Natural Gas: Playing the Haynesville Shale

Includes: CHK, GDPM, HK
by: Jim Kingsdale

The Wall Street Journal explicated the Haynesville shale play offering various views on the three main ways to participate. Chesapeake (NYSE:CHK) is the diversified approach, Petrohawk (NYSE:HK) is the concentrated way, and Goodrich (GDP) seems to be the small cap approach. Haynesville is a southeastern shale deposit in Arkansas, Louisiana, and Texas.

The Journal article states:

Chesapeake Energy has snapped up more than 300,000 acres of potential mineral reserves and is bargaining for 200,000 more in the Haynesville area. The company, which has vast resources to unearth gas deposits, accelerated a real-estate bidding war in April, when it declared that Haynesville “could potentially have a larger impact” than any of its previous energy investments...

The race to acquire Haynesville acreage started fewer than two years ago. Petrohawk was already drilling a gas deposit known as Cotton Valley, a separate deposit that runs roughly 3,000 feet above parts of Haynesville’s deposits, when it became aware of Haynesville in 2006. Chesapeake later raised expectations with claims that Haynesville holds large quantities of natural gas.

The real-estate frenzy, largely inspired by Chesapeake’s initial claims of vast resources, has created a short-term windfall for Goodrich, which has acquired most of its Haynesville land at an average price of $350 per acre. New territory in Haynesville is selling for more than $4,000 an acre, according to a senior official at Goodrich. The rush to develop Haynesville is also being fueled by natural-gas-futures prices that recently reached $11.17. All three energy producers are in a hurry to begin drilling while natural-gas prices are high.

It is an unconventional gas field that seems typical of a number of others, such as the Barnett Shale, that are lifting U.S. natural gas production and offering a vision of resource plenty. I suspect that vision is accurate in the short term but likely to disappoint beyond a few years out. Moreover, it may tempt electric utilities to add gas fired capacity, a decision they may come to regret if gas price continue their recent rapid climb.