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Petrohawk Slashes Capital Budget, May Sell Permian Basin Assets

Petrohawk Energy Corp. will reduce its 2009 capital budget by 33% and is considering the divestiture of certain conventional assets in the Permian Basin region next year, the company said last Wednesday.

The Houston-based independent said it will cut its capital budget, including drilling, completions, seismic and facilities, to $1 billion from a previously announced $1.5 billion and reallocate spending to projects with the highest internal rates of return and highest potential for reserve growth -- namely, development in the Haynesville and Fayetteville shales.

The belt tightening will result in deploying 25-30% fewer rigs next year than the company had planned, CEO Floyd Wilson said at Merrill Lynch's Global Energy Mid and Small Cap Conference in New York City. "This is in response to lower gas prices and the credit crunch that most industries are going through right now," Wilson said.

The entire industry may be doing some similar belt tightening. Chesapeake Energy Corp. CEO Aubrey McClendon recently said 200-400 rigs could be "laid down" in the next few months in response to low natural gas prices (see NGI, Sept. 29). Speaking with energy analysts about his company's decision to reduce capital spending through 2010 because gas prices have slumped 50% since June, McClendon said more gas-intensive independents are sure to follow. Chesapeake has said it will reduce its capital spending budget by 17%, or $3.2 billion, because of the drop in gas prices.

"To us, this is reflective of capital efficiency, the core of our bearish natural gas call in July," Friedman, Billings, Ramsey & Co. Inc. (FBR) analysts Rehan Rashid and Michael Jones said of the Chesapeake decision. "Shale gas, driven by technology, can deliver material production growth at ever declining costs, and if we were to extrapolate [Chesapeake's] metric to the 1.25 Bcf/d supply imbalance we see by 2010, total industry capex would have to come down by an additional $10 billion cumulatively versus current projected spend of $87 billion in 2008."

In conjunction with 2009 capital planning, Petrohawk completed the redetermination of its credit facility to $1.1 billion from $800 million on Sept. 10. The facility is currently undrawn. The company said it has no current plans or need to access equity capital markets.

"The message today is about flexibility and sustainability," Wilson said. "These are durable assets and they'll be here for a long time. We have an ability to take our budget quite a bit lower if we care to. We could probably grow 15-20% spending $500 million...our liquidity is very good right now."

Petrohawk is evaluating the divestiture of Permian Basin properties including its interests in the Waddell Ranch, Sawyer, Jalmat and TXL fields of West Texas and southeastern New Mexico. The Permian Basin properties currently produce approximately 35 Mmcfe/d.

"We won't sell them today, it's a bad market," Wilson said. "But markets change and we'll be ready to sell them at some right time in the future."

In January Petrohawk said it was hiking its 2008 capital budget to $800 million from $700 million in 2007 (see NGI, Jan. 28). At the same time it delayed the initial public offering of its planned master limited partnership (MLP) because of market conditions. The anticipated MLP, which was announced in 2007, would have held a "substantial portion" of Petrohawk's Permian Basin properties (see NGI, July 2, 2007).

For the third quarter, Petrohawk reaffirmed its previously stated production guidance range of 310-320 Mmcfe/d and reiterated previously stated guidance for the full year 2008 of 295-315 Mmcfe/d.

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