17
Sep

Petrohawk Energy (HK) – Smooth Operator

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Petrohawk Energy (HK). ($15.72 as of 9/17/07)

Operational Summary: They are active in the Cotton Valley trend of North Louisiana and have nascent but growing positions in both the Fayetteville and Woodford Shales.

Management: Another subscriber to the "under promise and over deliver" school of management, the company perennially exceeds and then raises forward guidance while maintaining a conservative balance sheet (LTD to TC of 43%). They take a portfolio approach to their asset base usually employed by larger companies (most little guys just want to grow) and they are quick to punt higher operating cost plays which has reduced their breakeven point below almost all of their peers. The continuous transformation they are undergoing reminds me a little of a smaller scale (NFX) but with a narrower asset focus.

Recent Management Changes: The CFO and COO left in the last 3 months (June and September) respectively. Usually that's a yellow card and then a red. The Street seems less concerned and the guys who took over, both from the inside, are seasoned employees. Judging from the reaction to the COO's departure last week I think these moves had been telegraphed to the Street.

Production Growth:

13-16% production growth expected 2007 and I would expect low to mid double-digit percentage growth next year as well (on a pro-forma basis excluding the by then divested Gulf Coast division).

Reserves:

  • 1.1 Tcfe fully engineered by Netherland Sewell. The company estimates 3P reserves at 4.1 Tcfe.
  • Operate over 75%.
  • Long reserve life (9.8 years)
  • Gassy (86% of reserves)
  • Finding Costs: Organic F&D costs of $1.65 in 2006 was near to best in class.
  • 1,300 proved locations, 3x that in non-proved locs.

Price Realizations:

  • Stout Hedge Positions: 80% of 2H07 expected gas production hedged at > $7.25.
  • Narrow differentials to NYMEX; in 2Q07 they received: 
    • 99% of the NYMEX gas price
    • and 95% of NYMEX oil

LOE / Mcfe Hard To Beat. More details in the property section below but they are alarmingly efficient operators:

hk-loe-091707aaa.jpg

Reserve Life / Price To CF.

hk-p-to-cf-to-rl-091707.jpg

Valuation: Cheap Inexpensive.

hk-08-cf-multiplesaaa.jpg

Upcoming Catalysts:

  • Sale of the Gulf Coast Division:
  • Conservatively, I'd expect a pretty decent price for it, say $900 million to $1.3 billion based on YE06 reserves of 663 Bcfe in the division and a selling price of $1.50 to $2.00 per Mcfe. Could go higher as the division has been prospect rich and there's a good 3D seismic library to accompany the property. This would be a significant boon given their 2007 non-Gulf Coast budget is $450ish million.
  • Also from a style points perspective, they are once again punting the highest cost / highest decline rate division of the company. Look for immediate improvement on LOE and in time, reserve life which should allow for a little price to cash flow multiple expansion.
  • Expected close in the fourth quarter.
  • MLP formed to acquire select Permian and Arkoma properties. Expect to raise $150 to $225 million upon it's offering in the fourth quarter.

Core Areas of Operations

hk-core-ops-map-091707.jpg(Please click on map to enlarge)

North Louisiana:

  • Elm Grove: Largest of Petrohawk's fields spanning three Louisiana parishes. Production stood at 94,000 Mcfepd as of Feb 2007 (about 30% of total 2Q production) up from just 5,000 Mcfepd in 2001. The play targets Lower Cotton Valley and Hosston zones via infill drilling which has gotten down to 20 acre spacing and a couple of science project stage horizontal wells.
    • They plan to drill about 140 wells here this year and at this rate they have a 10+ year inventory (over 1,500 locations).
    • This is extremely low cost stuff to operate too ($0.24/Mcfe lease operating expense)
    • 20 acre infills showing strong results:
      • Average EUR of 1.13 Bcfe of 24 20 acre wells drilled so far)
      • In 2007, 30 to 35 of the 140 wells planned here will be 20 acre infills.
      • Hosston - Coil tubing multiple small sand fracs working better, more target allowing for co-mingling of Cotton Valley and Hosston production, more cost efficient than one large frac. Hosston sands are strung out in numerous narrow bands 2 to 15' wide over a 900 gross foot interval above the Cotton Valley so the potential is large. They'll do a 100 of these recompletions ($400K apiece) in 2007 and likely accelerate the program in 2008.
    • 6 horizontals planned for 2007, second one IP'd at 4,000 Mcfepd (first was at 2,400 Mcfepd).
  • Terryville: 106 sections (34,000 net acres), lower cotton valley and gray sand zones, development drilling, field expansion and gray sand exploration. 2007 plans: $122 mm, 51 wells plus a 50 sq mi 3D. The main plain is on 40 acre spacing now and they're drilling a dozen 20 acre infills in the remainder of the year.
    • Average Well: 1 to 3 bcfe,
    • $2.5 million /well + $0.6 mm to deepen for Gray Sand exploratory target.
    • 2.5 mm/d initial production
    • 550 locations, 2004 production was negligible, began to ramp activity in 2006 and production increased to 17 Mmcfepd, 2007 expected near 40 Mmcfepd. Gray sand has seen some bigger wells, 3 recent deeper wells (12,000 feet) had combined IP of 15,000 Mcfepd.
    • Even cheaper to operate than Elm Grove at $0.14 per Mcfe.

Arkansas:

  • Fayetteville Shale 80,000 net acres mostly in Van Buren Country (western part of the play were (SWN) has been drilling their better wells). 2007 plans call spending $37 mm to drill 27 wells.
    • $2.5-2.9 mm apiece with a 3,000' lateral.
    • 2.0 to 2.5 Bcfe per well  That's up from 1.5 to 2.5 Bcfe thoughts earlier this year.
    • with average 2,000 Mcfepd IP. A few recent wells, simul-fracced with IPs over 3.
    • 1,000+ locations.
    • next to nothing booked as of YE06 (0.5 Bcfe); could see additions of 40 to 509 Bcfe this year.

Oklahoma:

  • Woodford Shale - 26,000 gross acres. They were set to to drill a half dozen wells here in 2007 but I've not yet seen results from any. Will check further and update. 

Summary: I like them. As they transition to a resource play steadier growth it afford should translate into multiple expansion towards the middle range of its peer group. They have very effectively hedged three-quarters of expected production with natural gas floors over $7 / Mmbtu and ceilings that will give them upside to over $12 this winter. Finally, it’s inclusion in the two shale plays adds an element of sustainable growth not usually found amongst the smaller E&Ps.

 

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