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Petrohawk Not Slowing Down in Haynesville

Petrohawk Energy Corp., which drilled the highest-producing well to date in the Haynesville Shale, said last week its estimated ultimate recovery (EUR) in the play has risen to 7.5 Bcfe/d based on performance data from its first 14 completed wells.

Based on the data, Petrohawk's total resource potential in its 300,000 net acres Haynesville leasehold is 13.7 Tcfe, CEO Floyd Wilson told financial analysts during a quarterly earnings conference call. The company in November placed three Haynesville wells in production at a combined rate of 73 MMcfe/d, with one well delivering 28.2 MMcfe/d (see NGI, Dec. 15, 2008).

"Certainly there will be variations across the huge position we have in the field," Wilson said. "This curve...is the average curve from released wells, within that data set. They range from 6 [Bcf/d] to 10-11 Bs on a per-well basis...While it's only a small set of wells, they cover miles of territory...Going forward we may not average this, but so far that's the answer."

And Petrohawk doesn't plan to give up its drilling edge, recession or no recession. Other producers are laying down rigs in less profitable regions of the country, especially in the Rocky Mountains. However, Petrohawk is making money in the Haynesville Shale at today's gas price, and it has no plans to slow down. The producer has set aside $1 billion for its drilling program in 2009, and around three-fourths of the spending will be in northwestern Louisiana.

"My opinion is not worth a nickel" when it comes to the outlook for natural gas prices, Wilson told analysts. "The gas market is going to be tough for a bit here. This recession is deep and it's harmful. As I've said before, we're in stages of a multi-decade drilling of a very important natural resource. We don't intend to let short-term thinking drive our activities here...

"As I say that, we're hedging like crazy to secure our ability to do what we're doing," said Wilson. "We don't think gas prices will be this low forever. When it turns around -- I don't know, this year, next year, 2011 -- we do know we'll still be drilling wells here...for 10-15 years. We still make money at low gas prices...Some people don't like that idea [of drilling despite the low pricing], but this is a great business we've built here and we're not just going to back off from a good business."

Wilson admitted that it was a "strange time to be upbeat," but he said Petrohawk's assets justify his optimism. "We've set the table for years to come. We won't back away from this business. We're out there doing it."

Around 80% of Petrohawk's proved reserves -- the regions it is most focused on -- are located in its four primary operating areas. In the Haynesville Shale's Elm Grove Field of the Cotton Valley trend, Petrohawk has an estimated 685 Bcfe in proved reserves. Estimated proved reserves in other parts of the Haynesville Shale holdings are 163 Bcfe. In the Terryville Field of the Cotton Valley, Petrohawk has an estimated 112 Bcfe of proved reserves. It also holds an estimated 173 Bcfe of proved reserves in the Fayetteville Shale of Arkansas.

In addition to its core operations, Petrohawk is participating in a joint venture with EOG Resources Inc. in the James Lime/Travis Peak area of East Texas. Prospective developments also are under way in the Eagle Ford Shale of South Texas, the West Edmond Hunton Lime Unit in Oklahoma and in the Permian Basin.

This year, however, Petrohawk is mostly focused on the Haynesville Shale. Plans are to drill 70-80 wells in the northwestern Louisiana holdings. There's money to be made and things to be learned even with stagnant gas prices, Wilson said.

"Some of what we're doing is understanding the nuances of this type of formation, how best to prepare for the future in terms of capabilities and what nots," Wilson said. "It's not just a matter of reacting to a very short-term situation...what we hope is a short-term situation."

Asked if there was a circumstance in 2009 or in 2010 when Petrohawk might consider downscaling its drilling plans, Wilson said the company would "have to see the strip in the $4 range, and I don't mean for this month, but for the three-year range. We don't see that...If we do, there might be some places where we could cut back. I hope it doesn't go there. We're so substantially hedged this year and next. We tend to take the longer view on gas prices. But we'd be cutting back at the $4 range, that's for sure."

Like its peers, Petrohawk has seen a big decrease in costs over the past few months, Wilson said. "It's dramatically less than it was a year ago, not quite 50%, but 35-40% less than it was. Rig availability is not a problem."

COO Dick Stoneburner told analysts that it's costing Petrohawk an average of $10 million to drill one Haynesville Shale well, but costs are coming down even as it drills longer laterals and adds more fractionation stages.

"It's a two-fold equation," Stoneburner said. "When we're discussing our primary vendors, the pumping companies, the mud companies, tubular companies, all of them are showing significant [cost] decreases of 15-30% from two to three months ago. The other part of the equation is from the efficiencies we are seeing almost every day. The [exploration and production] group has a good sample set of wells, and we're seeing an improvement in build rates...[rate of recovery] rates, lots of things are being learned and that's going into the cost equation as well..."

Petrohawk's average output in the final quarter of 2008 reached 361 MMcfe/d, a 15% sequential increase from 3Q2008. Total oil and gas production was 33.2 Bcfe, which included 30.6 Bcf of gas and 426,000 bbl of oil. In 2008 production averaged 305 MMcfe/d and totaled 111.6 Bcfe, which, excluding divestments, was 39% higher than in 2007.

After adjusting for selected items, Petrohawk reported a net loss of $10 million (minus 4 cents) in 4Q2008, versus net income of $25.8 million (15 cents) in 4Q2007. Noncash items in 4Q2008 included a $950.8 million reserve write-down, a hedging gain of $173.3 million and an income tax benefit. Including the noncash items, Petrohawk lost $545.1 million in 4Q2008 (minus $2.18/share). Net income for 2008 totaled $114.3 million (49 cents/share); before adjustments, the company reported a net loss in 2008 of $388 million (minus $1.77).

Production this year is expected to be 40% higher than 2008, averaging 422-432 MMcfe/d, which would be well ahead of Petrohawk's previously announced estimate of 392-402 MMcfe/d. In the first three months of 2009, production is seen averaging 400-410 MMcfe/d.

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