TPS Trade Alert – August 30, 2013
August 30, 2013
Recommendation:
Buy Quicksilver Resources (NYSE: KWK) up to $1.85 per share.
Trade Rationale:
The last recession, which we are still feeling the effects of, changed the way consumers view gas prices. These days, even if crude oil rises, gas prices haven’t necessarily been following suit.
You see, as gasoline prices rise, demand has gone down. Consumers just don’t have the disposable income to spend on fuel when it’s so expensive. Instead, people have been turning to numerous alternatives including public transportation, carpooling, hybrid/electric vehicles, and biking.
Here’s the thing…
One new development I’ve noticed around town is public buses using natural gas as fuel. I believe we’re going to see more and more natural gas powered vehicles as crude oil prices stay at these high prices (and with what’s going in Syria, you can bet oil prices are going to remain high for awhile).
Natural gas is cheaper and cleaner than oil. And, more importantly, we have a huge supply of it right here on American soil.
Sooner rather than later, there’s going to be a push for more vehicles switching to natural gas fuels. And that’s why it’s a great time to load up on Quicksilver Resources (NYSE: KWK).
KWK produces natural gas, natural gas liquids, and oil in the US. The company focuses primarily on unconventional development of resources such as fractured shales, coal beds, and tight sands.
Although the company does produce a little oil, it’s nearly a pure play on natural gas. In fact, nat gas and nat gas liquids make up 99% of the company’s reserves. The reserves come from properties in Texas, Colorado, Wyoming, Montana, Alberta, and British Columbia.
Here’s what we like about KWK…
First off, for the price, the company has a substantial asset base. KWK has 2,250 natural gas and 212 oil producing wells. That’s on 1.1 million net acres.
What’s more, the company’s total proved reserves have a present value of roughly $1.6 billion. And, 56% of the acres are still undeveloped. In other words, there’s plenty of upside potential.
Moreover, the company focuses on higher valued natural gas liquids. That means KWK operates with high margins, especially compared to other natural gas producers.
Not to mention, Quicksilver has the option to develop oil plays should the natural gas market not develop as expected. Basically, for a small company in a relatively risky industry, KWK actually is a very safe play for the long-term.
Financially speaking, Quicksilver basically looks like what you’d expect. The company has a lot of debt and is not yet operating at a profit – which isn’t unusual for a small oil and gas company in the development stage.
KWK does pull in nearly $650 million in revenue per year and has over $200 million in EBITDA. So, the company’s not likely far off from operating in the black.
The company also has $215 million in cash compared to just under $2 billion in debt. Again, that’s not an unusual scenario for this industry. And, KWK has enough cash and operating cash flow ($50 million per year) to cover debt expenses for the foreseeable future.
From a valuation standpoint, KWK looks cheap. The shares are trading at nearly 30% below their 200-day moving average. And, the stock’s currently sitting 66% below the 52-week high of nearly $5 a share.
With oil prices once again moving higher due to the instability in the Middle East, demand for natural gas is going higher. Sooner rather than later, there’s going to be big push to make natural gas the energy source of choice in the US.
And Quicksilver is in perfect position to profit off this coming boom. Grab your shares now while they’re still cheap.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Quicksilver Resources |
| Ticker: | KWK |
| Recent Price: | $1.67 |
| Market Cap: | $286.1 million |
| Avg. Daily Volume: | 2,793,300 shares |
Chart:
Category: TPS Trade Alert
