How Low Will Quicksilver Resources Go?
Shares of Quicksilver Resources (NYS: KWK) hit a 52-week low yesterday. Let's look at how it got here and whether clouds are still ahead.
How it got here
Drilling for natural gas hasn't been the profitable boom Quicksilver Resources thought it would be when the company racked up billions in debt to expand its natural gas footprint. Production expanded and prices fell, squeezing even the biggest players in the market. As prices fell, investors became even more concerned about Quicksilver's $2 billion debt load, and when the CEO's buyout bid never materialized the stock had nowhere to go but down.
This hasn't been the only company suffering in the industry, though. Chesapeake Energy (NYS: CHK) , Denbury Resources (NYS: DNR) , and SandRidge Energy (NYS: SD) have all seen their stock prices tumble over the last five years as the price of natural gas fell, and have yet to recover. The general strategy for these companies has been to slow down natural gas production in favor of oil, but Quicksilver has stayed bullish on natural gas.
When compared to these companies, you can see that Quicksilver is even more highly leveraged than its competition and isn't even expected to make a profit this year or next. That's not a good sign for a company that should be well on its way to making money in the energy business.
Quicksilver | 0.5 | 2.8% | 158.2 | N/A |
Chesapeake Energy | 0.8 | 4.4% | 70.5 | 10.1 |
SandRidge Energy | 1.7 | 5.2% | 118.1 | 19.3 |
Denbury Resources | 1.1 | 8.4% | 55.5 | 8.7 |
Source: Yahoo! Finance.
For Quicksilver, return on assets is weak, debt-to-equity is high, and the company isn't turning a profit. That's a recipe for a new low if I've ever seen one.
What's next?
There is simply too much risk here for me to bet on a recovery, particularly when the competition is turning its attention to more profitable oil plays. At this point, Quicksilver is a highly leveraged bet on the price of natural gas and I think it adds more risk than investors need.
The CAPS community, however, is more bullish, with 834 out of 861 players thinking the stock will outperform the market. Over the last 12 months that's been a losing bet.
If you must make a bet on natural gas, I think the way to do it is through United States Natural Gas Fund (ASE: UNG) , a direct bet on the price of natural gas without the leverage of Quicksilver. The downside is much lower and you still have upside potential if the price of natural gas goes up.
Interested in reading more about Quicksilver Resources? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.
At the time thisarticle was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Denbury Resources and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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