Monday, February 27, 2012

EXCO Cutting Back in Haynesville

Add EXCO to the list of companies (that pretty much includes every producer) cutting back in the Haynesville Shale.  The company announced in its year-end conference call (presentation) that it will be reducing rig counts from an average of 13 down to an average of nine.  That doesn't sound bad, but behind the numbers, the actual plan is to reduce the count to eight in the second quarter and four to six by year end. Depending on gas prices, the rig count may stay in the low single digits for a while. If prices start to move up, the company will ramp up the rig count to follow.  In its call, management indicated that if prices get back to $5/MMBtu the company could be looking at 20 rigs in the Haynesville Shale.

This seems pretty manic depressive at first glance, but the strategy is to keep capital spending within cash flow, something many other producers can't or won't do. Since EXCO largely is focused on shale gas and is not going headlong into chasing oil and liquids, it is particularly at the mercy of gas prices.  For the next two years, EXCO sees prices staying between $2.50 and $3/MMBtu.

The current capital budget for 2012 is to spend $485 million ($470 million on drilling) in the Haynesville Shale in 2012.  That figure represents 61% of the company's budget, which is already less than half of 2011's budget. At the current rate, the 2013 budget would be considerably lower because of a continued low rig count.

EXCO's operations will be focused on "factory" developments in DeSoto Parish.  EXCO is currently running 11 rigs in DeSoto Parish, six in the Caspiana field and five in the Kingston field.  The company plans to "reduce all other Haynesville activity."

Perhaps the biggest silver lining for most producers is that with less competition for drilling, costs are going down.  With the combination of negotiating power shifting to producers and greater operational expertise, EXCO expects drilling and completion costs for Haynesville wells to drop from $9.5 million to $8.9 million.

Over the past year, EXCO has seen success in its restricted rate flow back program in producing wells.  Initial production rates are kept relatively low to maintain higher pressures for significantly longer periods.  Management sees the "crossover" (where cumulative volumes from restricted wells equal and then surpass volumes from wells with wider chokes) in the first year, often within a few months of completion.  It leads to less impressive IP rates, but it yields better producing wells long-term.

No comments: