Quicksilver, Shell Form JV

Quicksilver forms JV with Shell subsidiary to develop acreage in Sand Wash Basin.

Quicksilver Resources Inc. (NYSE: KWK) plans to form a joint venture with a subsidiary of Royal Dutch Shell Plc (NYSE: RDS.A) to jointly develop oil and gas interests in the Sand Wash Basin in Northwest Colorado.

In addition, the companies plan to establish an area of mutual interest covering more than 850,000 acres in the basin.
The parties will each assign to the other a 50% working interest in the majority of their acreage in the Sand Wash Basin so that each party will own a 50% interest in approximately 330,000 acres and have the right to a 50% interest in any acquisition within the AMI. In addition, the agreement provides that SWEPI, the Royal Dutch Shell subsidiary, will pay Quicksilver an equalization payment for 50% of the differential in acreage contributed by Quicksilver in excess of the acreage that SWEPI contributes.

“This alliance with Shell in the Sand Wash Basin is a validation of Quicksilver’s efforts over the past two years to unlock significant oil reserves in the Niobrara shale formation. We will now combine our resources to push a much larger project forward,” said Quicksilver Chairman Toby Darden. “This agreement is in addition to - and independent of - the two joint ventures we referred to on our recent earnings conference call.”

SWEPI will be the operator of the majority of the lands subject to the agreement, although Quicksilver will continue to operate wells it drilled prior to the agreement and other designated lands. Closing is expected to occur before year-end 2012.

Not all analysts were impressed with the announcement. KeyBank Capital Markets analyst David Deckelbaum said the agreement was not ideal for Quicksilver, which might not be able to keep up with Shell’s demands for cash to develop the acreage.

“We view this morning's release as slightly disappointing; while KWK is beginning to execute on some of the joint ventures it has been working toward for the last few quarters, the non-operated nature of the partnership is not ideal. In SWEPI, KWK acquires a knowledgeable partner with additional data in the play who will likely develop the play horizontally. While this should increase EURs and returns, it could also potentially accelerate cash burn if SWEPI develops at too fast a pace,” he said.

Deckelbaum noted that the deal effectively keeps costs per well flat for KWK as prior vertical development costs of $3 million will be matched by a $3 million share of a $6 million horizontal well. The increased productivity factor is more-or-less free, he said.

“Finally, it is unclear the pricing KWK is getting for its acreage as the ‘equalization payment’ amount was not yet disclosed; it is likely the payment was not of a size to be material to KWK's debt levels, and this deal will not serve as a needed de- leveraging event for the company,” he said.

The announcement comes in addition to the two joint venture deals in the works that Quicksilver referenced on its second quarter earnings conference call, indicating that additional joint venture deals, possibly with de-leveraging benefits, are likely still in the pipeline, Deckelbaum said.