Wednesday, April 13, 2011

What a Difference a Year Makes

Petrohawk presented at the annual IPAA OGIS New York investor conference today, exactly one year to the day that the company appeared at the conference last year.  Last year the company was touting its asset sales and liquidity.  This year Petrohawk is talking about liquidity of another kind, oil and NG liquids.  But the biggest difference I noticed was in the company's Haynesville decline curve.  Check it out:

2010:

2011:


In 2010, the curve reflected wells on a 24/64" choke versus a restricted choke of about 14/64" in the new wells.  The estimated ultimate recovery is 7.5 Bcf, but the decline is steep, 82% in the first year. This mostly is the result of a high initial production rate.  The newer curve is flatter because it starts at a lower IP rate because of the narrower choke and it drops off on a flatter curve.  The first year decline is 50% and the EUR is higher at 8.5 Bcf.  The B factor drops from 1.1 to 0.65

This is not a major revelation, but it is interesting to see how the company's restricted choke technique is impacting production.

6 comments:

Anonymous said...

A question and a comment. Since they only moved to the smaller choke in 2010, how do they know what the decline curves are for years 2 - 10?

Comment: moving from a 7.5bcf EUR to an 8.5bcf EUR isn't necessarily a win on a DCF basis because the revenues are being spread out over a longer time.

Robert Hutchinson said...

Answering a question with a question: with only 3.5 years at most of production with their oldest shale well, how can they extrapolate years 4-10 for older wells? All theoretical. I'm oversimplifying it, but it's a calculation with a handful of inputs, and the "B" factor is the shape of the decline curve, which makes a big difference.

I agree with your comment about the discounted cash flow, but one of the things that Petrohawk is quick to point out is how fast the cumulative production with a flatter decline curve catches up with a roaring well with a steep curve.

To me a central conflict is how a company looks at an investment versus how an investor does. The investor wants IRR and quick returns. They are not necessarily long-term investors in the company. I would argue that a company should look at NPV (net present value), which is also time-based but better measures the long-term impacts of higher, steadier quantities.

I realize that PV10 (the present value to get a 10% rate of return)is an industry standard when evaluating projects, but I would argue that it is also a short-sighted measure. To me, NPV is a better measure because it also gets to the aggregate value of an investment. Picking A over B because A has a higher IRR is short-sighted if B generates a significantly larger return without exposing the company to undue risk. But all of these tools must be taken together to evaluate the risk and return. But I digress...

Joe said...

i think most people would invest money for a payout in 2-3 years @$4dollar gas-fairly consistent wells-with the upside of downspacing and multiple zones---I see it as a real wealth builder
i guess Exxon does too

Robert Hutchinson said...

Joe, I agree, but when you have to spend all of your available cash flow and then sell valuable assets to become an "oil company" at the behest of investment analysts, the overall returns aren't quite as attractive.

Joe said...

Believe me --i like the liquids too--i guess what i mean is as compared to buying a shopping mall for a 6 cap this stuff looks pretty good

Robert Hutchinson said...

I agree. To me it's a question of focus and finding the pure play producer or at least one not chasing its tail. It's too bad the market doesn't have a long-term perspective (at least in my opinion).