Natural gas-directed Petrohawk Energy Corp. made it a triple play Monday, announcing it is selling its extensive Gulf Coast division, increasing its stake in the Fayetteville Shale and in North Louisiana, and forming a master limited partnership (MLP) to initially hold some of its mature domestic assets.
Petrohawk will completely exit the Gulf Coast with the sale of its extensive operations, which extend from South Texas to Mississippi. The move, which is expected to be completed by the end of the year, will allow Petrohawk to focus on tight gas development in North Louisiana, East Texas and in the Fayetteville and Woodford gas shale basins, CEO Floyd Wilson said during a conference call.
"This is an exciting time for us," said Wilson. "These moves reflect Petrohawk's strategy to optimize its portfolio on long-lived, low-cost gas drilling opportunities."
Petrohawk's Gulf Coast division, with a 2007 capital budget of $200 million, includes a substantial inventory of exploration and development projects, which are primarily company-operated. The properties were producing 105 MMcfe/d at the beginning of June. Eight rigs are currently drilling, and so far this year, 38 wells have been drilled with a success rate of 86%.
"The Gulf Coast division has a rich set of properties," said Wilson. The company has built "a highly successful drilling program there, bolstered by an extensive library of 3-D surveys [and] joint ventures with quality partners, and we have a large inventory of 3-D-based drilling prospects in the Wilcox, Vicksburg and Frio trends. In late 2006, we announced three major discoveries -- the Nabors, Colson and Winchester fields -- and additional exploration prospects are being evaluated with the 2007 drilling program."
However, the sale of the Gulf Coast operations will "allow us to continue to grow our already strong position in tight gas development areas," said Wilson. "Today's announcement to increase our position in the Fayetteville Shale and North Louisiana are important steps in that direction."
Petrohawk will be losing about 100 MMcfe/d with the Gulf Coast sale, but "our ambition is to more than replace that in short order" with the acquisitions, said Wilson. "We will have to see how things look at the end of the year, how well we've done with that process. But we intend to more than make up for the losses."
The Houston-based independent will be acquiring about 32,500 net acres in the Fayetteville Shale, nearly quadrupling the company's holdings to about 43,000 net acres. The new acreage is "right in the center" of the play in Van Buren County, AR. The purchase, for an undisclosed amount, is expected to close in 3Q2007. Petrohawk also is negotiating to buy more acreage in the Fayetteville, and that process is in "various stages of evaluation and negotiation," said Wilson.
In addition to the Fayetteville Shale purchase, Petrohawk will add to its holdings in both the Elm Grove and Terryville fields, its two highest producing tight gas fields in North Louisiana (see Daily GPI, Dec. 15, 2005). In Elm Grove, Petrohawk will add more than 10,000 acres; in the Terryville field, another 3,000 acres will be added. No financial details were disclosed.
Since the transactions are not expected to close before the end of the year, Wilson was cautious in discussing Petrohawk's plans in the Midcontinent.
"We are buying acreage in the fastest growing part of the Fayetteville shale," he said. "We have had notable success there this year, and we've had some of the best wells in the entire play. As we add to our position in this growing tight gas trend, we intend to take advantage of our infrastructure" already in place. "We have years of development activity ahead in the Midcontinent region, and our price realizations are among the best in the industry..." He said once the transaction closes, "we plan to really step it up" in the Fayetteville Shale.
Petrohawk already holds significant acreage in the Cotton Valley, James Lime, Fayetteville and Woodford Shale trends of the Midcontinent. Proved reserves in the region at year-end 2006 were 663 Bcfe, 95% weighted to natural gas, with probable and possible reserves of more than 2 Tcfe. Petrohawk plans to drill about 316 wells in the Midcontinent this year.
In its third announcement, Petrohawk said HK Energy Partners LP is expected to spin off as an MLP in the final three months of the year, initially to hold some of its more mature Permian and Arkoma basin properties. The MLP is expected to grow "principally through acquisitions," both from the parent company and other sources, Wilson said. The MLP, he said, will not only strengthen Petrohawk's financial position but also allow it to fund the development and acquisition of "resource-style properties" within the company's core exploration focus. About $150-200 million of the partnership units will be offered to the public; Petrohawk expects to own at least 50% of the partnership at closing.
Wilson and his management team have been adept at making some shrewd deals in the past several years. The Wichita native founded Hugoton Energy Corp. in 1987, which merged with Chesapeake Energy Corp. in 1998. Wilson then became CEO of 3TEC Energy Corp. until its merger with Plains Exploration and Production Co. in early 2003 (see Daily GPI, Feb. 4, 2003).
Wilson and his principal investor, Encap Investments LC, acquired a controlling interest in Beta Oil and Gas, a small publicly traded, Tulsa-based energy company for $3.30/share in November 2003. The company, staffed with former 3TEC executives, was renamed Petrohawk, and company headquarters was moved to Houston. Since then, Petrohawk has made its mark through acquisitions and development, all in the Lower 48 states. Shareholders approved the name change on July 15, 2004.
In November 2004, Petrohawk bought Wynn-Crosby for $425 million, marking its first large acquisition. Two years ago, Petrohawk merged with Mission Resources, nearly doubling in size (see Daily GPI, April 5, 2005). One year later, Petrohawk bought KCS Energy for 80 million shares of stock and $900 million in cash (see Daily GPI, April 24, 2006).
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