Tuesday, August 31, 2010

Petrohawk: Trying to Pick Up the Stock

Two things came out of the recent presentation Petrohawk gave at Enercom 2010 Oil & Gas Conference:  1) the company's willingness to move away from gas production if commodity prices remain low and 2) more data on its restricted choke program. The goal of both of these discussions, in my opinion, is to boost the company's flagging stock price, which continues to sag versus the other big Haynesville players.


While Petrohawk was an early entrant in the "liquidy" Eagle Ford Shale, the company is still regarded as "gassy."  Petrohawk made it clear to investors, however, that it is prepared to lay down rigs if gas prices remain low over the next two years.  As management said, "HK has considerable flexibility post-primary lease capture phase in the Haynesville Shale."  To reinforce this statement, the company offered its flexible strategy based on certain gas commodity prices:

  • $4 gas: reduce ~35% of Haynesville rigs in 2011; reduce ~45% of Haynesville rigs in 2012
  • $5 gas: reduce ~15% of Haynesville rigs in 2011 and 2012
  • $6 gas: reduce ~15% of Haynesville rigs in 2011 and 2012
Clearly, $6 is the company's economic threshold.  This could have a relatively significant impact on the Haynesville region if prices stay down.  Petrohawk plans to maintain 14 rigs in the play through the end of 2010 and 15 rigs in 2011.  The 2010 capital budget calls for Petrohawk to spend $850 million (40% of its $2.13 billion capex budget) in the Haynesville Shale.  Start slashing rig count and the negative economic impact will be visible quickly.  

Petrohawk also spent a great deal of time discussing its restricted flow program aimed at optimizing reservoir recovery.  Rather than reproduce all of the slides, here is the link to the presentation (slides 13-19).  The important takeaway is that management believes that estimated ultimate recoveries will increase from around 5.75 Bcfe for an unrestricted well to around 7.25 Bcfe for a restricted well.  The trade-off for better long-term productivity is lower initial production rates, and cumulative gas production that lags wells produced on wider chokes for about a year and a half.  That translates into lower short-term earnings and cash flow.

From the perspective of a land owner, I'd rather have a higher EUR than a higher IP.  It's a perpetuity for me, not a short-term investment.  From a shareholder/investment analyst perspective, I guess it's not quite so hot.  The sacrifice of lower short-term cash flow likely is hard for some investors to take, and it does add some financial risk to the company.  Expect Petrohawk to continue to go to great lengths to defend the practice.

2 comments:

Anonymous said...

This is a nice blog about Haynesville. Eagle Ford seems to be where things are getting hot right now. A landowner blog about DeWitt County can be found at
http://eaglefordinfo.blogspot.com/

Bossier Shale Minerals said...

Thanks for the update on Petrohawk.