Petrohawk Energy Corp. has gone west in pursuit of oil and liquids-rich gas production from the Permian Basin, adding to its established holdings in the Eagle Ford and Haynesville shales.
"The addition of the Permian Basin completes our vision of a well crafted asset base where we can leverage our operational expertise -- with a balanced portfolio of oil and gas opportunities," said CEO Floyd C. Wilson. "In addition to product diversification to maximize revenues, we encounter these powerful assets in different stages of development, which is ideal for generating strong multi-year growth."
Petrohawk began building a position in the Permian in the second half of last year and has now acquired or committed to acquire about 325,000 net acres at about $1,400/acre, with more than 90% expected to be operated by the company. Petrohawk's core position includes acreage in the Midland Basin, where the primary target is the Lower Wolfcamp; and acreage in the Delaware Basin, where the primary targets are the Lower Wolfcamp Shale, Bone Spring Sands and Avalon Shale.
The company said it will spend about $75 million of drilling and completion capital to drill on the Permian acreage this year and plans to run four rigs in the basin with 15 wells scheduled. Capital spending in this area is scheduled to increase through 2012 and beyond with most lease terms providing for a four- to five-year development window. Midstream unit Hawk Field Services LLC is in the planning stages to address infrastructure issues and opportunities for both Petrohawk and third parties, the company said.
In the Midland Basin Petrohawk said it plans to target oil with associated gas in the Wolfcamp Shale at a depth of about 8,000 feet. Horizontal wells are expected to have laterals exceeding 5,000 feet at an estimated cost of $7 million per well.
The Delaware Basin holds three objectives, the Avalon Shale, Bone Spring Sands and the Wolfcamp Shale, in a gross interval of about 3,000 feet. These targets are found at a depth of 5,000-12,000 feet across the basin. Petrohawk said it expects a product mix of primarily condensate and natural gas with "significant" natural gas liquids (NGL) yield. Horizontal wells are forecasted to cost $6.5-8 million.
For the first quarter Petrohawk reported average production of 826 MMcfe/d, an 8.5% increase over fourth quarter 2010 production, a 32% year-over-year increase, and 56 MMcfe/d above the midpoint of the company's guidance of 770 MMcfe/d. Total production for the quarter was 66.9 Bcf of natural gas, 717,000 bbl of oil and 526,000 bbl of NGLs, or 74.4 Bcfe, of which 10% was liquids. Petrohawk grew liquids production by about 400% from the year-ago quarter.
Full-year guidance was increased to 940-960 MMcfe/d (87% gas, 8% oil, 5% NGLs), and Petrohawk expects to exit 2011 producing 16% liquids, achieving 295% year-over-year liquids growth. Production guidance for the second quarter is 930-940 MMcfe/d (88% gas, 7% oil, 5% NGLs), or 13% growth over first quarter production.
The company's production results for first quarter and the increase in its 2011 production outlook are due to higher volumes from the Eagle Ford as well as the Haynesville shales, the company said. During the second quarter, the company said it will begin reducing its rig count in the Haynesville to bring it in line with market conditions following the initial drilling phase to hold leases. By the beginning of the third quarter, Petrohawk expects to be operating six rigs in the Haynesville, a level it expects to maintain through the end of the year.
Petrohawk said it plans 2011 capital expenditures for drilling and completions of $2 billion, with $950 million allocated to each of the Haynesville and Eagle Ford shales, $75 million to the Permian Basin, and $25 million to other properties.
Analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said in a note Thursday they like what Petrohawk is doing on the ground, but they have an eye on spending.
"On one hand, Petrohawk is pressing their business toward oil as they add a new core oily area in the Permian, reducing Haynesville gas rig count from 16 rigs to six rigs as the play is held by production, and the Eagle Ford continues to charge forward with some of the best economics in the business," TPH said.
"On the other hand, [Petrohawk's] spending continues at a very fast pace (balanced by asset sales at a fast pace) as [Petrohawk's] $682 million of Q1 capex [capital expenditures] annualizes to $2.7 billion and leasing in a new play was $455 million over the last nine months. Petrohawk is already long drilling opportunities with the largest constraint being capital followed by people, so adding an additional 325,000 net acres that requires $6-8 million wells comes at a cost."
FBR Capital Markets said Friday that adding the Permian assets is a good move.
"The flexibility in capital allocation and the upward pressure on rate of return becomes too meaningful to ignore and should help drive continued revaluation," FBR said. "We believe that given the strength of the underlying asset base, the balance sheet remains in reasonable shape and is not a concern despite continued near-/intermediate-term cash flow outspend."
For the first quarter Petrohawk posted a net loss of $1.2 million. Adjusting for special items, mainly related to the noncash impact of derivatives, net income was $44.4 million (15 cents/share) compared to $39.9 million (13 cents/share) in the year-ago quarter. Revenue of $492 million was up 22% from the previous quarter and 12% from the year-ago quarter.
The company sold its gas for an average of $4.90/Mcf during the quarter, including a hedging gain of 97 cents/Mcf. Petrohawk's average realized oil price for the quarter was $85.01/bbl, including a 97-cent/bbl realized loss from oil derivatives.
Petrohawk on Thursday also announced the sale of its half of the KinderHawk Field Services LLC joint venture in the Haynesville Shale to partner Kinder Morgan Energy Partners LP as part of its divestiture program (see Shale Daily, May 6).