Quest Resource Corporation (NASDAQ: QRCP) ("QRCP") and Quest Energy
Partners, L.P. (NASDAQ: QELP) ("QELP") today provided the following
update on operations, liquidity, and planned distributions:
Quest Resource Corporation -- Appalachian Basin
QRCP owns the right to develop more than 122,000 net acres
within the recognized fairway of the emerging Marcellus Shale play
in the Appalachian Basin 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. The development of
this acreage will require significant amounts of additional capital
resources.
In the fourth quarter of 2008, QRCP plans to spend approximately
$11 million on Appalachian Basin capital projects including the
drilling of one vertical test well in Lycoming County,
Pennsylvania, two horizontal wells in Wetzel County, West Virginia,
one horizontal well in Lewis County, West Virginia, and two
vertical wells in Ritchie County, West Virginia.
QRCP currently has one rig drilling the two horizontal wells in
Wetzel County that will be moved to Lewis County upon completion of
these wells. A contractor has begun preparing the drilling location
in Lycoming County for a rig that is expected to be on location by
the middle of October. A rig is expected to arrive on location in
Ritchie County to drill the two vertical wells within the next 10
days.
QRCP must drill these wells to satisfy obligations under various
leases with deadlines prior to the end of the year. If QRCP did not
drill some or all of these wells, it could potentially lose leases
covering up to approximately 15,000 net acres in the Appalachian
Basin.
On an unconsolidated basis, QRCP currently has an outstanding
term loan of $33.5 million and total available cash of
approximately $1.0 million.
In addition to the capital expenditures discussed above, QRCP
and its affiliates are currently experiencing significant
unexpected costs associated with the investigation of the
questionable transfers of funds from the Quest entities by Mr.
Jerry Cash, QRCP's former chief executive officer. Management
believes that QRCP will need to raise significant additional
capital in the near term in order to fund these capital
expenditures and to pay these expenses. QRCP is currently
negotiating with its lender for, among other things, an additional
revolving credit facility and a waiver of any potential defaults
that may have occurred as a result of Mr. Cash's questionable
transfers.
QRCP has engaged Tudor, Pickering, Holt & Co. Securities,
Inc. to assist QRCP in exploring strategic alternatives, including
a number of options to, among other things, secure adequate funding
for its planned drilling and development activities in the
Marcellus Shale region, including the sale of equity securities,
the incurrence of additional debt, joint ventures, farm-outs and
selected asset sales. David Lawler, President of each of the Quest
entities, said, "We remain optimistic about the potential
associated with our large acreage position prospective for the
Marcellus Shale. We are also reassigning some of our people to this
area from the Cherokee Basin, which will enhance our operations in
the area."
There is no assurance that QRCP will be successful in raising
additional capital, obtaining additional debt financing or
obtaining any required waivers. If QRCP is unsuccessful in its
negotiations with its lenders or raising additional capital, QRCP
would experience liquidity issues that would adversely impact its
future plans and results of operations.
Internal Investigation Update
The independent internal investigation initiated by the boards
of QRCP and the general partners of QELP and Quest Midstream
Partners, L.P. into the questionable transfer of funds to Mr. Cash
remains ongoing. Based on the information obtained in the
investigation to date, the special committee of the boards
conducting the investigation continues to believe that the
questionable transfers involved a total of approximately $10
million (as originally announced). QRCP and QELP are aggressively
seeking restitution from Mr. Cash for this amount. The companies
cannot accurately predict when the investigation will be complete,
what the final results of that investigation will be, or whether
any recovery of the missing assets can be made.
In addition, both QRCP and QELP and certain of their officers
and directors have been named as defendants in several class action
securities lawsuits and QRCP and certain of its officers and
directors have been named in lawsuits asserting derivative claims
for breach of fiduciary duty related to the questionable transfers
of funds to Mr. Cash. QRCP and QELP have retained counsel to
represent them in such litigation and intend to defend themselves
vigorously against such claims.
Quest Energy Partners, L.P. -- Cherokee Basin
QELP is the largest producer of natural gas in the Cherokee
Basin of southeast Kansas and northeast Oklahoma. QELP's total net
natural gas production averaged an estimated 58.5 million cubic
feet per day (Mmcf/d) in the third quarter of 2008, up from an
average of approximately 56.2 Mmcf/d in the second quarter of 2008,
a sequential increase of 4%.
QELP has hedging contracts covering approximately 4.5 Bcf of
production for the fourth quarter of 2008. Approximately 35% of the
hedge contracts are tied to NYMEX prices with no basis locks and
thus expose the partnership to the recent widening of the basis
differential in the region, which were $3.38/Mmbtu for the October
2008 bid week and $1.99/Mmbtu for the September 2008 bid week
versus an average of $1.37/Mmbtu for the first eight months of
2008. The partnership currently expects to realize an approximate
weighted average price of between $6.25/Mmbtu and $6.50/Mmbtu on
hedged volumes in the fourth quarter of 2008.
QELP has entered into hedging contracts for approximately 16 Bcf
of production for 2009. Only 5% of the 2009 contracts are tied to
NYMEX prices without basis locks. As a result, the partnership
currently expects to realize a weighted average price of between
approximately $7.80/Mmbtu and $7.90/Mmbtu on hedged volumes in
2009.
As of October 3, 2008, QELP has drilled 336 gross wells in the
Cherokee Basin, which exceeds the 325 wells planned for the year.
As of the same date, the partnership had completed and connected
302 gross wells in the Cherokee Basin out of the 325 wells planned
for the year and had an inventory of approximately 100 wells that
had been drilled but are awaiting completion and connection. The
partnership has decided to defer the completion and connection of
the majority of these wells due to the currently wide natural gas
price differential in the basin and a desire to operate within cash
flow from operations.
Mr. Lawler said, "We exceeded our annual drilling plan in the
Cherokee Basin ahead of schedule due to the efficient work of our
drilling crew. At this time, due to our inability to access the
public equity and debt capital markets at attractive prices as a
result of the current crisis in our country's financial markets and
the costs associated with our ongoing internal investigation, we
determined that it would be prudent to proactively slow down our
development in the Cherokee Basin in the short term. The low
natural gas prices in the Cherokee Basin have reinforced this
decision. Absent these factors, our internal oilfield service
division would now be working to complete and connect the wells.
However, we expect to resume our Cherokee Basin development program
upon the conclusion of the independent internal investigation and
after market conditions improve. As a result of this slow down, 28
internal development related operations personnel were
unfortunately impacted."
Quest Energy Partners, L.P. -- Appalachian Basin
QELP expanded into the Appalachian Basin in July 2008 through
the acquisition from QRCP of natural gas and oil producing wells
and has opened an office in the Pittsburgh area. Estimated total
net natural gas equivalent production is currently approximately
3.4 million cubic feet of equivalents per day (Mmcfe/d) and has
averaged this rate since the properties were acquired in July.
In Ritchie County, West Virginia, production was curtailed for
approximately nine days during the quarter due to a gathering
system upgrade that was completed last week. Infrastructure
enhancement projects are underway in Wetzel County, West Virginia
and are scheduled for completion by the end of this month. The
enhancements in Wetzel County should allow for unconstrained sales
on three producing vertical Marcellus wells owned by QELP and for
the horizontal wells currently being drilled by QRCP. Removing the
production constraint is expected to immediately increase
production from the existing wells by a combined 0.3 to 0.5
Mmcf/d.
Mr. Lawler said, "Our expansion into Appalachia has given the
partnership long-lived natural gas producing properties that 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. Our operating team in Appalachia believes the opportunity
exists to enhance production from existing wells and we have
reassigned several of our Cherokee Basin employees to capture this
potential upside."
Quest Energy Partners, L.P. -- Liquidity and Distributions
QELP will require significant additional capital resources in
order to fully develop its undeveloped natural gas reserves in the
Cherokee Basin and to further develop its Appalachian Basin
reserves. There is no assurance that such resources will be
available to QELP.
At September 30, 2008, QELP's total funded debt balance was $228
million and total cash was approximately $9 million. As of
September 30, 2008, total funded debt consisted of $183 million
drawn on its revolving credit facility (out of a total current
availability of $190 million) and a $45 million, second lien term
loan facility that matures in January 2009. However, the
partnership is currently undergoing its mid-year borrowing base
redetermination and is negotiating with its lenders for, among
other things, an extension of its term loan facility and a waiver
of any potential defaults that may have occurred as a result of Mr.
Cash's questionable transfers. In the event that QELP's lenders
were to reduce the borrowing base and therefore the amount
available under QELP's revolving credit facility, not extend the
maturity date of the term loan and/or grant any required waivers,
QELP intends to seek additional funding through the incurrence of
additional indebtedness, the sale of equity securities or the sale
of assets and the reduction of costs. If QELP is unsuccessful in
its negotiations with its lenders or raising additional capital,
QELP would experience liquidity issues that would adversely impact
its future plans, results of operations and ability to make
distributions on its units.
Due to lower than expected natural gas prices in the Cherokee
Basin and significant unexpected costs associated with the ongoing
internal investigation, management currently plans to recommend to
QELP's Board of Directors a cash distribution for the third quarter
of 2008 of $0.43 per unit for all common units outstanding
(unchanged from the prior quarter). The potential distribution is
subject to QELP's negotiations with its lenders or ability to raise
additional capital and to approval by the Board of Directors of
QELP's general partner.
Gary Pittman was recently appointed Chairman of the Board of
Directors of QELP's general partner.
Quest Midstream (Natural Gas Pipelines Segment)
QRCP's natural gas pipelines segment conducts its operations
through privately held Quest Midstream Partners, L.P. ("QMLP").
QMLP increased the size of its low pressure gathering system in the
Cherokee Basin during the third quarter to approximately 2,133
miles after constructing approximately 50 miles of low pressure gas
gathering pipelines. In the third quarter of 2008, QMLP's total
natural gas throughput volumes in the Cherokee Basin rose by
approximately 4% from the prior quarter and by approximately 19%
from the year ago quarter. QMLP's interstate natural gas
transmission pipelines in Oklahoma, Kansas, and Missouri did not
experience any significant interruption during the third quarter of
2008.
As of September 30, 2008 QMLP's total funded debt balance was
$128 million, consisting solely of amounts drawn on its $135
million revolving credit facility, and total cash was approximately
$4 million. The partnership is negotiating with its lenders to,
among other things, delay the step down provision of its total
leverage ratio and obtain a waiver of any potential defaults that
may have occurred as a result of Mr. Cash's questionable transfers.
If QMLP is unable to negotiate a step down in its leverage ratio or
obtain any required waivers, QMLP would need to either sell
additional common units, reduce costs and/or sell assets in order
to reduce its outstanding indebtedness and to replace the remaining
undrawn amount under its revolving credit facility if it wishes to
fund an ongoing capital program. At such time as QELP resumes its
development program in the Cherokee Basin, QMLP will require
additional capital resources in order to connect the additional
wells developed by QELP. There is no assurance that QMLP will be
successful in raising additional capital. If QMLP is unsuccessful
in its negotiations with its lenders or raising additional capital
and is therefore not able to fund an ongoing capital program, QMLP
would experience liquidity issues that would adversely impact
QRCP's and QELP's future plans and operations.
The partnership's initial public offering plans have been
suspended due to soft market conditions and the investigation into
Mr. Cash's questionable transfers of funds. As a result, QMLP will
not satisfy its contractual obligation with its investors to have
completed an initial public offering by December 22, 2008. Under
the terms of an investors' rights agreement among QRCP and QMLP's
investors, after December 22, 2008 and until such time, if any, as
an initial public offering is completed by QMLP, the investors may
require QMLP's general partner to effect a sale of either all of
QMLP's assets or partner interests. Additional information about
the investors' rights agreement is contained in QRCP's most recent
annual report on Form 10-K filed with the Securities and Exchange
Commission.
QRCP is currently evaluating a number of options in response to
these developments.
About Quest Resource Corporation and Quest Energy Partners,
L.P.
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
122,600 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 2,300 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 2,000 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 results of the internal investigation
described in this press release, the ongoing worldwide crisis in
the capital markets, 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.
These risks, and other risks are detailed in Quest Resource
Corporation's and Quest Energy Partners, L.P.'s filings with the
Securities and Exchange Commission, including risk factors listed
in their latest annual reports on Form 10-K and other filings with
the Securities and Exchange Commission. You can find Quest Resource
Corporation's filings with the Securities and Exchange Commission
at www.qrcp.net or at www.sec.gov and Quest Energy Partners, L.P.'s
filings with the Securities and Exchange Commission at www.qelp.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.
Company Contact: Jack Collins CFO Phone: (405) 702-7460
Websites: www.qrcp.net & www.qelp.net
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