[source: U]


Quicksilver Gas Services LP
1Q09 Update: Stronger Than Expected


Earnings per unit (EPU) beats the street
KGS reported diluted 1Q09 EPU of $0.34, compared to $0.12 in 1Q08. Increasing revenue/Mcf gathered (to $0.633 from $0.501) offset slower than estimated volume growth and drove results ahead of both UBS and consensus estimates of $0.28 and $0.31, respectively.


Raising estimates
Incorporating higher than anticipated revenue/Mcf gathered and processed (more than offsetting expected near term volume weakness), we are increasing our 2009-10 EPU estimates to $1.37/$1.50 from $1.31/$1.48. KGS’ ~$38mm of undrawn capacity on its $235mm credit facility (now expandable to $280mm with lender approval) should be sufficient to fund near-term organic growth, in our view.

Distribution run-rate flat vs 4Q08, withholding cash to enhance liquidity
KGS’ $1.48 run-rate represents a 17.5% increase over the 1Q08 run-rate of $1.26 and is flat vs 4Q08. While strong ruture earnings and a high coverage ratio provides KGS with the capacity to support above average distribution growth, we expect the partnership to moderate distribution growth in the near term to enhance its liquidity position as capital markets remain strained.

Valuation: Maintaining 12-month price target of $16
Our price target is based on our distribution discount model (DDM) and implies a 10.0% yield on our 1Q10 target distribution run-rate of $1.60/unit, versus the peer target median of 8.7%.