OKLAHOMA CITY, OK ("Quest Resource") today reported record
financial results for the first quarter of 2008, excluding the
impact of the non-cash change in derivative fair value. Adjusted
earnings before interest, income taxes, depreciation and
amortization (Adjusted EBITDA), a non-GAAP measure, rose by 95%
from the first quarter 2007. The increase in Adjusted EBITDA was
driven primarily by organic production growth, higher realized
natural gas prices, a 21% reduction in per unit lease operating
expense, and contributions from the KPC interstate pipeline
acquired in November 2007 and oil producing properties acquired in
February 2008.
The net loss for the period totaled $11.6 million, or $0.50 per
share, as results were impacted by a $23.8 million unrealized loss
on hedging instruments due to the large increase in natural gas
prices experienced over the quarter.
Selected financial information in a comparative format for the
quarters ended March 31, 2008 and 2007 is shown in the table below.
For additional detail, investors can access Quest Resource's Form
10-Q which was filed with the Securities and Exchange Commission on
May 12, 2008.
Select Financial and Operating Data (in thousands, except per share data)
Three Months Ended
March 31,
--------------------
2008 2007
--------- ---------
(unaudited)
Total Revenue 44,304 27,078
Net Income (Loss) Before Minority Interest (17,693) (2,877)
Minority Interest 6,050 (434)
Net Income (Loss) (11,643) (3,311)
Net Income (Loss) Per Share Basic (0.50) (0.15)
Net Income (Loss) Per Share Diluted (0.50) (0.15)
Operating Income 11,215 4,416
Adjusted EBITDA(1) 26,324 13,474
Weighted Average Shares Outstanding Basic 23,295 22,206
Weighted Average Shares Outstanding Diluted 23,295 22,206
(1) A reconciliation of Adjusted EBITDA to Net Income and Net
Cash from Operations, 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) ("Quest Energy"), the
natural gas and oil master limited partnership formed with the
contribution of certain producing properties from Quest Resource,
declared a cash distribution of $0.41 per unit for the first
quarter of 2008 for all of its outstanding units. On an annualized
basis, the distribution was 2.5% higher than the partnership's
indicated initial quarterly rate of $0.40 per unit. The
distribution will be paid on May 15, 2008 to unitholders of record
at the close of business on May 5, 2008. Quest Resource owns
approximately 57% of the outstanding common and subordinated units
and 100% of the general partner of Quest Energy. Quest Resource
will receive approximately $5.1 million in cash distributions from
its ownership interest in Quest Energy for the first quarter
2008.
Quest Midstream Partners, L.P. ("Quest Midstream") declared a
cash distribution for the first 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 May 15,
2008 to unitholders of record at the close of business on May 5,
2008. Quest Resource owns subordinated units representing
approximately 36% of the outstanding limited partner units and 85%
of the general partner of Quest Midstream. Quest Resource received
approximately $0.1 million in cash distributions from its ownership
interest in Quest Midstream for the first quarter 2007.
Quest will provide additional detail regarding Quest Energy's
first quarter 2008 financial results and update 2008 guidance in
the partnership's press release that will be issued after its Form
10-Q is filed on May 15, 2008.
Gas and Oil Production Segment Results
Quest Resource primarily conducts its gas and oil production
operations through Quest Energy 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 55.6
million cubic feet equivalents (Mmcfe) per day for the first
quarter 2008, a 34% increase from an average of 41.4 Mmcfe per day
from the first quarter 2007. The increase was driven by the
successful execution of Quest's development program over the past
twelve months as well as the $9.5 million acquisition of oil
producing properties in the first quarter 2008. Realized natural
gas sales prices for the quarter, including the impact of hedges,
was $7.26 per Mcf in the first quarter of 2008, up from $7.12 per
Mcf in the year ago quarter.
Total production costs, excluding gross production and ad
valorem taxes, were $1.12 per Mcfe for first quarter 2008 down from
$1.41 per Mcfe in the first quarter 2007. This decrease was the
result of rising production volumes and the benefits from certain
cost cutting programs started during the third quarter 2007. Quest
expects to continue to benefit from these programs and rising
volumes in 2008 and anticipates production costs, excluding gross
production and ad valorem taxes, of $1.00 per Mcfe to $1.15 per
Mcfe for the full year.
During the first quarter, Quest drilled a total of 118 gross
wells and completed 101 gross wells in the Cherokee Basin out of
the 325 gross wells it plans to drill and complete in 2008. Quest
leased approximately 15,000 net acres in the Cherokee Basin during
the quarter at a cost of $100 per acre to $125 per acre.
At December 31, 2007, Quest Energy had the right to develop
approximately 558,000 net acres in the Cherokee Basin, of which
approximately 48% were undeveloped. At year end 2007, Quest Energy
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
Quest Resource conducts its natural gas pipelines operations
through Quest Midstream.
Quest Midstream increased the size of its low pressure gathering
system in the Cherokee Basin to approximately 2,000 miles after
constructing approximately 70 miles of low pressure gas gathering
pipelines in the first quarter 2008. The gathering system is the
largest in the Cherokee Basin with current capacity of
approximately 85 Mmcf/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 97% to
$15.6 million for the first quarter 2008 compared with $7.9 million
in first quarter 2007. This increase was principally driven by the
29% increase in gas gathering throughput volumes from the year ago
quarter and the higher compression and gathering fees payable by
Quest Energy under the midstream services agreement that was
adjusted on January 1, 2008 as well as a $4.9 million contribution
from KPC Pipeline which was acquired on November 1, 2007.
Pipeline operating costs, were $1.04 per Mcf for first quarter
2008, up 13% from $0.92 per Mcf for first quarter 2007. The
increase in operating costs was due to the delivery of additional
compressors in anticipation of increased pipeline volumes, the
number of wells completed and operated during the year, the
increased miles of pipeline in service, the increase in property
taxes, and the operations of KPC pipeline. Quest anticipates
operating costs to decrease on a per Mcf basis in 2008 due to the
increased volumes forecasted from new wells completed in 2007 and
those planned for 2008.
New Ventures Update
Quest Resource develops early-stage and/or unconventional plays
through its wholly-owned New Ventures group. The group draws on the
expertise of Quest Resource's technical team to pursue higher
risk/higher return potential exploration projects. New Ventures
holds approximately 22,000 net undeveloped acres in southwest
Pennsylvania (Somerset County) that is prospective for the
Marcellus Shale. The group has drilled and completed and is testing
its first well on the acreage and is encouraged by the early
results. New Ventures will continue to evaluate the test results
and is considering additional development of the acreage.
Management Guidance
Quest Resource provided the following guidance with respect to
the distributions it expects to receive from Quest Energy and Quest
Midstream and for certain expenses not associated with the
partnerships. The guidance range for Total Distributions from
Affiliates was changed from $23.5 mm to $25 mm to reflect Quest
Energy's first quarter distribution increase.
(all amounts in $mm) 2Q08E FY 2008E
-------------- --------------
Quest Energy Partners Distributions 5.0 - 5.5 20.0 - 22.0
Quest Midstream Partners Distributions 0.1 - 0.5 3.0 - 4.0
Total Distributions from Affiliates 5.1 - 6.0 23.0 - 26.0
General & Administrative 0.5 - 1.0 2.0 - 2.5
Net Interest Expense 0.8 - 1.0 3.0 - 3.5
Capital Expenditures (1) 1.0 - 1.5 2.0 - 3.0
(1) Represents anticipated capital expenditures for new well
development outside the Cherokee Basin.
Management Comment
Jerry Cash, Chairman, President, and Chief Executive Officer of
Quest Resource, said, "We are pleased to report record results for
the first quarter 2008. Adjusted EBITDA and distributable cash flow
of Quest Energy exceeded the high-end of our guidance ranges due to
lower than projected operating costs and higher realized natural
gas prices. We continue to lower costs through operating efficiency
improvements and benefit from our fully integrated approach to
developing our extensive land position in the Cherokee Basin. We
successfully drilled 118 gross wells and completed 101 gross wells
in the Cherokee Basin out of the 325 gross wells planned for the
year. Our drilling program and $9.5 million purchase of oil
producing properties drove a 34% increase in net sales volumes from
the year ago quarter and our interstate pipeline purchase
contributed to record performance for Quest Midstream. We currently
intend to use the distributions from our two master limited
partnerships to create value for Quest Resource shareholders
through higher risk exploration projects that have the potential to
generate higher rates of return than the natural gas and oil
development projects being conducted by Quest Energy and/or debt
reduction."
Conference Call
Quest will host a conference call to discuss 2008 first quarter
operating and financial results on Tuesday, May 20, 2008 at 11:00
a.m. Eastern time. There will be a question and answer period
following the presentation.
Call: 877-604-9665 (US/Canada) and 719-325-4920 (International)
Passcode: 6804172
Internet: Live and rebroadcast over the Internet: simply log on to
www.qrcp.net.
Replay: Available through May 30, 2008 at 888-203-1112 (US/Canada)
and 719-457-0820 (International) using passcode 6804172 and
at www.qrcp.net.
About Quest Resource Corporation
Quest Resource Corporation is a fully integrated E&P company
that owns 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 Corp.
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. For more information, visit the Quest Energy Partners
website at www.qelp.net.
Quest Midstream Partners, L.P. was formed by Quest Resource
Corp. to acquire and develop transmission and gathering assets in
the midstream natural gas and oil industry. The partnership owns
approximately 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 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 ($ in thousands)
Three Months Ended
March 31,
--------------------
2008 2007
--------- ---------
Net income (loss) (11,643) (3,311)
Minority interest (6,050) 434
Net interest expense 5,107 6,936
Change in unrealized derivative value 23,831 464
Depreciation, depletion, and amortization(1) 13,575 8,528
(Gain) loss on sale of assets (57) (65)
Non-cash stock compensation 1,561 488
--------- ---------
Adjusted EBITDA 26,324 13,474
(1) Includes depreciation and amortization expense associated
with company owned equipment which is included in oil and gas
production costs.
Reconciliation of Net Cash from Operating Activities to Adjusted EBITDA
($ in thousands)
Three Months Ended
March 31,
--------------------
2008 2007
--------- ---------
Net cash from operating activities 9,310 10,383
Net interest expense 5,107 6,936
Change in current assets and liabilities 12,331 (3,304)
Other net cash changes (424) (541)
--------- ---------
Adjusted EBITDA 26,324 13,474
Company Contact: Jack Collins Investor Relations Phone: (405)
702-7460 Website: www.qrcp.net
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