Memo to Petrohawk Energy: Stop Talking and Start Doing
Petrohawk Energy (HK), an independent oil and natural gas producer, said its proven reserves more than doubled in 2009, thanks to new finds in its Haynesville Shale play. But the company remains strapped for cash and challenged by low natural-gas prices, both of which could hamper its development plans.
Proved reserves (98% natural gas) and average production grew 122 percent and 63 percent, respectively, to 2.75 trillion cubic feet equivalent (Tcfe) and 598 Mmcfe per day, driven mostly by expanded drill-bit activity in the Haynesville Shale play in northern Louisiana and East Texas.
The company is nursing a mighty hangover after awaking from a 2 ½-year buying binge -- $5 billion spent on acquiring leasehold interests in unconventional pay zones, specifically the Haynesville Shale, Fayetteville Shale, and Eagle Ford Shale plays. Petrohawk is like the U.S. Treasury in some respects, having funded its expansive appetite with paper -- common stock outstanding has almost doubled since 2006 to 300 million shares -- and deficit spending: At September 30, long-term stood at approximately $2.4 billion, roughly 73 percent of stockholder equity. And, interest expense to service this debt totaled $174 million through September, up from $88.4 million in all of 2006, according to regulatory filings.
Management has had success in getting note holders to eliminate problematic debt covenants, such as fixed charge coverage. Good thing -- as the company would need to generate additional earnings of $1.7 billion just to enter the first quarter of 2010 at breakeven.
Petrohawk's 2010 drilling program is currently budgeted at $1.45 billion, with $900 million allocated to expanding well operations in Haynesville and $350 million towards exploration/production activities of core Eagle Ford Shale holdings in south Texas, specifically its Hawkville Field holdings (stated goal is to expand number of wells operating from 22 to 60 wells). If the company is unable to achieve anticipated operating gains this year, such as a progressive decrease in "days of spud" to production and/or costs per drilled foot, look for pushout of some targeted second-half well activity into 2011.
"Today we stand with an excellent liquidity position sufficient to execute our 2010 drilling program," chairman and chief executive officer Floyd Wilson proclaimed to analysts on the February 1 operations call. Management also anticipates turning free cash flow positive (operating cash flow less capex) come 2012. (He gave a similar speech in May 2006 when talking about second half activity.)
Key themes expected to underwrite these performance goals include the following:
- Asset monetization and property sales -- the company anticipates divesting non-core assets worth an estimated $1 billion, such as a mature oil & gas field in Oklahoma City (West Edmond Hunton Lime Unit).
- The company is aggressively pursuing and testing new lateral drilling technologies aimed at reducing finding and development (F&D) costs. Another production concept. called "reservoir optimization," looks to flatten the decline curve and improve recovery rates by depleting well pressures at a more gradual rate.
The evidence might be compelling, but drilling more than two miles deep (with extended laterals of one mile or more) to extract commercial quantities of prospective "tight gas" reservoirs trapped in shale formations of varying thickness (from 50 feet to 300 feet thick) and porousity will require more data -- with longer production histories.
Extremely high decline rates (80 percent in first 12 months) and overstated gas reserve valuations -- critics argue that the EURs are predicated on too-high initial production (IP) rates (average IP at Haynesville wells during 2009 was 17.8 Mmcfe per day), as factual evidence doesn't longer reserve life projections.
- The company gets high marks for managing cash flow (or attempting to) and price risk through derivatives and hedging transactions: 68 percent (459.7 Mmcfe/day) and approximately 50 percent (526 Mmcfe/day) of anticipated 2010 and 2011 production is locked in, at price points between $5.83 - $9.21 (2010) and $5.55 - $ $9.66 (2011).
Contractual obligations maturing on Petrohawk's leveraged balance sheet climb from $663 million in the next 12 months to approximately $1.9 billion in 2011 - 2012. The company has never thrown-off positive free cash flow since being birthed by Wilson through a reverse merger of some long forgotten energy exploration shell back in 2003. Time to stop talking, Mr. Wilson, and show us what Petrohawk can do.
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