Thursday, October 27, 2011

QEP to Dial it Back in the Haynesville

QEP Resources (formerly Questar) stated in its quarterly earnings and operations update conference call that with the exception of one section for which it recently became the operator, it has concluded its Haynesville lease retention strategy in north Louisiana.  The company has started drilling 80 acre density pilot programs in several areas to assess the proper density to drill the play.

But management warned that it likely will "dial back activity going forward" in the Haynesville Shale.  The company currently operates six rigs in the play, but expect QEP's attention (and rigs) to shift to some of its acreage in the west that features oil and natural gas liquids. The CEO said that QEP won't go down to zero rigs, but he "would expect a substantial pulldown" in terms of rig count.  The company will continue to invest capital in non-operated wells, and that commitment likely will impact its investment in its own drilling program.

Interestingly, the CEO noted a strange quirk regarding non-operated wells that is unique to Louisiana.  A working interest partner in a well can opt not to participate in the drilling of a well, but it is still on the hook to pay royalties to the property owner.  As a result, producers are lot likely to pass on a non-operated well.  I imagine it can create a really tough situation for a company with weak finances that has numerous working interest relationships.  It also helps to have good neighbors that can drill wells efficiently (read: cheaply).  I'll have to ask my oil and gas lawyer relatives about that one...

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