07
May

HK Reports Solid Quarter – Bulking Up The Hawk

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HK Reports 1Q08 Results Good Results; Announces Share and Debt Offerings; Jacks Up Budget and Attacks The Haynesville In Almost Chesapeake Fashion.

My sense is that the stock dips in the early morning hours. Even some analysts may attempt to decry the wanton levels of spending. This will pass. I will likely buy more if it is still low during the conference call. At the end of the day, their growth to 150,000 shares will propel them to the forefront of the Haynesville mania. There are a number of very solid developments in the PR which I’m chewing on now.

The 1Q Numbers:

  • EPS  of $0.15 (ex item) vs $0.16 Street Consensus,
  • CFPS of $0.72 vs $0.70 expected,
  • Revenue of $215mm vs $202mm expected,
  • Production of 261,000 Mcfepd vs guidance of 250 to 260,000 Mcfepd (91% natural gas),
  • Lease operating expense was a low, low $0.52 / Mcfe.

The Offerings:

  • 21 million shares - 11% of the outstanding, should raise just over $500 million. An overallotment would increase the dilution by 3.15 shares or to 12.5% which is I bet what occurs. Book is being run by Lehman and Merrill Lynch ... so expect an upgrade by Merrill the day after the secondary. 
  • $500 million Senior notes.
  • Half and half offering keeps the capital structure relatively balanced 

 

Guidance:

  • Production Guidance:
  • 2008 reaffirmed at  295 to 315 MMcfepd
  • 2Q08 initiated at 280 to 290 MMcfepd, the mid point of which would equate to 9% sequential growth.
    • Capital budget increased 62% from $800 million to $1.3 billion. Additional dollars go to fund:
      • Haynesville acreage grab
      • $150 mm additional to drilling in the Haynesville, WEHLU (read on), and the Jame Lime JV (read on),
      • building gathering systems in the Fayetteville shale,
      • further corporate liquidity, and
      • total company rig count to increase to 30 from the low 20s now.

hk-2008-revised-budget.jpg

  • Gross resource potential (unproven reserves) now at 10.3 Tcfe versus year end company reserves of 1.06 Tcfe.   

 

Operations Update:

  • Haynesville Shale Update:  Haynesville Shale exposure now at 150,000 acres up from "more than 70,000 net acres" in early April. Plan is to go to 400,000.
    • drilling the 4,000 foot lateral on their first well now
    • a second rig will be in the field in May and they will move to a 5 to 6 rig program by 4Q08.
    • New acreage bumps them up on the Haynesville leverage chart:

haynesville-play-exposure-050608.jpg

 

  • Elm Grove Update:
    • Business as usual in the regular Lower Cotton Valley program with an 8 rig 140 program on schedule. 
    • Taylor Sand Horizontal Cotton Valley Tests: one IP at 13 MMcfepd and one at 6 MMcfepd with a 42% NRI for 8 MMcfepd net combined. I think a third well here was dry but those are very nice rates from this normally resource style field.
    • Davis Sand Horizontal: completed one well with an IP of 4.5 MMcfepd, again a nice rate, I think a little better than they expect from the Davis which is tighter than the Taylor.
    • Fayetteville Shale: 
      • Production: 76 MMcfepd gross, 43 net. This is up slightly from early April.
      • Drilling costs are falling as they get more efficient. Wells are being drilled more quickly even with longer laterals. Overall, costs fell 12% YoY while IP's increased 20%.
      • 6 rig program on track to drill 140 wells.
  • WEHLU - West Edmond Hunton Lime Unit.
    • 30,000 acres
    • 15 horizontal wells drilled to date
    • latest well doing 485 boepd gross, don't know WI% yet here
    • plan to drill 16 more, half of them horizontals, looks like lots of room to run
  • East Texas James Lime JV With EOG - 30,000 net acres in Nacogdoches and Shelby Counties, Texas. A five well (EOG) operated pilot begins this quarter. 

Conference Call: 9 EST

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