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Petrohawk Energy Corporation (NYSE:HK)

Q4 2008 Earnings Call

February 25, 2009 10:30 AM ET

Executives

Floyd C. Wilson - Chairman, President and Chief Executive

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

Richard K. Stoneburner - Executive Vice President Chief Operating Officer

Analysts

Joseph Allman - JPMorgan

Andrew Coleman - UBS

David Heikkinen - Tudor Pickering

Rahan Rashid - FBR Capital Markets

Leo Mariani - RBC Capital Markets

Kim Pacanovsky - Collins Stewart Llc

Subash Chandra - Jeffries & Co.

Chris Pikul - Morgan Keegan

Jason Gammel - Macquarie

Steve Berman - Pritchard Capital Partners, LLC

Ron Mills - Johnson Rice & Company LLC

Michael Hall - Stifel Nicolaus

Joseph Magner - Tristone

Dan McSpirit - BMO Capital Markets

Operator

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Petrohawk Energy Corporation Fourth 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. Floyd Wilson. Please go ahead.

Floyd C. Wilson

Good morning everybody, 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 more detailed description of our disclaimer, see our press release issued yesterday ... issued today, and postpone to our website as well as our other public filings.

Today, we're recapping 2008, and we've included some information related to our course of action in 2009. I'll start by discussing some steps we've recently taken to interest of (ph) our already strong financial position and degree of predictability for Petrohawk, against the backdrop of an unpredictable financial landscape. We've been fortunate to have been able to reach this excellent financial position without any ill-timed assets sales or JVs.

Late last month, we completed a $600 million senior notes offering. We repaid our senior revolving credit facility, and we announced today that we've completed an early re-determination of that revolving credit facility. Our borrowing base was confirmed at $950 million. This is what we asked of the banks at this time, pricing and terms did not change.

We did this to further secure our ability to execute a very important capital program this year, and again, to reduce uncertainty in these uncertain times.

By the time we visit with our bank group in the fall, we'll have significant new reserves to be included in the valuation. We've also placed additional hedges on for 2010, locking in so far about 300 Mcfe per day of production at, mostly with callers ranging floors and sealing 628 to 928 per MMbtu.

We plan to increase our 2010 hedge position to about 70% of expected production. We've also included some basis hedging in our program designed to anticipate expected disruptions in the natural gas market.

Our marketing activities will be delineated in our financial statements starting with the fourth quarter of 2008, you'll see that today. Also our gathering and transportation subsidiary, Hawk Field Services will be broken out starting in Q1 of 2009.

These activities are designed to optimize price realizations and to serve our rapidly growing production from the Haynesville Shale. We are offering third party services and expect this will be a revenue generating business for Petrohawk and will further leverage our extensive and anchor position in the play.

We are also working on one of the major new pipeline projects designed to transport our additional Haynesville Shale gas out of the area. And we are confident that that project will get underway soon, we'll be the largest shipper on that line.

In the meantime, we have acquired ample transportations based on existing pipes to serve our needs in the Haynesville into early 2010.

All of these actions I have mentioned further enable us to move ahead with our exciting development program, which for 2009 is focused on our great Haynesville Shale position.

The Haynesville Shale will, has been, and will be, a powerful driver of lower operating costs in F&D in 2009 and beyond. 2008 organic F&D costs were 277 per m, a competitive number which was achieved with the Haynesville only contributing during the latter part of the year.

This attractive F&D was accompanied by triple-digit reserve growth, and in 2008, we feel will be an even, will have an even greater positive impact on our organic F&D and reserve growth.

Our Haynesville development will also continue to lower lease operating costs which is one of the most enduring measures of asset value. We've included revised guidance on our lease operating costs for 2009, adjusting our targets even lower. This already good stat is getting better and better.

We've also increased our production target for 2009 from 30% year-over-year growth to 40% year-over-year growth. This is ... we have not increased our CapEx projections. Our Haynesville drilling results and projections are more than offset in the decline, we expect to come from reduced capital spending in other fields. We're doing more with less.

Importantly, we've announced higher estimated ultimate recoveries from the Haynesville wells, based on a more mature data set, the consistency exhibited is remarkable.

We've raised our EUR estimate to 7.5 Bcfe, and the time-zero plot of this data set is included in today's press release.

Our observations also include the note that the production profile is hyperbolic in nature and consistent with other known type gas reservoirs just as we expected it would be.

I'll turn the call over to Mark right now to talk about our quarter, 2009 guidance and anything else he cares to talk about. Mark?

Mark J. Mize

Okay. Thank you, Floyd. Before I address the financial information, I want to comment on our recent high yield bond placements and as well as the few other items. Last month in January, we went out with the 300 million high-yield offering that was very well received by the market. We booked sizable book in fairly short order.

We ended up upsize in the deal and issued 600 million of high yield bonds, with the coupon of about 10.5%. At the time of placement bonds were issued at a discount, yielding about 12.75, but fairly quickly try to close the par before subsequently pulling back slightly with aggressive high yield market. They're 5.5-year term, no call three, and a portion of the net proceeds from the offering, which did yield about 535 million net to the company. We'll use to payoff all outstanding borrowings under the revolving credit facility.

Turning to the revolving credit facility, as Floyd has already stated; we did go through an early re-determination. You may recall last September, we went through a borrowing base, a re-determination that we could process with the $1.1 billion facility upon the placement high yield notes and in accordance with the revolving credit agreement, our borrowing base was reduced to $950 million.

And our next re-determination was set for April of this year, but in the first part of this month, we did initiate the reaffirmation on the borrowing base. And yesterday, we were notified by Paraball (ph), that our deal was approved. Needless to say, we're very pleased with the outcome of the process and are continuing to reinforce and in some cases, build long-lasting and solid banking relationships.

An additional item to note, which has been previously disclosed in conjunction of our high yield placement is the non-cash full cost full impairment charge of approximately $951 million that was reported in the fourth quarter as promulgated by the SEC rules, full cost companies are required to assess an impairment and full cost pool at the end of each reporting period. And then to the extent, your full cost pull that have any accumulated depletion exceeds the discounted future net revenues, all of your oil and gas reserves, not excess, must be charged to the extents.

At year-end, assuming test value of the company's reserves were calculated based on the Henry Hub price of $5.71, which by the way yields of PV10 of about 2.2 billion. And due to the effect of gas prices at year-end, the calculation did require a charge one was obviously before it.

One final item before getting into the results of operations; during November this past year, we did start a marketing company here at Petrohawk. You'll see on the gross income and extent from the face of the income statement related to this effort, and we did initiate those activities on November 1, this past year.

Turning to the fourth quarter results of operations and the financial position of the company; we did finish the year with a net debt to capital ratio of 38%, and a debt to total capital 40%. Our production came just over the mid 40s guidance, 361 million a day of that 92% of our production being natural gas. Price realizations including the impact of hedges came in at 85% and 95% in my mix for the quarter and year-end respectively. But it's just under the low-end of full year guidance.

For full year 2009 guidance, we did anticipate price realizations being between 92% and 97%. LOE only for the fourth quarter came in at $0.45 per Mcfe, which is a nickel under the low-end of guidance. We project LOE for 2009 to be between $0.36 and $0.44 per Mcfe, which does represent an almost 30% cost reduction when you compare that to where we were in the 2008 guidance.

Taxes other than income; is another metric coming in under the low-end of guidance at approximately 5% of oil and gas revenues.

Due to the shift in the operations for the company, our severance taxes are now substantially derived from volume metric calculations that have been derived based on the value of natural gas. I mean as such we've revised our guidance presentation to a current Mcfe amount versus our historical presentation as a percent of oil and gas revenue. So for 2009, we published our guidance to come in somewhere between 35 and $0.45 per Mcfe.

Gathering transportation and other came in slightly over the high end of guidance of $0.43 per Mcfe, which is primarily driven by increased production and transportation related Fayetteville. We've set out 2009 guidance at 40 to $0.48 per Mcfe.

As anticipated and stated in the third quarter earnings call, G&A ended the year above guidance $0.67 per Mcfe, which does include non-cash stock based compensation of $0.11. This was driven by a ramp-up in the operations of the company really centered around Fayetteville and Haynesville operations, and then to a lesser extent at cost that we can incurred to raise just under 3 billion of capital this past year.

Head count of the company due to the ramp-up in the operations is close to or has exceeded level seen prior to the sale of Fayetteville's properties in November of '07, but that's contributed to the 2008 number. And then for 2009 we've established to 40, $0.50 per Mcfe range for G&A, which excludes the impact of non-cash stock-based compensation.

As it's been the case in historical periods this quarter our hedge mark-to-market was a sizeable number to our operating results coming under the 173 million of unrealized non-cash gains and that's the company with the 16 million of cash receipts collected by the company, which yielded a total gain of 189 million. And has always been the case the unrealized non-cash portion of the side has been removed from our EPS calculation in our selected items table that can be found in the press release.

Just wrapping up my comments, I'm going to touch on income taxes. We've made cash tax payments in 2008 of just under 23 million. However, we either have or will be filing refunds for substantially all of those payments and expect an ultimate cash outflow, about $1.5 million related to an AMT liability.

You'll also notice as our reported effective tax rate came in at 27%, and is really driven by an adjustment to our blended state tax rate due to the ship for the operation for the company to the Arkansas and Louisiana, following the sale of the Gulf Coast property package that we had in '07 as well as the capital that we deployed in those two states in 2008.

If you exclude the impact of this onetime adjustment, our effective rate would have come in just over 39% and we're giving guidance for full year 2009 of an effective tax rate between 38 and 41%. I'll also add that the majority of any tax that we recognize going into 2009 will be substantially deferred.

And with that, I'll turn it back over to Floyd.

Floyd C. Wilson

Thanks Mark. Well, we're excited. I understand that this is a strange time to be upbeat, but our assets justify it. Based on the immense potential lodged within the Hawk, we are doing the right things to not just sustain our business but also improve it and discuss the table for years to come.

We won't back away from good business. We are out there doing it; maybe a small part of the answer to the overall negative economic situations. We have some time for questions, now if anybody has any.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Joe Allman with JPMorgan.

Joseph Allman - JPMorgan

Yes. Thank you. Good morning everybody. Could you talk about the increase in your estimate to 7.5 Bs or do you think that applies to all of your acreage, and if not is there some acreage do you think is higher than that and some acreage where you think that you guys are lower?

Floyd Wilson

Well, there is certainly, will be variations across the huge position we have in the field. This curve that we published as an average curve from the publicly released wells and this is just the average of those wells within that data set. There is a range from about 6 to about 10 or 11 Bs on a per well basis.

But the importance of this time zero play was to indicate that the decline curve so far as we expected it. And that, while this is an average of a fairly small set of wells, these wells cover quite a few miles of territory both on the ongoing structure and off of it. So it's maybe going forward, the... our entire position will average just we are not sure. But, so far that's the answer.

Joseph Allman - JPMorgan

Okay, that's helpful. And then just on the different topic, just on CapEx and cash flow, just wondering under what circumstances in 2009, would you consider reducing your CapEx and think about 2010 as well? I mean like, where could you cutback some spending if you had to just because prices are staying lower for longer?

Floyd Wilson

We are so substantially hedged already for 2010 at attractive prices that we would have to see us drift out there in the $4 range. And I don't mean this month. I mean a three year strip for us to start really scaling back. We don't see that yet.

If we see that, there is certainly are some places we could and would could cutback. We're hoping it doesn't go there. But again, as I say, we're so substantially hedged for this year and next that we tend to pick a longer view on gas prices. We would definitely be cutting back at down around that $4 range. So, that's for sure.

Joseph Allman - JPMorgan

Okay. That's very helpful. Thank you very much.

Operator

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

Andrew Coleman - UBS

Hi folks.

Floyd Wilson

Hi Andrew.

Andrew Coleman - UBS

I had a question. You guys have some excellent reserve bookings on the gas side. Would you carry to deposit at the range would it be a bit larger this year, with the higher production growth? Do you think it's going to be a safest to start with kind of consistency?

Floyd Wilson

Well, in the last several years our reserve growth has been fairly consistent with production growth. So, perhaps going forward it will be that way as well.

Andrew Coleman - UBS

Okay. And then, a question on the oil side, it was a bit under a 100%. Was that driven mainly due to pricing, or does that signal just the back to the portfolios going so much more towards gas?

Floyd Wilson

About realized prices for oil?

Andrew Coleman - UBS

No. The oil reserve bookings from your chelas (ph) that they were 83% of production, when you strip out the revisions. I am just curious about if that was a price driven thing or if it was kind of something else?

Floyd Wilson

I can't remember if we drilled an oil well in 2008 to tell you the truth.

Andrew Coleman - UBS

Okay. Fair enough. And then, also is that your spud staying over there are pretty consistent there. So, that's a real good sign. I guess do you see anything changing in your spud's velocity as you kind of increase the step-up of your Haynesville wells?

Floyd Wilson

Well, we don't really have a philosophy. We just... you dealt the cards on an SEC basis that you play with. The SEC rules are going to be changing for next year, so there may well be some differences. But, we don't drill wells to create spuds. We drill wells to convert non-proved reserves into cash flow, and whatever comes with that we'll just take it as its own.

Andrew Coleman - UBS

Okay, great. And then, last question I had is what goes into... getting your bankrupt keyed up on an early re-determination?

Floyd Wilson

What goes into that? Interest in getting that job done early year, trying to think of what all the components of that would be. They were ready to go, we were ready to go. It seemed like a good thing to do to do, beat the rush, gosh I don't know.

Andrew Coleman - UBS

Okay. Fair enough. Thank you, guys.

Operator

Your next question comes from the line of David Heikkinen with Tudor Pickering, Holt.

David Heikkinen - Tudor Pickering

Good morning. Thinking about your capital budget, and what you are investing in, how many of the wells and how much of your CapEx is discretionary, versus how much of it is designed to hold acreage in the Haynesville?

Floyd Wilson

Yeah, it really is relegated to the Haynesville, because almost everything else we own is HPP.

David Heikkinen - Tudor Pickering

Right.

Floyd Wilson

I would say a good percentage of our budget for the Haynesville is designed to hold acreage and utilize rig contracts. I don't think we figured that out. But it's probably good three-fourths of it at least.

David Heikkinen - Tudor Pickering

Okay. And so, as you think about given you've got hedges in position that one of your contracted the rigs, can you talk about what rate of returns are for your unhedged Haynesville is in today's price environment?

Mark Mize

Well, it's hard to kind of separate hedged from unhedged because it's a derivative product.

David Heikkinen - Tudor Pickering

Right.

Mark Mize

But, at $4 gas we make money with the Haynesville well. We don't hope to have $4 gas. We don't have it quite yet. But we make some with the Haynesville activities at $4. And keep in mind David that we are going to drill something like 70 or 80 wells this year out of thousands and thousands of locations.

David Heikkinen - Tudor Pickering

Yeah.

Mark Mize

So, some of what we are doing has to do with understanding the new aspects of this kind of formation in these pressure and temperatures and understanding how best to prepare for the future in terms of capacities and what not. So, it's not just the matter of reacting to a very short-term situation, and what we hope is a short-term situation.

David Heikkinen - Tudor Pickering

Yeah, and as you think about that delineating and understanding, I had seen some permits on the Texas side, do you have any well results there, either in the Bossier, Haynesville line or anything that you can talk about or even the Haynesville?

Floyd Wilson

Well, we have ... we're very active as you know. We'll put out an operational update shortly after the end of the quarter. Things are going great, I can say that.

David Heikkinen - Tudor Pickering

Are you seeing any major differences or similarities versus Texas, Louisiana state line commentary that ... is there any difference or can you talk any generalities about that?

Floyd Wilson

Well, we've just in the midst of getting ready to track our first operated well in Texas.

David Heikkinen - Tudor Pickering

Okay.

Floyd Wilson

But we are ways away from having any knowledge but, it's still close to the state lines. I can't imaging there is a huge difference between that area of Texas and the adjacent area in Louisiana. But we don't really have a lot of commentary there, where our activities are concentrated in Northwest Louisiana.

David Heikkinen - Tudor Pickering

Right. Yeah. Okay. Thanks, guys. I appreciate it.

Operator

Your next question comes from the line Rahan Rashid with FBR Capital Markets.

Rahan Rashid - FBR Capital Markets

Good morning, Floyd.

Floyd Wilson

Hey.

Rahan Rashid - FBR Capital Markets

On the cost front, as kind of pressures alleviate, what particular areas do you think you can see some reasonable cost savings? And then, with or without kind of service driven reduction in cost, is there anything happening that will systemically move the cost curve down some as well, and just some thoughts around that, please?

Floyd Wilson

I am going to ... Dick, Dick Stoneburner is here of course. And I'm going to ask him to really respond to that. We are seeing costs go down dramatically and more so even the weakest weeks (ph) than we had seen in few months ago. And certainly, we are anticipating and planning for some cost reductions through efficiencies. But Dick may be a few more specifics.

Richard Stoneburner

Yeah. Like Floyd said, it's a two fold equation. Right now, we're discussing our primary vendors, mainly our pumping companies or mud companies or tubular companies, all of those are showing significant decreases on a percentage basis, probably anywhere from 15% to 30% reduction in what we saw maybe two or three months ago. And then as Floyd mentioned, the other part of the equation is the efficiencies that we're seeing almost everyday, the group having a pretty good sample set of wells behind us.

We're seeing where we can improve on our build rates and occur. We're improving in our ROP rates in the lateral part of the well. So, a lot of things there that are being learned are also going into the cost equation as well. So, we're hopeful that throughout '09, we'll be able to drive down costs a significant amount. I really don't want to throw a big number out there, but we do see the opportunity to drive costs down.

Floyd Wilson

Yeah and keep in mind that; one, we're still doing a lot of science out here with dried (ph) holes and micro seismic and all kinds of tools that we need to move this job alone. We're also drilling longer laterals and with more farc stages. For the quarter, our average lateral length has increased, and we're intending to keep doing that.

So, in light of the costs going down and some efficiencies kicking in, we are driving wells on a relative basis to actually be more effectively cover this section. So, it's a balancing act between projecting lower costs when you are actually drilling the wells.

Rahan Rashid - FBR Capital Markets

Quite right. But on a per unit basis, definitively moving towards substantial savings that should say year-end or a year-out from now?

Floyd Wilson

We would definitely see some substantial decreases in a per well cost over the next 12 months.

Rahan Rashid - FBR Capital Markets

And once again just may be recap, of let's just say every $100 saved, do you think ... how would you split it up between just a softness in the marketplace to what systemically you are changing and I am going to throw in the longer laterals in there; I am just interested in per unit kind of thought process there. So, any thoughts, very broad brushed thoughts on that front?

Floyd Wilson

Well, it's a bit vague to think about that but the enduring cost savings will be driven by efficiencies and experience will still be subject to the marketplace with either a lower or higher cost based on how commodity prices are going. But the efficiencies will take the front seat in that in the long run.

Rahan Rashid - FBR Capital Markets

Okay, alright. Thank you.

Operator

Your next question comes from the line of Leo Mariani with RBC.

Leo Mariani - RBC Capital Markets

Yeah, good morning here folks. Obviously, you talked about Haynesville having some substantial decrease in per well cost in that 12 months, what are you guys looking at for current low cost?

Floyd Wilson

Our current well costs have been running at 10 million or a little bit more as I say we're doing a lot of science here and there. We expect that number to decrease a bit even though we are drilling longer laterals with more frac stages.

Leo Mariani - RBC Capital Markets

Okay. Speaking with the Haynesville here, I think you guys have around 300,000 net acres out there. Trying to get a sense of what that position will look like on a gross acreage basis and kind of how much of that you guys operate?

Floyd Wilson

I don't guess I have a number. It's quite a large number on a gross acreage basis. We could probably develop that in half hour with a calculator. On the operated side, I don't know how much of that we're going to operate because we continue to improve our operated position. We're going to operate hundreds of sections, so hundreds of unit.

We really haven't developed that or disclosed that because we're still in the process of anchoring our position in certain of these areas.

Leo Mariani - RBC Capital Markets

Okay. So, that's mostly through trades or fill-ins and things like that?

Floyd Wilson

Yes and yes. We're buying a little acreage. We're doing some trades. We're proposing wells. We're doing whatever we can to control the bulk of our acreage.

Leo Mariani - RBC Capital Markets

Okay. Course your price realizations here, it looks like they were a little bit lower on the GAAP side versus NEMEX in the fourth quarter you guys talked about board walk and having some lower FAS differentials that may let lower for the first quarter. To see in your guidance for 2009 was for little bit lower differentials that we've seen in the past, is that ... is anything else going on there and your basis issues other than board walk in the first quarter?

Floyd Wilson

None that jump out. Board walk is just not fully under low yet to its final destination. So we've not unloaded our gas about halfway to what our final destination would be. We're suffering the effect of that. The major component of our growth would be from the Haynesville and we are actually projecting higher realizations in the company average for just the Hayneville gas. So, I don't know if we're being cautious or something with projecting just under Henry Hub but we'll see how it turns out.

Leo Mariani - RBC Capital Markets

Alright. So what are you thinking in terms of Haynesville differentials in '09 to put a number on it?

Floyd Wilson

Well, we are anticipating moving all of our gas eastwards so that we will get essentially a slight premium over Henry Hub prices for the Haynesville gas for all of our gas from that region including Cotton Valley and so on. It's to the tune of 1% to 3% I think.

Leo Mariani - RBC Capital Markets

Okay, thank you very much.

Operator

Your next question comes from the line of Kim Pacanovsky with Collins Stewart.

Kim Pacanovsky - Collins Stewart Llc

Good morning, everyone. I guess that thinking on Elm Grove is that, the strong rates here in part related to the structure and possibly I guess natural fracturing as a result of that. Can you talk about the well you drilled in the Holly Field, the Griffith well and may be with some of the thinking is I know just one data point. But with some other thinking is on why that was such a strong result?

Floyd Wilson

Let me get Dick to answer Kim. But, we're darn good at what we do. Held quite a few wells off the structure by now.

Richard Stoneburner

That's a great question. It's one that I think three or four months ago, we had in the back of our mind as well as to whether the Elm Grove structure was dictating the quality of our results.

But, as Floyd said, we drilled a number of wells, the sample well, the 9.1 (ph) that came in at 28 million a day was definitely off structure and basically just mind final dip, hollows about the same way. I really think the answer is quality rock that we have in Northwest Louisiana, and quality completion techniques which we're fairly employing. So, I don't think tectonics is a driving factor in the success that Petrohawk has had.

I think it's been in the right spot in terms of rock quality, and completing the well in a fashion that looks it's a long-term, not saving dollars today to creating reserves tomorrow. And we've done a really good job with that.

Kim Pacanovsky - Collins Stewart Llc

Okay, great. And then, you're moving further south right now. I guess with that Timberlines well. What's the status on that well?

Richard Stoneburner

I think we're setting an intermediate, we're going to take a hard look at the bossier down there as well. I think that's something that we are very intrigued with, and have a pretty good handle on where we think it might be going. And sometime probably within the next quarter or two we'll test the bossier as well. But that well we'll be looking at both bossier and Haynesville over the course of the next couple of weeks.

Kim Pacanovsky - Collins Stewart Llc

Okay. So, you won't be completing that in the bossier, you're just going to take a look see at this point.

Richard Stoneburner

Probably just court, evaluate it.

Kim Pacanovsky - Collins Stewart Llc

Okay, great. And I guess speaking of the bossier, I mean what's the status right now on information sharing both with you guys and within the industry? Who do you have set agreements with, and could you kind of talk about that a little bit?

Floyd Wilson

Well Kim, there is still a lot of competition out here. So the... we do have sharing agreements with several other great companies, and we're trying to get some others to join the group of information sharing. Dick, go ahead.

Richard Stoneburner

Well, I think that's something that's between the group that's doing it. I will say in a general sense that I am real pleased with the response of all our peers, in sharing information that is getting technical answers out to everybody that's participating. So, but I don't think we need to go into the details of who we're working with. I think it's very --

Kim Pacanovsky - Collins Stewart Llc

Okay.

Richard Stoneburner

Very well around the group, and we're really pleased with it.

Kim Pacanovsky - Collins Stewart Llc

Great, fair enough. Thanks so much.

Operator

Your next question comes from the line of Subash Chandra with Jeffries.

Subash Chandra - Jeffries & Co.

Yes Floyd. Could you give a breakdown, I know you loved doing this on sort of production by area in the '09 guidance?

Floyd Wilson

I think we've split that out, we will. And we'll put that out. But, we haven't done it for this call. As you know Subash, most of our drilling money is going towards the Haynesville. And that's by definition, puts most of the other fields on decline. But, we'll come up with that and put it out to the entire group.

Subash Chandra - Jeffries & Co.

Okay, thanks. So, you talked about I guess, is tectonics Dick, not meaning as much et cetera. So, could you provide some sort of boundary on what you think core acreage is at this moment, from what you think the bare minimum might be, and that as a starting point?

Richard Stoneburner

See Subash, core acreage in our position?

Subash Chandra - Jeffries & Co.

Yeah, albeit 300?

Richard Stoneburner

All of our acreages would be highly perspective at this time.

Subash Chandra - Jeffries & Co.

Got you. Okay. In this a new debt with, I guess a new facility in play, so, are the existing facility give a covenants change at all?

Mark Mize

No, they did not. We just reaffirmed the borrowing base that we already had in pricing and covenants remained unchanged.

Subash Chandra - Jeffries & Co.

Okay. And the new pipeline that you're talking about, have you done, you've committed volumes, does it require any other sort of upfront capital on your part?

Floyd Wilson

Subash, I don't know that it requires it. Early on we offered to support that project with cash, a small amount of cash relatively speaking. But, first the large commitment that they are looking for is the group commitment which we've made. We'll have a better update on that in a few weeks I think. But, we're highly optimistic that we're very optimistic that that project is moving forward.

Subash Chandra - Jeffries & Co.

Any other details you can share at this time size timing or should we just wait for the release?

Floyd Wilson

Well, we'll put something at on it, but it's a well-known project in that region. It's designed to be a little bit more than a Bcf per day of capacity before any future expansion efforts would come along compression or whatever.

Subash Chandra - Jeffries & Co.

Okay. I am sorry. Yeah, it's one of those fights. I'm sorry. I thought this was some other Petrohawk specific, new one. I got the details, got it. So, I guess one final one for me. You still think that no 3D will be required, should it sounds like it, and another question on what kind of variance in per well cost you might be seeing?

Floyd Wilson

I'll get Dick to address the 3D. In the variance and well costs, a lot has to do with whether we're drilling a pilot hole or whether we're running any trouble. Some of these wells at south, the temperature gets pretty high. We might be making a few extra ships to replace tools. On the 3D, we're really behind the drive to increase the 3D coverage there.

Richard Stoneburner

Yeah we're... we do believe in the benefit. I don't know about need but the benefit of 3D is clearly there. There is not a lot of faulting, but that faulting that is there we'll be able to see. We also have modeled our 3D data for an AVO effect and we see the possibility of having amplitudes present in the Haynesville that I think will help give us a better idea as to the area like stand, if you want to call the sweet spot or the good rock.

So we're actually undertaking approximately 300 miles into the lead underwriter or issued over the Elm Groove cost beyond area. One of our, the other major companies in the area is undertaking issue with VERITAS and we're underwriting it to a certain extent. So we will, we basically seen enough 3D projects underway out there to have essentially all of our Northwest Louisiana acreage covered probably within the next 12 months.

Floyd Wilson

And Subash, by the way the whole region will be covered within the next 12 or 18 months. It's inevitable and it's ongoing.

Subash Chandra - Jeffries & Co.

Got it. Okay. Thank you.

Operator

Your next question comes from the line of Chris Pikul with Morgan Keegan.

Chris Pikul - Morgan Keegan

Yeah, thanks. Good morning, Floyd. Just couple of bookkeeping questions. Can you give us any guidance on DD&A and interest expense here in '09?

Floyd Wilson

As far as DD&A is concerned, obviously we do not give formal guidance on that. But I can tell you though directionally speaking we would expect that rate decline for no other reasons due to full cost impairment that was taken of just under a billion.

And with regards to interest expense, all of our high yields sticks. So we don't give guidance on that because that's a predictable number to calculate. Obviously the variable would be where we end up drawing under revolving credit facility. But our utilization grid did not change so that will be L plus anywhere from 125 to 200.

Chris Pikul - Morgan Keegan

Fair enough. That's helpful. Thank you. Just sort of the big picture question, what might we expect in terms of your ability to book reserves under these new rules at year-end, given your resource properties, what kind of impact do you see that having? Is it very material or can you just give a comment on that?

Floyd Wilson

No, it's uncertain exactly how that will get applied. And I would say it will be material but we really don't have a good way of knowing how it's going to be at year-end 2009 yet. If you just look at basic outlines that we've been given as an industry, it's a significant departure from the rules that were in place in 2008.

Chris Pikul - Morgan Keegan

Yeah, okay. And just to be clear the 13.7 Bcf you talk about in the Haynesville, what sort of kind of risk factor does that embody?

Floyd Wilson

We've over risk it way too much, but internally we're using a 65% piece of that.

Chris Pikul - Morgan Keegan

Alright, good to know. And then, can you give us an update on what's going on over the Eagle Ford?

Floyd Wilson

Dick.

Richard Stoneburner

Yeah. We've just racked our third well. We're not in a position to talk about it right now, but we're encouraged. We're drilling our fourth well. We'll bring another rig in right first quarter or early second. So, it's all progressing extremely well. I'm very encouraged and we'll be talking more about it at the end of the first quarter.

Chris Pikul - Morgan Keegan

Will you be running two rigs in that area?

Richard Stoneburner

Pardon me?

Chris Pikul - Morgan Keegan

Two rigs in that area then for '09?

Richard Stoneburner

It will be that way around the beginning of the second quarter.

Chris Pikul - Morgan Keegan

All right. Great. And then lastly; Floyd, as you ramp production into depressed gas market, it seems like you're optimistic about rising prices in the future, even though you're actively hitting the 2010 hedges. Can you just kind give us a brief overview of where you see the gas market going relative to how you think this Haynesville resource will payoff for you?

Floyd Wilson

You mean where I see the gas market going?

Chris Pikul - Morgan Keegan

Yeah. Well, the way you're structuring, you're going to drill through this period of low prices, obviously in anticipation that perhaps better realizations going forward. Whether or not, that's all hedged in 2010 or just kind of, yeah, just sort of give us your overview of where you see the gas market going?

Floyd Wilson

Well, my opinion is not worth a nickel, but I'll give it to you. The gas market is going to be softer a bit here. And we don't know when that's going to change. This recession is deep and it's harmful. As I've said before though, we are in the early stages of a multi-decade development here, but very important national resource or national asset, and we don't intend to let short-term thinking drive our activities here.

Having said that, we are hedging like crazy wherever it's appropriate, where we think that we're securing our ability to do what we're doing. And we just don't think that the gas price is going to be this low forever. Now when it turns around, I don't know; late this year, next year 2011. What I do know is, we'll still be drilling wells during 10 or 15 years and we need to set the steam for that. And we still make money at these low gas prices.

So, I know from the textures of some of these questions, a lot of people don't like that idea, but this is a great business we've built here. We're not ... as I said earlier, we're just not going to back off from a good business.

Chris Pikul - Morgan Keegan

Actually that's very helpful. Thank you for your time.

Operator

Your next question comes from the line of Jason Gammel with Macquarie.

Jason Gammel - Macquarie

Thank you. I wanted to ask a question about the change in the assumed recovery per well. It was wasn't it this directionally related to your assumption that you're going to be drilling a longer lateral with future wells, and just accessing more rock or, is most of the assumption in recovery related to just a higher recovery resource in place?

Floyd Wilson

Let me clear that. This time-zero plot is based on the wells that we've already drilled and have the actual data on. And that group of wells is going to average in our opinion about 7.5 days per well as opposed to the 6.5 the guidance that we've given in the past. We have drilled these wells miles and miles apart in many cases so that it does cover a large area. It may well be that on a go forward basis all of our activities will be that way.

We are suggesting though that 7.5 be, is a reasonable target for us to put out informationally as our expectation for an average, for the field and our areas that we're going to drill in.

Jason Gammel - Macquarie

That's exactly what I was looking for. And Floyd is 4500 foot lateral with 15 frac stages still sort of what you're targeting on what the optimal well could be in the play?

Floyd Wilson

Dick, respond of that.

Richard Stoneburner

It is, and it's been an evolutionary process, mainly dealing with the surface land owners out there. They're getting a lot more reception to the idea of drilling on the adjoining section and billing the curve, entering the Haynesville at the legal location of the section that we'll be producing from, which if you basically take a mile long opportunity and take 660 feet off a bit year around, 4600 feet. And just actually saw a whole set of AFEs coming across, we're drilling that more often.

So yes, on a go forward basis, we're going to continue to try and do that wherever possible. We're not going to be able to do it on all locations, but we will have some good results to report on within the next several months on how that's working.

Jason Gammel - Macquarie

Great. We look forward to that. Maybe one more if I could, please; just on the borrowing base re-determination, the revolver balance reduced by 150 million but the total debt outstanding was obviously taken up by the term debt issuance. Could we also kind of look at that as the borrowing base re-determination might've resulted in 400 million more of capacity on the revolver itself, had the term debt not initiated?

Richard Stoneburner

We didn't run that scenario so that'd be a hard question for us to answer.

Jason Gammel - Macquarie

Okay, fair enough. Thanks, guys.

Operator

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

Steve Berman - Pritchard Capital Partners, LLC

Hey, good morning. Most of my questions have been answered. I would like to ask a few on your new revenue lines. The marketing number for the fourth quarter was ... when exactly did that start? Just trying to get a sense for what this might look like on a quarterly basis for the four quarters in '09.

Mark Mize

I think I made a comment on that. That activity actually started on November 1.

Steve Berman - Pritchard Capital Partners, LLC

November 1, I heard the November, I didn't hear the 1st.

Mark Mize

Okay. That's two months actually.

Steve Berman - Pritchard Capital Partners, LLC

And then any sense for what this might look like going forward and just in terms of size and is this margin, at least in this first quarter, indicative of what it might look like going forward?

Mark Mize

At this time, I would say the results that we reported at year end are going to be some what indicative of what we would expect going forward. But we get the first quarter behind us we'll, obviously have more information at that time.

Floyd Wilson

Art Seagal (ph) is in here. Art, do you have a comment on that?

Unidentified Analyst

Just as more gas comes out of the ground we'll be making more money.

Floyd Wilson

Okay.

Steve Berman - Pritchard Capital Partners, LLC

Can you repeat that? I didn't hear that.

Floyd Wilson

He said, Steve he said, as more gas comes out of the ground we will make more money.

Steve Berman - Pritchard Capital Partners, LLC

Okay. How about there is a second line item that you are going to, if I heard you correctly, you're going to report as another revenue line. Can you talk about that a little more maybe some going forward thoughts there?

Floyd Wilson

Mark will address that specifically but that line item is for Hawk's field services as they are gathering subsidiary which principally is laying extensive gathering systems in the Fayetteville and in the Haynesville, gathering and trading facilities and perhaps in the future compression.

So, we have an ambition there to of course, serve all of our own needs and pick up some third party business just by virtue of laying pipe in an around other people's operations. Mark?

Mark Mize

I don't have anything to add.

Floyd Wilson

We will know a lot about that going forward but we expected to be a revenue generator.

Steve Berman - Pritchard Capital Partners, LLC

Yeah. And just one factual question follow-up here in term ... I mean as is this something if you didn't have all the hedges on that you would even be drilling now because I mean that the differentials up there are just very high to put it kindly and it's ... I am just want to get more of your thoughts Floyd going forward here, where do you think that might be going?

Floyd Wilson

Steve, we've been waiting for so long for this Boardwalk completion and we have experienced a significant basis difference on that area. When Boardwalk is fully operational, which we expect to happen during this quarter, or hope to have it during this quarter, we expect to achieve a near Henry Hub pricing for that gas as well.

It's ... in all of our major areas we try to market our gas away from the local market and into markets that track Henry Hub and that's no exception.

Steve Berman - Pritchard Capital Partners, LLC

Is this gas going to be ... find its way to the Eastern markets, is that why you think you can get NEMEX pricing?

Floyd Wilson

Yes.

Steve Berman - Pritchard Capital Partners, LLC

Okay.

Floyd Wilson

Yes. I mean we're in contract with Boardwalk and we have deliveries in Lebanon, Ohio and it's causing which is substantially hyper and mid-continent pricing that we are receiving on a portion of our gas right now. We're expecting Boardwalk in the last we talked with them, to be operational somewhere in March.

Steve Berman - Pritchard Capital Partners, LLC

And can you say how much capacity you have on that expansion?

Floyd Wilson

I think we have sufficient capacity to take care of all our expected production for the foreseeable future from the Fayetteville. We've got some other space on the CenterPoint system I believe, and some on Boardwalk that both achieve about the same price result.

Richard Stoneburner

Yes, that is correct.

Steve Berman - Pritchard Capital Partners, LLC

Okay. Thank you.

Operator

Your next question comes from the line of Adrel Askew (ph) with Hartford Investment Management.

Unidentified Analyst

This is Adrel Askew. Could you talk a little bit about approach for 2010 hedging program coming into the year, and because I guess given your price outlook?

Floyd Wilson

We've been, the group here that runs at is managed by Larry Helm. And the way that we've been approaching that, we've been looking for points to add hedges for the future. Usually this involves some volatility in the marketplace. And we find a time when the new hedge that we add doesn't dilute existing packing of hedges. So, we will just put some more on.

Our overall target is to be 70% or a little bit more hedged of what we expect to produce for the next two years. We were nearly 70% hedged for 2009. But, we've increased our production target this year. So, on a percentage basis we're little less hedged.

For 2010, we intend and hope to increase our positions to about the same 70%. And 6/9 or 6.25/9.25 very attractive levels, given the current circumstance and the supply demand picture.

Unidentified Analyst

Do you have a requirement that needed on credit agreement and minimum requirement there?

Floyd Wilson

Larry is shaking his head. No, I don't guess, I understood your question. But, I guess the answer is no.

Unidentified Analyst

Is there a minimum hedge requirement on the credit agreement?

Floyd Wilson

No, no, no.

Unidentified Analyst

Okay, that's helpful. Thanks.

Operator

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

Ron Mills - Johnson Rice & Company LLC

Good morning. I think there is one question left. On the pipeline situation you talked about in the Haynesville, how does that compared to it looks like at least in your 10-K you talk about a Bcf a day of gallon capacity including your trading facilities, given that you would be the lead shipper on the new pipeline, what kind of firm transport would you have heading to the east side of your Haynesville?

Floyd Wilson

Right now we've got capacity arranged to get out this area of up to about 750 a day for this year. We're building the system in the field to handle a Bcf a day for this year. It will be expandable. The additional capacity which is, it's no secret, it's on the regency line?

Ron Mills - Johnson Rice & Company LLC

Right.

Floyd Wilson

That's to be built. I think we've committed to 400 million a day with a pro rata share of any future expansion. And we may, if there is a bit less there, we may commit for a little bit more. But, we think we are in awfully good shape, going from 2009 into 2010.

Ron Mills - Johnson Rice & Company LLC

Okay. And either for you or for you Floyd or for Dick, any appreciable change in the way you all are completing the wells, not just lateral lengths and number of back stages. But, in terms of your frac designs from your last update, it sounds like you are using anywhere from 9 to 12,000 barrels of slick water and 250 and 200,000 pounds of sands. Are you all pruning in on that technique, and as it relates to the carbon, how are you in terms of locking up supply for your 2009 program?

Floyd Wilson

We've got plenty of carbon supply lined up for 2009. I'll let Dick answer about the specifics of the fracking. But, we are... our crew, our staff that is very, very good in that area are constantly tweaking their sox. But we do have a successful process that we're following at this time. And Dick will you?

Richard Stoneburner

Yeah, it haven't changed much Ron. It's about 80,000 pounds under measure and about 200,000 pounds of 40/70 first stage about 12 stages. I think each stage has around 12,000 barrels trying to stay away from jail, and for the most part we are. So, slick water 100 mesh, 40/70 pretty much the same recipe we'd be doing almost from the start.

Floyd Wilson

So, it's mainly resin coated, occasionally some ceramic. But, there is just a not a lot of that available right now.

Richard Stoneburner

Exactly.

Ron Mills - Johnson Rice & Company LLC

And it seems like the resin coated has delivered good enough results anyway.

Floyd Wilson

We're very comfortable with resin.

Ron Mills - Johnson Rice & Company LLC

Okay, great. Thank you guys.

Operator

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

Michael Hall - Stifel Nicolaus

Thanks. Just... most things having been covered. Just real quick on the increase and production outlook. How much of that is, it wasn't totally clear. How much of that is increased efficiency assumption as opposed to decrease cost assumption sand therefore increased activity?

Floyd Wilson

Actually, we haven't not programmed any efficiency into that. This is just a result of the drilling the same number of wells with... our historical results have been higher and we had expected so they are just yielding better higher rates.

Michael Hall - Stifel Nicolaus

Okay.

Floyd Wilson

If we end up drilling more wells at the same amount of money, that would change as well but we're not projecting that at this time.

Michael Hall - Stifel Nicolaus

Would that be your reaction to lower costs would be drill more wells or would it be a reduce spending?

Floyd Wilson

Well, it's hard to say we probably intend to drill how many wells we intend to drill this year. And so that would tell you, we might spend little less if the efficiencies were significant enough. It's a hard thing to answer until it's really until, it's almost already happened.

Michael Hall - Stifel Nicolaus

Fair enough. And then on the profit, can we get back on that. You don't think there is any long-term risk that resin got to chanced the whole up as we get out into the further years tails on these wells?

Mark Mize

No, we really don't. The test on this propane is far exceeds the bossier stress, that's going to be placed upon it. So, I mean ceramic is a great product and appropriate for all that probably run it, but we're very comfortable with the resin.

Michael Hall - Stifel Nicolaus

Okay. And then finally, and the borrowing base any, I don't know if you've provided it the price assumptions that we use there?

Floyd Wilson

You are asking what --

Michael Hall - Stifel Nicolaus

On re-determination.

Floyd Wilson

Price that used by the bank?

Michael Hall - Stifel Nicolaus

Yeah. And any average or anything?

Floyd Wilson

We haven't provided that. But as you might guess, it was considerably lower than they were last re-determination.

Michael Hall - Stifel Nicolaus

Okay. Good enough thanks.

Operator

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

Joseph Magner - Tristone

Good morning, thanks. In recent release you talked about a pilot that you're working on to chill back the rates on some of these wells for an extended period of time. Can you give us an update on that pilot and some other things that you hope to learned from it?

Floyd Wilson

Yeah. We can. I think we've abandoned that pilot. It become pretty quickly evident that from a reserve angle we weren't going to really see any better results in terms of ultimate recoveries. And on a PV basis it wasn't nearly as well as just producing these wells. So, we are back to following our standard practice of cleaning up the wells quickly and then achieving a choke size and a flowing rate and pressure rate, it's all conducive with proper production practices out there. Dick anything to add?

Richard Stoneburner

No, no. It's exactly right.

Joseph Magner - Tristone

I remember one point. Part of the reason then have been to not overrun gallon and take away, but it sounds like you're comfortable with where you have wind up there? I don't know if there is an icepack map published recently by a small player in the region based on some work that core labs have done. And that shows that perhaps some of the thickest areas that shale may not be drilled yet. Do you agree with that? And have you learned anything new in the well that you have drilled with respect to what you're seeing on from the ability across your financial fracturing that would maybe not necessarily tie results, better results to ultimate thickness?

Richard Stoneburner

I'll get back to the comment about the quality of the rock that we've seen across all of the areas that we've drilled so far. So, there is no surprises in terms of whether it would be fracturing or natural from ability and porosity that we haven't seen pretty much from the group for that we've taken in all the data that we've accumulated over the months.

If you are referring to the thickest of that in Northeast Texas that is an area that we certainly haven't drilled a lot in and it had been tested. But I guess I am really not picturing the comment that the thicker areas haven't been drilled yet.

Joseph Magner - Tristone

Look at the map, it looks like maybe up to the Northeast where you guys or folks watered efforts so far, there might be some thicker regions?

Richard Stoneburner

I don't know about that.

Joseph Magner - Tristone

Okay.

Floyd Wilson

We'd be surprise of that one, but I can say that we wouldn't much more to rely much more heavily on a quality set of rock and well bore as opposed to thickness and a good completion technique has been the two main drivers. The thickness is nice to have but so far we've seen that the very thickest wells don't generally have the same quality as some of the wells aren't quite as thick.

But that's ... I mean, it's early days, who knows.

Joseph Magner - Tristone

Okay, thanks. In relation to changes you made on the per well EURs, Have you adjusted your spacing assumption?

Floyd Wilson

No.

Joseph Magner - Tristone

Okay. I think on your regularity efforts underway in Louisiana to perhaps allow for longer laterals to be drilled in areas that you might have ... where you might have continues acreage, and that could be undertaken?

Richard Stoneburner

Nothing I'm aware of.

Floyd Wilson

There is a procedure where you can apply for a larger unit. But you normally have to have a good reason to do it based on surface conditions. It's certainly not streamlined as it is up in the Fayetteville to drill across these lines and so on. I don't ... we don't anticipate getting that improvement anytime soon.

Joseph Magner - Tristone

Okay. And just one last one, Hawk Field Services, is that subsidiary ... is that something that you're going to have the financials independently audited for aside from Petrohawk corporate results?

Mark Mize

That's actually something that have been discussed internally. There aren't any plans right now to have an independent audit done. It is a wholly owned sub of the company and the financials will clearly show the results of the organization what's there broken out in the Petrohawk filings.

Joseph Magner - Tristone

Okay. Fair enough. Thanks.

Operator

Your next question comes from the line of Dan McSpirit with BMO Capital Markets.

Dan McSpirit - BMO Capital Markets

Gentlemen, good morning. Further to Joe's question on development spacing; based on what you know of the rock qualities of the Haynesville and your growing sample set of drilling results, what can you tell us about development spacing going forward here as this play begins to scale? And in 2009, specifically, will you test 80 acre spacing?

Floyd Wilson

We just don't have the latitude to down space a section with fully this year, we're making sure that we're covering our acreage and so on and so forth. The early work that was done, reservoir work that was done indicated 80 acre spacing would be about right. We're hoping that it with longer laterals and effective frac jobs. We could increase that spacing to 100 or something like that, and actually drill fewer wells overtime.

It's early days, and until we have a good set of sections that are really drilled tightly and communicating, we really won't have that answer theoretically. The theory is, it is 80 acres but if you could figure out a way to drill two or three fewer wells per section, you'd make a real economic success out of this play if you could do frac techniques and longer laterals et cetera.

Dan McSpirit - BMO Capital Markets

Got it. And forgive me if this next question has been answered, but the rig market in the Haynesville today and at least in North Louisiana, what are you finding for? What do you see for rig availability and knowing that you all had your rigs tied up for the immediate future, but in terms of day rates, what's the going rate today?

Floyd Wilson

Drilling rate's dramatically less than it was. I don't think it's quite 50%, but it's fairly 35% or 40% less than in it was. We're ... rig availability is not a big problem today.

Dan McSpirit - BMO Capital Markets

Got it. Thank you.

Operator

Your next question comes from the line of David Snow (ph) with Energy Equities Incorporated.

Operator

Mr. Snow, your line is open.

Floyd Wilson

He must have left, as I guess this is getting boring. So, I think with that we'll conclude the call. Thank you everybody for joining. If you think of something we didn't cover, give me a call, and we'll talk again soon.

Thank you.

Operator

Thank you. That concludes today's conference call. You may now disconnect.

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Source: Petrohawk Energy Q4 2008 Earnings Call Transcript
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