Mukesh Ambani’s Reliance Industries (RIL) is said to be in talks with Quicksilver Resources, a Fort Worth, Texas-based exploration and production company that’s into development of shale gas, coal-bed methane and tight-sands gas in North America.
There are three options being discussed, sources familiar with the development said: a buyout of the company, buying a stake in the mothership or partnering Quicksilver, which has an estimated enterprise value of $4.6 billion, for one of its major projects called the Horn River Basin assets in British Columbia, Canada.
Quicksilver, which will have estimated sales of $900 million this year, currently has two world-class shale basins with proven reserves of around 2.4 trillion cubic feet of gas.
That’s apart from unevaluated assets in the Horn River Basin, which is said to hold around 10 trillion cubic feet of gas in an area as small as 130,000 net acres.
Along with assets in South Alberta Bakken in Montana, US and in
Barnett Shale, Texas, they promise to add trillions of cubic feet more to potential gas reserves, sources said.
RIL may be interested in a joint venture for the Horn River Basin project, sources said.
Contacted, an RIL spokesperson said the company did not comment on market speculation.
Quicksilver could not be reached for comment.
According to US oil and gas industry sources, an RIL stake buy or complete buyout of Quicksilver would bring synergies to the Texas firm, and help it to deepen its exploration activities in America and Canada, while preserving its low-cost structure.
“Quicksilver is the most likely takeover target in the natural gas and oil exploration industry, a sector where we expect M&A activity to heat up soon,” a well-respected Wall Street oil and gas analyst told DNA in New York.
“The Texas-based firm lacks sufficient capital cushions so it should consider an RIL bid should one be made, but it has very closed management so it may not be easy.”
A deal with RIL ultimately hinges on how badly Quicksilver needs a “Daddy Warbucks” to pursue explorations, he said.
Analysts said with a debt to current fiscal Ebidta ratio of 3.7 times (vs 1.8 times for peers), Quicksilver is highly levered and the management has a history of straining the balance sheet in pursuit of growth (it spent 221% of cash flows during 2004-2008).
“This, combined with an aversion to issuing equity, increases the risk of untimely asset sales and/or covenant violations during periods of low commodity prices or restricted credit,” Rhett M Bruno and Gill Yang of Bank of America Merrill Lynch said in a March 16 note.
There is almost a consensus among Wall Street analysts that Quicksilver needs at least a joint venture partner or cash.
Anish Patel, Johnathan Wolff and Christopher Hoffman, New York-based analysts with Credit Suisse, said securing a joint venture partner will clearly be a welcome deleveraging event for the Horn River Basin.
“A partner could help accelerate what will likely be an operationally demanding development, while reducing Quicksilver’s marketing and infrastructure risks … A joint venture that included a combination of an upfront payment and drilling carries would likewise shape a drilling program and enhance the project value,” Patel, Wolff and Hoffman said in a May 12 note.
Kim M Pacanovsky and Mark Aydin, analysts with McNicoll Lewis Vlak in New York, said in a June 29 note that Quicksilver was undervalued on the basis of its risked net asset value, but needed cash or a joint venture partner.
“We do note that Quicksilver is producing enough cash flow to keep going in the Barnett and Horseshoe Canyon, but to take the big leap into the Horn River without doing further damage to the balance sheet, it needs to do something.
At 69% debt/cap, Quicksilver is one of the more leveraged independent E&P’s and really can’t add more debt to the balance sheet. It does recognise that the debt is a “drag on the stock,” and has several options at its disposal for deleveraging and funding Horn River. It can 1) joint venture; 2) sell Breitburn units; and/or 3) issue equity. At this moment, we think the first option will be the next step for Quicksilver.”
Bruno and Yang said success from exploration initiatives could increase the odds that Quicksilver’s resource potential will outgrow its balance sheet over the next several years.
“Even now, a larger entity, perhaps an international player in search of a US unconventional footprint, could create value by accelerating development. This, in addition to gaining exposure to a promising exploration portfolio and a technical team with a track-record of early, low cost entry into unconventional plays,” Bruno and Yang said.
“With continued success at Horn River and other projects, Quicksilver’s undeveloped resource potential could quickly outpace its capital resources, especially given a historical aversion to issuing equity,” Bruno said.
“In our view, the company’s concentrated portfolio could make it attractive for an international firm looking to establish an immediate footprint in North American unconventional plays. Nearly all of Quicksilver’s assets are of sufficient scale to be meaningful within a larger entity,” Bruno and Yang said.
Eric Hagen and Drew Venker of Lazard Capital Partners were
blunt when they downgraded the company in mid-June and underscoring the imperative of a partner.
“With high debt levels, the company remains more capital (and we believe growth) constrained in a low natural gas price environment than the peers. Our valuation does not assign any credit for Quicksilver’s Horn River project. We do not believe the project has any material value unless the company monetises the potential of this asset through a joint venture or sale. We believe this is likely a 2011 or early 2012 catalyst, if it occurs at all,” Hagen and Venker said in a note.
Comments