Friday, May 3, 2013

PXP Illustrates Haynesville Quandary

Plains Exploration (PXP) held its Q1 2013 conference call yesterday, and on the call, CEO James Flores illustrated the case of why I think activity in the Haynesville Shale has already bottomed out.  Obviously, with gas prices nearly double where they were last year, the Haynesville is not quite the pariah it became, but $4/MMBtu gas is not enough on its own to justify a pickup in activity.

PXP is a bit of an odd bird in the Haynesville because it does not function as an operator.  It entered the play as a JV partner of Chesapeake, which is where it derives most of its Haynesville production.  But, being a producer, it is judged by its production volumes and revenues, so it has to show growth and vitality in this department.  Overall for the company, gas volumes were up about 7.6% in Q1 2013 to 246.9 MMcf/day vs. Q1 2012, but the gains came from other plays.  Production in the company's Haynesville acreage decreased by 22.7% (-39.3 MMcf/day) over the same period to 134.2 MMcf/day.  Interesting to note that with the production declines the Haynesville still represents 54% of PXP's gas output.  As of the end of March, PXP had a working interest in four rigs in the Haynesville.

Two comments struck me as interesting.  First, CEO Flores noted that keeping PXP's production flat in the Haynesville would take about nine rigs.  With four rigs, they are faced with continual production declines.  Second, Flores said that the company doesn't plan to look at expanding its presence in the Haynesville until 2014, but it will need to make sure its production doesn't decline too much because it has commitments to deliver certain amounts of gas, so they may up their participation in the second half of 2013.  Said Flores:
"Because there's transportation costs out there from the operator, that the lower the volumes get, the double bite that takes because they're underproducing as for their midstream commitments. So from the standpoint, as they nominate wells in the better areas, then we'll take a look at those and we could participate in some."
Not eloquently stated (it was in response to a question, not a prepared remark) but the point he is making is that he can't afford to let production decline significantly.  That means PXP needs to start funding new Haynesville wells at some point.  Nothing massive, but still increased activity.  This same conversation of balancing production declines and midstream commitments with increased capital spending likely is going on at high levels of all of the larger Haynesville producers that aren't actively drilling relative to their past activity.

I'm not suggesting a sudden bloom in Haynesville activity, but I do suspect that we have seen the bottom for now.

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