08
Aug

Z Note HK 2Q07 08/08/07

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  • (HK) Nice Beat. Major operational quarter. Kicked butt with the drill bit.
    • Reported $0.17 versus $0.15E;
    • More importantly reported $0.86 CFPS which is pretty massive for 1 quarter on a $15 stock if you think about it given the their high production growth rate and low cost structure.
    • Revenue $234mm actual vs $228 expected;
    • Production: 324 Mmcfepd (middle of guidance) which is up 151% from a year ago.
    • 3Q production guidance: 322 to 332 Mmcfepd.
    • LOE at $0.59 per Mce is below mid point of previous guidance.
    • Cost guidance remains low and unaltered from last quarter except for per unit G&A which is expected to fall.
    • Operations: 98 out of 100 wells drilled during the quarter successful. 19 rigs running now.
      • Mid-continent region saw 74 of 75 wells successful, seven were Fayetteville Shale, four of those were company operated with nice IPs of 3 mm/d.
      • Gulf Coast 17 of 18 wells successful (Elm Grove and Terryville in La).
      • Permian: 7 for 7.
    • Acquisition: bought a private company in the last week for undisclosed $ with properties in Arkansas, Indiana, and Texas. Adds 32,000 acres to their position in the Fayetteville and gives them a good start in the New Albany. This is in addition to the 32,500 acres acquired in the Fayetteville announced in June (now 80,000 net acres there)
  • Fayetteville Shale: Plan 50 operated wells for 2H07 and will participate in another 40 during that time. This is a significant acceleration of activity since the last report. Two wells had multiple simultaneous stimulations (probably by Multifrac) and came in with IPs of 3.5 and 3.8 Mcfgpd. I know this is a small number of wells and the Fayetteville is anything but homogeneous but these are some sweet rates. Ask (SWN) whose last 10 wells averaged IPs of 2.6 Mmcfgpd. They have three rigs running now and expect to be at eight rigs by mid 2008. Wow.
  • Louisiana: Terryville Field. Downspacing a portion of the field to 20 acres. They didn’t quantify how much of the field they could expect to downspace but said it could add substantially to the 550 locations they have on 40s. Don’t expect to double here but it should be a nice add to inventories. Also, completing one Gray sand well after another came in at 6.1 mm/d (which is a little above the old average as I recall it closer to 5). These are $2.5 million wells which have typical initial production of 2.5 mmcfepd and an additional $600K gets you deeper to the Gray. Nice. They’ve grown this area from nothing in 2004 to an expected 40,000 Mcfepd in 2007.
  • Louisiana: Elm Grove: operated wells IPs of 2 mm/d with program running like clockwork. Second horizontal test came in at 4 mm/d; plan four more by year end. 20 acre infills showing strong results with average IP of 1.5 mm/d.
  • Lion Field, Goliad County, Texas. Two big wells added during the quarter.
  • Along the Gulf Coast - they drilled several deeper tests (some with (NFX)) and have encountered quite a bit of pay. More later on this druing the conference call.

Adds Conference call notes:

Raised Capex Budget to $675mm

MLP will be filed in 3Q

Expect Gulf Coast to close prior to year end and given their continued success there I would agree with them that it should be a pretty competitive sale.

Elm Grove - after drilling of the second horizontal well that program is just getting kicked off. Targets the Davis and Taylor in the lower Cotton Valley as well as certain structural features. Thing the horizontals outperform the verticals by a factor of 2 to 2.5x.

Terryville - 3D shoot will be delivered in 3Q and will give better focus for targeting the gray sands outlined above.

Fayetteville Shales: those two wells mentioned in the PR that were multi-fracced and came in at IPs of 3.8 adn 3.5 Mmcfgpd are flowing 3.1 30 days later. Pretty strong for  wells that are costing $2.7mm apiece now and are planned to fall to $2.4 to $2.5 as the science firms up. EURs looking like 2.0 to 2.5 though of course, that's the sweet spots, not the whole 80,000 acres.

Gulf Coast: Peregrine apparent discovery

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