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Questar's Haynesville Acreage May be Play's 'Sweet Spot'

Early results from a pair of wells in northwestern Louisiana's Haynesville shale play could indicate that Questar Corp.'s exploration & production (E&P) unit has hit the play's "sweet spot," CEO Keith Rattie said Thursday.

The company turned to sale its third Haynesville well, the Golson 32H, in late January, and its fourth, the Shelby 31H, earlier this month, Rattie said during a conference call with analysts. Questar E&P has a 91% working interest in Golson 32H, which had an initial rate of about 23.5MMcf/d and has averaged about 18 MMcf/d. The company also has an 83% working interest in Shelby 31H, which went to sale at an initial rate of 20.3 MMcf/d.

"These early results, combined with results reported by other operators on wells in which we have a working interest, continue to suggest that our nearly 31,000 net acres could be in the sweet spot of the Haynesville play," Rattie said.

In December Petrohawk Energy Corp. and EXCO Resources Inc. each reported ramping up "monster" natural gas wells in the Haynesville Shale (see NGI, Dec. 15, 2008). Houston-based Petrohawk placed three new Haynesville Shale wells on production in November at a combined rate of 73 MMcfe/d, with one well delivering the highest reported initial production (IP) rate of any well in the company's history at 28.2 MMcfe/d. Dallas-based EXCO said its first Haynesville horizontal well had an IP rate of 22.8 MMcfe/d. Chesapeake Energy Corp., which anticipates running 25 rigs in the play this year has had average initial production/test rates of 16 MMcfe/d from its last seven horizontal wells (see NGI, Feb 2a). EOG Resources Inc., which has a 116,000 net-acre leasehold in the Haynesville play, has estimated its net reserve potential there is 3-4 Tcf (see NGI, Feb. 9).

In October, Salt Lake City-based Questar said it would take its capital out of the Rockies and spend it in northwestern Louisiana and western Oklahoma, where returns are more attractive (see Daily GPI, Nov. 3, 2008).

Questar reported 4Q2008 net income of $121.2 million, or 69 cents/share, a 7% decline from 4Q2007's $130.8 million, 74 cents/share results. The results were driven by mark-to-market losses on natural gas basis-only swaps. The company said it expects 2009 net income of $2.50-2.70/share, compared with previous guidance of $3.05-$3.25/share. Production for the year will be 180-186 Bcfe, compared with prior guidance of 185-193 Bcfe and an increase of 5-9% compared with 2008 results, the company said.

"In short, we're going to drill fewer wells in 2009 and that means lower production growth," Rattie said. "Since September we've dropped half our rigs. Questar E&P today has 19 operating rigs, compared to our peak of 42 in 3Q2008."

Questar E&P reported 4Q2008 net income of $47.9 million, down 27% from $65.2 million in 4Q2007, despite a 28% increase in production volumes and higher gas prices. Production costs for the unit hit $3.92/Mcfe, up 13% from $3.47/Mcfe in 4Q2007. Questar Pipeline net income increase 19% to $14 million in 4Q2008; Questar Gas net income increased 14% to $20.4 million.

Despite the decline in the fourth quarter, Questar reported $683.8 million net income for all of 2008, a 35% increase from $507.4 million in 2007, driven by a 22% increase in natural gas and oil-equivalent production in Questar E&P and record net income in all six of its business units. While it was "by far the best year in this company's 81-year history," the worldwide economic slump which began in the second half of 2008 has Questar, like so many other companies, looking at things a little differently, Rattie said.

"2009 shapes up to be a tough year for the U.S. economy, a tough year for the natural gas industry, and thus for Questar," he said. "We're battening down the hatches, we're going to weather the storm, markets will improve -- they always do -- and when they do, we think we'll be well positioned for the recovery."

Also on Thursday, Questar officials joined Utah Gov. Jon Huntsman in a ceremony to officially launch the state's I-15 Natural Gas Corridor. Huntsman previously called for the designation of the highway from the border with Idaho in the north to Utah's southeastern border with Arizona as a natural gas corridor, with sufficient refueling stations to support long distance travel in natural gas vehicles. Subsequently, the Utah House of Representatives passed a resolution calling on the state government to encourage the formation of public and private partnerships to increase the states' refueling infrastructure for natural gas-powered vehicles, and urging changes in Environmental Protection Agency regulations to speed conversions of existing vehicles from fueling with gasoline to burning natural gas (see NGI, Feb. 2b).

"Our utility team is going to turn our governor's vision into a reality and we hope a blueprint for the rest of the country," Rattie said. "Gov. Huntsman understands that this country is swimming in natural gas, and indeed the story of the year in U.S. energy in 2008 may be the amazing breakthrough in the exploitation of the massive amounts of natural gas in plays and shale formations across the country. Simply put, this should change the paradigm for U.S. energy policy. It should turn that paradigm on its head."

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