04
Nov

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

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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.

10 Responses to “HK 3Q09 Pre Call Note; Volume Driven Quarter, Guidance Going Up”

  1. 1
    bill Says:

    >NO DEAL. No debt, no equity, no deal.

    They stole a page from chk..Yhe only way they fund next year capital budget is planned 1 b in asset sales

    They were also strangly silent on their hedges

  2. 2
    zman Says:

    At last check they were 70% hedged for 2010 at $5.93.

  3. 3
    zman Says:

    Also leverage is lower now and liquidity on unborrowed line is higher for HK relative to their planned budget relative to CHK’s budget.

  4. 4
    bill Says:

    atpg numbers out

    20 cent loss on 75 m in revenue lower than expected.

    The revenue number is so anemic it doesnt cover interest expense let alone all the other operating costs

    Interest exp was 9 m expense and 71 m capitalized or 80 m in the qtr

    The story here is new production ,(oil and unhedged) coming online in 2010

  5. 5
    zman Says:

    Bill – I think they said everything is on schedule re Telemark, right? Other than that I saw little new other than the numbers for the quarter which no one should really care about.

    Going through CLR now, solid, uneventful. Guiding 10% growth for 2010, seems conservative based on ramp in drilling activity.

  6. 6
    bill Says:

    Correction on atpg interest expense..71 m capitalized was for 9 months..so is about 27 m capitalized per qtr + 9 exp or 36 m per qtr vs rev of 75 m

  7. 7
    bill Says:

    Yes, everything is still on schedule on telemark and this qtr really doesnt mean anything.

    We should hear more today…

  8. 8
    zman Says:

    I’m a little confused by what their net add is going to be when telemark goes on line. They have traded some interest in the project for service/equipment, right? Do you know what their net addition to current volumes will be?

  9. 9
    BirdsofpreyRcool Says:

    Pre-Mrkt

    Levels at 7amET:

    · SP futures dn 1.5pts (off lows)

    · Euro Stoxx also off lows down 0.6%

    · USD (DXY) up slightly

    · Gold dn $3 to $1089

    · Crude dn 50c

    Today’s Top Stories & Catalysts

    · European stocks down 0.5% but have bounced off opening lows; Asia was a mixed bag with Japan/HK ending lower but China finishing at a fresh 3-mo closing high.

    · BOE leaves rates unchanged as expected (hit at 7amET); they bump asset buy program by gbp25B, also as expected (although some debate about whether they would leave QE unchanged). GBP/USD spikes higher following the decision. ECB now in focus; EUR trading slightly lower vs the USD ahead of the ECB decision out later this morning; widely expected to leave rates unchd but people are looking for ECB to talk about exit strategies.

    · Brazil’s government is considering additional methods to halt Real gains; is considering selling real-denominated debt in international markets among steps to battle a surge in the nation’s currency. Reuters

    · CRE update: the commercial real estate industry is expected to hit bottom in 2010; Owners of business properties such as office buildings, warehouses and malls will suffer a surge of painful defaults, write-downs and workouts with their lenders. Report due to be published today by PriceWaterhouseCoopers and the Urban Land Institute, a real estate industry trade group and think tank. LA Times

    · Tech update: CSCO earnings were the big news of the night. EPS came in much better and revs also topped expectations (while revs exceeded plan, margins were the real bright spot). Tone in the press release and on the call re the state of the macro economy was pretty sanguine. On the call, Chambers cautioned Wall St analysts about becoming too bullish on the co’s earnings ests (i.e. trying to keep a lid on ests – “I just want to get ahead of ourselves”…”I just don’t want people to be modeling a normal year just yet – too many of our customers and competitors aren’t seeing the turn in business that we are”). Outside of CSCO, QCOM also reported earnings. The headline EPS was a miss, although on the call the company says that ex out a Korean fine payment, the results would have beat plan. The St seems pretty pleased w/the report and guidance (and keep in mind that expectations weren’t that high). There are more positive reviews of the new MOT Droid (the latest being in WSJ/Mossberg) – these reviews are one of the reason RIMM and PALM have traded poorly lately.

    · Retail SSS hitting this morning;

  10. 10
    zman Says:

    Had to step out, missed the PXP call.

    Equity futures continuing to improve into the open, all kind of moot until we see payrolls tomorrow. Next week is exceptionally light on data with no releases on my calendar Monday through Wednesday, Wednesday is Veteran’s Day, so EIA will release Oil #s on Thursday.

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