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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 001-14837

Quicksilver Resources Inc.

(Exact name of registrant as specified in its charter)

777 West Rosedale, Suite 300, Fort Worth, Texas 76104

(Address of principal executive offices) (Zip Code)

(817) 665-5000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of October 29, 2004, the registrant had 49,966,078 outstanding shares of its common stock, $0.01 par value.

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QUICKSILVER RESOURCES INC.

INDEX TO FORM 10-Q

For the Period Ending September 30, 2004

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PART I. FINANCIAL INFORMATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Quicksilver Resources Inc.

Fort Worth, Texas

We have reviewed the accompanying condensed consolidated balance sheet of Quicksilver Resources Inc. (the Company) as of September 30, 2004, and the related condensed consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2004 and 2003 and of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2003, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 15, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in Note 2 to the condensed consolidated interim financial statements, on January 1, 2003, the Company adopted Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations.

/s/ DELOITTE & TOUCHE LLP

Fort Worth, Texas

November 9, 2004

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except for share data – Unaudited

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

In thousands, except for per share data – Unaudited

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands – Unaudited

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

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QUICKSILVER RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES AND DISCLOSURES

The accompanying condensed consolidated interim financial statements of Quicksilver Resources Inc. (“Quicksilver” or the “Company”) have not been audited by independent public accountants. In the opinion of Company management, the accompanying condensed consolidated interim financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2004, its income and comprehensive income for the three and nine month periods ended September 30, 2004 and 2003 and its cash flows for the nine month periods ended September 30, 2004 and 2003. All such adjustments are of a normal recurring nature. Certain amounts presented in prior period financial statements have been reclassified for consistency with current period presentation. The results for interim periods are not necessarily indicative of annual results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Management believes its estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company’s estimates.

Certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2003.

Stock Split

On June 1, 2004, the Company announced that its Board of Directors declared a two-for-one split of the Company’s outstanding common stock effected in the form of a stock dividend. The stock dividend was payable on June 30, 2004, to stockholders of record at the close of business on June 15, 2004. Treasury shares were not affected by the split.

All share and per-share information included in the accompanying consolidated condensed financial statements for all periods presented have been adjusted to retroactively reflect the stock split.

Net Income per Common Share

Basic net income per common share is computed by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is calculated in the same manner but also considers the impact on net income and common shares of the potential dilution from stock options, stock warrants, and any other convertible securities outstanding. For the three and nine month periods ended September 30, 2004 and 2003 there were no adjustments to net income for purposes of calculating diluted net income per common share. The following is a reconciliation of the weighted average common shares used in the basic and diluted net income per common share calculations for the three and nine month periods ended September 30, 2004 and 2003.

No outstanding options were excluded from the diluted net income per share calculation for any of the 2004 periods presented. For the nine months ended September 30, 2003, options covering 40,420 shares of common stock were excluded from the diluted net income per share calculation because the exercise price exceeded the average market price of the Company’s common stock.

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2. ASSET RETIREMENT OBLIGATIONS

The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. This statement, adopted by the Company as of January 1, 2003, establishes accounting and reporting standards for the legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development and the normal operation of long-lived assets. It requires that the fair value of the liability for asset retirement obligations be recognized in the period in which it is incurred. Upon initial recognition of the asset retirement liability, an asset retirement cost is capitalized by increasing the carrying amount of the long-lived asset by the same amount as the liability. In periods subsequent to initial measurement, the asset retirement cost is allocated to expense using a systematic method over the asset’s useful life. Changes in the liability for the asset retirement obligation are recognized for (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

In connection with adoption of SFAS No. 143, all asset retirement obligations of the Company were identified and the fair value of the retirement costs were estimated as of the date the long-lived assets were placed into service. The asset retirement obligations’ fair values were then estimated as of January 1, 2003. At January 1, 2003, the Company recognized asset retirement costs of $10.8 million and asset retirement obligations of $13.3 million, of which $0.9 million was classified as current. The cumulative-effect adjustment of $2.3 million included $1.3 million for additional depletion and depreciation of the asset retirement costs, $2.2 million for accretion of the fair value of the asset retirement obligations and $1.2 million for deferred tax benefits.

The following table provides a reconciliation of the changes in the estimated asset retirement obligation for the nine months ended September 30, 2004 and 2003.

During the nine months ended September 30, 2004 and 2003, accretion expense was recognized and included in depletion, depreciation and accretion expense reported in the statement of income for the period. Asset retirement obligations at September 30, 2004 are $19.7 million, of which $54,000 has been classified as current.

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3. HEDGING

The estimated fair values of all hedge derivatives and the associated fixed price firm sale and purchase commitments as of September 30, 2004 and December 31, 2003 are provided below. The associated carrying values of these financial instruments and firm commitments are equal to the estimated fair values for each period presented.

The fair values of all natural gas and crude oil financial instruments and firm sale commitments as of September 30, 2004 and December 31, 2003 were estimated based on market prices of natural gas and crude oil for the periods covered by the hedge derivatives. The net differential between the contractual prices in each hedge derivative and commitment and market prices for future periods, as adjusted for estimated basis, has been applied to the volumes stipulated in each contract to arrive at an estimated future value. This estimated future value was discounted on each contract at rates commensurate with federal treasury instruments with similar contractual lives. As a result, the fair value of the Company’s hedge derivatives and commitments does not necessarily represent the value a third party would pay or receive to assume the Company’s contract positions nor does it necessarily reflect the final settlement to be realized by the Company. The fair value of the interest rate swap was based upon third-party estimates of the fair value of the swap.

At September 30, 2004, all derivative assets and liabilities have been classified as current based on the maturity of the derivative instruments. The Company estimates $20.7 million of after-tax losses to be reclassified from other comprehensive income over the next twelve months.

4. LONG-TERM DEBT

Long-term debt consists as follows:

The Company refinanced its prior senior bank debt on July 28, 2004 upon entering into a new five-year $300 million senior revolving credit facility, which the Company has the option to increase to $600 million with the consent of the senior lenders. The lenders’ commitments under the facility are allocated between U.S. and Canadian funds, with the U.S. funds being available for borrowing by the Company and Canadian funds being available for borrowing by the Company’s Canadian subsidiary, MGV Energy Inc. The Company’s initial borrowing capacity under the facility is $300 million (of which amount approximately $238 million was drawn immediately to refinance all amounts outstanding under the Company’s prior credit facility). The Company’s interest rate options under the facility include rates based on LIBOR, U.S. prime, and Canadian prime. As borrowings increase, LIBOR margins increase in specified

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increments from 1.125% to a maximum of 1.75%. The facility is secured by Quicksilver’s oil and gas properties, and the lenders annually re-determine the global borrowing base under the facility in accordance with their customary practices for oil and gas loans based upon the estimated value of the Company’s year-end proved reserves. The loan agreements for the credit facility prohibit the declaration or payment of dividends by the Company and contain certain financial covenants, which, among other things, require the maintenance of a minimum current ratio and a minimum earnings (before interest, taxes, depreciation, depletion and amortization, non-cash income and expense, and exploration costs) to interest expense ratio. As of September 30, 2004, the Company had $24.8 million available under the senior revolving credit facility and was in compliance with all such covenants. Additionally, the Second Mortgage Notes contain restrictive covenants, which, among other things, require maintenance of a minimum current ratio, a minimum collateral coverage ratio and a minimum earnings (before interest, taxes, depreciation, depletion, accretion and amortization, non-cash income and expense and exploration costs) to fixed charges ratio. As of September 30, 2004, the Company was in compliance with all such covenants.

On November 1, the Company completed a private placement of 1.875% convertible subordinated debentures with a face value of $150 million for gross proceeds of approximately $147.8 million. The debentures cannot be called by Quicksilver for seven years after issuance and will mature in 20 years. Holders of the debentures can require the Company to repurchase the notes on the seventh, tenth and fifteenth anniversaries of the issuance. Upon conversion, the Company has the option to deliver, in lieu of Quicksilver common stock, cash or a combination of cash and Quicksilver common stock. The debentures are convertible into Quicksilver common stock at a rate of 21.8139 shares for each $1,000 debenture, subject to adjustment. This results in an initial conversion price of approximately $45.84 per share and represents a premium of 42.5 percent over the closing sale price of $32.17 per share on October 26, 2004. Generally, except upon the occurrence of specified events, holders of the debentures are not entitled to exercise their conversion rights until the Company’s stock price is $55.01 (120 percent of the conversion price per share). The Company anticipates using the $147.8 million of gross proceeds to repay approximately $129 million of the balance outstanding under the Senior Credit Facility and to pay fees and expenses related to the offering.

On June 27, 2003, the Company redeemed $53 million in principal amount of subordinated notes payable through the issuance of $70 million in principal amount of second mortgage notes. As a result of the redemption, the Company recognized additional interest expense of $3.8 million, consisting of a prepayment premium of $3.2 million and remaining deferred financing costs of $1.5 million partially offset by an associated deferred hedging gain of $0.9 million.

5. COMMITMENTS AND CONTINGENCIES

On October 6, 2004, Quicksilver entered into the Incentive Arrangements Agreement (the “Agreement”) with three executives of MGV and one employee of Quicksilver. The Agreement provides for the amendment and restatement of employment agreements with two MGV executives and terminates incentive agreements with the other two individuals. In addition, the Agreement provides for awards of cash bonuses based upon the achievement of specified proved reserve targets, as well as options granted under the Company’s 1999 Stock Option and Retention Stock Plan covering 1,183,422 shares of common stock at an exercise price of $31.27. The cash bonuses, in the aggregate, shall be determined as a base amount of $5.0 million for achieving proved reserves of 400 billion cubic feet equivalent (Bcfe) at December 31, 2005. Proved reserves in excess of 400 Bcfe and up to but not exceeding 1,000 Bcfe will increase the cash bonuses earned by $0.05 per Mcfe. Presently, the Company has not recognized an obligation for the cash bonuses; however, the Company will continue to monitor its potential liability in respect of these matters, and will record accruals in respect of such liabilities when payment thereof becomes probable and estimable.

The Company is subject to various possible contingencies, which arise primarily from interpretation of federal and state laws and regulations affecting the natural gas and crude oil industry. Such contingencies include differing interpretations as to the prices at which natural gas and crude oil sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Although management believes it has complied with the various laws and regulations, administrative rulings and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, production rates, marketing and environmental matters are subject to regulation by various federal and state agencies.

6. STOCK-BASED COMPENSATION

Quicksilver has two stock-based compensation plans, the 1999 Stock Option and Stock Retention Plan and the newly adopted 2004 Non-Employee Director Stock Option Plan. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

On January 7, 2004, the Company granted stock options covering 575,930 shares of common stock to the Company’s officers and employees. These options were granted at an exercise price of $16.515. Stock options

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covering 15,384 shares of common stock were granted to the Company’s non-employee directors on May 18, 2004 at an exercise price of $23.75. Additionally, the Company granted options covering 1,183,422 shares of common stock at an exercise price of $31.27 in connection with the Agreement discussed in footnote 5.

The following table reflects pro forma income before the cumulative effect of an accounting change and the associated earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

7. RELATED PARTY TRANSACTIONS

The Darden family and associated entities, including Mercury Exploration Company (“Mercury”), Quicksilver Energy L.P., The Discovery Fund, Thomas Darden, Glenn Darden, Anne Darden Self, Lucy Darden and eight Darden family trusts beneficially own approximately 38% of Quicksilver’s shares outstanding. Thomas Darden, Glenn Darden and Anne Darden Self are officers and directors of the Company.

Quicksilver and its subsidiaries paid $0.6 million during each of the nine-month periods ended September 30, 2004 and 2003 for rent on buildings owned by a Pennsylvania Avenue Limited Partnership, a limited partnership owned by members of the Darden family and Mercury. Rental rates were determined based on comparable rates charged by third parties.

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8. GEOGRAPHIC INFORMATION

The Company operates in two geographic segments, the United States and Canada. Both areas are engaged in the exploration and production segment of the oil and gas industry. The Company evaluates performance based on operating income.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this quarterly report and other materials we file with the SEC, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may relate to a variety of matters not currently ascertainable, such as future capital expenditures, drilling activity, acquisitions and dispositions, development or exploratory activities, cost savings efforts, production activities and volumes, hydrocarbon reserves, hydrocarbon prices, hedging activities and the results thereof, financing plans, liquidity, competition and our ability to realize efficiencies related to certain transactions or organizational changes. Forward-looking statements generally are accompanied by words such as “may,” “will,” “could,” “should,” “anticipate,” “believe,” “budgeted,” “expect,” “intend,” “plan,” “project,” “potential,” “estimate,” “continue,” or “future” or the negative, other variations thereof or other or similar statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause our results to differ materially from the results discussed in such forward-looking statements include:

All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the Commission that warn of risks or uncertainties associated with future results, events or circumstances identify important factors that could cause actual results, events and circumstances to differ materially from those reflected in the forward-looking statements.

The following discussion and analysis should be read in conjunction with our condensed consolidated interim financial statements contained herein and our annual report for the year ended December 31, 2003, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in such annual report.

Unless otherwise noted, discussions relating to our shares of common stock reflect the effects of the two-for-one split of the Company’s common stock effected in the form of a stock dividend payable to stockholders of record as of the close of business on June 15, 2004.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared with Three Months Ended September 30, 2003

We recorded net income of approximately $7.9 million ($0.16 per diluted share) for the three months ended September 30, 2004, compared to net income of approximately $5.2 million ($0.11 per diluted share) for the third quarter of 2003.

Operating Revenues

Revenues for the third quarter of 2004 were $45.5 million, a $12.0 million increase from the $33.5 million reported for the three months ended September 30, 2003. Production revenue increased $11.8 million as a result of a 19% increase in realized sales prices and a 15% increase in sales volumes.

Gas, Oil and Related Product Sales

Sales volumes, revenues and average prices for the three months ended September 30, 2004 and 2003 are as follows:

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