Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Petrohawk Energy Corp. (NYSE:HK)

Q1 FY08 Earnings Call

May 7, 2008, 9:00 AM ET

Executives

Joan Dunlap - VP, IR

Floyd C. Wilson - Chairman, President and Chief Executive

Richard K. Stoneburner - EVP and COO

Mark J. Mize - EVP, CFO and Treasurer

Analysts

David Heikkinen - Tudor Pickering Holt

Joe Magner - Tristone Capital

Tom Nowack - Merrill Lynch

Ron Mills - Johnson Rice

Steve Berman - Pritchard Capital Partners

Leo Mariani - RBC

Andrew Coleman - UBS

Operator

Good morning. My name is Carmen and I will be your conference operator today. At this time I would like to welcome everyone to the Petrohawk Energy Corporation First 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].

I will now turn the conference over to Ms. Dunlap. Please go ahead.

Joan Dunlap - Vice President, Investor Relations

Good morning. This conference call contains 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 yesterday and posted to our website as well as our other public filings. In addition to our first quarter earnings release, our company issued two additional press releases yesterday relating to an equity offering and a debt offering that we are currently conducting. Due to SEC regulations involved, we are not at liberty to discuss the subject matter of either of those releases.

I'll now turn it over to Floyd Wilson.

Floyd C. Wilson - Chairman, President and Chief Executive

Good morning everyone and thanks for joining. Today we'll discuss our strong first quarter and an increased capital budget which includes a significant component for the Haynesville Shale play in North Louisiana and East Texas. We've also begun large scale development of an oil resource play in Oklahoma and of our James Lime and Travis Peak position in East Texas. These activities all contribute to our continuing program of building a concentrated high quality low risk and low cost resource inventory which today includes some 13,000 drilling locations equating to a bit over 10 Tcfe of risk non-proved potential. It's impressive to me that just six months ago that number stood at less than half of that.

In the Haynesville Shale, Petrohawk has ceased a rare opportunity. Over the past year we have accumulated a large amount of data on the Haynesville Shale, and we believe the attributes for success in the shale play are all present. And now we have commenced a very aggressive drilling program. We have acquired or have commitments for over 150,000 net acres in this play.

Petrohawk comes into the Haynesville... came into the Haynesville Shale play with approximately 40,000 net acres already in hand in Elm Grove, Longwood and Joaquin. Leasing in this area is highly competitive. The tough competition is a natural outgrowth of the potential of this play.

We're in an awesome position here. We have several early mover advantages. We're leveraging our experience in the Fayetteville Shale to evaluate and plan a significant ramp-up activity in the Haynesville Shale. We have proven our ability to successfully drill and complete technically challenging horizontal shale wells. And we've shown that we can get a large scale development up and running quickly. We have analyzed approximately 50 Haynesville specific data points and with our program at Elm Grove we're in extremely active driller in the area already. We have infrastructure advantages that will play a key role for us.

We're well staffed. We have excellent relationships with service providers and the local community. We are known in the area for fair dealing experience and fast action not to mention above average results. We are bringing it all to this play.

Our revised 2008 budget now set at $1.3 million, up from $800 million includes $384 million allocated to land acquisition and drilling in the Haynesville. We estimate that at about... that about 2500 locations exist on our current acreage position yielding an estimated 6.1 Tcfe in risk upside total resource potential as we sit today and I hope to more than double this acreage position over time.

The potential for the Haynesville alone has the ability to eclipse by several times our current size. I'll add that if you are a land owner interested in leasing your Haynesville rights, please get off this call now and contact us at 318-987-7560 we'd like to talk to you today.

Switching over to the Fayetteville Shale, we have a program that is growing fast. Much of the risk has been taken out the play over time and what we are seeing now are upside drilling results and efficiencies and I believe the limit to these efficiencies is yet to be found. As Dick will detail for you, costs are down and IP rates are up quarter-over-quarter truly what you like to see in a play.

We believe that almost all of our acreage here will be productive. Costs and results vary with depth. Days to drill have been reduced to 12 or less on average and completion techniques have continually been refined over the past several months. These efficiencies are being seen by most of the operators in the play signaling the maturing of the science driven phase of the play and a transition to optimization.

Our net production in the Fayetteville has risen to 43 million cubic feet equivalent per day, that's an 800% increase over a year ago. We have made gathering efficiencies and takeaway capacity priorities in this play and elsewhere. In the Fayetteville, we are well into our 2008 project to lay over 100 miles of pipe in the area which we believe will have a major impact on long term price realizations.

Today we're adding two new resource plays to our discussion. In addition to the Haynesville, the first is the large scale redevelopment of an oilfield called the West Edmond Hunton Lime Unit or WEHLU near Oklahoma City.

WEHLU has been a great... has historically been a great field and covers over 30,000 acres. We're well underway with our plan to redevelop this field as an oil resource play bringing new technologies to an existing field to accelerate and create value. The second new resource project is our James Lime/Travis Peak position in East Texas.

Our leasehold will be developed through a joint venture with EOG covering about 30,000 net acres. This joint venture is an ideal way for us to optimize personnel and resources and acknowledge the high potential in this area and acknowledge our partners' expertise there.

Now a few comments about production. We grew first quarter production by 10% quarter-over-quarter and pro forma for the sale of our Gulf Coast Division and we project that in the second quarter we will grow production by 9% over the first quarter. So we're off to a great start in terms of production for the year.

As for full year production guidance, we're currently projecting over 25% production growth for 2008 and we utilized 28 rigs to accomplish this and drill nearly 700 wells. Our 2008 plan calls for rig additions in the Haynesville to occur as the year progress with production increases to follow. As we have done in other areas, we've worked the science in all of the early wells, I feel like our presence here requires a long-term focus. We directed our staff towards refining, drilling and completion techniques and to take the time they need to analyze all data. We'll revisit our production goals later this year as results dictate and report on that.

A brief comment on services, we have been extraordinarily well served by some of the best service companies in the business, continue to be well served by them. Demand for good drilling and frac crews is increasing. There is also a bit of shortage in some tubular goods and the general tightening in the market for drilling rigs in certain areas especially those rigs with top drive.

While we are getting what we need to accomplish our 2008 plan, things are a bit tighter than they were a few months ago. Service costs have crept up a bit so far neutralized by efficiencies. We will continue to monitor situation but at this time we don't see any problems in executing this 2008 program.

We've recently taken advantage of strong oil and gas prices to increase our hedges. We believe that locking in pricing that will allow us to move forward with our capital program is an important piece of business for us. We focus dually on hedging and price realizations to attain high margins. Geographic location and concentration of our assets, aggressive views towards controlling infrastructure, and diligent market arrangements are among the reasons that we post natural gas price realizations comfortably above NYMEX quarter after quarter.

Now that I have taken credit for just about everything that he and his staff have accomplished, here is Dick Stoneburner to offer more detail on operations.

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

Thanks Floyd. As Floyd mentioned the first quarter of 2008 was another strong quarter of organic growth for the company. The drilling programs in all of our core areas continue to achieve excellent results as well as a few other areas where Petrohawk positioned itself to accelerate growth.

In the Fayetteville Shale trend we drilled a total of 62 wells, 26 of which were operated, of the 26 operated that were drilled we've conducted state tests on 18 of them. Our comparison of the productivity and cost of these wells with wells tested during the fourth quarter of 2007 provides excellent support for the improvement we have seen in the play, as Floyd previously mentioned.

The average state test volumes have increased 20% quarter-over-quarter while completed well costs have decreased 12%. During the quarter, we've operated 5 horizontal rigs and one spudder rig. We will be adding our 6th horizontal rig later this month and add a 7th horizontal rig by mid year. We'll continue to expand our drilling program to extend across the full breadth of our acreage position in order to fully test the block and accelerate those areas provide... that provide the best economic returns.

All in all, I would state that we have achieved very quickly a highly productive program with a relatively low number of what I would call research and development wells. In the Elm Grove field, we've continued our core drilling of vertical wells in the Cotton Valley by utilizing three vertical rigs but also employed three horizontal rigs and completed three horizontal wells during the quarter.

We completed one well in the Cotton Valley Davis section at initial rate of 4.5 million a day. More impressively, we completed two Lower Cotton Valley Taylor wells for 13 million and 6 million a day. We also have two Lower Cotton Valley Taylor wells that recently reached total depth and should be completed within the next 2 to 3 weeks. We continue to commit two horizontal rigs drilling at Lower Cotton Valley Taylor wells throughout the year. In addition to our Cotton Valley program, we continue a fast paced, Hosston recompletion program using efficient and low cost completion methods with the emphasis being on the underdeveloped aspects of the lands in our recent acquisition.

These properties are your largely untested in Hosston and provide numerous high quality recompletion opportunities. We have scheduled three Hosston recompletions per week for the balance of the year which should increase production significantly.

In the Terryville field, we are currently operating 5 rigs, 4 which are developing our core Lower Cotton Valley and Bossier locations, and one is drilling a Gray sand test on our recently acquired Terryville extension acreage immediately west of the core Terryville assets.

We continue to experience excellent results in the area of the Bossier wedge. We completed 12 wells during the quarter... in the quarter in this area, and after commingling Bossier sands with Lower Cotton Valley, our average initial production rates were 4.6 million a day. We also logged the offset well to our recently Gray sand discovery. The well had a very well developed Gray sand section and will be completed in the very near future.

Our program for the balance of the year, we focus on continued development of the Lower Cotton Valley Bossier play in the central portion of the field as well as expanding the development of the Terryville extension. We should have our newly acquired 3D data over the extension area by late third quarter, early fourth quarter which should provide a much clear path of development as we plan our 2009 program.

Outside of these three primary core areas of development, we've advanced the development of several other significant plays. In WEHLU we completed our first horizontal test in our operated portion of the field. The well had initial production rates of 360 barrels of oil and 750 Mcf a day or 2.9 million equivalents per day. We are very encouraged by this result and have increased our 2008 budget for this asset in order to accelerate the development.

We have also executed a definitive letter of intent and are in the final stages of generating a joint venture agreement with EOG Resources whereby each company will contribute its acreage position within the Nacogdoches and Shelby Counties, James Lime and Travis Peak play.

EOG will be the operator and we'll work closely together to generate a valuable development program on this significant acreage position. And last but not the least we have been extremely active in the Haynesville Shale play. As Floyd mentioned since our announcement of our involvement in this play in early march, we've increased our position from around 40,000 net acres to approximately 150,000 net acres. We are currently drilling our first horizontal well and expect to spud our second well by the middle of May. We've been adding rigs throughout the balance of the second and third quarters and expect to have 5 to 6 rigs running by the fourth quarter. Additionally we are actively working in the midstream aspect of this play in order to ensure our ability to move these potentially large volumes of gas.

With that I'll turn the call over to Mark Mize.

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

Thank you, Dick. As evidenced this morning by the comments from Dick and Floyd, and which should be further supported by our financial review we are off to a great start in '08, and we believe we've really set the stage for what's going to be a tremendous year for the company and shareholders.

Before we jump into the results of operations, couple of items that I'll touch on. In the fourth quarter of last year we closed the divesture of the Gulf Coast Division and in conjunction with that we collected cash of $700 million as well as note receivable. I am pleased to say that note has been collected in full to the tune of $100 million. And we did apply the majority of that cash collection to reduce our revolving credit facility.

Another note, earlier this week we actually made the decision to go ahead and pull the Form S-1 registration statement for the anticipated MLP that was going to house a portion of our Western region assets. In the second quarter we'll have a charge somewhere in the neighborhood of about $3.5 million which represents monies that were substantially spent in 2007 related to the formation of the MLP and the filing of the S-1.

Turning our attention to the results of operations, I am really going to focus my comments on the highlights of the current quarter, touch a little bit on '08 guidance but stay away from any quarter-over-quarter discussions just because of the transformation the company has really gone through in recent months. We did generate revenues this quarter of about $215 million, about 90% being driven by natural gas and as has already been discussed on the call, we did exceed the high end of our production rate coming at 261 million a day, which is about 24 Bcfe for the quarter.

We did continue to recognize very attractive price realizations as Floyd had commented coming in at the high end of NYMEX and guidance, and more importantly with the oil coming in far north of NYMEX and 104% for the quarter. We continue to maintain an impressive LOE per Mcfe metric of Q1 coming in. About $12.4 million or $0.52 per Mcfe which is at the low end of our annual guidance. All other operating cost metrics are either in line with the full year '08 guidance that we published or under the low end with the exception of G&A.

G&A per Mcfe is currently running at about $0.57 excluding the non-cash stock-based comp charges and all inclusive it is coming at about $0.68 per Mcfe. Annual guidance was published at $0.45 to $0.55 with the elevated reported Q1 metric really falling in line with earlier expectations just due to the fact that we sold the Gulf Coast in Q4 of '07 which is about a third of our daily rate production and we saved 22% to 25% of G&A. We do continue to believe that the '08 guidance is good and we expect this metric to fall in line with that guidance just to ramp up our production throughout the year.

We do continue to recognize an effective tax rate of approximately 37% and expect to be in an AMT position in '08 with the only gain of any or tax bill of any significance being a small portion that relates to the Gulf Coast sale. All this being said, our reported loss which was really driven by the derivative mark-to-market liability flips to net income of $29 million when you exclude the non-cash mark-to-market effect and puts us on a diluted earnings per share of $0.15, which is in line with consensus estimates. From a cash flow perspective our diluted per share metric of $0.72 beating the consensus estimate of $0.70.

Before turning to the balance sheet to talk a little bit about our revolver capacity and position, I will add that as we go into the quarters that the Q2 and Q3 quarters in '08 we continue to focus on the operational control and takeaway capacity of our company in some of these new areas. There will be a little more financial visibility given to that activity as it becomes the more significant piece of our business as you can expect to see that in future filings and earnings releases.

As far as the balance sheet is concerned and more specifically our debt levels we did in the quarter 54% drawn on the revolver, that equates to a balance of about $535 million on our a $1 billion facility. This does equate to a debt to total cap ratio of about 41% that is slightly down from year end, and I will note that the majority of the significant acquisitions that we closed in the Fayetteville and Elm Grove in Q1, a large majority of those acquisitions were paid for through the lifetime exchange proceeds from the Gulf Coast sale.

In summary, we continue to be very bullish on natural gas prices and we look forward to continued strong operational financial results as we move through 2008.

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

Floyd C. Wilson - Chairman, President and Chief Executive

Thanks Mark. We are having a great year in every respect, and we really look forward to what's ahead at Petrohawk and in all of our core area of operations. We're happy to take questions now if there are any.

Question And Answer

Operator

[Operator Instructions]. Our first question comes from David Heikkinen of Tudor Pickering Holt.

David Heikkinen - Tudor Pickering Holt

Question, thinking about your production in the Haynesville, with this ramp in rig count, can you talk about your gathering and processing capacity and where you'd expect to exit 2008?

Floyd C. Wilson - Chairman, President and Chief Executive

We don't have a firm projection on where we expect to exit, if you're talking about production wise, we have a fairly smooth increase of rigs starting with two this month going up to 5 or 6 rigs by the fourth quarter. Each well is going to re-project take about 60 days or so to drill, maybe a little less as the program progress, maybe another 15 to 30 days to get each well hooked up. We'll have a lot more data over the next... the course of this quarter.

In terms of infrastructure, our early drilling has been done in areas that are very close to our existing gathering and compression and facilities. So, we have no issues whatsoever probably for what we're doing this year.

David Heikkinen - Tudor Pickering Holt

As you think about the increase in your capital budget, but no increase in production target, what it sounds like is as you get some definition full year actual production as you drill well you would have an upward bias to your production estimate?

Floyd C. Wilson - Chairman, President and Chief Executive

We fully expect to revisit that David through the course of the year. We certainly wouldn't expect to spend that much more money without having an upward bias towards production. I'd just like to let results... concrete results dictate the scale of that, and I remind that we already have a fairly aggressive production target in hand for the year of actually nearly 30% year-over-year. So yes I think you hit the nail on the head.

David Heikkinen - Tudor Pickering Holt

And as you think about the number of wells that you'll drill with that ramp in rig count can you step us through that?

Floyd C. Wilson - Chairman, President and Chief Executive

Dick, do you have a number for that? It strikes me, it was about 15 or so is that right?

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

I think it's right around 10, Floyd that we'd actually have drilled and maybe not completed but drilled.

David Heikkinen - Tudor Pickering Holt

Okay.

Floyd C. Wilson - Chairman, President and Chief Executive

And with 5 or 6 being in progress that you would have about total of 15 or so data points.

David Heikkinen - Tudor Pickering Holt

Okay. I will step off and let other people ask question. Thanks.

Operator

Your next question is from Joe Magner with Tristone Capital.

Joe Magner - Tristone Capital

Good morning. I guess stepping over the Fayetteville Shale, looks like production was up 4 to 5% over the last couple of months, and like at the analyst meeting it was in the low 70s, net production was I guess probably slightly up as well. Can you walk us through sort of how that's going to ramp up throughout the year whether midstream, and gathering facilities and takeaway capacity here in place or what... how that's going to kind of play out throughout the year?

Floyd C. Wilson - Chairman, President and Chief Executive

Yes. Dick jump in here if I don't cover everything but we've got a program of I think 6 rigs to be drilling here within this quarter and perhaps add a rig or two in the second half of the year. We're getting as we pointed out results as expected on a per well basis. We've had a few delays here and there with laying a little pipe or doing a little extra diagnostic work on the few wells. We have a little bit of gas shut in, in the field but it's not a significant amount, just waiting on right of ways or some gathering line. So we don't expect any big delays in. On the other end of that we've got sufficient takeaway capacity certainly for our expectations for our drilling program for 2008, and we have plans underway to increase that takeaway capacity on the transmission lines to provide for growth during 2009.

Floyd C. Wilson - Chairman, President and Chief Executive

The only thing I'd add to that is we're experiencing some curtailed production in our Wizen Hunt [ph] lease area, Hurricane area due to the need for additional compression that our gathering company is taking that gas does not quite put in place yet. So we're a little bit behind because of that otherwise we're right on target.

Joe Magner - Tristone Capital

Okay, thanks.

Operator

Your next question is from Tom Nowack with Merrill Lynch.

Tom Nowack - Merrill Lynch

Hi good morning. Just to clarify that, the $1.3 billion I presume it includes the acquisitions made in the first quarter, the 231 in the Fayetteville and 169 in the Elm Grove?

Floyd C. Wilson - Chairman, President and Chief Executive

No, actually it doesn't include those early in the year. We only budgeted drilling and completions in a normal amount of... a nominal amount of seismic and land. So this increase is strictly relating to increased drilling, a bit of infrastructure and leasing in the Haynesville. So those early acquisitions are not included in the $1.3 billion

Tom Nowack - Merrill Lynch

Okay and they were largely funded with the restricted cash balances, right?

Floyd C. Wilson - Chairman, President and Chief Executive

Yes.

Tom Nowack - Merrill Lynch

Okay thanks.

Operator

Your next question comes from Ron Mills with Johnson Rice.

Ron Mills - Johnson Rice

Just to follow up a little bit on the Fayetteville, how are you progressing on the 100 miles worth of gathering/pipeline takeaway installations and when do you expect to have those, that program completed?

Floyd C. Wilson - Chairman, President and Chief Executive

It's well under way, I believe I don't know if, I don't think Rich B. Michelle [ph] is on the call but I think we are projecting to finish it by year end. I think we are close to a third being done... accomplished already. We are building it in stages so that we can take advantage of existing takeaway capacity along the line, and we'll hook it all together by year end as one piece of business.

Ron Mills - Johnson Rice

Okay and then at WEHLU as I recalled that was the major property that data had, when you did the recap. What's... can you explain... or go into to a little bit more detail on the horizontal oil development that you have going on there and what's driven you all to pick that ball back up?

Floyd C. Wilson - Chairman, President and Chief Executive

Yes, I'll get Dick to add a little color to this but we are drilling both horizontal and vertical wells there, and we are very happy with the results that well Dick mentioned mainly being an oil well has actually produced that came in at about 450 barrels equivalent per day. I think we have Dick about 8 wells scheduled for this year, about half vertical, half horizontal, is that right?

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

It's actually eight of each, about eight horizontal and seven or eight vertical.

Ron Mills - Johnson Rice

Okay.

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

I would add that that one of the reasons as you mentioned to pick that ball back up is we really took a technical break to evaluate the technical aspects of the play. This field's got 650 data points in it and we really wanted to kind of study what we thought was driving the success of the horizontal activity in the area that we had joint venture would Avalon and then Chesapeake as they acquired it. We really I think come up with some pretty good answers that have allowed us to put a real methodical approach to the development program that we have in place.

Ron Mills - Johnson Rice

And if you look at your 33,000 acres in the play, any more color on what kind of spacing these horizontal wells can be drilled, what the resource potential of the WEHLU can be under this new development program?

Floyd C. Wilson - Chairman, President and Chief Executive

I think the early stages of this we have some specific areas in mind that we think will be perhaps more impressive than certain other areas. The 30,000 acres I believe is the amount of land that field covers. I don't believe that's our net acreage position there, Ron but Dick what would you add to that?

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

Not a lot, again the study that we've have undertaken, southern portion of the field both due to a combination of lower bottom hole pressure and cultural issues with the city, coming much more in the play in the southern part of the field. We have not allocated a lot of resource potential to that part. We are not ignoring it but we think most of the resource potential is in the northern area of the field and therefore you can't just do a math equation on 30,000 acres and come up with the numbers, but again without giving specific detail to the number we see there it's significant. And we think we can really exploit it over the next couple of years.

Ron Mills - Johnson Rice

And finally on the James Lime have you all drilled any James Lime wells yourself or is this just a way to leverage that acreage? And now EOG who's been active in that play already is going to kind of help, speed you along as you focus on Haynesville and Fayetteville?

Floyd C. Wilson - Chairman, President and Chief Executive

I will let Dick answer about the wells as we certainly drilled a few. I will say that we haven't given this play the attention and... nor are we nearly as far along the learning curve as our joint venture partner is. And we are really looking forward to this JV as a way to get the... this good property developed. Dick we drilled how many?

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

Three horizontal wells, last one was the best one we drilled so we were making progress in the play but I would say Floyd answered it perfectly. We hadn't paid enough attention for whatever reason we are very excited about the technical abilities that the EOG brings, and we think it will be a great partnership.

Ron Mills - Johnson Rice

Great. Thank you guys.

Operator

your next question is from Steve Berman with Pritchard Capital Partners.

Steve Berman - Pritchard Capital Partners

Good morning everyone. Couple I guess balance sheet related questions. Can you tell me what the cash was at the end of quarter, just have current assets on this balance sheet and the press release?

Floyd C. Wilson - Chairman, President and Chief Executive

Mark did we have any cash around at the end of the quarter?

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

Yes at the end of the first quarter we did have a cash balance. Obviously it wasn't anything of any significance though.

Steve Berman - Pritchard Capital Partners

All right and so the $100 million came in after the close of the quarter, can you talk a little bit about what your current availability is on the revolver and if you intend given this increase in the size of the company here with the recent and proposed acreage acquisitions etcetera, your propose to increase the borrowing base and the credit facility anything to talk about there?

Floyd C. Wilson - Chairman, President and Chief Executive

I don't know about the availability, Mark I think you said we had 500 and some odd drawn on a billion dollar borrowing base at the end of the quarter. We did collect $100 million on the Gulf Coast sale right at the end of April, anything to add to that Mark,

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

No that's correct, we are 535 drawn about 600 today and we did collect $100 million and we used the majority of it to pay down against the revolver.

Steve Berman - Pritchard Capital Partners

Thanks but as we speak today in May they is still availability on the line.

Floyd C. Wilson - Chairman, President and Chief Executive

Well there may be some but Steve we've been extremely active in acquiring property and acreage in north Louisiana here, in the last... this year.

Steve Berman - Pritchard Capital Partners

And is your intent with the Haynesville to try and stay within Louisiana or do you see anything moving into some companies in East Texas are involved in the play, are you staying in where you are now pretty much?

Floyd C. Wilson - Chairman, President and Chief Executive

Well as you know we've got a significant amount of property in East Texas anyway, and the play looks pretty perspective over there, we are working that side of the border. However our early success in acquiring additional leases has been mainly in the Louisiana side. We do think there are some very perspective areas over there though in Texas.

Steve Berman - Pritchard Capital Partners

And last question do you think some of the planned wells balance of this year, do you think... is that going to be spread out testing maybe both sides both Louisiana and Texas?

Floyd C. Wilson - Chairman, President and Chief Executive

I don't believe we have any wells planned on the Texas side for 2008. In fact, most of our wells for the first half are going to be situated on or around our acreage that we hold there at Elm Grove in a general sense. And in the second half we will be stepping out to a few other areas in the play that are not exactly within the confines of Elm Grove.

Steve Berman - Pritchard Capital Partners

Great, thank you.

Operator

Your next question comes from Leo Mariani with RBC.

Floyd C. Wilson - Chairman, President and Chief Executive

I didn't hear that question, if there was one, operator?

Operator

Hold just for a moment.

Leo Mariani - RBC

Hello.

Floyd C. Wilson - Chairman, President and Chief Executive

Good morning. Operator, if you're on we're not hearing any question on this end.

Operator

Okay sir, I do apologize. We're experiencing technical difficulties. Hold for just for a moment. Excuse me Mr. Mariani?

Leo Mariani - RBC

Yes, can you hear me?

Operator

Yes sir, your line is now open.

Leo Mariani - RBC

Okay yes, just a question on the WEHLU play here, just trying to get a sense of what the costs are on those horizontal wells and if you guys have any indication on what the EURs are out there?

Floyd C. Wilson - Chairman, President and Chief Executive

Dick?

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

They are in around 2.8 million on the horizontal, about 1 million on the vertical. EURs are... we're kind of looking at around the 200,000 barrel equivalent, right?

Leo Mariani - RBC

Okay. So, for the horizontal wells?

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

Correct. And we are hopeful that I mean our studies indicate that we have a chance of coming up with nearly the same type of that reserve. Therefore, obviously much better economics on vertical well and that's why we're going to test that program and really just to see what the results dictate us to whether the horizontal or vertical becomes the most efficient use of capital. So, by the year end, I would say with this test of 7 or 8 of each, we should have a good handle on which direction we'll be going forward and some of that will be driven by culture as well, vertical wells versus horizontal wells.

Leo Mariani - RBC

Okay. You guys mentioned the three wells that have kind of been down there in the James Lime play, and you said your last result was the best. Can you give us some indication of what kind of rates you are seeing on those wells?

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

About 3 million a day initially. Not as well as some our competitors, we think we can exceed that dramatically with more work with our partner. They've obviously got a lot of work in the Louisiana side of this play and we didn't enter into this relationship without a lot of sharing of ideas and thoughts and technology so, we're confident we can beat them.

Leo Mariani - RBC

Okay, what kind of well costs you guys are expecting out there?

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

Those horizontal James wells are not too terribly dissimilar than WEHLUs kind of mid twos.

Leo Mariani - RBC

Okay. Thank a lot for your time.

Operator

Your next question comes from Monroe Helm [ph] with CM Energy Partners.

Unidentified Analyst

Answered earlier but what kind of well costs and the EURs you are looking for in the Haynesville play at this point in time?

Floyd C. Wilson - Chairman, President and Chief Executive

We don't have a firm number to publish however for planning purposes we are using between... somewhere between $6 million and $7 million for the drilling costs and 5 Bcfe on a per well basis and then of course internally we are risking those numbers down a bit.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions]. Your next question comes from Ron Mills with Johnson Rice.

Ron Mills - Johnson Rice

$0.3 billion budget just to be sure is that related or similar to the $150 million that you spent on drilling and completion in the first quarter or is it that... it sounds like that does include leasing. So how would you... how should we look at your spending levels over the remainder of the year from a quarterly standpoint?

Floyd C. Wilson - Chairman, President and Chief Executive

Yes that will of course be ramping and the spending in both the Haynesville and the Fayetteville, the 150 spend in the first quarter does relate to the original $800 million budget on a go forward basis to $1.3 billion budget includes a Haynesville component of about $400 million or little less than that that is a lot of that's for a land position there.

Ron Mills - Johnson Rice

Okay. But would you expect even to get to your $1.3 billion that to be... continue to be fairly lumpy depending on when you actually get leases signed up or is it going to be more heavy in the second and third quarters or even more constant throughout the year, just trying to match it with all's [ph] quarterly cash flows.

Floyd C. Wilson - Chairman, President and Chief Executive

Sure it will be certainly heavier in each succeeding quarter. I wouldn't call that lumpy and we are certainly not waiting on leases. We have a huge position there already. We are leasing but we are just working the technology and staging the rigs in, and taking a workman like approach to the exploitation of this shale much as we've done in the Fayetteville Shale.

Ron Mills - Johnson Rice

All right great thanks.

Operator

Your next question comes from Andrew Coleman of UBS

Andrew Coleman - UBS

Can you on... mentioned you looked about 50 data points on the Haynesville, have any trends kind of stood out that you can highlight there?

Floyd C. Wilson - Chairman, President and Chief Executive

There hadn't been enough drilling in production to highlight trends, our belief is that this play will be much like most other plays a bit statistical in nature though. There will be some areas that are better than average and some that are worse than average. As of now there are no real averages to cite. We do feel that there is some point in the northern area that it gets a bit thin, over in Texas as you farther west it's a bit thin, down to the south it's deeper and a little bit thinner. So there are some an overall kind of a macro picture of where we believe the players perspective. I got to say tough that covers a several thousand square miles over a couple of million acres. So there is a lot sort to be determined about this play Ron or Andrew?

Andrew Coleman - UBS

Okay, so sort of think about the development and kind of mirroring what you guys did in the Fayetteville last year with the focus [ph] on the selective kind of sweeter spots and kind of stepping out to test more on the acreage after you got a few wells down?

Floyd C. Wilson - Chairman, President and Chief Executive

Yes, I think a very similar pattern and we actually feel really good about being able to use our experience in the other shale play to perhaps accelerate the learning curve in this play.

Andrew Coleman - UBS

It also mentioned in the release you've got 4000 foot lateral, currently drilling, is that going to use a pretty standard like a Fayetteville completion in terms of frac stages or do you guys kind of look at optimizing or changing the recipe if you will at this point?

Floyd C. Wilson - Chairman, President and Chief Executive

We'll certainly look to optimize and change as results dictate but for now I think our model plan is to drill a 4000 foot lateral. We'll use a liner and we will do about 8 stages of frac in that 4000 foot length.

Andrew Coleman - UBS

Okay. And my last question is with the pulling the S-1 for the MLP, you guys currently I think have one rig on the Permian, do you foresee that changing going forward?

Floyd C. Wilson - Chairman, President and Chief Executive

Well, actually we've got a fairly active program out there and several other fields in the Permian. We've pulled the S-1, we just didn't want to keep it... have to keep updating it that MLP market in perfectly situated for what our designs are at this time. So we have a pretty active program out for the balance of this year. We are drilling at Sawyer, we are drilling at Waddell Ranch, we are drilling at Jalmat. We are drilling at TXL. So there is quite big going on out there, it's just the each operation is relatively shallow and doesn't require a whole lot of capital.

Andrew Coleman - UBS

Okay, thank you.

Operator

Your next question comes from Tom Kaplan [ph] with Cadence Investment.

Unidentified Analyst

Hi thanks for the opportunity to ask you questions. I just want to make sure I didn't miss your response with earlier question from Monroe Helm about some of the EURs and the well costs in the Haynesville, might you just repeat what you said?

Floyd C. Wilson - Chairman, President and Chief Executive

Sure, on a planning basis, we are using about five Bcfe per well, we expect the gas to be dry, pretty good Btu content from what we've analyzed so far. We think that costs are going to be between $6 million and $7 million per well with the earlier wells costing a little bit more as we do more diagnostic work than we might be doing later on. And then internally we risk that, the piece of asset [ph], we are using 65%. So that's what we are using in and we'll certainly be refining that as our own results start coming in as we ramp up the drilling in the play.

Unidentified Analyst

Okay thank you so much. Appreciate you taking the question.

Operator

At this time there are no further questions, do you have any closing remarks?

Floyd C. Wilson - Chairman, President and Chief Executive

Operatorthank you and thanks every one for dialing in. We've had a very interesting quarter and interesting time and if you think there's something we didn't cover on this call just feel free to give us a call. Thank you.

Operator

This concludes today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Petrohawk Energy Corp. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts