April 29, 2002; Quicksilver Progressing on Coal Bed Methane with Encana

So far, Mr. Glenn Darden is a lucky man, or maybe he is smart.  Mr. Darden is the chief executive of a highly levered company that invested in high cost natural gas and at the same time has a surprisingly favorable deal to develop coal bed methane in Canada.  Leverage has been working in Mr. Darden’s favor with the rising long-term price of natural gas.  As recently as the beginning of March, KWK had a high McDep Ratio of 1.40 and a prohibitive, in our view, ratio of debt of 0.60.  Now the McDep Ratio is well under our maximum of 1.20 for holding a stock and the ratio of debt is down to a high, but permissible, 0.43.  And those measures do not include any recognition for the company’s promising coal bed methane program. 

Recall that KWK has the rights to develop CBM on legacy lands of PanCanadian Energy, now Encana Corporation.  Most of the activity has been on the Palliser Block east of Calgary where there is well-developed infrastructure serving 10,000 conventional natural gas wells.  Another favorable cost factor is that testing of about a hundred CBM wells so far has yielded low water production rates in contrast to most CBM projects. 

To gauge how rapidly the opportunity may develop for KWK consider that the company may be credited with about 6 million cubic feet daily to its interests in the fourth quarter of 2002 from about 250 wells.  Thereafter a reasonably rapid development might be a thousand wells a year.  Thus KWK’s Canadian CBM production might be 30 mmcfd at the end of 2003, 54 at the end of 2004 and so on.  Net proven reserves might be 20 bcf, 100 bcf, 180 bcf etc.  Present value per share might be $1, $5, and $9.