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SOURCE: Quest Resource Corp.
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August 11, 2008 21:00 ET
Quest Resource Announces Second Quarter 2008 Results
OKLAHOMA CITY, OK--(Marketwire - August 11, 2008) - Quest Resource Corporation (NASDAQ: QRCP)
("QRCP") today reported financial results for the three and six months
ended of June 30, 2008. For the quarter, adjusted earnings before
interest, income taxes, depreciation and amortization (Adjusted EBITDA), a
non-GAAP measure, rose by 54% from the year ago period. The increase in
Adjusted EBITDA was primarily driven by a 28% increase in natural gas
equivalent production, higher realized natural gas and oil prices, a 12%
reduction in per unit lease operating costs, and contributions from the
interstate pipeline acquired in November 2007.
Net Income totaled $5.0 million, or $0.21 per share, for the three months
ended June 30, 2008 as compared to a Net Loss of $4.5 million, or $0.20 per
share, in the year ago period. Net Cash Provided by Operating Activities
totaled $32.2 million for the three months ended June 30, 2008 as compared
to $2.2 million in the year ago period. Adjusted EBITDA is reconciled to
Net Income (Loss) and Net Cash Provided by Operating Activities, its most
directly comparable GAAP measures, in the financial schedules at the end of
this release.
Selected financial information in a comparative format for the three and
six months ended June 30, 2008 and 2007 are shown in the table below. For
additional detail, investors can access QRCP's Form 10-Q which was filed
with the Securities and Exchange Commission on August 11, 2008.
Select Financial and Operating Data
(unaudited, in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2008 2007 2008 2007
-------- -------- -------- --------
Total Revenue $ 47,123 $ 29,640 $ 91,427 $ 56,718
Operating Income 8,499 3,689 19,714 8,105
Net Income (Loss) Before Minority
Interest 11,990 (3,837) (5,703) (6,714)
Minority Interest (7,026) (650) (975) (1,084)
Net Income (Loss) 4,964 (4,487) (6,678) (7,798)
Net Income (Loss) Per Share Basic 0.21 (0.20) (0.28) (0.35)
Net Income (Loss) Per Share Diluted 0.21 (0.20) (0.28) (0.35)
Net Cash Provided by Operating
Activities $ 32,179 $ 2,240 $ 41,490 $ 12,623
Adjusted EBITDA (1) 23,780 15,439 50,104 28,913
Weighted Avg Shares Out. Basic 23,773 22,217 23,534 22,212
Weighted Avg Shares Out. Diluted 23,831 22,217 23,534 22,212
(1) A reconciliation of Adjusted EBITDA to Net Income (Loss) and Net Cash
Provided by Operating Activities, its most directly comparable financial
measures calculated and presented in accordance with generally accepted
accounting principles, or GAAP, follows this news release.
Cash Distributions from Affiliates
Quest Energy Partners, L.P. (NASDAQ: QELP) ("QELP"), the natural gas and
oil master limited partnership formed with the contribution of certain
producing properties from QRCP, declared a cash distribution of $0.43 per
unit for the second quarter of 2008 for all of its outstanding units, a
4.9% increase from the prior quarter. The distribution will be paid on
August 14, 2008 to unit holders of record at the close of business on
August 4, 2008. QRCP owns approximately 57% of the outstanding common and
subordinated units and 100% of the general partner of Quest Energy. QRCP
will receive approximately $5.4 million in cash distributions from its
ownership interest in Quest Energy for the second quarter of 2008.
Quest Midstream Partners, L.P. ("Quest Midstream") declared a cash
distribution for the second quarter of 2008 in the amount of $0.425 per
common unit (and the proportionate distribution on the general partner's
units). The distribution will be paid on August 14, 2008 to unitholders of
record at the close of business on August 4, 2008. QRCP owns subordinated
units representing approximately 36% of the outstanding limited partner
units and 85% of the general partner of Quest Midstream. QRCP will receive
approximately $0.1 million in cash distributions from its ownership
interest in Quest Midstream for the second quarter of 2008.
For additional detail regarding QELP's second quarter 2008 financial
results and updated 2008 guidance, please see the partnership's press
release and Form 10-Q released on August 11, 2008.
Management Comment
Jerry Cash, Chairman, President, and Chief Executive Officer of QRCP, said,
"We are pleased to report solid operating performance for our second fiscal
quarter. More important for our long-term outlook, shortly after the end
of the quarter we significantly expanded our exposure to the emerging
Marcellus Shale play in the Appalachian Basin through the joint acquisition
of privately held PetroEdge Resources (WV) LLC ("PetroEdge") by QRCP and
QELP on attractive terms that we expect to create value for the equity
holders of each of the Quest entities. Also after the end of the second
quarter, we hired an experienced senior manager to lead our expansion in
the area."
"When combined with the farm-out agreement that we consummated in the
quarter, QRCP owns the right to develop more than 122,000 net acres within
the recognized fairway of this emerging shale play and more than 7,000 net
acres outside the fairway. QRCP plans to drive reserve and production
growth through the development of this large acreage position and fund the
development with the distributions we receive from QELP and Quest Midstream
and existing cash balances. In the second half of 2008, we plan to drill
up to six wells on our Appalachian acreage, including up to three
horizontal and three vertical wells."
"With the PetroEdge acquisition, QELP added long-lived natural gas
producing properties that are immediately accretive to distributable cash
flow per unit, add geographic and geologic diversity, receive premium
natural gas pricing, and offer numerous opportunities to complete the
existing wells in additional formations with proved developed non-producing
reserves. Subject to final approval from its Board of Directors, QELP
anticipates the PetroEdge acquisition and organic growth from its Cherokee
Basin operations to enable the partnership to increase its distribution
paid in November for the third quarter of 2008 by an additional 16% and 28%
to an annual rate of between $2.00 and $2.20 per unit, up from $1.72 per
unit currently. The planned total distribution increase over the second and
third quarters from the first quarter is consistent with the guidance QELP
provided in conjunction with the closing of the PetroEdge acquisition."
"Quest Midstream has the right of first offer on gathering and processing
of QRCP's and QELP's production, and this acquisition provides Quest
Midstream the opportunity to build a significant presence in Appalachia.
Quest owns 85% of the general partner and a 36% limited partner interest in
Quest Midstream."
"We believe the future for Quest is bright as we continue the low-risk
development of our large acreage position in the Cherokee Basin while
building a new core area of operations in the Appalachian Basin. We look
forward to developing our sizeable acreage position in the basin and
further illustrating the benefits of our unique structure."
Gas and Oil Production Segment Results
During the three and six months ended June 30, 2008 and 2007, QRCP
primarily conducted its gas and oil production operations through QELP and
owns 3,201,521 common units, 8,857,981 subordinated units, and a 2% general
partner interest in the partnership.
Total net natural gas equivalent production averaged 57.3 million cubic
feet equivalents per day (Mmcfe/d) for the second quarter of 2008, a 28%
increase from an average of 44.7 Mmcfe/d for the second quarter of 2007.
The increase was driven by our development program over the past twelve
months as well as the $9.5 million acquisition of oil producing properties
in the first quarter of 2008. Realized natural gas sales prices for the
second quarter of 2008, including the impact of hedges, was $7.44 per Mcf,
up from $6.84 per Mcf in the year ago quarter.
Total production costs, excluding gross production and ad valorem taxes,
rose to $6.3 million from $5.6 million due to the first quarter
acquisition, and higher electrical, legal, and road maintenance costs. On
a per Mcfe basis, costs declined to $1.22 per Mcfe in the second quarter of
2008 from $1.38 per Mcfe in the second quarter of 2007. Gross production
taxes rose by approximately 100% from the year ago quarter to $2.4 million
from $1.2 million due to increased production and a 41% increase in
wellhead natural gas prices.
In the first half of 2008, QELP successfully drilled 243 gross wells and
connected 183 gross wells in the Cherokee Basin out of the 325 gross wells
planned for the year. At December 31, 2007, QELP had the right to develop
approximately 558,000 net acres in the Cherokee Basin, of which
approximately 48% were undeveloped. At year end 2007, QELP had identified
approximately 2,100 gross drilling locations on its acreage in the Cherokee
Basin, of which approximately 800 were classified as proved undeveloped.
These locations represent an approximate six and a half year inventory of
drilling activity at the planned 2008 level of 325 wells.
Natural Gas Pipelines Segment Results
During the three and six months ended June 30, 2008 and 2007, QRCP
primarily conducted its natural gas pipelines operations through Quest
Midstream.
Quest Midstream increased the size of its low pressure gathering system in
the Cherokee Basin to more than 2,100 miles after constructing
approximately 118 miles of low pressure gas gathering pipelines in the
first half of 2008. The gathering system is the largest in the Cherokee
Basin with current capacity of approximately 85 Mmcfe/d and delivers
virtually all its gathered gas into Southern Star Central Gas Pipeline at
multiple interconnects. Quest Midstream also owns over 1,100 miles of
interstate natural gas transmission pipelines in Oklahoma, Kansas, and
Missouri.
Quest Midstream's total gas pipeline revenue increased by 84% to $15.8
million for the second quarter of 2008 compared with $8.6 million in first
quarter of 2007. This increase was principally driven by the 24% increase
from the year ago period in throughput volumes from our Cherokee Basin
properties, the higher compression and gathering fees payable by QELP under
the midstream services agreement that was adjusted on January 1, 2008, and
a $4.9 million contribution from KPC Pipeline which was acquired on
November 1, 2007.
Pipeline operating costs for the three months ended June 30, 2008 totaled
approximately $8.3 million as compared to pipeline operating costs of $4.3
million for the three months ended June 30, 2007. The increase in operating
costs was due primarily to the cost to operate the KPC Pipeline, the
delivery of additional compressors in anticipation of increased pipeline
volumes in the Cherokee Basin, the number of wells completed and operated
during the year, the increased miles of pipeline in service, and an
increase in property taxes.
Appalachian Expansion
On July 11, 2008, QRCP completed the purchase of privately held PetroEdge
for approximately $142.0 million, subject to post-closing adjustment.
PetroEdge owns approximately 78,000 net acres of natural gas and oil
producing properties in the Appalachian Basin with estimated net proved
reserves of 99.6 billion cubic feet of natural gas equivalent (Bcfe) as of
May 1, 2008 and net production of approximately 3.2 Mmcfe/d as of July 11,
2008.
Simultaneous with the closing of the acquisition, QRCP sold approximately
400 of the PetroEdge natural gas and oil producing wellbores and related
assets with estimated net proved developed reserves of 32.9 Bcfe, to QELP
for cash consideration of approximately $71.6 million, subject to
post-closing adjustment. The acquisition of low-risk, producing wells with
predictable production profiles that are immediately accretive to
distributable cash flow is consistent with QELP's strategy of providing
sustainable distribution growth to its unitholders.
QRCP funded its portion of the acquisition with proceeds from its follow-on
public offering of 8,800,000 shares of its common stock that closed on July
8, 2008.
In June, QRCP consummated a farm-out agreement with a private company that
gives it the right to develop approximately 29,000 net acres in Potter
County, Pennsylvania for a one-year period. All of the acreage is within
the recognized fairway of the Marcellus Shale play. QRCP funded the $4
million initial cost of the agreement with existing cash balances. At the
end of the farm-out period, QRCP has the option to acquire all of the deep
rights on the acreage for an additional payment of $6.5 million. If QRCP
does not exercise the purchase option, it is entitled to keep any acreage
that was developed during the farm-out period.
QRCP plans to significantly increase its capital expenditure budget for the
remainder of 2008. In the second half of 2008, QRCP plans to spend between
$10 million and $15 million on projects in the Appalachian Basin to convert
proved undeveloped reserves to proved developed and to add new reserves and
production from currently unproven acreage. QRCP is currently in the
process of drilling its first two horizontal wells targeting the Marcellus
Shale formation in Wetzel County, West Virginia with completion expected in
the fourth quarter of 2008 and is permitting its initial drilling locations
in Lycoming County, Pennsylvania with two vertical wells planned before
year end.
Conference Call
Quest will host a conference call to discuss 2008 second quarter operating
and financial results on Tuesday, August 12, 2008 at 11:00 a.m. Eastern
time. There will be a question and answer period following the
presentation.
Call: 877-675-4752 (US/Canada) and 719-325-4848 (International)
Passcode: 4681784
Internet: Live and rebroadcast over the Internet: simply log on to
www.qelp.net.
Replay: Telephonically available through August 15, 2008 at 888-203-1112
(US/Canada) and 719-457-0820 (International) using passcode 4681784 or
archived at www.qrcp.net.
About Quest Resource Corporation
Quest Resource Corporation is a fully integrated E&P company that owns: the
right to develop approximately 130,000 net acres in the Appalachian Basin
of the northeastern United States, including more than 122,000 acres
prospective for the Marcellus Shale; 100% of the general partner and a 57%
limited partner interest in Quest Energy Partners, L.P.; and 85% of the
general partner and a 36% limited partner interest in Quest Midstream
Partners, L.P. Quest Resource operates and controls Quest Energy Partners
and Quest Midstream Partners through its ownership of their general
partners. For more information, visit the Quest Resource website at
www.qrcp.net.
Quest Energy Partners, L.P. was formed by Quest Resource Corporation to
acquire, exploit and develop natural gas and oil properties and to acquire,
own, and operate related assets. The partnership owns more than 2,400 wells
and is the largest producer of natural gas in the Cherokee Basin, which is
located in southeast Kansas and northeast Oklahoma and holds a drilling
inventory of nearly 2,100 locations in the Basin. The partnership also owns
natural gas and oil producing wells in the Appalachian Basin of the
northeastern United States and in Seminole County, Oklahoma. For more
information, visit the Quest Energy Partners website at www.qelp.net.
Quest Midstream Partners, L.P. was formed by Quest Resource Corporation to
acquire and develop transmission and gathering assets in the midstream
natural gas and oil industry. The partnership owns more than 2,100 miles of
natural gas gathering pipelines and over 1,100 miles of interstate natural
gas transmission pipelines in Oklahoma, Kansas, and Missouri. For more
information, visit the Quest Midstream Partners website at www.qmlp.net.
Forward-Looking Statements
Opinions, forecasts, projections or statements other than statements of
historical fact, are forward-looking statements that involve risks and
uncertainties. Forward-looking statements in this announcement are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Although Quest believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In particular,
the forward looking statements made in this release are based upon a number
of financial and operating assumptions that are subject to a number of
risks, including the uncertainty involved in exploring for and developing
new natural gas reserves, the sale prices of natural gas and oil, labor and
raw material costs, the availability of sufficient capital resources to
carry out the anticipated level of new well development and construction of
related pipelines, environmental issues, weather conditions, competition
and general market conditions. Actual results may differ materially due to
a variety of factors, some of which may not be foreseen by Quest. In
addition, there can be no assurance that the merger of Quest and Pinnacle
will be approved by their respective shareholders. These risks, and other
risks are detailed in Quest's filings with the Securities and Exchange
Commission, including risk factors listed in Quest's latest annual report
on Form 10-K and other filings with the Securities and Exchange Commission.
You can find Quest's filings with the Securities and Exchange Commission at
www.qrcp.net or at www.sec.gov. By making these forward-looking
statements, Quest undertakes no obligation to update these statements for
revisions or changes after the date of this release.
Reconciliation of Non-GAAP Financial Measures
Adjusted EBITDA is defined as net income (loss) plus:
-- net interest expense;
-- depreciation, depletion and amortization expense;
-- gain (loss) on sale of assets;
-- provision for impairment of gas and oil properties;
-- cumulative effect of accounting change, net of tax;
-- change in derivative fair value; and
-- non-cash compensation expense.
Adjusted EBITDA is a significant performance metric used by Quest
management, and by external users of Quest's financial statements, such as
investors, commercial banks, research analysts and others, to assess (prior
to the establishment of any cash reserves) the cash distributions Quest
Energy and Quest Midstream expect to pay their unitholders. Specifically,
this financial measure indicates whether or not the partnership's are
generating cash flow at a level that can sustain or support an increase in
their quarterly distribution rates without regard to the impact of
financing methods, capital structure or historical cost basis of their
assets.
Adjusted EBITDA also is used as a supplemental liquidity measure by Quest's
management, and by external users of Quest's financial statements, such as
investors, commercial banks, research analysts and others, to assess the
ability of Quest's assets to generate cash sufficient to pay interest
costs, support its indebtedness, and the ability of Quest Energy and Quest
Midstream to make distributions to their unitholders. Adjusted EBITDA is
also used in calculating the financial covenants under the credit
agreements for each of Quest Resource, Quest Midstream and Quest Energy.
Adjusted EBITDA should not be considered an alternative to, or more
meaningful than, net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in
accordance with GAAP as measures of operating performance, liquidity or
ability to service debt obligations. Adjusted EBITDA does not include
interest expense, income taxes, depreciation and amortization expense,
change in derivative fair value or non-cash compensation expense. Because
Quest Resource, Quest Energy and Quest Midstream have borrowed, and intend
to borrow, money to finance their operations, interest expense is a
necessary element of Quest's overall costs. Because Quest Resource, Quest
Energy and Quest Midstream use capital assets, depreciation and
amortization are also necessary elements of Quest's overall costs. Because
Quest Resource and Quest Energy have used, and intend to use, derivative
contracts to hedge their exposure to commodity prices, changes in the fair
value of those contracts is also a necessary element of Quest's overall
costs. Because Quest Resource, Quest Energy and Quest Midstream have used,
and intend to use, non-cash equity awards as part of their overall
compensation package for executive officers and employees, non-cash
compensation expense is a necessary element of Quest's overall costs. Due
to fluctuations in commodity prices, Impairments of oil and gas properties
may at times be a material element of Quest's business. In the future,
income taxes may become a material element of Quest's business. Therefore,
any measures that exclude these elements have material limitations. To
compensate for these limitations, Quest management believes that it is
important to consider both net income and net cash provided by operating
activities determined under GAAP, as well as Adjusted EBITDA, to evaluate
Quest's financial performance and liquidity.
Management compensates for the limitations of Adjusted EBITDA as an
analytical tool by reviewing the comparable GAAP measures, understanding
the differences between the measures and incorporating this knowledge into
management's decision-making processes.
Reconciliation of Net Income (Loss) to Adjusted EBITDA
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2008 2007 2008 2007
-------- -------- -------- --------
Net income (loss) $ 4,964 $ (4,487) $ (6,678) $ (7,798)
Minority interest 7,026 650 975 1,084
Net interest expense 5,174 7,507 10,281 14,443
Change in unrealized derivative
value (8,862) (279) 14,969 185
Depreciation, depletion, and
amortization (1) 13,745 9,219 27,320 17,747
(Gain) loss on sale of assets 30 299 (27) 234
Non-cash stock compensation 1,703 2,530 3,264 3,018
-------- -------- -------- --------
Adjusted EBITDA $ 23,780 $ 15,439 $ 50,104 $ 28,913
Reconciliation of Net Cash Provided by Operating Activities
to Adjusted EBITDA
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2008 2007 2008 2007
-------- -------- -------- --------
Net cash provided by operating
activities $ 32,179 $ 2,240 $ 41,490 $ 12,623
Net interest expense 5,174 7,507 10,281 14,443
Change in current assets and
liabilities (13,034) 6,391 (703) 3,087
Other net cash changes (539) (699) (964) (1,240)
-------- -------- -------- --------
Adjusted EBITDA $ 23,780 $ 15,439 $ 50,104 $ 28,913
(1) Includes depreciation and amortization expense associated with company
owned equipment which is included in oil and gas production costs and cost
to plug and abandon an exploratory well in New Mexico.