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.
Company Contact: Jack Collins Investor Relations Phone: (405)
702-7460 Website: www.qrcp.net
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