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Executives

Floyd C. Wilson - Chairman, President and Chief Executive

Mark J. Mize - EVP, CFO and Treasurer

Richard K. Stoneburner - EVP and COO

Analysts

David Heikkinen - Tudor Pickering Co. SEC

Michael Hall - Stifel Nicolaus & Company, Inc.

Stephen Berman - Pritchard Capital Partners LLC

Subash Chandra - Jefferies & Co.

Leo Mariani - RBC Capital Markets

Ronald Mills - Johnson Rice & Company

Jeff Robertson - Barclays Capital

Joe Magner - Tristone Capital

Dan McSpirit - BMO Capital Market

Andrew Coleman - UBS

Petrohawk Energy Corporation (HK) Q3 FY08 Earnings Call November 6, 2008 10:00 AM ET

Operator

Good morning. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to the Petrohawk Energy Corporation Third Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Wilson. Please go ahead.

Floyd C. Wilson - Chairman, President and Chief Executive

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 a detailed description of our disclaimer, see our press release issued today and posted on our website.

Well, we reported solid quarter this morning, delivering on production growth, lowering lease operating cost and maintaining liquidity. The release in operational update in late October detailed in recent Haynesville and Fayetteville Shale activities and we have another great data points out in the Haynesville today.

We also announced an increased lease hold in the Eagle Ford Shale, we acquired an additional 50,000 acres highlighting that this project is quite large and important to Petrohawk and has meaningful upside potential. We reported third quarter production at 315 million cubic feet equivalent per day, mainly natural gas.

Despite having about 5 million a day shut-in for the quarter due to effect of hurricane and the delay of the pipeline completion, with service at our Fayetteville Shale project. Pro forma production was up 37% over Q3 of 2007 and our numbers are tracking to our full year 2008 production target of 35%. Our goal for 2009 is 30% production growth, even with the capital budget that we reduced by a third.

Our platform for exciting long-term economic growth is well established. The principal of Petrohawk is achieving an operating structure that is significantly lower than many of our peers. Lease operating costs have turned it down over the last two years as a result of declining low cost properties, and divesting high cost properties and growing organically in areas which offer scale.

And as Haynesville shale becomes a larger component of our production, we expect ROE to head even lower. Before turning to the call over to Mark Mize, our CFO to discuss our financial results, I will mention the latest Haynesville shale completion at 15.7 million cubic equivalents per day. This laid us well as in line with results from all of our previous wells, all of which went into production at rates over 15 million a day. Our confidence in ultimate recoveries is building and we are increasing our estimated EUR per well to 6.5 Bcfe, up from 5 Bcfe over our entire leasehold.

We're currently completing our fifth Haynesville well and expect to complete approximately 10 additional Haynesville wells before year end. During 2009, we'll operate an average of 12 rigs in North Louisiana and a couple of rigs over in East Texas, all drilling for Haynesville shale, Bossier shale and a few other targets. And then our Eagle Ford shale play, we're finishing up on our second well and preparing to start our third. That third well which is located about 15 miles east of the second well and about 30 miles east of the first well, we'll also take at the Fayetteville Shale.

Lastly, on our drilling program in the Fayetteville shale going great, we are experiencing widening basis differentials in that area. Completion of the Boardwalk pipeline which is expected in December, will solve that issue as well as a shut-in gas production that I mentioned earlier. We view these as short-term problems until Boardwalk is up and running which has more than sufficient capacity for our Fayetteville Shale program. Mark?

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

Okay, thank you Floyd. Needless to say, we were looking at very interesting times. At this time last quarter HK was trading around $30 a share. We had debts around 11. Today we sit here operationally and financially and it's good to say that the company has never been a very strong balance sheet, but just due to the overall global economic fears, the company is treading below 20, which is clearly far below any valuation that's been on HK, either internally or externally.

We're confident logical evaluations, will once again return to the market, our shareholders will well positioned to benefit at that time. In August we issued just under 29 million shares of stock for trades and net proceeds to the company of about $734 million. As of September 30th, which essentially put substantial portion of those proceeds to work in additional Haynesville acreage and we ended the quarter with just over $250 million of cash remaining from the offering, when we coupled out with the $1.1 billion of capacity we have in our revolving credit facility, we end the quarter with about $1.4 billion of liquidity.

In September, we did close to re-determination of our revolving credit facility. This increased our borrowing base from 800 million of 1.2 billion with the utilization period ranging from 125 to 200 basis points. The re-determination was led by Parabol [ph], we offset Bank of America and Bank of Montreal as cost indication agents and we had JPMorgan, Wells Fargo and Ford as co-documentation agents. So we're very pleased with the outcome of re-determination that we believe, we have a top tier and very solid bank rates supporting HK.

Tuning to the third quarter results of operations for financial position of the company, we did finish the quarter with a net debt-to-capital ratio of 27% and a debt-to-total cap of 32%. As Floyd had mentioned, our production came in right in the middle of guidance of 315 million a day and that represents about 92% of that was natural gas driven.

Prices realizations only are off slightly from Q2, continue to be fairly strong with debt coming in at a 95% NYMEX; oil coming at a 99% NYMEX; going to Q2 at a 100% of NYMEX or just over 100% of NYMEX on gas though as Floyd already mentioned the erosion that we have experienced there is really fueled by the widening of basis differential from the mid-continent.

LOA continues to trend downward as the company focuses on its North Louisiana and Arkansas properties. We did finish year end 2007 with LOE per Mcfe of $0.56, we ended '06 $0.73, the release did yet stay that LOE per Mcfe of $0.43 and that does represent about a 25% reduction as compared to the 2007 operation and is clearly under the low end of guidance.

This is a positive trend and one we expect to continue, continue to see stuff remainder of the year and looking to future years as well especially if you consider the potential sale of our Permian properties. Taxes other than income is another metric coming in under below end guidance at approximately 4% of oil and gas revenue. This is another trend we expect to see continue and is really driven by the volume basis production tax structure in the Louisiana and Arkansas.

G&A is above guidance which to ramp up in the operation of the company into a lesser extent, internal cost incurred to raise just under $3 billion of capital this year. Headcount of the company has increased ramp up of operation and we do expect to see a continued downward trend in G&A per Mcfe. We would expect it to be above guidance throughout the end of the year. As has been the case in historical periods this quarter, our hedge mark-to-market was a sizable number of total sales operations coming in at $423 million of unrealized non-cash gain which was offset up by $36 million of payment.

That resulted in a net gain to the company of $388 million as we have always done in the past, we have backed out the unrealized non cash portion of this item in our selected items table which can founded in back of our press release.

Overall market position expense decreased by just under $2 million, that was really driven by production that was essentially sold with the Gulf Coast package back in November of last year and on a per Mcfe basis it increased slightly by about 7%.

Touching on income taxes, we currently project our '08 cash tax to be around $25 million and we do continue to report an effective tax rate of 38%. And finally, earnings per share as reported was $1.30, I have explained the non-cash gain on outstanding derivative position at September 30 in the amount of $424 million earnings per share came at a $0.19 just substantially inline with the estimate of $0.20.

With all this being said, then we continue to push ahead with the planned operations for the company. We're obviously very confident that we'll weather the economic and financial storm that we're currently experiencing. The operations of the company are solid and so is the balance sheet. Thank you for joining us for the call and I'll now turn it back over to Floyd.

Floyd C. Wilson - Chairman, President and Chief Executive

Well, as Mike mentioned these estimates have been...per share and I personally think we will likely be to in for some additional interesting days ahead. We operate a durable program based on an attractive cost structure, superior pricing and an excellent growth potential, and will do so for years to come. We are ready to field a few questions now if there are any.

Question And Answer

Operator

[Operator Instructions]. Our first question comes from the line of David Heikkinen with Tudor Pickering Co.

David Heikkinen - Tudor Pickering Co. SEC

Good morning, just a question about third quarter production. Can you talk about your regional production; how much was from the Fayetteville, how much was kind of traditional Cotton Valley, Houston and then kind of where do you see Haynesville contribution going into the fourth quarter?

Floyd C. Wilson - Chairman, President and Chief Executive

Looking at the date, just picking it out of my book here. In mid September, we were producing about a 125 million in Elm Grove. About 45 to 50 million in Terryville, about 60 million in Fayetteville and at that point, we were in the mid teens in the Haynesville.

David Heikkinen - Tudor Pickering Co. SEC

Okay.

Floyd C. Wilson - Chairman, President and Chief Executive

And then about 74 million in our Western region.

David Heikkinen - Tudor Pickering Co. SEC

Okay. That's helpful. Yes, that's good. And as you think about your capital budget and your targets over next year, how sensitive is your '09 target to timing of wells coming online and are you building any cushion in for gathering system delays and have the same thing that's happened in the Fayetteville, particularly in the Haynesville area?

Floyd C. Wilson - Chairman, President and Chief Executive

We have not particularly built in any delays. We've arranged for most of our capacity needs through the year. We're not particularly sensitive to certainly early in the year. I think that later in the year there could be some issues that certain project were not happening. We're not currently counting on any new build project in the field it's our reform gathering efforts in the Haynesville, but Fayetteville will be complete by the end of this year and so will the Fayetteville, the Boardwalk pipeline, so they're only getting items for our projection for 2009 and the Haynesville would be our won gathering which we're handling ourselves. So, we're fairly confident that we can make a way through this production growth that we foresee.

Floyd C. Wilson - Chairman, President and Chief Executive

Okay, Thanks guys.

Operator

Our next question comes from the line of Michael Hall with Stifel Nicolaus.

Michael Hall - Stifel Nicolaus & Company, Inc.

Thanks. As you look at your program in East Texas, you have any plans to look at the Haynesville lines?

Floyd C. Wilson - Chairman, President and Chief Executive

Yes, we refer to that as Cotton Valley line more then Haynesville on year, that's right. We have actually a well that we're currently drilling, that will test that line horizontally and in northern Shelby County and we're excited about that much like what XPO's been doing over in conventional free stone limestone counting trends. So we have few well schedules there.

Michael Hall - Stifel Nicolaus & Company, Inc.

Can I, I mean on the Eagle Ford Shale the new acreage position... our new acreage areas, what kind of acreage cost are those at pretty low.

Floyd C. Wilson - Chairman, President and Chief Executive

Yes relatively low around $350 an acre all in including brokerage cost, it's a five year leases. It is a series of contiguous blocks contiguous on existing position. So it is nice addition for us, we are doing a little more leasing there but we leased up the local feature most of the it as we see it.

Michael Hall - Stifel Nicolaus & Company, Inc.

And then looking into 2009, as you informed... continue to look at budget, in current gas price environment would you mirror or as gas prices continue to deteriorate would you expect to continue to bring down the budget and spend within cash or would you given that you have a little actual liquidity at this point to spend into it?

Floyd C. Wilson - Chairman, President and Chief Executive

Well, of course we're going to try to stay relatively close to cash flow for the year, and gas prices were 92%, 93% natural gas. So we did take that for us. So I think you would expect to see us take a look at further reductions, however we've got such great cost numbers on the two areas we are almost all the money that and we're still well hedged that we're a little less concerned about it in 2009 as we might be in 2010.

So I think you might see us cut back a little bit more that we think our current budget which by the way is round numbers of $1 billion, round numbers of about 800 million of that is for drilling and completions and the rest for facilities. We think it's a very well positioned budget for the current gas price environment.

Michael Hall - Stifel Nicolaus & Company, Inc.

Right, great. That's helpful, thank you.

Operator

Our next question comes from the line of Steve Berman with Pritchard Capital.

Stephen Berman - Pritchard Capital Partners LLC

As you're moving up the curves in the Haynesville, can you talk a little bit about how you're managing that whole process in terms of things like pressures and how do you think in terms of choking that wells, et cetera. I mean I suppose you could be opening these up more. But, how do you feel overall in terms of managing that whole process?

Floyd C. Wilson - Chairman, President and Chief Executive

I think we bound pretty consistent choke that these wells like to perform on. It's around to a 24/60 force choke. Most all the wells, once we give the wells cleaned up and the water production diminishes to 10, 15 wells an hour, it seems like we get up pretty stable decline that gives us a good picture of the EUR on that 24/60 force choke. And that's where most all the wells are, where they start and where they still are. So that's kind the way we see it.

Stephen Berman - Pritchard Capital Partners LLC

And given in terms of when you first started to where you are now in terms of things like decline rates and fresh reserves or things about what you expected better, where does it stack up so for?

Floyd C. Wilson - Chairman, President and Chief Executive

I think it's pretty much what we expected. We monitor our decline rates and EUR projections on a pretty much weekly basis and nothings really deviating from what we have kind of seen a month or two ago. So, I think we're very pleased with the overall performance of all the wells and the consistency and the projections that we've been making over the last couple of months.

Stephen Berman - Pritchard Capital Partners LLC

And then in terms of just giving a sense as to how low LOE might go on...do have the number of what LOE was, either just for the Haynesville or for that whole area Haynesville carriers and Elm Grove or combined?

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

Elm Grove, Steve is a more mature field and the last number I remember Elm's always about $0.24. Terryville was about $0.15 or thereabouts was there about. So far the Haynesville's acting like it can be about a nickel or a dime. But, we need a lot more history to really nail that down. It's... as regarding volumes so quickly or fairly be a leading type number in the low number pennies per Mcfe.

Stephen Berman - Pritchard Capital Partners LLC

Wellterrific. Okay, thanks for the outlook, someone else go in.

Operator

Our next question comes from the line of Subash Chandra with Jefferies & Co.

Subash Chandra - Jefferies & Co.

Yes, further back to the CapEx side of the 100 million that's budgeted for the Gulf Coast and Permian areas. Is that a number that sort of assumes that business is usual that you won't be putting the assets on the block and I suspect if you do you probably would spend a bit less there, but just tying to get a sense may be if that's an area you can reduce CapEx given what oil prices are doing in particular, and if there is any other wriggle room in the Fayetteville so?

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

Subash keep in mind that the budget number I believe that you're looking at is for the entire western region which includes WEHLU, the Permian and our East Texas drilling program which include some Haynesville and Bossier shale and Cotton Valley line wells. So we already reduced activity to some extent as you may remember we have some experience in selling properties.

We have always found its better to continue to operate the property as if we were going to continue to own them, rather than cut back. So we cut back in the context of lower oil and gas prices and not in the context of selling the property. We could probably save a few more dollars out of all the budgets including the Fayetteville and but as I mentioned earlier given our hedging position and cost metrics that we have in the main producing areas we are pretty comfortable with where we are.

Subash Chandra - Jefferies & Co.

Okay. Any unsettled lease transactions still out there?

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

We have a few left probably in the 10s and 20s of million. I think we had about a 100... we reported earlier 175 at the end of the quarter and most all of those have been closed and there are just a few left over.

Subash Chandra - Jefferies & Co.

Okay. And one final one for me. How important is the Cotton Valley or just a horizontal program ex Haynesville and East Texas and Louisiana to Elm Grove... I am sorry, in the Louisiana IV Elm Grove production. And what's the outlook there your near terms? How many rigs do you have working in the horizontal program there and do you intend to make changes in the horizontal?

Floyd C. Wilson - Chairman, President and Chief Executive

Subhash,Are you talking about the horizontal program in the lower Cotton Valley?

Subash Chandra - Jefferies & Co.

Correct. Let me let Rick answer that. We're... very important to us that we certainly have curtailed this a bit in favor of things go well.

Richard K. Stoneburner - Executive Vice President and Chief Operating Officer

That exactly right. We drill a total of nine wells through the third quarter, that's counting our initial discovery well that was in December of '08 or of '07. But at this point in time, we have committed all of those rigs that are capable off drilling a lower Cotton Valley Taylor through the Haynesville. It is basically what Floyd has said, for the last couple of months as we really need to focus on the acreage that is not held by production. We don't need be drilling spuds, we don't need to be drilling opportunities where the acreage is secured and held.

So that's the main reason we've differ the continued drilling of any of the Cotton Valley, not just a Lower Cotton Valley Taylor but the Cotton Valley Davidson, in turn that we were quite excited about continuing that efforts. So, its still there, we still have lot of opportunity through out the Elm Grove field, both vertically and horizontally. But right now, the lion's share of our capital in that area are is going to Haynesville.

Subash Chandra - Jefferies & Co.

Great, thank you.

Operator

Our next question comes from the line of Leo Mariani with RBC Capital Markets.

Leo Mariani - RBC Capital Markets

Yes, a quick question for you this morning. Just curious to hear if you guys have any kind of a recent well reserves that are in the Fayetteville. Just really haven't seen a lot in your recent press releases. I'm curious to know whether or not you guys are going to slow down that program in the face of lower seasonal practice here?

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

Obvious... I'll speak to the reserves, we are clearly changing our completion approach somewhat, I mean not dramatically but we have gone through all cemented liner. We're definitely following the same pattern that the Southwestern is doing, with how we perforate which we've been doing pretty much all along. But we are going to longer laterals, we've going to summated laterals and I think by the end of the fourth quarter, we'll have a more substantial dataset to speak towards the increased results that we're seeing.

There were few wells that we mentioned in our operational update in late October. They addressed higher rates than we've seen before. But honestly, I think I mean your observation is correct. But it takes sometime to get some real data points that we can make comparisons to and I think we'll see those by the end of the fourth quarter. And Floyd, do you want to address the activity level?

Floyd C. Wilson - Chairman, President and Chief Executive

You know the, one thing I think it's fair to say we've had no real disappointment in the field work. We're approving along with, I guess we have 7 or 8 rigs running today. 10 rigs running today with represented reserves in all areas. We definitely are going to cutback on the rigs for next year. This is really inline, just the overall reduced budget. We have noticed this seasonal softening or the seasonal lightening of the differentials out in this area. We feel that with the firm transportation space that we have acquired on the Boardwalk pipeline, will be solved as soon as that pipeline is in operation. In operation, in another words we would be getting close to NYMEX prices for that gas. So we haven't specifically slowed it down because of pricing. We slowed it down just in favor of the most bang for the buck and a reduced budget.

This question and the last question I'd like to say that I take it as my task to try to find the money sometime to see this problems back up because we have had awesome results in both the Fayetteville and our legacy Elm Grove field in this lower Cotton Valley and it turns out they can say about it but the Davidson and Turner horizontal drilling it turns out that it's a lot better than we thought it would be with very low decline rates relative to other Cotton Valley wells and very representative of economics almost the same as one of our good Taylor Lower Cotton Valley well.

So we've only reduced activities in those two important areas just in favor of reduced budget and the fact that we have made sure we are hold all of our acreage in Fayetteville, we are making sure we're going to hold all the acreage in the Haynesville by directing more of the funds in that direction.

Leo Mariani - RBC Capital Markets

Okay, thanks a lot guys.

Operator

Our next question comes from the line of Ron Mills with Johnson Rice.

Ronald Mills - Johnson Rice & Company

Good morning. Couple of questions to follow on Subash. It sounds like you cleaned up a lot of unpaid leases since quarter end or can you give us a snapshot of what you're current cash position and or do you have any borings out on your revolver at this point?

Floyd C. Wilson - Chairman, President and Chief Executive

We don't report that in between quarters, Ron as I said as Mark pointed out, we had about 1.4 quarters in and we've closed down around numbers of 125 or 2 million of the 175 that we are in place at quarter end we have a 30, 40 million left to close on. We are in very liquid position at this moment.

Ronald Mills - Johnson Rice & Company

Okay. And you have the 250 million in cash already. Can you give us some update on where are you stand in terms of firm transport lined up in the Haynesville as the activity levels there continue to increase.

Floyd C. Wilson - Chairman, President and Chief Executive

You know that's a very fluid situation out there, with the credit crunch it's been on going many of these new projects sound like they are going to be either cancelled or delayed. We are working on sources of increasing our capacity in the existing pipes and our existing relationships. We think we have got a pretty good handle on what's going to happen through 2009. However there is definitely for Petrohawk certainly there need to be additional capacity by 2010. And right now with I think the timing of credit, some of these projects would be delayed significantly.

We haven't made a specific projection publicly for the Haynesville for 2009 however it's a significant growth profile over 2008 and we feel like we've arranged for ways to get the gas out of there on economic terms for all of 2009. We need to wait and see what goes on with some of these new built projects.

We're hoping that when the credit markets reorients and sells albeit at perhaps slightly higher interest rates that some of these projects will get back under way. Do you have anything to add to that, Art.

Unidentified Company Representative

No we've covered it all. The positions that outside the company changes daily and we are working it as hard as we can.

Ronald Mills - Johnson Rice & Company

Okay and just from a timing standpoint if new builds need to be in place or loopings need to be in place by 2010, not I assume be just for Petrohawk but for everyone, how long of a lead time do... is really needed to be able to have capacity increases meet the expected industry activity increases.

Floyd C. Wilson - Chairman, President and Chief Executive

On the capacity increases or if we are just doing compressions and looping those are not all that time consuming however the bulk of the gas of the future gas is going to have to be serviced with new build lines and the new build lines take at least the year isn't it, Art?

Unidentified Company Representative

Yes and if there is a big enough stake the full process adds to that. I mean the actual getting it in the ground is not the biggest time consumers with the large interest stake

Richard K. Stoneburner - Executive Vice President and Chief Operating Officer

The wild card in all Ron would be what will the actual drilling activity be in the field for 2009 under the current condition versus what we thought it might be six months ago. That will create some space that we can't really speak to the rest of the folks out there but we've done we think a fairly diligent job of making sure that we are well serviced for 2009 and we are working with several parties for 2010.

Ronald Mills - Johnson Rice & Company

Okay, great now I assume that in terms of you both your comments both the Eagle Ford and Haynesville leasing activities slowed down significantly and going forward the spinning will really be focused on drilling and indoor facilities required to get the production to market.

Floyd C. Wilson - Chairman, President and Chief Executive

Yes, we have ton of acreage both of those plays as we do in the Fayetteville and we are going to continue to add bits and pieces in all the plays to make our operated piece more attractive. However we are not spending very much at all these days.

Ronald Mills - Johnson Rice & Company

Great appreciated thanks.

Operator

Our next question comes from the line of Adam like [ph] with RBC Capital Markets.

Unidentified Analyst

Hi, guys, good morning little bit left over to follow up on CapEx questions. Beyond the leasehold settlements you talked about. Is there more acreage that you spent on during Q4? Can you give some us guidance on Q4 CapEx.

Floyd C. Wilson - Chairman, President and Chief Executive

Generally, it's been a nominal amount down in the Eagle Ford, this 50,000 acres we had we believe we paid for it in Q4. It's a $8 million or $10 million, $12 million since $10 we don't have very little going on in the quarter so far nor do we anticipate very much in Haynesville. So it's a nominal amount for this quarter.

Unidentified Analyst

Okay and then for 2009 of the $800 million of drilling expenditures just proportionally how much of that is to hold leases?

Floyd C. Wilson - Chairman, President and Chief Executive

We don't have any projected or additional lease until 2009. The actual number for that budget we haven't really put it out but it's not that crucial, its $830 million for drilling and completion.

Unidentified Analyst

No, what I meant was of the $830 million for drilling and completions, how much of that is to hold leases that you have acquired?

Floyd C. Wilson - Chairman, President and Chief Executive

How much of that is drilling that we will hold leases.

Unidentified Analyst

Yes.

Floyd C. Wilson - Chairman, President and Chief Executive

Oh, probably 90%, 95% we have got our lease hold scheduled out for the next several years, just to make sure they won't be dropping in leases, majority of it is going towards non spud drilling both in the Fayetteville and the Haynesville.

Unidentified Analyst

Okay, great, that's all I got. Thanks.

Operator

Our next question comes from the line of Jeff Robertson with Barclays Capital.

Jeff Robertson - Barclays Capital

Thanks, my questions were answered a few minutes ago.

Operator

Our next question comes from the line of Ronny Iceman [ph] with JPMorgan.

Unidentified Analyst

Roughly 2.5 billion spent this year on oil and gas expenditures, how much of that was for leasehold?

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

Out of the 2.5, we had on leasehold right around about $1.5 billion.

Unidentified Analyst

So, that is roughly $1 billion spent for drilling, completion, die make [ph] and facilities right?

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

Drilling, completion, ARL obligations there is other number that factor in to that capitalized overhead et cetera.

Unidentified Analyst

Okay, thank you. That's all I had.

Operator

Our next question comes from the line of Joe Magner with Tristone Capital.

Joe Magner - Tristone Capital

Good morning. Just... been hearing some reports of extended drilling times and delays and completions, waiting for adequate amounts of profit and what not with increased activities level and I guess increasing size of these wells that are being drilled now, the number of frac stages going up, what are you doing to sort of stay ahead of that curve on the proppant side, the tubular side or any other sort of critical supply you need?

Floyd C. Wilson - Chairman, President and Chief Executive

Joe as we've mentioned before, and I would like Dick to chime in here but we spent a lot of time planning the wells well before we move rigs in and that's all the way to planning for the horse power and proppant and water gathering the pipe for the well. We think we have a very good system for that and we are not experiencing any unusual delay that I have been told about this time, proppant is certainly a hot button out there and we have made some arrangements to provide the majority of our proppant for 2009, What would you add to that, Dick?

Richard K. Stoneburner - Executive Vice President and Chief Operating Officer

ot a whole lot, it is... I think proppant is the one issue that were finding hardest day to day but were succeeding at it. We are working specific relationships with a number of suppliers of both the ceramic and the resin coated proppant such that like Floyd said we are pretty confident with the rig program that we have, the operator rig program in the Haynesville that we have the vast majority of our needs already secured for the whole year. While we may have a little slippage with a frac or two because of you know specific proppant requirements, overall the program is I think very safe.

Joe Magner - Tristone Capital

And have you discussed any changes for the size of the frac stages is going to half or million pounds first stage roughly?

Floyd C. Wilson - Chairman, President and Chief Executive

It's round about 2 million pounds of the 40, 70 and about a half a million pounds of hundred mash [ph] on each given frac but that's now averaging close to 12 stages. We have extended our lateral length on most of our wells to the low 4000s and so we keep our recipe pretty straight forward with around 350 to 375 feet first stage, so as we drill it longer laterals, we will have a little up lower more stages involved.

Joe Magner - Tristone Capital

So its about 2 to 250 first stage 1000 pounds of sand. Okay and then just one other question in light of the comment about 90% to 95% expenditures next years going towards holding acreage. Can you lay out how you plan to stay in front of the gathering needs for I guess a lot wells being drilled over a broad area.

Floyd C. Wilson - Chairman, President and Chief Executive

Yes,what I would like to characterize that 90-95%, I would just say non-spud drilling, we have lot of term left on all of our leases in the Haynesville, so we are not under any gun but we are planning for future years as we did in the Fayetteville and that gathering will complete by year end. We have outlined a comprehensive gathering system, we're under construction four different areas of it already and we expect that to be complete by about the first quarter, end of the first quarter 2009.

So we have got our rigs and our wells scheduled right now, Joe and we have got gathering strategies for every single we plan to drill. In fact, we're laying pipe in some cases, six months before we're going to be in the area with rig. We think we've got a pretty good handle on that.

Joe Magner - Tristone Capital

Okay, that helpful. And just one last one in terms of the Eagle Ford. Do have any sort of goal in terms of how much of acreage you looked to put together down there?

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

Like Floyd said, the 150 net acres that we have today is probably going to be... there's not going to be a whole lot more on top that. As he said, we've got our feature leased or virtually leased. There is a few things that are...we're still negotiating with. But every lease that we see within our feature is pretty much kind of be garnered within the next couple of weeks and we'll have it all with maybe another 20 or 30,000 acres.

Joe Magner - Tristone Capital

Okay, thank you.

Operator

Our next question comes from the line of Dan McSpirit with BMO capital Markets.

Dan McSpirit - BMO Capital Market

Gentlemen, good morning. Any...on the Eagle Ford in South Texas, any restrictions with respect to the hunting season that's coming up that may limit your activity in that area.

Floyd C. Wilson - Chairman, President and Chief Executive

Some of the leases have hunting clauses in them. We don't see that there will be an impediment. At this time, we've just got one rig running down there. So we have plenty of flexibility to drill around those hunting requirements. This could become more of an issue in future years when the thing is more eventually drilled that assuming that at all of goes well, but right now its not real big issue. But I would be venture to guess it probably a third of our leases have hunting provisions on them.

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

Yes, the other thing that in kind of trade-off on those hunting provisions days that will let you bank the days on your continuous development. So it makes it a little bit more palatable when you can those days in the bank if you know what I mean in terms of drilling wells throughout the year and extending the term of that lease.

Dan McSpirit - BMO Capital Market

Got it. And then given the state of capital markets today, have you seen much by way of distressed or urgent A&D or M&A across your desk.

Floyd C. Wilson - Chairman, President and Chief Executive

We...I don't believe we see anything that we would call urgent or distressed. We hear that there is some things like that out there, but we haven't and we're not particularly looking either at this time.

Dan McSpirit - BMO Capital Market

Got it. Thanks.

Operator

Our next question comes from the line of Andrew Coleman with UBS.

Andrew Coleman - UBS

Success, hey good morning guys.

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

Good morning.

Floyd C. Wilson - Chairman, President and Chief Executive

Good morning, Andrew.

Andrew Coleman - UBS

Had a question on...tell me what's your total operated well count is approximately. I think it's around 5000 in the last year. Is that, is it going up by a whole lot this year or is?

Floyd C. Wilson - Chairman, President and Chief Executive

I don't have that number in front of me, but it won't go up by whole lot because we're drilling a finite number of wells in the Haynesville and in the Fayetteville and the Eagle Ford. So I think that our current budget rolling is going to drill about 354 wells operated.

Andrew Coleman - UBS

Finite and quite that many.

Floyd C. Wilson - Chairman, President and Chief Executive

It won't change by a lot. The large well count in that group is out in the Permian region and of course Elm Grove of our legacy Elm Grove has got, I think 700 or 800 wells in it or so.

Andrew Coleman - UBS

Okay. Then looking at the transportation cost line item that, looks like it's just kind of gone up a bit here since last year as you've kind expanded your areas. As you take more control over the infrastructure and side of the equation, did you think you have any ability to bring that cost down?

Floyd C. Wilson - Chairman, President and Chief Executive

I wouldn't think that the trend would be down in that category. I would think it would be a good job if we could keep it flat.

Andrew Coleman - UBS

Okay and is there where you put compression cost or is that going to LOE?

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

I'd say compression is a component of that and transportation another.

Andrew Coleman - UBS

Okay, all right. Great and then I guess, lastly then looking at the work over side of the equation, its only fixed $0.05 to $0.06, but as drilling activities slows down, would you expect to see any sort of increase there in the work over side of things?

Floyd C. Wilson - Chairman, President and Chief Executive

First of all, work over is sort of... most of them are really maintenance it's just normal wear and tear when things break down and we repair them. I don't think we're go in on regular basis and redo.

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

Well, now the Houston rig inflations would be the only one that that I think are something what really is substantial.

Floyd C. Wilson - Chairman, President and Chief Executive

We intend to keep that on our--

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

Yes, We're going to do that on as we faced the rays [ph] of comparable basis.

Andrew Coleman - UBS

Okay and thank you.

Operator

Our last question for today comes from the line of Chris Nicole with Morgan Keegan.

Unidentified Analyst

Can you just confirm are you still at roughly 300,000 perspective net acres for the Haynesville, or is that number increased?

Floyd C. Wilson - Chairman, President and Chief Executive

We haven't reported beyond that number and we will at some point in time.

Unidentified Analyst

So we can assume that's still growing?

Floyd C. Wilson - Chairman, President and Chief Executive

It's not growing much, that's for sure.

Unidentified Analyst

Floyd, can you have any color on the shareholder rights plan that you adopted or is that pretty straight forward?

Floyd C. Wilson - Chairman, President and Chief Executive

I think it's pretty straight forward. We had a couple days there when we had 15 million and 20 million shares trading days and we were trading at $9 and $10 a share. We just thought it would be appropriate to put in a very short duration shareholders right plan that would create the opportunity for somebody to have an orderly discussion with us if they cared to. It only goes on for a year and it's...all of components are fairly typical of it's type. Had we have not traded down that low and had those volumes to we wouldn't have even considered it because that not really our style. But it was something that we felt would be a shareholder protection device in those few weeks when things were really strange.

Unidentified Analyst

Did that result in any negotiation?

Floyd C. Wilson - Chairman, President and Chief Executive

We have nothing to report along those lines.

Unidentified Analyst

So and else can you just get a broader view that the Eagle Ford play, kind of how you generated the play concept and how those initial results came in relative to your expectations and just comment on. It seems like you're moving the play to the east. Is there acreage available to the west or did you feel like it got less prospective in that direction?

Richard K. Stoneburner - Executive Vice President and Chief Operating Officer

We think we have that all controlled. It's very discreet play based on our mapping, the quality shale is readily apparent when you study the limited but still very obvious well controlled in terms of having necessary thickness, having necessary petrophysical characteristics. So, we knew it was heading a little bit further east in our initial view of it, that was released a couple weeks ago. It was fairly going to go into McMillan County. But we think right now that we've got a pretty well control on it and that was done through, I called it old fashion exploration work. Finding a concept based on some sub-surface mapping, doing the rockwork to confirm that the rocks were conducive to the generation of thermogenic gas. And once that occurred, you'll begin leasing, drill the well and I'd say that results are very consistent. If not may be a little better than our expectations, but certainly commercial in our mind and something we're very excited about.

Floyd C. Wilson - Chairman, President and Chief Executive

Chris by the way, Dick said that we think we've got it at leased really speaking of the Eagle Fort shale, in this particular localized feature that they identify geologically. It may well be a great target somewhere else in the South Texas and probably is. But we're just speaking to this one feature that we identify there, that Dick and his group identified and by the way, I mentioned that we're going to check the pierce all [ph] in our third well. We think it's highly perspective, perhaps just as perspective as the Eagle Ford, only another 15,000 feet or so deeper.

So it's a play that we have extreme optimism for and plan to pursue with lots of activity here going forward.

Unidentified Analyst

Well, I think that adds a lot of credibility to your exploration effort, just one last question. Could you comment on what we might see as far as year end reserve impacts from the Haynesville? How do you think the reserve orders are going to take a look at the early day you're seeing?

Floyd C. Wilson - Chairman, President and Chief Executive

Well, other than to say that, that work is ongoing. We started to work and it'll have a very nice impact. We don't have any numbers to report. We expect that to have significant would have zero Haynesville on reserves at the beginning of the year and that our mid year number that we reported included. So, we would expect some significant movement given what's going on. 2009 will clearly be a huge year for reserve adds in the Haynesville also.

Unidentified Analyst

Great, thank you very much for taking my question.

Floyd C. Wilson - Chairman, President and Chief Executive

Well thanks everyone for dialing in and if we can add something, just give us call offline and we'll sign off now.

Operator

Thank you. This concludes today's Petrohawk Energy Corp. Third Quarter 2008 Earnings Conference Call. You may now disconnect. .

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