HK 3Q09 Pre Call Note; Volume Driven Quarter, Guidance Going Up

 

HK Beats Top Line; Raises 2010 Guidance

What I Was Looking For Vs. What I Got:

• Good chance they beat on 3Q volumes. They traditionally have either come in anywhere from center of guidance range to extremely high to guidance. Haynesville wells have exaggerated this habit. Either way they will be able to say they topped 0.5 Bcfepd for the first time, up huge (like 60%) from 3Q08 levels.
  • Mission accomplished. 0.512 Bcfepd largely due to better Haynesville well production. 

• Probably a reiteration of the 30 to 40% growth in 2010 they announced last quarter.
  • Wrong: They Boosted 2009 numbers and then boosted 2010 to 43% above that bigger base.

• The Street is expecting bigger wells from them in the Eagle Ford. It would seem likely they deliver a modestly higher rate set of wells (just north of 10 MMcfepd, with a focus on more liquids rich wells) as they announced that JV with SFY which begs the question, why do that if the returns don’t justify it? Answer is that the returns due justify it and that the E.F.S. is every good a shale play as the Haynesville from a rock and organic content standpoint.
  • Nope, IP's contracted relative to their prior wells - hot topic for the call.  They did announce additional acreage in the core and in the oilier Dimitt County area.

• Probably some Haynesville wells, look for drilling time to have fallen again and well costs to be down again. CHK saying some at $6mm now, last HK said was $8.5 mm.
  • $9.5 mm year to date average, trending to $8 to 9 mm.

• Budget talk to remain constrained to $1.3 billion next year.
  
  • Close but they upped it to $1.45 billion. But See Next Bullet.
    

• NO DEAL. No debt, no equity, no deal.
  • And I quote:
    

"The plans outlined today aim to balance 2010 cash flow and expenditures and accelerate drilling in these core shale plays, eliminating the need for future capital raises to fund their development."

On To The Pre Call Quarterly Discusion:

The 3Q Numbers:

• Production of 512 MMcfepd vs guidance of 495 to 505 MMcfepd:
  
  • vs 483 MMcfepd last quarter (up 6% sequentially)
    
  • vs 315 MMcfepd year ago quarter (up 63% YoY)
    
• Revenue of $346 mm vs $305  mm expected
  
• Costs Trending Lower
  
  • As Haynesville shale production becomes a bigger piece of the HK pie, its low LOE nature, along with production growth is driving per unit LOE well into best in class territory. This past quarter LOE came in at $0.44 per Mcfe.
• EPS of $0.11 (net of items) vs $0.12 expected.
  
• CFPS of $0.52 vs $0.51 expected.

Highlights:

• Haynesville Shale:
  
  • 24 more weels drilled during the quarter
  • On their normal choke regime, IPs averaged 18.6 MMcfepd, up slightly from their past average
  • They are conduction a choked back pilot on 4 wells (14/64") that is showing shallower declines than their normal methodology.
  • Drilling times continue to come down as do costs as mentioned above.
  • HK commented that introduction of a new PDC bit has meant faster lateral drill times
  • Well performance also improving due to higher pump rates on the frac (up to 100 barrels per minute, more sand per gallon of water (3 pounds now), and tighter spacing of fracs.
  • Acreage up 53,000 acres this year, now at 345,000 net acres
    

 

• Bossier Shale:
  • 122,000 net acres in what they think is the core
  • Thinking 5 to 6 Bcfe per well based on the results of others to date.
    
  • Planning to spud first Lower Bossier well 1Q10.

 

• Eagle Ford Shale:
• • No big boomers to report.
  • Average IP came down slightly with the most recent set of wells at 8 MMcfepd (6.7 MMcfgpd and 220 barrels of condensate per day avg.)
  • Completed well costs now $5.3 mm, up from $5.0 mm last quarter due to longer laterals, increased frac stages - they'd mention this would happen.
    
  • Going forward, looking at 6 to 6,500 foot laterals, vs 4,300 feet on the last set of wells.
  • Acreage moved up to "over 225,000 net acres" from 210,000 net acres at last count.

 

• Fayetteville Shale:
  • Still mostly non-operate activity.
  • Production was 88 MMcfepd net in August before Boardwalk went off line.
    
  • Also, expect to drill some deeper tests next year. Not exactly sure what they mean, (conventional sands?) will hear questions on this on the call for sure. 

Capital Budget:

•  2009 crept up to $1.1 B. You just knew it would.
  
• 2010 will be $1.45 B, also higher than previously stated.
• Non-core divestitures planned. HK saying they have id'd $1 billion in non core assets (mentioned the midstream assets, Terryville, and WEHLU) ; Street will want to know level of interest so far, proposed timing, prices on each piece so will be listening for them to spill on the call.

Guidance:

• 4Q09 Guidance revised up from a range of 525 to 535 MMcfepd to a range of 565 to 575 MMcfepd, and this excludes the loss of 30 MMcfepd from the Permian property sale.

• This puts 2009 average production at 490 to 500 MMcfepd, up 75% vs 2008

• 2010 Guidance was "30% to 40% over 2009 levels"

• This is revised up to 43% growth to a range of 665 to 685 MMcfepd

Nutshell:  Big booming growth and falling operating expenses mean CFPS estimates for 2009 and more importantly for 2010 will be on the rise again. If I had one nit about the quarter it would be the Eagle Ford Shale performance in the most recent set of wells being off despite longer laterals. I'm sure this will be a hot topic on the call. At present, HK is trading at 8.2x 2010 CFPS est. of $2.94. This multiple will contract if the stock stands still as estimates will again be on the rise. While not cheap for an E&P name, it is cheap among the gassy, yet lower growth resource players list and its balance sheet is much improved since the start of the year. HK is largely hedged in 2010 but the extra volumes leave upside as prices rise next year. I continue to hold the common and multiple strikes in near month calls.

Conference Call: Thursday, 10:30 am EST.