Monday, February 3, 2014

Haynesville Outlook: Petrohawk - "Preserving Value" Rather than Creating Value

Over the next couple of weeks as time permits, I'm going to do a series of "outlook" posts to summarize the current and projected Haynesville activity for the major and minor producers in the play.  I will aggregate smaller, less active guys into a single post, while others will get their own, starting with Petrohawk.  (I know Petrohawk was acquired by BHP Billiton, but I'll continue calling them Petrohawk for now, if only because I don't like holding down the shift button that much.)

Petrohawk ended 2013 with four Haynesville rigs, two in DeSoto and two in Red River.  Since the company has holdings across the Haynesville Play, it tends to drill all over the place, but I suspect 2014 will see the 'Hawk drilling in a more concentrated area, as shown on the graphic below.

The darker green indicates the areas where HK believes it will recover the highest amounts of gas per well, and it's centered on the "four corners" of S Caddo, NW Red River, S Bossier and NE DeSoto.  The darkest green indicates greater than 10 Bcf per well.  As of last week the company moved its rigs to southern Caddo (two) and Bossier (two).

While the company's drilling activity might be more concentrated I would not expect its activity level to increase markedly in the coming year, as the parent company still feels the sting of the Petrohawk acquisition and has continued to rein back its dry gas drilling program in favor of the ever popular liquids.  As a result, Petrohawk is expecting to incur significant cash charges in terminating rigs (~$100 million) and not meeting gas pipeline commitments (~$170 million - mostly in the Haynesville) in 2014 and 2015.

It's a curious thing when a company would rather lose $270 million in cash rather than invest the capital necessary to actually make a profit (and not lose the $270 MM).  I'm not sitting in BHP Command Central, but that seems to be a short-sighted move designed to look good on a glossy investor presentation and not one designed to drive value.  Perhaps one reason for this decision is the accounting treatment for the loss.  It is likely the $270 million will be treated as a one time expense and get shoved "below the line," thus not impacting operating profit.  In particular, the $170 million related to Haynesville midstream obligations likely will be lumped in with the treatment of the sale of Petrohawk's interest in the midstream assets to Kinder Morgan.  But lest we forget, this is a cash expense, not just an accounting charge.  Sure, BHP can improve its "low cost position," but it is still wasting a quarter billion dollars in cash.

One hope for the Haynesville is BHP's promise that its shale program "will be continually optimised for value."  I read that as the company will chase the best marginal returns.  In its investor literature, below, BHP cites Haynesville wells as averaging 30% post-tax IRRs based on September 2013 pricing (average price = $3.61/MMBtu).  Given that prices over the past 30 days have averaged $4.67, that's $1.06/MMBtu falling straight to the bottom line as pure profit.  That's got to juice the returns.

While it is unlikely Petrohawk will reorient its drilling program to chase what is likely to be a temporary boost, the company is positioned with leases and infrastructure to "dial up" its Haynesville drilling presence short term to take advantage of higher gas prices. But will it?  So far, it's not looking that way.  Over the past four months, Petrohawk has filed for a small handful of permits, but there is not enough there to imply an increase in drilling activity.  For now it looks like BHP will continue to "preserve the value" of its shale assets by not drilling them.


Anonymous said...

I don't understand the $100m on terminating rigs. Can't they find other locations (with liquids) for them, were the rigs Haynesville specific?
In regards to the loss on gas pipeline commitments, I wonder if royalty owners will find their transportation charges increased if the $170m charge falls to that bucket and Petrohawk shares the pain.


Robert Hutchinson said...

In terms of the pipeline charges, either the royalty owners or the shareholders will feel the pain.

I haven't looked too deeply into the rig charge item, but some of the Haynesville equipment is fairly unique. That's not to say that an overpowered rig can't handle another play. Sounds like one of those bad "accounting-driven decisions" to me or just a case where BHP is cutting the capex budget with a cleaver.


Anonymous said...

30% rate of return at those prices? Only in this industry will you see companies jumping ship on a 30% IRR opportunity already in place.


Anonymous said...

It's actually a 440 million charge, as far as I can see, as the 170 million is per annum in 14 and 15.