Petrohawk Energy Q3 2010 Earnings Call Transcript

Petrohawk Energy (HK)

Q3 2010 Earnings Call

November 02, 2010 11:00 am ET

Executives

Floyd Wilson - Chairman and Chief Executive Officer

Richard Stoneburner - Founder, President and Chief Operating Officer

Tina Obut - Senior Vice President of Corporate Reserves

Mark Mize - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Michael Hall

Dan McSpirit - BMO Capital Markets U.S.

Chris Pikul - Morgan Keegan & Company, Inc.

John C. Nelson

Stephen Berman - Pritchard Capital Partners, LLC

Brian Corales - Howard Weil Incorporated

Gil Yang - BofA Merrill Lynch

Marshall Carver - Capital One Southcoast, Inc.

David Heikkinen - Tudor, Pickering & Co. Securities, Inc.

Leo Mariani - RBC Capital Markets Corporation

Joseph Allman - JP Morgan Chase & Co

Andrew Coleman - Madison Williams and Company LLC

Robert Morris

Presentation

Operator

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Previous Statements by HK
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Good day, and welcome to the Petrohawk Energy Corporation Third Quarter Earnings Call. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Floyd Wilson. Please go ahead, sir.

Floyd Wilson

Good morning, everyone, and thanks for joining. This conference call may contain forward-looking statements intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For more detailed description of our disclaimer, see our press release issued yesterday and posted to our website, as well as in our other public filings.

Well, third quarter 2010, our results this quarter were excellent. We achieved all of our targets and did so at our profit to shareholder. Everything is working quite well at Petrohawk. Production grew substantially quarter-over-quarter, and we expect substantial growth next quarter as well. And we will report significantly increased proved reserves at year end.

We are in a high growth phase of our property development where production and proved reserves have been added at tremendous rates, driven largely by lease capturing in the Haynesville Shale. And as our restricted rate program there becomes more meaningful and flattening our PDP decline, the production we add is stacked on an ever higher production base.

In the middle of next year, we will dial down the activity in the Haynesville Shale dramatically. At the time when all of our key acreage there will be held by production, it is hard to overemphasize the importance of our activities to get to that point. Our ability to do so successfully underpins a significant portion of our future value and represents captured highest quality acreage in the play.

The Haynesville Shale is a world-class natural gas play, and we own the heart of that play. The imbalance that we and others have created by continuing to grow in a negative price environment will not last forever, and so we march on for the time being. And this quarter, we marched on protected by hedges, protected by continued operational efficiencies and protected by our solid balance sheet and very strong liquidity.

We accepted much higher-than-expected levels of capital spending from our non-operated partners, as they address their own lease capture issues. And we have accepted higher levels of overall spending today in order to predict future value at a time when we believe prices will be higher, costs would be lower and value will be recognized.

There is more clarity of information in the natural gas market today than there has been on the last year or two. Our realized prices this quarter were $4.20 per Mcf, which is over $1 higher than the realized price during this time last year of $3.13 per Mcf. At a time when last about the shale era was understood, the size and duration of new, major gas plays are more well understood, the size of the course in those plays are more well understood, and the cost to produce the highest quality portions of those plays is more well understood.

Our decision to push to conclude the lease capture phase in and Haynesville Shale was not taken lightly. Our balance sheet affords us this flexibility and that is not an accident. We delivered 100 million more in proceeds from divestitures in 2010 than expected, and our latest borrowing base redetermination, which takes our facility higher by $750 million, shows that even with today's low natural gas prices, we are adding significant value.

We managed our way through severe cost inflation in pressure pumping services, which significantly increased well costs. Although we believe this to be somewhat temporary, we feel that the frac cost inflation we've experienced in both the Haynesville and Eagle Ford Shale has peaked and should improve next year. First, we expect that new equipment coming to existing companies, and some new companies entering these plays will help reduce shortages. Second, we believe our ability to execute our new well-designed, and the Haynesville Shale will garner significant savings. That design is being tested this year with full implementation scheduled for next year.

Lastly, we'll have 16 operated rigs running in the Haynesville Shale in the first half of 2011 versus the planned seven rigs running there in the second half of 2011. Many other operators will also be scaling down as their own lease capture effort issues are addressed. The market dynamic is right for change.

Today, we have outlined an exciting plan for 2011, and we believe the time is right to bring the Eagle Ford Shale into the forefront of our capital spending and production profile. We aren't going to wait for a lower drilling level in the Haynesville Shale to increase our Eagle Ford Shale activity. We'll run 12 or more rigs in the Eagle Ford, all of next year, targeting for the most part, the condensate rich areas of the play, particularly at Black Hawk.

Increased Eagle Ford Shale drilling is the perfect complement to our ramp down in the Haynesville Shale. We've talked to this year about reacting to gas prices and looking ahead to form plans around what gas prices might do in the future. With the visibility created by our lease capture efforts, our hedging program and our divestitures, we are prepared to react appropriately in the future. We have constructed a durable plan for these times.

We planned ahead to have the capital capacity for this important job, and we'll continue to plan ahead and share those plans with the marketplace.

Today's call comes with the significant amount of operational detail, which Dick Stoneburner will discuss. Dick?

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