Monday, May 9, 2011

Petrohawk's Haynesville Rig Count Headed Down

Petrohawk Energy released its first quarter earnings report last week.  As the company has been saying for the past year, it expects to have the "vast majority" of its leasehold held by production in the second quarter of this year.  As a result, it will start reducing rig count in the next few months.  Now that the drilling for lease retention phase is over, Petrohawk will "bring the rig count in line with market conditions."  The company has been averaging 16 Haynesville rigs, but that number will drop to six by the beginning of the third quarter and hold until the end of the year, assuming market conditions remain the same.

The company also announced that with the upcoming reduction in drilling, its Haynesville operations will finally be cash flow positive.  When you step back to think about it, the company has produced 410 billion cubic feet of natural gas in three years and has yet to break even.  Economists would describe that as irrational.  Running that many rigs drilling +/- $10 million wells in a crappy commodity price environment?  At the same time, the company took on debt, somewhat diluted its shareholders and sold valuable assets.  But Petrohawk made a business decision that will benefit the company in the long run if natural gas prices go up.  That looks like a big "if" sometimes, but that's what risk/reward is all about.

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