Petrohawk Poised for Gains on Natural Gas Prices

| About: Halcon Resources (HK)
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East coast natural gas in storage is running –5.7% below its 5-year average thanks to cold weather seasonal drawdowns. Last week’s draw on supplies was the 6th highest on record since the EIA began tracking the data in 2002. Overall, US natural gas in storage is 1.9% above the 5-year average, however, remains within its 5-year range.

Producer capex will be driven by pricing in 2011 as well drilling costs have risen sharply in the wake of producers machine gun approach in 2010. In the week ending the 14th, natural gas rigs fell 12 to 902, marking a 6th consecutive week of decline from the recent peak of 961 on December 3rd. As producer selectivity in production continues, inventory supply demand will improve providing tailwinds to pricing, supporting independent gas plays including Petrohawk (NYSE:HK).

In 2010, Petrohawk sold $2.1bn in assets, including its December sale of Fayetteville assets to Exxon’s XTO subsidiary for $650mn. Last quarter, HK’s realized prices rose $1.17 per Mcf year-over-year to $4.20 per Mcf. A combination of higher realized prices and capital from asset sales provides opportunity for Petrohawk to develop key production acreage, including its Haynesville and Eagle shale assets.

In both Haynesville and Eagle Shale, Petrohawk spent readily in 2010 to bring acreage to held by production, securing acreage for ongoing production. The company plans to reduce its activity in Haynesville by year end to 7 from 16 rigs. A maturing of its development in Haynesville allows Petrohawks capex to focus on ramping Eagle Shale, where the company plans to operate 12 rigs this year.

In Q3, production was 10% higher than Q2 and in the first nine months of 2010, Petrohawk drilled 82 operating and 185 non-operating wells at Haynesville, helping to drive a 38% lift in Haynesville production year-to-date. At Eagle Ford, the company saw its more limited spending boost production by 150%.

Overall, the company had 60% of its 2011 production hedged entering Q4 with a floor price of $5.55. Oil and natural gas operating revenue was $820.7mn in the first 9 mo’s of 2010, up from $492.2mn year over year, while marketing revenue was $360.4mn vs $216.1mn year over year.

HK holds 368k net acres in Haynesville and 228k net acres at Eagle Ford Shale under lease. Back in May, Vice Chairman James Christmas showed his confidence in the company’s future production, buying $285k of stock at the market price of $17.83 per share, his first at the market purchase since at least April ‘09. In November and December, SVP of Corporate Communications Ellen also invested $92k and $84k respectively on at-the-market buys.

In the past five years, Petrohawk shares have risen 8.45% on average, finishing the quarter higher in four of the past five periods. In the past 30 days, 5 analysts have boosted their 2010 and 2011 EPS forecasts, while no analysts have lowered expectations.

Disclosure: I am long HK, UNG, RRC.