaver Creek and Cinnabar. MTS sells, installs,
repairs, and maintains compression for the natural gas industry.
Dominion Indiana Acquisition
On September 26, 2000, Quicksilver purchased substantially all of the
interests in producing gas wells, related gathering and transmission systems
and fifty percent in undeveloped leasehold acres owned by Dominion Reserves-
Indiana, Inc. for $2.2 million. The remaining interests in these properties
located in Indiana and Kentucky were acquired by Quicksilver from Mercury
effective July 1, 2000.
MGV Energy Inc.
In December 2000, MGV Energy Inc. ("MGV"), Quicksilver's Canadian
subsidiary, announced the formation of a joint venture with PanCanadian
Petroleum Limited to explore for and develop coal bed methane reserves on over
1 million acres of PanCanadian lands. The exploration project, which initially
focuses on PanCanadian's Palliser block in southern Alberta, began in December
of 2000. Quicksilver subsequently acquired the remaining minority interest in
MGV it did not own for the equivalent of 283,669 shares of Quicksilver common
stock in the form of MGV exchangeable shares.
Assumption of Administrative and Operational Functions
On April 1, 2000, Quicksilver assumed the accounting, treasury and
administrative functions, and on July 1, 2000, it assumed operational
functions of its oil and gas properties, all of which were previously
performed by Mercury. As a result, headcount went from 23 on December 31, 1999
to 214 at year-end 2000. With the acquisition of the Mercury assets (described
above) and assumption of all functions from Mercury, the Company has all but
eliminated its dependence on and transactions with Mercury.
Cinnabar Expansion
During 2000, Cinnabar Energy Services & Trading, LLC ("Cinnabar"),
Quicksilver's wholly owned marketing company (upon completion of the Mercury
acquisition), expanded its operations to provide third party marketing
services to other producers, as well as managing the equity product sales of
Quicksilver. Cinnabar, on behalf of Quicksilver and its third party clients,
sold over 25 Bcf of gas in 2000.
Marketing
The natural gas produced from Quicksilver's properties is marketed by
Cinnabar under existing long-term sales contracts and short-term wholesale
spot market sales. Oil production is sold at local prices to the principal
purchasers of crude oil in the respective areas of operations.
Cinnabar sells the oil and gas to creditworthy counterparties, such as
utilities, major oil companies (or their affiliates), industrial customers,
large trading companies or energy marketing companies, refineries and other
users of petroleum products. Cinnabar is not confined to or dependent upon one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser in areas in which Cinnabar sells its production would not materially
affect Quicksilver's product values. For 2000, however, purchases by CoEnergy
Trading Company, Reliant Energy Services Inc., Scana Energy Marketing Inc. and
Sempra Energy Trading Corp., exceeded 10% of the total revenues from
Quicksilver's product sales.
6
Competition
The Company encounters substantial competition in acquiring oil and gas
leases and properties, marketing oil and gas, securing personnel and
conducting its drilling and field operations. Many competitors have financial
and other resources, which substantially exceed those of the Company. The
competitors in development, exploration, acquisitions and production include
the major oil companies as well as numerous independents, individual
proprietors and others. Resources of the Company's competitors may enable them
to pay more for desirable leases and to evaluate, bid for and purchase a
greater number of properties or prospects than the Company. The ability of the
Company to replace and expand its reserve base in the future through
acquisition will be dependent upon its ability to select and acquire suitable
producing properties and prospects for future drilling.
The Company's acquisitions have been financed through debt and internally
generated cash flow. There is competition for capital to finance oil and gas
acquisitions and drilling. The ability of the Company to obtain such financing
is uncertain and can be affected by numerous factors beyond its control. The
inability of the Company to raise capital in the future could have an adverse
effect on certain areas of its business.
Governmental Regulation
The Company's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations.
In particular, natural gas and crude oil production and related operations are
or have been subject to price controls, taxes and other laws and regulations
relating to the industry. Failure to comply with such laws and regulations can
result in substantial penalties. The regulatory burden on the industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, such laws and regulations are frequently
amended or reinterpreted so the Company is unable to predict the future cost
or impact of complying with such laws and regulations.
Environmental Matters
The Company's oil and natural gas exploration, development, production and
pipeline gathering operations are subject to stringent federal, state and
local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental
agencies, such as the Environmental Protection Agency ("EPA"), issue
regulations to implement and enforce such laws, and compliance is often
difficult and costly. Failure to comply may result in substantial civil and
criminal penalties. These laws and regulations may require the acquisition of
a permit before drilling commences; restrict the types, quantities and
concentrations of various substances that can be released into the environment
in connection with drilling, production and pipeline gathering activities;
limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands, frontier and other protected areas; require some form of
remedial action to prevent pollution from former operations such as plugging
abandoned wells; and impose substantial liabilities for pollution resulting
from the Company's operations. In addition, these laws, rules and regulations
may restrict the rate of natural gas and crude oil production below the rate
that would otherwise exist. The regulatory burden on the industry increases
the cost of doing business and consequently affects the Company's
profitability. Changes in environmental laws and regulations occur frequently,
and any changes that result in more stringent and costly waste handling,
disposal or clean-up requirements could adversely affect the Company's
operations and financial position, as well as the industry in general. While
management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations and the Company has not
experienced any materially adverse effect from compliance with these
environmental requirements, there is no assurance that this will continue in
the future.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into
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the environment. These persons include the present or past owners or operators
of the disposal site or sites where the release occurred and the companies
that transported or arranged for the disposal of the hazardous substances at
the site where the release occurred. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to
natural resources and for the costs of certain health studies; it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damages allegedly caused by the release of
hazardous substances or other pollutants into the environment. Furthermore,
although petroleum, including natural gas and crude oil, is exempt from
CERCLA, at least two courts have ruled that certain wastes associated with the
production of crude oil may be classified as "hazardous substances" under
CERCLA and thus such wastes may become subject to liability and regulation
under CERCLA. State initiatives to further regulate the disposal of crude oil
and natural gas wastes are also pending in certain states, and these various
initiatives could have adverse impacts on the Company.
Stricter standards in environmental legislation may be imposed on the
industry in the future. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain exploration and
production wastes as "hazardous wastes" and make the reclassified wastes
subject to more stringent handling, disposal and clean-up restrictions. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as on the industry in general.
Compliance with environmental requirements generally could have a materially
adverse effect upon the capital expenditures, earnings or competitive position
of the Company. Although the Company has not experienced any materially
adverse effect from compliance with environmental requirements, no assurance
may be given that this will continue in the future.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other petroleum
wastes into navigable waters. Permits must be obtained to discharge pollutants
into state and federal waters. The FWPCA and analogous state laws provide for
civil, criminal and administrative penalties for any unauthorized discharges
of crude oil and other hazardous substances in reportable quantities and may
impose substantial potential liability for the costs of removal, remediation
and damages. Federal effluent limitations guidelines prohibit the discharge of
produced water and sand, and some other substances related to the natural gas
and crude oil industry, into coastal waters. Although the costs to comply with
zero discharge mandated under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a materially adverse impact on the Company's
financial condition and results of operations. Some oil and gas exploration
and production facilities are required to obtain permits for their stormwater
discharges. Costs may be incurred in connection with treatment of wastewater
or developing storm water pollution prevention plans.
The Resource Conservation and Recovery Act ("RCRA"), as amended, generally
does not regulate most wastes generated by the exploration and production of
natural gas and crude oil. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by the EPA or state
agencies as solid waste. Moreover, ordinary industrial wastes, such as paint
wastes, waste solvents, laboratory wastes and waste compressor oils, are
regulated as hazardous wastes. Although the costs of managing solid hazardous
waste may be significant, the Company does not expect to experience more
burdensome costs than would be borne by similarly situated companies in the
industry.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters
of the United States" (a term defined to include rivers, creeks, wetlands and
coastal waters) to adopt and implement plans and procedures to prevent any
spill of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35
million in financial resources to pay for the costs of cleaning up an oil
spill and compensating any parties damaged by an oil spill. Substantial civil
and criminal fines and penalties can be imposed for violations of OPA and
other environmental statutes.
8
Employees
As of March 9, 2001, the Company had 221 full time employees, including
officers.
ITEM 2. Description of Properties
Location and Characteristics
Quicksilver owns significant interests in the following properties:
Michigan
Reserve Data as of Average Daily Production
December 31, 2000 for 2000
------------------------- ---------------------------
Gas Oil NGL Total Gas Oil NGL Total
(Bcf) (Mbbl) (Mbbl) (Bcfe) (Mmcf) (Bbls) (Bbls) (Mmcfe)
----- ----- ----- ----- ----- ----- ----- ------
Producing Formation:
Antrim Shale.......... 469.1 -- -- 469.1 60.5 -- -- 60.5
Prairie du Chien and
Other................ 74.0 4.4 1.4 108.7 27.7 1,458 393 38.8
----- --- --- ----- ---- ----- --- ----
Total............... 543.1 4.4 1.4 577.8 88.2 1,458 393 99.3
===== === === ===== ==== ===== === ====
Michigan has very favorable natural gas supply/demand characteristics in
that Michigan has been importing an increasing percentage of its natural gas,
and currently imports approximately 75% of its demand. This supply/demand
situation generally allows Michigan producers to sell their natural gas at a
slight premium to typical industry benchmark prices. It also provides
opportunities for long-term contracts at favorable terms with end users who
value such supply arrangements.
The Antrim Shale
The Antrim Shale underlies a large percentage of the Company's Michigan
acreage and is fairly homogeneous in terms of reservoir quality; wells tend to
produce relatively predictable amounts of natural gas. While subsurface
fracturing can increase reserves and production attributable to any particular
well, the over 7,000 wells drilled in the trend and the approximately 552
wells Quicksilver has drilled suggest typical per well reserves of 600 Mmcf to
800 Mmcf and a total productive life of more than 20 years. As new wells
produce and the de-watering process takes place, they tend to reach a
production level of 150 Mcf to 200 Mcf per day in six to 12 months, remaining
at these levels for one to two years, then declining at 8% to 10% per year
thereafter. The total cost to drill and complete an Antrim well is
approximately $225,000, including all acreage, production facilities and
flowlines, and the wells tend to produce the best economic results when
drilled in large numbers in a fairly concentrated area. This well
concentration provides for a more rapid de-watering of a specific area, which
decreases the time to natural gas production and increases the amount of
natural gas production. It also enables Quicksilver to maximize the use of
existing production infrastructure, which decreases per unit operating costs.
Since reserve quantities and production levels over a large number of wells
are fairly predictable, maximizing per well recoveries and minimizing per unit
production costs through a sizeable well-engineered drilling program are the
keys to profitable Antrim development.
At December 31, 2000, Quicksilver owned interests in 3,681 Antrim wells and
operated 1,249 of these wells, or 34% of the Company's total Antrim wells.
During 2000, average net production was 60.5 Mmcf per day. Since 1996, the
Company has drilled 186 Antrim wells and successfully completed 184 for a
success rate of 99%. Quicksilver has 201 net identified Antrim drilling
locations of which 156.0 (net) are currently classified as proved undeveloped
locations. In 2000, the Company drilled 30.5 (net) Antrim wells, all of which
were successfully completed. For 2001, Quicksilver has budgeted for the
drilling of 112.9 (net) Antrim wells at a cost of approximately $21.9 million.
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The Prairie du Chien
Quicksilver's Prairie du Chien ("PdC") wells produce from several Ordovician
age reservoirs with the majority being in the 1,000 feet to 1,200 feet thick
Prairie du Chien Group that has three major sands: the Lower PdC, Middle PdC
and Upper PdC. Many of these wells also can produce from the St. Peter
sandstone and the Glenwood formations, both of which lie directly above the
PdC. Some of the wells are producing from two or more of these zones.
Depending upon the area and the particular zone, the PdC will produce dry gas,
gas and condensate or, oil with associated gas. The average depths of these
wells range from 7,000 feet to 12,000 feet.
Quicksilver owns an average net revenue interest of 57%, on a Bcfe basis, in
the wells comprising the Company's PdC reserves. Quicksilver operates over 98%
of these reserves. The Company's PdC production is well established, and three
development wells have been drilled in recent years to increase production
from existing fields. As a result of some of this work and an acquisition from
Union Oil Company of California ("Unocal") in May of 1999, Quicksilver has
identified eight additional proved undeveloped locations. In addition, there
are numerous proved non-producing zones in existing wellbores that provide
recompletion opportunities, allowing the Company to maintain or, in some
cases, increase production from its PdC wells as currently producing
reservoirs deplete. As of December 31, 2000, the Company had 38 gross (24.1
net) PdC wells producing 25.0 Mmcfe per day. For 2001, the Company has
budgeted $430,000 for various workovers and recompletions on its PdC wells,
and plans to spend $3.3 million in 2001 to drill two new wells.
Richfield/Detroit River
Quicksilver's Richfield/Detroit River wells are located in Kalkaska and
Crawford counties in the Garfield and Beaver Creek fields. The Garfield
Richfield has seven producers producing under primary solution gas drive.
Additional potential exists in the Garfield Richfield either by secondary
waterflood and/or improved oil recovery ("IOR") with CO2 injection. The
potential upside is under evaluation and has not been included in
Quicksilver's booked reserves.
The Beaver Creek Richfield is currently being waterflooded, with 113
producing wells and 60 water injection wells. The Richfield zone consists of
seven dolomite reservoirs spread over a 200 foot interval. Quicksilver has
drilled two wells of a five well stepout program on the eastern flank of the
structure, with drilling operations ongoing. Once drilling operations have
ceased, the five wells will be completed. Pending a testing/production
monitoring period on this five well program, an additional five well drilling
and completion program is planned for later in 2001.
The Detroit River zone III at Beaver Creek also produces from three wells.
Lying approximately 200 feet above the Richfield, the Detroit River zone III
is a six foot dolomite zone which covers approximately 10,000 acres on the
Beaver Creek structure. Quicksilver is currently recompleting seven wells on
the north and west flank of the structure. A 20 well drilling program is
planed for midyear 2001 to continue development of the Detroit River zone III.
Quicksilver plans to continue drilling and recompleting wells to fully develop
the Detroit River zone III by mid 2002. In addition to booked primary proved
undeveloped reserves in the Detroit River zone III, upside potential exists
for IOR with CO2.
The Company's average daily production from the Richfield and Detroit River
formations totals approximately 4.2 Mmcfe.
Niagaran
Quicksilver's Niagaran wells produce from numerous Silurian age Niagaran
(dolomite/limestone) pinnacle reefs located in Cheboygan, Grand Traverse,
Kalkaska, Livingston, Manistee, Montmorency, Oakland, Otsego and Presque Isle
Counties. The depth of these wells range from 3,400 feet to 7,800 feet with
reservoir thickness from 300 feet to 600 feet. Depending upon the location of
the specific reef in the pinnacle reef belt of the northern shelf area, the
Niagaran reefs will produce dry gas, gas and condensate or oil with associated
gas.
10
As of December 31, 2000, the Company had 64 gross (28 net) Niagaran wells
producing 7.3 Mmcfe per day. Quicksilver operates, on a Bcfe basis,
approximately 50% of the reserves associated with these wells.
Indiana
Quicksilver acquired a 95% working interest in 33 New Albany Shale producing
wells from Dominion Reserves-Indiana effective April 1, 2000 and also acquired
the remaining 5% working interest from its predecessor, Mercury Exploration
Company effective July 1, 2000. With these two acquisitions, the Company also
purchased the eight mile 12 inches GTG gas transmission pipeline that runs
from Southern Indiana to Northern Kentucky. Current production is
approximately 1.4 Mmcf per day. The New Albany Shale is similar to the
Michigan Antrim as it has to be dewatered in order to produce desorbed methane
gas. Typical reserves per well are estimated to be approximately 250 Mmcf.
Quicksilver initiated a five well expansion drilling program in December 2000
with the wells commencing production in February 2001. In addition,
Quicksilver anticipates that it will drill between 20 to 30 additional wells
in the New Albany Shale in 2001.
Rocky Mountain Region
Quicksilver's Rocky Mountain properties are located in Montana and Wyoming,
and production, which is primarily crude oil, is from well-established
producing formations at depths ranging from 1,000 feet to 17,000 feet. These
properties typically have multiple producing zones, some of which include the
Phosphoria at 750 feet to 1,000 feet, the Tensleep at 1,000 feet to 3,000 feet
and the Muddy/Mowry at 8,400 feet to 9,000 feet. The Company's Rocky Mountain
producing properties possess significant development drilling, secondary
recovery and other exploitation opportunities. As of December 31, 2000, the
Company's Rocky Mountain proved reserves were 10.3 Mmbbls of crude oil and 2.0
Bcf of natural gas, for total equivalent reserves of 63.8 Bcfe. In 2000, daily
production averaged 9.6 Mmcfe. During 2000, Quicksilver spent approximately
$500,000 on various exploitation activities relative to its Rocky Mountain
properties. The Company is currently conducting an active exploitation program
on several of its Rocky Mountain fields that involves recompletions in
existing wells. In 2001, Quicksilver has budgeted $2.6 million for the
drilling of 3 exploration wells and $1.2 million for exploitation activities.
South Casper Creek Steamflood Project
In October 1995, Quicksilver's predecessor acquired the South Casper Creek
steamflood project in Natrona County, Wyoming as part of a larger acquisition
from Unocal. In the 1970s and 1980s, Unocal had conducted several steamflood
evaluations of the Tensleep formation, a producing horizon that contains 14
degree gravity crude oil which is relatively heavy and is more effectively
recovered when heated with steam, allowing the oil to flow toward the wellbore
at a faster rate. In the late 1980s, Unocal attempted several additional
redesigned pilot steamfloods and had encouraging results. Based on these
results, Unocal undertook full development of the project, drilling additional
steam injection wells and installing four 50 Mmbtu per hour generators
providing 13,000 barrels of steam per day through eleven injection wells. The
post-steamflood production peaked in 1992 at 1,500 barrels per day, an 88%
increase from the pre-steamflood production of 800 barrels per day, exceeding
Unocal's original expectations. Despite this success, Unocal decided to cut
the project's budget, resulting in a decrease in steam injection, a decrease
in production and the eventual discontinuation of the project. Quicksilver's
predecessor's acquisition of this project included all of the associated steam
generating equipment in place that had been installed by Unocal. This
equipment is in good condition and could be restarted at an estimated cost of
under $2.4 million. While the project is economically viable at current crude
oil prices, the Company has excluded this project from its reserve report and
is studying options in light of the project's sensitivity to long-term oil
prices.
Canada
Quicksilver believes that a number of producing areas in Canada offer
excellent opportunities for acquisition and exploitation. The strengths of
MGV, Quicksilver's wholly-owned subsidiary, lie in its unconventional gas
resource expertise and its ability to conduct detailed reservoir engineering
studies over producing fields to
11
identify remaining reserves not currently being exploited by the current
operator. MGV's technical staff has developed proprietary reservoir software
designed to integrate large amounts of engineering and geological data to
identify such opportunities. MGV has a joint venture with PanCandian Petroleum
Limited ("PanCandian") where MGV identifies opportunities in a 36,000 square
mile area of mutual interest. This area of mutual interest is primarily in
southern Alberta, which has historically produced and continues to produce
significant amounts of hydrocarbons. When MGV identifies a prospect, it has
the right to acquire up to a 20% interest if PanCanadian participates and a
100% interest if PanCanadian declines. During 2000, MGV acquired a 20%
interest in 26 wells and proven reserves estimated at 1.8 Bcf. At the end of
2000, MGV held an interest in 401 wells in southern Alberta and 15.3 Bcf of
proved reserves. Net daily production at the end of the year was 1.9 Mmcf. MGV
has budgeted for the drilling of 48 gross (5.36 net) infill wells in 2001 on
properties they do not operate. Also budgeted is the drilling of 10 infill
wells on operated lands acquired last fall. Late in 2000, MGV drilled the
first 8 wells of a 30 well program for a Coal Bed Methane ("CBM") project. The
CBM project is a joint venture with PanCandian to explore for and develop
natural gas from coal beds situated on over 1.0 million acres of PanCanadian
lands. During 2001, MGV has budgeted to spend $7.2 million (Cdn) on its CBM
project and $1.5 million (Cdn) for the drilling of infill wells on existing
properties. See also "Recent Events--MGV Energy Inc".
Oil and Gas Reserves
The following reserve quantity and future net cash flow information for
Quicksilver represents proved reserves that are primarily located in the
United States. Reserve estimates were prepared by Holditch-Reservoir
Technologies Consulting Services, independent petroleum engineers. The
determination of oil and gas reserves is based on estimates that are highly
complex and interpretive. The estimates are subject to continuing change, as
additional information becomes available. Under the guidelines set forth by
the SEC, the calculation is performed using year-end prices held constant
(unless a contract provides otherwise) and is based on a 10% discount rate.
Future production costs are based on year-end costs and include production
taxes. This standardized measure of discounted future net cash flows is not
necessarily representative of the market value of Quicksilver properties.
There are numerous uncertainties inherent in estimating oil and gas reserves
and their estimated values, including many factors beyond Quicksilver's
control. The reserve data set forth in this document represents only
estimates. Although Quicksilver believes the reserve estimates contained in
this document are reasonable, reserve estimates are imprecise and are expected
to change, as additional information becomes available.
The following table summarizes Quicksilver's proved reserves, the estimated
future net revenues from such proved reserves and the standardized measure of
discounted future net cash flows attributable thereto at December 31, 2000,
1999 and 1998.
Years Ended December 31,
----------------------------
2000 1999 1998
---------- -------- --------
Proved reserves:
Natural gas (Mmcf)........................ 570,814 192,963 147,226
Oil (Mbbl)................................ 14,856 15,281 17,983
Natural Gas Liquids ("NGL") (Mbbl)........ 1,535 845 996
Total (Mmcfe)........................... 669,160 289,719 261,100
($ in thousands)
Estimated future net cash flows, before
income tax................................. $4,026,537 $450,663 $275,737
Standardized measure of discounted future
net cash flows, before income tax.......... $1,592,761 $253,506 $160,495
Proved developed reserves:
Natural gas (Mmcf)........................ 444,865 135,326 118,295
Oil (Mbbl)................................ 9,391 9,954 9,829
NGL (Mbbl)................................ 813 838 908
Total (Mmcfe)........................... 506,089 200,078 182,717
12
Volumes, Sales Prices and Oil and Gas Production Expense
The following table sets forth certain information regarding the production
volumes and weighted average sales prices received for and average production
costs associated with Quicksilver's sale of oil and gas for the periods
indicated.
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
Production:
Natural gas (Mmcf).............................. 26,655 15,926 14,520
Oil (Mbbl)...................................... 1,035 724 667
NGL (Mbbl)...................................... 161 129 132
------- ------- -------
Total (Mmcfe)................................. 33,831 21,044 19,317
Weighted average sales price (including impact of
hedges):
Natural gas (per Mmcf).......................... $ 3.04 $ 2.25 $ 2.37
Oil (per Mbbl).................................. $ 22.87 $ 14.55 $ 9.55
NGL (per Mbbl).................................. $ 25.25 $ 9.93 $ 9.48
Production operating expense (per Mcfe) (1)....... $ 1.11 $ 0.90 $ 0.89
- --------
(1) Includes production taxes.
Development, Exploration and Acquisition Capital Expenditures
The following table sets forth certain information regarding the approximate
costs incurred by Quicksilver in its development and exploration activities
and purchase of oil in place (in thousands):
Years Ended December 31,
------------------------
2000 1999 1998
-------- ------- -------
Acquisition of producing properties................ $167,855 $40,272 $ 1,715
Development costs.................................. 20,078 9,486 8,283
Exploration costs.................................. 360 -- 1,095
-------- ------- -------
Total............................................ $188,293 $49,758 $11,093
======== ======= =======
Productive Oil and Gas Wells
The following table summarizes the productive oil and gas wells as of
December 31, 2000, attributable to Quicksilver's direct interests.
Gross Net
------- -------
Natural Gas.................................................. 4,252.0 1,104.0
Oil.......................................................... 562.0 526.3
------- -------
Total...................................................... 4,814.0 1,630.3
======= =======
Oil and Gas Acreage
The following table sets forth the developed and undeveloped leasehold
acreage held directly by Quicksilver as of December 31, 2000. Developed acres
are defined as acreage spaced or able to be assigned to productive wells.
Undeveloped acres are acres on which wells have not been drilled or completed
to a point that would permit the production of commercial quantities of oil or
gas, regardless of whether or not such acreage contains
13
proved reserves. Gross acres are the total number of acres in which
Quicksilver has a working interest. Net acres are the sum of Quicksilver's
fractional interests owned in the gross acres. States in which Quicksilver
holds undeveloped acreage include Michigan, Montana, Indiana and Wyoming.
Gross Net
--------- -------
Developed acreage.......................................... 594,033 272,484
Undeveloped acreage........................................ 687,472 251,034
--------- -------
Total.................................................... 1,281,505 523,518
========= =======
Drilling Activity
The following table sets forth the number of wells attributable to
Quicksilver direct interests drilled.
Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Development Wells:
Productive..................................... 55.0 35.5 25.0 24.8 41.0 24.8
Dry............................................ -- -- 3.0 2.9 -- 2.9
---- ---- ---- ---- ---- ----
Total........................................ 55.0 35.5 28.0 27.7 41.0 27.7
==== ==== ==== ==== ==== ====
Exploratory Wells:
Productive..................................... -- -- -- -- 9.0 9.0
Dry............................................ -- -- -- -- 1.0 .5
---- ---- ---- ---- ---- ----
Total........................................ -- -- -- -- 10.0 9.5
==== ==== ==== ==== ==== ====
ITEM 3. Legal Proceedings
The Company was not a party to any material pending legal proceedings during
2000 and is not currently a party to any material legal proceeding.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a stockholder vote during the fourth
quarter of 2000.
14
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Comparative Market Data
Quicksilver's common stock is traded on the American Stock Exchange under
the symbol "KWK".
The following table sets forth the quarterly high and low closing sales
prices of Quicksilver's common stock for the periods indicated below.
QRI COMMON STOCK
High Low
------- -------
2000
First Quarter................................................ $6.1250 $3.6250
Second Quarter............................................... 7.2500 5.6250
Third Quarter................................................ 9.7500 7.0000
Fourth Quarter............................................... 9.7500 7.7750
1999
First Quarter................................................ $7.6250 $7.2500
Second Quarter............................................... 7.3750 6.1250
Third Quarter................................................ 7.3750 6.5000
Fourth Quarter............................................... 7.6250 3.8125
As of March 9, 2001, there were approximately 3,700 common stockholders of
record.
The Company has not paid dividends on its common stock and intends to retain
its cash flow from operations for the future operation and development of its
business. In addition, the Company's primary credit facility restricts
payments of dividends on its common stock.
Sales of Unregistered Securities
On March 4, 2000, the Company issued 3,650,000 unregistered shares of its
common stock to CMS Oil and Gas Company as part of an earnest money
performance deposit by the Company for an acquisition of properties from CMS.
CMS returned the shares to the Company upon closing of the acquisition on
March 31, 2000 and the shares are now held as treasury shares. The issuance of
these securities was exempt from registration under the Securities Act of 1933
in reliance on Section 4(2) of such act.
ITEM 6. Selected Financial Data
The following table sets forth, as of the dates and for the periods
indicated, selected financial information for the Company and its
predecessors. The Quicksilver financial information for each year ended
December 31, 2000, 1999 and 1998 has been derived from the audited
Consolidated Financial Statements of the Company for such periods. The
financial information of the Company's predecessors for periods ended in 1997
and 1996 has been derived from the audited financial statements of the
predecessors for such periods. The information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes thereto.
The following information is not necessarily indicative of future results for
the Company.
15
Selected Financial Data of Quicksilver
(in thousands, except for per share data)
Years Ended December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
Consolidated Statements of Operations Data:
Total revenues................................ $ 120,048 $ 50,046 $ 45,028
Income before income taxes and minority
interest..................................... 27,731 3,023 7,413
Net income.................................... 17,618 3,162 4,885
Net income--per share
Basic....................................... $ 0.96 $ 0.24 $ 0.42
Diluted..................................... 0.95 0.24 0.42
Consolidated Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities.......................... $ 47,691 $ 10,220 $ 16,355
Investing activities.......................... (195,518) (42,288) (16,097)
Financing activities.......................... 158,103 34,330 (607)
Other Consolidated Financial Data:
Capital expenditures.......................... $ 194,507 $ 43,452 $ 16,097
EBITDA(1) .................................... 74,410 25,762 26,476
Consolidated Balance Sheet Data:
Working capital............................... $ 935 $ 7,168 $ 1,291
Properties--net............................... 374,099 170,800 134,810
Total assets.................................. 440,111 194,302 144,600
Total debt.................................... 244,135 97,086 85,039
Stockholders' equity.......................... 86,758 69,551 32,588
- --------
(1) EBITDA (as used in this financial data) is calculated by adding interest,
income taxes, minority interest and depreciation, depletion and
amortization to net income. Interest includes interest expense accrued and
amortization of deferred financing costs. EBITDA is presented here not as a
measure of operating results, but rather as a measure of Quicksilver's
operating performance and ability to service debt. EBITDA should not be
considered as an alternative to earnings or operating earnings, as defined
by generally accepted accounting principles, as an indicator of the
Quicksilver's financial performance, as an alternative to cash flow, as a
measure of liquidity or as being comparable to other similarly titled
measures of other companies.
16
Selected Historical Financial Data of Quicksilver Predecessors
MSR Exploration, Ltd.
For the Period from Inception, March 7, 1997, to December 31, 1997
(In thousands)
Statements of Operations Data:
Revenues.......................................................... $ 854
Net income........................................................ 30
Other Information:
Capital expenditures.............................................. $ 592
Balance Sheet Data:
Working capital................................................... $ 42
Total assets...................................................... 25,963
Long-term debt.................................................... 10,560
Stockholders' equity.............................................. 13,070
Mercury Exploration Company
(Includes Quicksilver Energy, LC)
(In thousands, except for per share data)
Years Ended
September 30,
Three Months Ended -----------------
December 31, 1997 1997 1996
------------------ -------- -------
Statements of Operations Data:
Revenues................................ $ 11,049 $ 41,328 $17,388
Net income.............................. 2,354 5,115 2,248
Net income per common share............. 9.38 20.38 8.96
Weighed average shares outstanding...... 251 251 251
Other Information:
Capital expenditures.................... $ 27,750 $ 54,231 $19,779
Balance Sheet Data:
Working capital (deficit)............... $ (9,324) $(13,133) $(5,813)
Total assets............................ 126,506 102,880 50,186
Long-term debt.......................... 65,275 47,174 19,560
Stockholders' equity.................... 17,670 15,316 10,427
Michigan Gas Partners Limited Partnership
(In thousands)
Years Ended
December 31,
--------------
1997 1996
------ -------
Statements of Operations Data:
Revenues...................................................... $3,021 $ 3,368
Net income (loss)............................................. 19 (617)
Other Information:
Capital expenditures.......................................... $ 13 $ 132
Balance Sheet Data:
Working capital............................................... $ 343 $ 261
Total assets.................................................. 9,835 10,551
Long-term debt................................................ -- --
Partners' equity.............................................. 9,453 10,313
17
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Information
Certain statements contained in this Annual Report on Form 10-K and other
materials filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements
made or to be made by the Company), other than statements of historical fact,
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements may relate to a variety of
matters not currently ascertainable, such as future capital expenditures,
drilling activity, acquisitions and dispositions, development or exploratory
activities, cost savings efforts, production activities and volumes,
hydrocarbon reserves, hydrocarbon prices, hedging activities and the result
thereof, financing plans, liquidity, regulatory matters, competition and the
Company's ability to realize efficiencies related to certain transactions or
organizational changes. Forward-looking statements generally are accompanied
by words such as "anticipate," "believe," "expect," "intend," "plan,"
"project," "potential," or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove
correct. Factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include:
fluctuations in crude oil and natural gas prices; failure or delays in
achieving expected production from oil and gas development projects;
uncertainties inherent in predicting oil and gas reserves and oil and gas
reservoir performance; the effects of existing and future laws and
governmental regulations; liability resulting from litigation; world economic
and political conditions; changes in tax and other laws applicable to the
Company's business and certain factors discussed elsewhere in this Annual
Report on Form 10-K. All forward-looking statements are expressly qualified in
their entirety by the cautionary statements in this section. The following
discussion and analysis should be read in conjunction with "Selected Financial
Data" and the Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this annual report.
Mergers and Acquisitions
During the year 2000, Quicksilver more than doubled its revenue base
primarily through acquisitions funded through additional borrowings and
monetization of tax credits.
CMS Acquisition
On March 31, 2000, the Company acquired from CMS Oil and Gas Company, a
subsidiary of CMS Energy Corporation, oil and gas properties located primarily
in Michigan ("CMS Properties" or "CMS Acquisition"). The purchase price, which
was finalized in November 2000, was $164 million. The CMS Properties consist
of interests in approximately 3,050 (650 net) producing oil and gas wells on
approximately 512,000 gross (450,000 net) acres. Estimated proved reserves
attributable to the CMS Properties include 315.1 Bcf of natural gas, 747.8
Mbbls of crude oil and condensate and 143.9 Mbbls of natural gas liquids, or a
total of 320.4 Bcfe. Approximately 80% of the proved reserve volumes are
classified as proved developed.
The CMS Acquisition was financed through restructuring of Quicksilver's
senior bank facility, the sale of $53 million in subordinated notes, and the
monetization through a major financial institution of a portion of the
accompanying Internal Revenue Code Section 29 income tax credits related to
the CMS Properties.
The CMS Acquisition was accounted for under the purchase accounting method,
and consists of both CMS oil and gas properties as well as 100% of the common
stock of Terra Energy Ltd.
Mercury Acquisition
Effective July 31, 2000, Quicksilver purchased substantially all of the oil
and gas-related assets of, and 65% of a gas compression company from, Mercury
Exploration Company ("Mercury"), a related party, for approximately $18
million. An independent appraiser determined the fairness, from a financial
point of view, of
18
the $18 million purchase price, and the non-related party members of the
Company's Board of Directors approved the purchase. The acquisition was
financed through assumption of existing debt of $6.1 million, application of
an account receivable of $7.2 million, a note payable to Mercury of $3.2
million and accounts payable of $1.3 million.
The assets purchased included all of the capital stock of Mercury Michigan,
Inc. ("MMI"), 65% of the capital stock of Mechanical Technology Services, LLC
("MTS"), and gas and oil properties located in Indiana and Kentucky (See
Dominion Indiana Acquisition below). MMI is a gas processing company, which
gathers and processes approximately 75 million cubic feet of natural gas per
day, and which owns fifty percent each of Beaver Creek Pipeline, LLC and
Cinnabar Energy Services & Trading, LLC. Quicksilver now owns 100% of Beaver
Creek and Cinnabar. MTS sells, installs, repairs, and maintains compression
for the natural gas industry.
Dominion Indiana Acquisition
Effective April 1, 2000, Quicksilver purchased substantially all of the
interests in producing gas wells, related gathering and transmission systems
and fifty percent in undeveloped leasehold acres owned by Dominion Reserves-
Indiana, Inc. for $2.2 million. The remaining interests in these properties
located in Indiana and Kentucky were acquired by Quicksilver from Mercury
effective July 1, 2000.
MGV Energy Inc. Minority Interest Acquisition
On December 22, 2000, Quicksilver acquired the remaining minority interest
in its Canadian subsidiary, MGV Energy Inc., headquartered in Calgary,
Alberta. Quicksilver's initial 89.5% interest in MGV was acquired on August
26, 1999. In exchange for their 10.5% interest, the minority shareholders of
MGV received the equivalent of 283,669 shares of Quicksilver common stock in
the form of MGV exchangeable shares valued at $2,309,000, which was allocated
to assets acquired and liabilities assumed based upon their fair value.
Results of Operations
Summary Financial Data
Year Ended December 31, 2000 Compared with December 31, 1999
Years Ended
December 31,
----------------
2000 1999
-------- -------
(in thousands)
Total revenues............................................. $120,048 $50,046
Total expenses............................................. 92,317 47,023
Income before income taxes................................. 27,731 3,164
Net income................................................. 17,618 3,162
The Company recorded net income of $17,618,000 ($0.95 per diluted share) in
2000, compared to net income of $3,162,000 ($0.24 per diluted share) in 1999.
The improvement was largely due to the increase in production resulting from
the CMS Properties acquired March 31, 2000 and higher product prices.
Revenues: Total revenues for the year ended December 31, 2000 were
$120,048,000; an increase of 140% from the $50,046,000 reported for the year
ended December 31, 1999. Higher volumes contributed $40,540,000 of the revenue
increase while increased prices added $20,616,000 to revenue. Volume increases
were primarily the result of production from the CMS Properties acquired March
31, 2000. Other income increased $8,842,000 from the prior year primarily as a
result of deferred revenue recognition from the 2000 Section 29 tax credit
monetization.
19
The Company's revenues for the year ended December 31, 2000 increased
significantly over 1999 as further shown below.
Years Ended
December 31,
----------------
2000 1999
-------- -------
Average daily production volume
Gas--Mcf/d............................................... 72,829 43,633
Oil--Bbls/d.............................................. 2,829 1,984
Natural gas liquid ("NGL")--Bbls/d....................... 439 353
Product sale revenues (in thousands)
Natural gas sales........................................ $ 81,044 $35,799
Oil sales................................................ 23,674 10,540
NGL sales................................................ 4,054 1,277
-------- -------
Total oil, gas and NGL sales........................... $108,772 $47,616
======== =======
Unit prices-including impact of hedges
Gas price per Mcf........................................ $ 3.04 $ 2.25
Oil price per Bbl........................................ $ 22.87 $ 14.55
NGL price per Bbl........................................ $ 25.25 $ 9.93
Gas sales of $81,044,000 for 2000 were 126% higher than the $35,799,000 for
1999. Gas volumes increased 67% over 1999 as a result of the CMS Acquisition.
Additional volumes of 10,729,000 Mcf contributed $32,622,000 of additional
revenue over 1999. Average gas prices were $3.04 per Mcf in for 2000, $0.79
per Mcf higher than the average price received in 1999. Increased prices added
$12,623,000 of revenue as compared to 1999.
Oil sales grew 125% to $23,674,000 for 2000 compared to $10,540,000 in 1999.
Crude oil production for 2000 was 1,035,000 barrels compared to 724,000
barrels in 1999 primarily as a result of the CMS Properties. The additional
311,000 barrels contributed revenue of $7,113,000 over 1999. Average 2000 oil
sales prices were $22.87 per barrel compared to $14.55 per barrel in 1999
increasing revenues $6,021,000.
NGL sales of $4,054,000 for 2000 increased significantly over sales for
1999. NGL prices increased from $9.93 to $25.25 per Bbl and added revenue of
$1,972,000. The additional NGL volumes, primarily from the CMS Properties,
added $804,000 of revenue.
Other income increased by $8,846,000 to $11,276,000 in 2000 compared to
$2,430,000 in 1999. Deferred revenue recognition from the 2000 Section 29 tax
credit monetization was $6,842,000. Revenue from the Company's marketing and
gas processing subsidiaries was $1,049,000 and income from equity affiliates
increased $867,000, both as a result of the acquisition of assets from Mercury
effective July 31, 2000.
Expenses: Total expenses of $92,317,000 in 2000 were 96% higher than the
$47,023,000 incurred in 1999 reflecting the addition of the CMS Properties,
Mercury assets and additional activity associated with MGV Energy Inc.
("MGV"), the Company's Canadian subsidiary, during 2000.
Operating Expenses
Operating expenses increased $18,870,000, or 101%, from 1999 operating
expense of $18,771,000. Lease operating expenses increased 86%, or
$13,995,000, to $30,332,000 reflecting an increase of 59% in sales volumes
from 1999 and increases in production overhead as a result of additional
operated wells associated with the CMS Acquisition. Increased sales volumes
and higher prices resulted in an increase of $4,305,000, or 177%, in severance
tax expense to $6,739,000.
20
Depletion and Depreciation
Year Ended
December 31,
---------------
2000 1999
------- -------
(In thousands,
except per unit
amounts)
Depletion................................................... $22,985 $13,315
Depreciation of other fixed assets.......................... 1,570 721
------- -------
Total depletion and depreciation............................ $24,555 $14,036
======= =======
Average depletion cost per Mcfe............................. $ 0.68 $ 0.63
Depletion and depreciation increased to $24,555,000 in 2000 from $14,036,000
in 1999. Depletion increased $9,670,000 to $22,985,000 as a result of
production volumes associated with the CMS Properties and higher depletion
rates.
General and Administrative Expenses
General and administrative costs incurred during 2000 were $8,276,000, 99%
higher than in 1999, reflecting higher salaries and related payroll expenses
($1,486,000), office and building rent expense ($718,000), professional fees
($572,000), franchise taxes ($282,000), and Canadian office expenses
($550,000). These increases are related to the growth of the Company through
the CMS Acquisition, purchase of Mercury assets and increased activity
associated with MGV.
Interest Expense
Interest expense of $22,124,000 in 2000 increased $13,421,000 from 1999
reflecting higher debt levels due to the CMS Acquisition and higher effective
interest rates in 2000.
Income Taxes
Years Ended
December 31,
-------------
2000 1999
------- ----
Income tax provision (in thousands)............................ $10,113 $ 2
Average income tax expense per Mcfe............................ $ 0.30 $--
Effective tax rate............................................. 36.5% --
The income tax provision of $10,113,000 includes taxes on pre-tax earnings
at the statutory rate of 35% and adjustment of prior deferred taxes. The prior
deferred tax balance was recorded at 34% since it was previously estimated
that the timing differences would reverse at the lower rate. The increase in
profitability of the Company from the CMS Acquisition and record high prices
will result in future taxable income at the 35% rate. In 1999, $1,026,000 of
income taxes that would otherwise have been due were eliminated because the
utilization of net operating losses available from prior years.
As of December 31, 2000, the Company had a deferred tax liability of
$47,139,000. The increase in the deferred tax liability over the December 31,
1999 balance includes $24,497,000 as a result of the CMS Acquisition and a
$2,628,000 reduction in the liability that resulted from the acquisition of
the Mercury assets effective July 31, 2000. The remainder of the increase is
the result of year 2000 deferred tax expense.
21
Summary Financial Data
Year Ended December 31, 1999 Compared with December 31, 1998
Years Ended
December 31,
---------------
1999 1998
------- -------
(in thousands)
Total revenues.............................................. $50,046 $45,028
Total expenses.............................................. 47,023 37,615
Income before income taxes.................................. 3,164 8,171
Net income.................................................. 3,162 4,885
Net income of $3,162,000 ($0.24 per share) was recorded for 1999 as compared
to 1998 net income of $4,885,000 ($0.42 per share). The reduction was largely
due to the 191% increase in general and administrative costs. The increase
reflected the higher cost of being a public company with its own officers and
employees. In 1998, Mercury performed all administrative work for the Company.
Revenues: Total revenues for 1999 were $50,046,000, an increase of 11% from
the $45,028,000 reported in 1998. Additional volumes, resulting primarily from
properties acquired from Unocal, increased revenue $3,954,000 over the 1999
period while an overall increase in prices added $1,576,000 of revenue.
Years Ended
December 31,
---------------
1999 1998
------- -------
Average daily production volume
Gas--Mcf/d................................................ 43,633 39,781
Oil--Bbls/d............................................... 1,984 1,829
NGL--Bbls/d............................................... 353 362
Product sale revenues (in thousands)
Natural gas sales......................................... $35,799 $34,463
Oil sales................................................. 10,540 6,367
NGL sales................................................. 1,277 1,250
------- -------
Total oil, gas and NGL sales............................ $47,616 $42,080
======= =======
Unit prices-including impact of hedges
Gas price per Mcf......................................... $ 2.25 $ 2.37
Oil price per Bbl......................................... $ 14.55 $ 9.55
NGL price per Bbl......................................... $ 9.93 $ 9.48
Gas sales of $35,799,000 in 1999 were 4% higher than the $34,463,000 for
1998 as gas volumes increased 10% to 15,926,000 Mcf in 1999 reflecting
additional production volumes. Production increases were primarily related to
the additional production from properties acquired from Unocal in May 1999.
Average gas prices of $2.25 per Mcf for 1999 were $0.12 per Mcf lower than the
average received in 1998 and decreased revenues by $1,823,000 from the prior
year.
Oil sales grew 66% to $10,540,000 for 1999 compared to $6,367,000 in the
1998 period primarily as a result of higher prices. Average oil sales prices
in 1999 were $14.55 per barrel compared to $9.55 per barrel in 1998 and
provided additional revenue of $3,340,000 over the prior year. Additional oil
production contributed $826,000 of revenue as compared to 1998. Crude oil
production increased 57,000 barrels, or 9%, to 724,000 barrels, compared to
667,000 barrels for 1998.
NGL sales and volumes for 1999 were essentially unchanged from 1998. Revenue
of $1,277,000 resulted from NGL production of 129,000 barrels as compared to
$1,250,000 in revenue from 132,000 barrels in 1998.
22
Other income in both 1999 and 1998 primarily consisted of income associated
with the monetization of Section 29 tax credits and income associated with
transportation and processing of natural gas. Income of $1,280,000 was
recognized from the monetization of Section 29 credits compared to $1,546,000
in 1998. Natural gas transportation and processing income for 1999 was
$1,017,000 versus $1,363,000 in 1998.
Expenses: Total expenses of $47,023,000 in 1999 were 25% higher than the
$37,615,000 incurred in 1998. Operating expenses of $18,771,000 increased 10%
from 1998 reflecting increased sales volumes of 9% over the prior year and
more well work-over projects.
Depletion and Depreciation
Years Ended
December 31,
---------------
1999 1998
------- -------
(in thousands,
except per unit
amounts)
Depletion................................................... $13,315 $12,008
Depreciation of other fixed assets.......................... 721 357
------- -------
Total depletion and depreciation............................ $14,036 $12,365
======= =======
Average depletion cost per Mcfe............................. $ 0.63 $ 0.62
Depletion increased to $13,315,000 in 1999 from $12,008,000 in the 1998
period as a result of higher production volumes associated with the acquired
Unocal properties and a higher depletion rate.
General and Administrative Expenses
General and administrative costs incurred during 1999 totaled $4,163,000 and
were 191% higher than 1998 reflecting the higher cost of being a public
company. Salaries were $1,200,000 higher in 1999 as Quicksilver increased its
staff of officers and employees. In 1998, Mercury performed all administrative
work for the Company. The remaining cost increase resulted from higher
professional fees and rent expense.
Interest Expense
Interest expense of $8,703,000 in 1999 increased 30% from 1998 reflecting
higher debt levels in 1999 and higher effective interest rates in 1999.
Income Taxes
Years Ended
December
31,
-----------
1999 1998
---- ------
Income tax provision (in thousands)............................. $ 2 $3,286
Average income tax expense per Mcfe............................. $-- $ 0.17
Effective tax rate.............................................. -- 40.2%
Federal income tax of $1,026,000 that otherwise would have been due in 1999
was eliminated because of net operating losses available from prior years.
Liquidity and Capital Resources
General
The following discussion compares the Company's financial condition at
December 31, 2000 and 1999. For the years ended December 31, 2000 and 1999,
$194,507,000 and $43,452,000, respectively, was spent on acquisition and
development activities. The capital program was financed from operations,
additional borrowings, a restructured bank facility, monetization of a portion
of acquired Section 29 tax credits and the sale of subordinated notes.
23
Cash Flow
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.
As part of the acquisition of the CMS properties and Terra Energy Ltd., on
March 31, 2000, the Company amended the agreement setting forth the terms of
its credit facility ("Credit Facility"). The 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. The Borrowing base is $210 million and is subject to
semi-annual determination and certain other redeterminations based upon a
variety of factors, including the discounted present value of estimated future
net cash flow from the Company's natural gas and crude oil production. The
next scheduled re-determination date will be as of April 2, 2001, based on
December 31, 2000 assets and proved reserves. At the Company's option, loans
may be prepaid, and revolving credit commitments may be reduced in whole or in
part at any time in certain minimum amounts. As of year-end, the Company can
designate the interest rate on amounts outstanding at either the London
Interbank Offered Rate (LIBOR) + 1.875% or bank prime. At December 31, 2000,
the Company's interest rate was 8.635% through April 2, 2001 on $180 million.
The collateral for the Credit Facility consists of substantially all of the
existing assets of the Company and any future reserves acquired. The loan
agreements prohibit the declaration or payment of dividends by the Company and
contain other restrictive covenants, which, among other things, require the
maintenance of a minimum current ratio. The Company currently is in compliance
with all such restrictions. At December 31, 2000, the Company had $29,850,000
available under the Credit Facility, which terminates March 31, 2003.
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 78% of its natural gas production under long-term, fixed
price contracts, and swap agreements. As a result, the Company benefits from
significant predictability of its natural gas revenues. Commodity market
prices affect cash flow for that portion of natural gas not under contract as
well as the Company's crude oil sales.
Net cash provided by operations for the year ended December 31, 2000 was
$47,691,000, compared to $10,220,000 for the same period last year. The
increase resulted from higher earnings, primarily as a result of the
acquisition of the CMS Properties, and higher non-cash charges.
Net cash used in investing for the year ended December 31, 2000 was
$195,518,000. Investing activities were comprised primarily of additions to
oil and gas properties through the acquisition of the CMS Properties ($164
million), development activity and, to a lesser extent, additions of field
service assets.
Net cash from financing activities for the year ended December 31, 2000 was
$158,103,000. The CMS Acquisition was financed through restructuring of
Quicksilver's senior bank facility, the sale of $53 million in subordinated
notes, and the monetization through a major financial institution of a portion
of the accompanying Internal Revenue Code Section 29 income tax credits
related to the CMS Properties.
Cash from operations in the year 2001 are budgeted to be sufficient to fund
the $54 million of planned capital expenditures and to repay a portion of the
long-term debt.
Recently Issued Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (amended by SFAS No. 138).
This statement establishes accounting and reporting standards 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
24
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. If hedge accounting
criteria are met, the change in a derivative's fair value (for a cash flow
hedge) is deferred in stockholders' equity as a component of other
comprehensive income. These deferred gains and losses are recognized in income
in the period in which the hedge item to the extent the hedge is effective.
The ineffective portions of hedge returns are recognized currently in
earnings.
All derivatives within the Company have been identified as of January 1,
2001. The Company has designated, documented and assessed the hedging
relationships, all of which are cash flow hedges. Adoption by the Company of
this accounting standard as of January 1, 2001 resulted in the recognition of
$92 million of derivative liabilities with a cumulative effect of $61 million
after tax as a decrease to other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" which
summarized the application of accounting principles generally accepted in the
United States of America for revenue recognition in financial statements. The
Company does not believe the adoption of Staff Accounting Bulletin 101 will
have an impact on its consolidated financial position or results of operations
since it recognizes revenue upon completion of the earnings process. Sales
from producing wells are recognized as the title passes to the purchasers.
Item 7A. 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. Approximatley 25% of the volumes sold under long-term contracts
are third-party volumes controlled by the Company. Approximately 38,243
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.
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 commited at market price through May 2004. Additional gas
volumes of 16,500 Mcf/day are committed at market price through September
2008. A portion 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 natural gas and
crude oil realized prices varying from market prices that the Company receives
from the sale of natural gas and crude oil. As a result of the hedging
programs, revenues in 2000 and 1999 were $22,474,000 and $1,021,000,
respectively, lower than if the hedging program had not been in effect.
25
The following table summarizes the Company's open positions as of December
31, 2000 related to natural gas production. Based on the financial fixed price
hedge positions, for each $1.00 per Mcf increase in the price of natural gas
the Company's annualized revenue would increase by approximately $17,762,000
of which $13,959,000 would be reduced due to the existing hedges.
Contract Weighted Ave
Product Type Time Period Volume Price per Mcf Fair Value
- ------- ----------- ------------ ----------- ------------- ----------
Gas Fixed Price Jan-Apr 2004 7,500 Mcfd $2.40 $(19,244)
Gas Fixed Price Jan-Oct 2004 604 Mcfd $2.14 $ (1,918)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,532)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,637)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,637)
Fair values were determined based on current market prices at December 29,
2000, as quoted by recognized dealers without regard to market liquidity. The
actual gains or losses ultimately realized by the Company from such hedges may
vary significantly from the foregoing amounts due to the volatility of the
natural gas commodity markets.
Interest Rate Risk
The Company has an interest rate swap agreement covering $25 million of its
variable-rate debt through June 17, 2002 that converts the debt floating LIBOR
base rate to a 6.86% fixed rate. The fair value of this swap was a loss of
$414,738 as of December 29, 2000. On October 2, 2000, the Company entered into
an additional interest rate swap agreement covering $50 million of its
variable-rate debt through March 31, 2003, which converts the debt floating
LIBOR base rate to a 6.78% fixed rate. The fair value of this swap was a loss
of $1,028,536 as of December 29, 2000. Interest expense for the year ended
December 31, 2000 was $177,532 lower as a result of interest rate swaps. If
interest rates on the Company's remaining variable debt increase or decrease
by one percentage point, the Company's annual pretax income would decrease or
increase by $1,050,000.
Credit Risk
Credit risk is the risk of loss as a result of non-performance by
counterparties of their contractual obligations. The Company sells its oil and
gas production directly under long-term contracts and through Cinnabar Energy
Services & Trading, LLC, a wholly owned subsidiary, to creditworthy
counterparties, such as utilities, major oil companies (or their affiliates),
industrial customers, large trading companies or energy marketing companies,
refineries and other users of petroleum products. In this manner, Quicksilver
reduces such credit risk.
Performance Risk
Performance risk results when a financial counter-party fails to fulfill its
contractual obligations such as commodity pricing or volume commitments.
Typically, such risk obligations are defined within the trading agreements.
The Company manages performance risk through management of credit risk. Each
customer and/or counter-party of the Company is reviewed as to credit
worthiness prior to the extension of credit and on a regular basis thereafter.
Foreign Currency Risk
The Company's Canadian subsidiary uses the Canadian dollar as its functional
currency. To the extent that business transactions in Canada are not
denominated in Canadian dollars, the Company is exposed to foreign currency
exchange rate risk.
26
QUICKSILVER RESOURCES INC.
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
QUICKSILVER RESOURCES INC.
Independent Auditors' Report............................................. 28
Consolidated Balance Sheets as of December 31, 2000 and 1999............. 29
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998........................................................... 30
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2000, 1999 and 1998........................................ 31
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998..................................................... 32
Notes to Consolidated Financial Statements for the Year Ended December
31, 2000................................................................ 33
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Quicksilver
Resources Inc. (the Company) as of December 31, 2000 and December 31, 1999,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Fort Worth, Texas
February 26, 2001
28
QUICKSILVER RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
In thousands, except for share and per share data
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................ $ 12,833 $ 2,557
Accounts receivable, net of allowance for doubtful
accounts of $0 and of $1,350 at December 31, 2000 and
1999, respectively...................................... 32,595 15,555
Inventories and other current assets..................... 2,021 780
-------- --------
Total current assets................................... 47,449 18,892
Investments in and advances to equity affiliates........... 12,570 3,100
Properties, plant and equipment--net ("full cost")......... 374,099 170,800
Other assets............................................... 5,993 1,510
-------- --------
$440,111 $194,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt........................ $ 4,149 $ 2,134
Accounts payable......................................... 12,787 6,543
Accrued liabilities...................................... 29,578 3,047
-------- --------
Total current liabilities.............................. 46,514 11,724
Long-term debt............................................. 239,986 94,952
Unearned revenue........................................... 18,958 800
Other long-term liabilities................................ 147 2,000
Deferred income taxes...................................... 47,748 15,088
Minority interest.......................................... -- 187
Stockholders' equity
Preferred stock, par value $0.01 10,000,000 shares
authorized, 1 and no shares issued as of December 31,
2000 and 1999, respectively............................. -- --
Common stock, $0.01 par value, 40,000,000 shares
authorized, 22,332,950 and 17,994,900 shares issued as
of December 31, 2000 and 1999, respectively............. 223 180
Paid in capital in excess of par value..................... 75,544 61,383
Treasury stock of 3,765,947 and 10,808 shares as of
December 31, 2000 and 1999, respectively.................. (14,675) (73)
Accumulated other comprehensive income..................... (13) --
Retained earnings.......................................... 25,679 8,061
-------- --------
86,758 69,551
-------- --------
$440,111 $194,302
======== ========
The accompanying notes are an integral part of these financial statements.
29
QUICKSILVER RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
In thousands, except for per share data
2000 1999 1998
-------- ------- -------
Revenues
Oil, gas and related product sales................. $108,772 $47,616 $42,080
Other income....................................... 11,276 2,430 2,948
-------- ------- -------
Total revenues................................... 120,048 50,046 45,028
Expenses
Operating expenses................................. 37,641 18,771 17,122
Depletion and depreciation......................... 24,555 14,036 12,365
Provision for doubtful accounts.................... (279) 1,350 --
General and administrative......................... 8,276 4,163 1,430
Interest........................................... 22,124 8,703 6,698
-------- ------- -------
Total expenses................................... 92,317 47,023 37,615
-------- ------- -------
Income before income taxes and minority interest..... 27,731 3,023 7,413
Minority interest in net loss of MSR Exploration..... -- 141 758
-------- ------- -------
Income before income taxes........................... 27,731 3,164 8,171
Income tax expense................................... 10,113 2 3,286
-------- ------- -------
Net Income........................................... $ 17,618 $ 3,162 $ 4,885
======== ======= =======
Basic earnings per share............................. $ 0.96 $ 0.24 $ 0.42
======== ======= =======
Diluted earnings per share........................... $ 0.95 $ 0.24 $ 0.42
======== ======= =======
Basic weighted average of shares outstanding......... 18,290 13,151 11,511
======== ======= =======
Diluted weighted average shares outstanding.......... 18,467 13,151 11,511
======== ======= =======
The accompanying notes are an integral part of these financial statements.
30
QUICKSILVER RESOURCES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
In thousands, except for share and per share data
2000 1999 1998
-------- ------- -------
Preferred stock, par value $0.01, 10,000 shares
authorized
Balance at beginning of year..................... $ -- $ -- $ --
Issuance of 1 share special voting preferred..... -- -- --
-------- ------- -------
Balance at end of year: 1 share issued at
December 31, 2000............................... $ -- $ -- $ --
-------- ------- -------
Common stock, par value $0.01, authorized
40,000,000 shares
Balance at beginning of year..................... $ 180 $ 115 $ 1
Issuance of common stock......................... 40 51 --
Stock dividend retroactively applied............. -- -- 102
Merger with MSR Exploration, shares in common
control for merger effective on March 4, 1999,
retroactively applied........................... -- -- 12
Common stock issued for purchase of minority
interest........................................ 3 14 --
-------- ------- -------
Balance at end of year: 22,332,950, 17,994,900
and 11,510,800 shares issued at December 31,
2000, 1999 and 1998, respectively............... 223 180 115
-------- ------- -------
Paid in capital in excess of par value
Balance at beginning of year..................... 61,383 27,574 27,851
Acquisition of minority interest................. 2,306 10,629 --
Acquisition of Mercury Assets.................... (4,883) -- --
Issuance of common stock......................... 16,779 23,806 --
Stock registration fees.......................... (41) (626) (149)
Merger with MSR Exploration, retroactively
applied......................................... -- -- (128)
-------- ------- -------
Balance at end of year........................... 75,544 61,383 27,574
-------- ------- -------
Treasury stock
Balance at beginning of year..................... (73) -- --
Reacquisition of treasury stock, at cost......... (14,602) (73) --
-------- ------- -------
Balance at end of year: 3,765,947, 10,808 and 0
shares at December 31, 2000, 1999 and 1998,
respectively.................................... (14,675) (73) --
-------- ------- -------
Retained earnings
Balance at beginning of year..................... 8,061 4,899 --
Merger with MSR Exploration, retroactively
applied......................................... -- -- 14
Net income....................................... 17,618 3,162 4,885
-------- ------- -------
Balance at end of year........................... 25,679 8,061 4,899
-------- ------- -------
Accumulated other comprehensive income
Balance at beginning of year..................... -- -- --
Foreign currency translation adjustment.......... (13) -- --
-------- ------- -------
Balance at end of year........................... (13) -- --
-------- ------- -------
Total stockholders' equity......................... $ 86,758 $69,551 $32,588
======== ======= =======
The accompanying notes are an integral part of these financial statements.
31
QUICKSILVER RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years End December 31, 2000, 1999 and 1998
In thousands, except number of shares
2000 1999 1998
--------- -------- --------
Operating activities:
Net income.................................... $ 17,618 $ 3,162 $ 4,885
Charges and credits to net income not
affecting cash
Depletion and depreciation.................. 24,555 14,036 12,365
Deferred income taxes....................... 10,143 -- 2,336
Recognition of unearned revenues............ (6,842) (538) (1,342)
Change in minority interest in subsidiary... -- (141) (758)
(Income) / loss from equity affiliates...... (768) 99 --
Amortization of deferred loan costs......... 1,071 244 66
Provision for doubtful accounts............. -- 1,350 --
Other....................................... (166) -- --
Changes in assets and liabilities
Accounts receivable......................... (23,839) (9,129) (6,609)
Inventory, prepaid expenses and other....... (530) (14) (97)
Accounts payable............................ 4,008 1,462 4,410
Accrued liabilities......................... 22,441 (311) 1,099
--------- -------- --------
Net cash from operating activities.............. 47,691 10,220 16,355
--------- -------- --------
Investing activities:
Acquisition of properties and equipment....... (191,157) (40,253) (16,097)
Acquisition of pipeline and facilities........ -- (3,199) --
Acquisition of investment in Terra-Hayes
Pipeline LP.................................. (1,952) -- --
Acquisition of Mercury Assets, net of cash
balances received............................ (1,398) -- --
Advances to equity subsidiaries-net........... (1,285) -- --
Proceeds from sale of properties.............. 274 1,164 --
--------- -------- --------
Net cash used for investing activities.......... (195,518) (42,288) (16,097)
--------- -------- --------
Financing activities:
Notes payable, bank proceeds.................. 250,172 35,365 10,493
Principal payments on long-term debt.......... (112,468) (23,342) (10,271)
Monetization of Section 29 tax credits........ 25,000 -- --
Payments to acquire treasury stock............ -- (73) --
Deferred financing and stock registration
costs........................................ (4,601) (800) (829)
Issuance of common stock...................... -- 23,180 --
--------- -------- --------
Net cash from (used for) financing activities... 158,103 34,330 (607)
--------- -------- --------
Net increase (decrease) in cash and
equivalents.................................... 10,276 2,263 (