Petrohawk Is Cookin' with Gas

Last week Petrohawk Energy Corporation (HK) posted earnings for the third quarter. (See earnings call transcript).  Once again, the company came through with flying colors as production was up 37% and operating expenses hit a new low at just 43 cents per Mcfe.  When adding overhead costs, the total cost to produce gas was $1.34 per Mcfe compared to average realization prices (what the company was able to sell the gas for) of $9.68 for the quarter.  This represents a strong multiple and allows management the flexibility to operate profitably even during periods of lower natural gas prices.

The company also updated its forward guidance for production, as estimated 2009 production will average 366 Mmcfe per day.  This compares very favorably to current production for the first three quarters below 300 Mmcfe per day.  In order to fund the necessary drilling to meet these production goals, the company is guiding for capital expenditures near $1.0 billion.  Capital expenditures can be challenging in this day and age with liquidity virtually unavailable, but the company is currently sitting on $258 million in cash and is expecting roughly $620 million in free cash flow.  This leaves a funding gap of about $380 million which should be easily covered by the company’s $1.1 billion of untapped resources in a revolving credit line.

Management is committed to investing wisely toward profitable drilling, but also commits to a disciplined approach.  The ability to accelerate or decelerate its programs based on the price of commodities is listed as one of managements most important tools.  This means that if prices fall too far, management will cut back on expenditures and maintain a healthy balance sheet.  Once prices recover, the production initiatives can pick back up to take advantage of higher revenue levels per Mcf.

One of the most important factors for any Oil or Natural Gas producer is the price they receive for the commodity they sell.  Up to this point, the company has had portions of their production with relatively limited choices as to who to sell to.  Since natural gas is still not considered an easily transported fuel, the company sometimes had to accept local market prices that may have been below the published NYMEX price for the particular period.   However, at the end of December, a new gathering and distribution pipeline will come online which should vastly improve the ability to sell to a wider marketplace.  This should increase the average price received per unit of gas or oil and add to the company’s revenues and profits.

As far as hedging production is concerned, the company has the majority of production boxed with a floor and a cap which provides stability while still allowing for strong gains if natural gas prices rise rapidly.  At this point it appears that 78% of 2009 production is protected with a floor of $7.95 and 66% of the production is capped with a ceiling at $11.77.  Barclays estimates that with gas at $7.50 per mcf,  the net asset value of the company including all the untapped reserves is roughly $41 per share.

Reaction to the earnings announcement last Thursday was relatively positive with the stock closing flat on an ugly day for the market.  As of today (Monday) the stock has run into resistance just below $20 but any strength in the overall economic period could drive oil and gas prices, and consequently HK’s stock price, higher.

HK Notes

Disclosure: Author does not have a position in HK