Dodging a Bullet in the Barnett Shale

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About a month back, you may recall that Quicksilver Resources (NYSE: KWK) was getting whacked. The crude credit crunch victim saw the limit of its reserve-based revolving credit line maintained at $1.2 billion, but the fees on that facility got hiked to less accommodating levels.

Concerns about the company's liquidity have dogged the stock for a while now. The firm does have one of the more enviable hedge positions among natural gas E&Ps, with about 75% hedged for the rest of the year at something like twice the current spot price, but Quicksilver's debt load is definitely on the heavy side.

Interestingly, a significant chunk of that debt is attributable to last year's $1.3 billion acquisition of a Barnett Shale property. That's exactly the asset that Quicksilver is now joint venturing with Italian oil major Eni (NYSE: E) to help pay down debt. Investors are bidding up the share price today, so someone likes this deal. Let's see if Quicksilver deserves the applause.

In its preliminary purchase allocation, Quicksilver has attributed $793 million of its total purchase price to proved reserves, which were pegged at 350 billion cubic feet (Bcf) of natural gas at the time of acquisition. By that math, they paid around $2.27 per thousand cubic feet (mcf). Not too bad.

Now, Quicksilver is selling a 27.5% stake in the property to Eni for $280 million. That includes 131 billion cubic feet of proved reserves, for a sale price of about $2.14/mcf. So right off the bat, it doesn't look like Quicksilver is following Denbury Resources (NYSE: DNR) into Barnett fire sale territory. When you consider that Eni will also be helping fund some $200 million in development drilling over the next several years, this starts to look like a fine arrangement for the rather strapped independent.

At the end of the day, this joint venture isn't as strong as the Chesapeake Energy (NYSE: CHK) deals that see partners like Plains Exploration & Production (NYSE: PXP) and BP (NYSE: BP) footing a disproportionate share of the drilling costs up front, but it's a step in the right direction for Quicksilver.