Thursday, November 12, 2009

Petrohawk Q3 Results

With my travel and day job schedule I’ve been delinquent in reporting/reflecting on Haynesville producers’ third quarter results. There is lots of good stuff that likely will take me a couple of weeks to process. First up, Petrohawk (HK). I’ve always found HK to be a good barometer of the Haynesville Shale because of its level of commitment to the play relative to the size of the company’s total operations. A long time ago, someone explained to me the difference between being involved in something and committed to it using the example of a ham and egg breakfast. The chicken is involved, but the pig is committed. Using this example, the ‘Hawk is committed to the Haynesville Shale, but not necessarily in a bad way.

Things are going swimmingly for HK, given the difficult environment. Overall production exceeded expectations, as might be expected with some of the strong wells HK has drilled in the Haynesville Play. The company cut its capital budget somewhat in 2009 but is still on track to drill and produce enough to hold its Haynesville leases.

In the third quarter, HK became more committed to the play by spending another $190 million to acquire an additional 53,000 net acres of leasehold, bringing the company’s total to 343 ,000 net acres. The new acreage is in the core area and the southern part of the play. Of the total, 36K acres were in north Louisiana and 17K acres were in Texas. HK announced its 2010 capital budget of $1.45 million, of which 62%, or $900 million, will be allocated to Haynesville drilling.

To date, HK has drilled or participated in 116 wells in the play. In the third quarter, the company drilled 24 wells (23 in LA, 1 in Shelby Co. TX), completed 18 and brought 14 to production. The average IP rate (presumably peak 24 hr rate) was 18.6 MMcf/day, ranging between 12.6 and 25.5 MMcf/day. In total, HK has 62 producing Haynesville wells generating 450 MMcf/day, and of those, 53 have been producing longer than 30 days. The average first 30 day production rate for those 53 wells was 14 MMcf/day.

HK is experimenting on some of its wells to choke back production to 14/64” and below to see if slower extraction will lead to shallower decline rates and presumably higher ultimate recoveries. So far, HK is testing four wells, and they are producing 8-9 MMcf/day at flowing casing pressures of 8,500 psi and above. I’ve noted that some other producers are trying similar experiments. While the company is a long way from drawing definitive (or at least educated) conclusions from these tests, I can’t help but wonder if the days of macho high IP rates might be coming to an end.

The press release had lots more information on improvements in drilling and completion techniques, including the development and implementation of a new “game changing” polycrystalline diamond compact drill bit. The release also noted that average well costs are around $8-$9 million, versus an average of $9.5 million YTD, and drilling times are shorter.

HK also mentioned that it has been looking hard at the Mid-Bossier Shale (they call it the Lower Bossier, but I find that confusing with the nomenclature in Texas, so I call it the Mid-Bossier to reinforce that it is above the Haynesville Shale). While the company hasn’t completed any Mid-Bossier wells – their first will be in Q1 2010 – it has accumulated technical data and drawn several conclusions. First, approximately 122,000 net acres of HK’s leasehold is prospective for Mid-Bossier Shale. Second, the rock quality is as good as the Haynesville formation only in places, not throughout (but it is still quite good). Third, the company expects recoverable gas to be about 75% of what it expects in the Haynesville, in the range of 5-6 Bcfe from Mid-Bossier wells. Right now the technology doesn’t exist to drill a Mid-Bossier well from a Haynesville well, so MB wells will be free standing for now.

I have to chuckle at how far we’ve come in the past couple of years. In 2007, producers would strip naked and do cartwheels in the streets of downtown Houston at rush hour for 122,000 acres of 5-6 Bcfe potential wells that are held by production. Petrohawk is excited about the Mid-Bossier, but there were no cartwheels.

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