Monday, May 24, 2010

Petrohawk Analyst Day: Part One

Petrohawk held its analyst day this morning, and it yielded lots of good information, especially about the Haynesville Shale.  I'll break it down into smaller bits over the next day or so for easier consumption. First, it is worth noting that Petrohawk considers the Haynesville Shale, at 250 Tcf of gas, to be the eighth largest oil and gas field in the world, and that list includes oil fields like the famous Ghawar in Saudi Arabia. 

Petrohawk worked hard to assure analysts that its lease retention strategy is "taken care of."  That's a confident statement when the company has a significant number of expirations in 2011-12, but management showed the graphic below as a way to explain its strategy, at least in north Louisiana, where the company has 294,000 net acres, or approximately 1,568 sections. 

Of the acreage, Petrohawk has deemed 312 sections north of Township 17N non-economic.  The company drilled one well in central Bossier Parish (Tri-State Realty 28 #2, serial #238771) and found the reservoir to be lower quality than the rest of the play, so it moved on quickly.  That land likely will be released (not re-leased).  Another 108 sections east of Range 9W in Bienville Parish is only slightly more favorable.  It has not been de-risked and seems a lower priority for retention.  It is, however, prospective for other formations, so the company likely will make the effort to hold this land. 

That leaves 1,148 sections, 367 of which are already HBP, leaving 781 sections to be held.  Of that, 422 sections are unitized but are operated by others.  Another 198 sections, 84 of which have 2012 expirations, are Petrohawk operated and make up the heart of Petrohawk's retention strategy.  Petrohawk is drilling 114 sections in the second half of 2010 and in 2011, so management feels like it is on its way to keeping its best acreage. That leaves 161 sections, about which management was a bit fuzzy.  They are not unitized yet and are operated by other companies.  They may or may not be drilled before lease expiration.

The chart illustrated that Petrohawk's acreage where the company is the operator is relatively small - a doable proposition.  It also illustrated that a large part of the company's lease retention is in the hands of other operators, which could be dicey in the long run. 

In Texas, Petrohawk mainly depends on AMI (area of mutual interest) partners like EOG Resources (Nacogdoches Co.), Noble Energy (Shelby Co.) and Newfield (Shelby Co.) to retain its approximately 75,000 acres.  EOG and Noble have been drilling for a while, but Newfield, which operates on a federal lease, only recently started its program.

Management went into great detail about its impression of the core of the Haynesville Play.  Based on the data the company has collected from its own wells and from other sources (trading partners, communal data and third party data), it has narrowed its definition of the economic boundaries of the play to the blue ring on the map below, which represents 4 Bcf wells.  It further narrows the core of the core to 10 Bcf wells in the area of northwest Louisiana where Caddo, Bossier, Bienville, Red River and DeSoto Parishes meet (that area needs a cool name like the Four Corners or Five Points South to describe the location). 

Note on the map above the area labeled "Do not plan to drill" - that is the 312 sections north of Township 17N noted above - and the "Not de-risked" area - that is the 108 sections east of Range 9W that is a low priority.  The general area of the Louisiana core is old news, but what is interesting to note about the map above is how little of the economic 4 Bcf area extends into Harrison and Panola Counties.  This reflects recent trends in drilling rig utilization in Texas as rigs have moved to the south. 

While Petrohawk is bullish on the Shelby Trough area in the southwestern corner of the Haynesville Play with EURs in the 6 to 7 Bcf range, it is totally in love with the NW Louisiana core area.  Management described the Louisiana core to be a "step-change" higher than the best of the Texas side.  This could be a little self-promotion given that Petrohawk is heavily invested in that part of the play, but the results have been consistently strong in the Louisiana core.   In fact, when management started the Haynesville portion of the presentation, it characterized the play in one word, "predictable."

The challenge for Petrohawk is going to be holding its acreage without outspending its cash flow and making sure that its non-operated leases get held.  Petrohawk has already said that it will not look outside for additional funding (not counting the $1.4 billion of assets sold off earlier this year).  The company noted that it is not going to be leasing any more Haynesville acreage, so at least the company's capital spending will be focused on holding existing leases.  I'll address finances, Petrohawk's operational initiatives and the company's update on the Mid-Bossier Shale tomorrow.

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