Barnett Shale Asset Purchase

Brian Hicks

Written By Brian Hicks

Posted April 2, 2013

Last Friday, Texas independent oil and gas company Quicksilver Resources Inc. (NYSE: KWK) agreed to sell a 25 percent stake in its Barnett Shale oil and gas assets for $485 million.

The company will sell its assets to TG Barnett Resources LP, a U.S. subsidiary of Japan’s Tokyo Gas Co. Ltd. (OTC: TKGSY), in a deal expected to close on April 30, 2013 after an effective date of September 1, 2012.

Quicksilver has been looking to unload a portion of its Barnett Shale operation since 2011, and the two sides have been in talks since mid-2012 after Quicksilver hosted a tour for Japanese gas executives of the Barnett Shale. The tour came off the heels of the Fukushima accident and included a show of operations at the Alliance development near Quicksilver’s Fort Worth headquarters.

According to Star-Telegram, the sale will help alleviate a $2.1 billion dollar debt that the company has racked up in the long-term.

Quicksilver has assets totaling roughly 127,000 net acres, Nasdaq reports, mostly in the Barnett Shale but also in the Fort Worth basin and in North Texas. And as of the year ending 2012, proved reserves totaled 1.5 trillion cubic feet of natural gas equivalents.

Under the agreement, Quicksilver will maintain operations of the Barnett and will control future development. Tokyo Gas will be responsible for 25 percent of the Barnett development moving forward and will reap its benefits accordingly.

Barnett Shale Natural GasRight now, the Barnett Shale is responsible for two-thirds of Quicksilver’s annual production, but there is no foreseeable effect on drilling in 2013, the budget for which was recently cut by 70 percent to $120 million, according to Star-Telegram.

Tokyo Gas – Japan’s largest natural gas utility company – is making its first foray into U.S. production with this deal. After the Fukushima disaster in 2011, Japan closed nearly all of its nuclear reactors, and itsoil and natural gas comes almost exclusively from outside sources. Japan has been scrambling ever since to fill its power plants and the electricity void left by the incident.

The problem with importing everything is that Japan is forced to buy a lot of liquefied natural gas (LNG), which isn’t an economically sound decision for Japan at the moment – in Asia, LNG is very expensive. After Japan makes a purchase from a supplier, it must ship it to its coastal terminals, where the chilled LNG is converted back to its gas state and then sent to users through a pipeline.

As the Star-Telegram reports, the average cost of LNG in Japan in January was up to $16.37 per million Btu, or roughly 1,000 cubic feet of gas – that is a 70 percent increase in the past two years.

Compare that to the price at which U.S. natural gas futures traded on Thursday – $4.02 per cubic feet. It gives a clear indication of Japan’s gas crisis, which directly affects its electricity consumers.

At this time, there have been no discussions between the two companies to export LNG to Japan, but instead everything produced will be consumed domestically. As for the long-term, there are no concrete plans.

In February, Quicksilver reported drastic losses for its fourth quarter after a profitable previous year, Nasdaq reports. There was a $1.2 billion non-cash ceiling impairment; 63 percent was attributed to a change in accounting policy. The rest was related to pricing revisions and reductions in drilling activity over natural gas prices.

That mess would eventually be revealed as error, and actual February returns were higher initially than reported.

Natural gas production as a whole is rising in the U.S., and it is in large part due to the Barnett Shale and the Marcellus Shale in the Northeast; together they will bring a record-setting sixth straight year of increased production – up 0.7 percent from 2012, reports Star-Telegram.

Production numbers continue to increase despite a 3 percent drop in the rig count two weeks ago. According to Star-Telegram, in the week of March 18, the Barnett Shale had 35 active rigs, up from a ten-year low of 27 in February but down from 49 a year ago.

Quicksilver CEO Glenn Darden sums up this budding partnership best, according to Star-Telegram:

“Our objective was to keep our Barnett assets intact,” Darden said. “Their objective is to lower their cost of supply. They believe getting involved in the upstream side” of the natural gas supply chain is a good way to do that, he said.


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