Drilling For Quick Profits

09/06/2007 12:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott H. Gue, editor of the Energy Strategist, says Quicksilver Resources is a good way to play a rebound in depressed natural gas prices—and it has other things going for it, too.

Stocks leveraged to the North American natural gas markets haven’t been big winners. Sentiment surrounding many of these stocks is extremely bearish.

In fact, some stocks in the group are now trading at valuations unseen in years; the group is pricing in a great deal of bad news. Analysts have already slashed their earnings estimates to reflect lower gas prices and weaker activity.

To profit, you must be selective and look for stocks with downside valuation support and plenty of upside leverage to firming natural gas prices, as well as a resurgence in drilling activity.

One of the fastest-growing exploration & production companies is natural gas-focused Quicksilver Resources (NYSE: KWK), [which] has a large position in the Barnett Shale of Texas.

Gas in the region is widely distributed, so the risk of any individual well coming up dry is minimal. Resource plays routinely have well success rates of more than 90 percent.

And Quicksilver has also streamlined its drilling operation, cutting the time it takes to drill a well by 15% from average 2006 levels. That’s allowed the producer to consistently beat forecasts for the number of wells it can drill in a given quarter.

This year, Quicksilver expects to drill far more than the 180 wells it had originally planned to drill. Next year, the company has plans to accelerate drilling even more aggressively in the region.

And [Quiksilver gets] 44% [of its production in the region from] natural gas liquids (NGLs). NGLs are hydrocarbons like propane, butane, and natural gasoline that exist naturally in the natural gas of the Barnett Shale region.

The value of NGLs tends to be tied more closely with crude oil than with natural gas prices. Therefore, this large NGL production is of huge value to Quicksilver and makes it less dependant on natural gas prices.

But Quicksilver isn’t just another Barnett play, nor is it just another way to play a turn in gas prices. I see several more key positive catalysts for the stock in the next six to eight months.

First, Quicksilver has a shale play in West Texas that it's testing to see if it's economical to produce.

Quicksilver’s decision to put some of its assets into a master limited partnership structure (MLPs) is another catalyst. MLPs pay no corporate-level taxation and pass through the majority of their cash flows to investors as tax-advantaged distributions. The ideal asset to put into an MLP is something that generates consistent, strong cash flows.

In addition, Quicksilver owns a mature gas shale play in Michigan. This region won’t show much further growth in production, but the reserves are absolutely ideal for an MLP

Mature wells in the region offer reliable production for many years; these are long-lived assets. Quicksilver is considering an MLP for these assets as well, and the listing of that partnership is another potential catalyst for the stock. Fast-growing Quicksilver Resources is a buy up to $44. (The stock closed above $41 Wednesday—Editor.)

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