Monday, November 12, 2012

Petrohawk's Minimum Haynesville Quantites

There has been a parlor game out there to predict when Haynesville Shale production will drop and by how much.  It's counter-intuitive that production has remained rather steady when rig count has dropped nearly 90% from its peak in July 2010.  One of the explanations for the lack of decline has been minimum quantities required by midstream deals struck by the various producers.

Having nothing better to do this morning, I perused the September 2012 financial report for Petrohawk, which is now owned by BHP Billiton.  I happened upon Petrohawk's minimum production commitments for the Haynesville Shale, at least vis-a-vis the gathering and midstream system it sold to Kinder Morgan last year.  Back in May 2010 when Petrohawk formed KinderHawk Field Services, LLC with Kinder Morgan to monetize its gathering and midstream operations, Petrohawk made a commitment to use the gathering system for thirty years and made certain minimum commitments for the first five years (summarized on the chart below).  In July 2011, Petrohawk sold its remaining 50% interest to Kinder Morgan but was required to maintain its minimum quantities or else "pay an annual true-up fee to KinderHawk."

Petrohawk's rig count has dropped from highs in the mid-teens back in 2010, but it has been rather steady since spring.  Early this year, the company actually added rigs (since removed) while everyone else was pulling them.  Given the company's minimum production levels over the next couple of years, I would suggest that Petrohawk is one company that is not going away from the Haynesville Shale anytime soon.

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