Natural Gas Producers Looks to Oil for Profits

Companies that functioned primarily as natural gas producers have looked elsewhere for profits as the price of natural gas sticks around $4/thousand cubic feet. The development of tight shale plays, which yield very high production rates very quickly, has contributed to the low natural gas prices and the search for opportunities outside natural gas.

Some big players in natural gas, like Chesapeake Energy (CHK), Anadarko Petroleum (APC), and Devon Energy (DVN), have increased their focus on the Eagle Ford play in south Texas. Other smaller players like Carrizo Oil and Gas (CRZO), Cabot Oil and Gas (COG), and Saint Mary’s Land & Exploration (SM) have recently bought stakes in Eagle Ford as well.

One of the larger players, Petrohawk Energy (HK) announced today that it was reducing its investment in the Haynesville and Bossier shales in northern Louisiana, and putting more capital expenditures into its Eagle Ford acreage. The company also announced a new 50-50 joint venture with Kinder Morgan Energy Partners (KMP) that will result in the creation of a new entity, KinderHawk Field Services LLC, to own and operate the gas gathering and treating business owned by Petrohawk. Kinder Morgan is paying Petrohawk $875 million in cash for Kinder Morgan’s part of the venture. The transaction is expected to close by end of May 2010.

The joint venture’s assets include 173 miles of pipeline in service, and the mileage is expected to double to about 375 miles by the end of 2010. The system’s projected throughput is 800 million cubic feet/day. The amine treating plants that are part of Petrohawk’s system are also included in the deal and are expected to have a capacity of 2,635 gallons/minute by the end of this year. Ultimately the joint venture expects daily throughput of about 2 billion cubic feet/day of fee-based transportation.

Petrohawk said that it plans to cut its rig count 20% to 14 in the Haynesville shale, slash its 2010 capital expenditures by $100 million, and reallocate $175 million of its capex budget of $1.35 billion to the Eagle Ford play. Petrohawk plans to spend $850 million in the Haynesville shale this year, almost exactly the price Kinder Morgan agreed to pay for its share of the joint venture. Just coincidence?

Not hardly. The reduction in Petrohawk production out of Haynesville will be more than made up for by other players in the field. The joint venture plans to offer firm transportation services to third-party shippers, and it’s a lead-pipe cinch that the transportation charges will end up higher than the price Petrohawk was charging itself.

Kinder Morgan does not expect the joint venture to affect its planned 2010 distribution either positively or negatively. The company does expect to generate cash available to unitholders from the joint venture in 2011.

As noted, Petrohawk is primarily going after oil, not natural gas, at its Eagle Ford acreage. The company estimates that it holds 340 million barrels of risked resource potential in the Eagle Ford play. And that includes a conservative risk factor of 80% in the estimated ultimate recovery of oil and gas from the company’s acreage. None of Petrohawk’s other leases include oil or condensate, so it the company wants to juice up its profits, Eagle Ford is the place to do it.

Paul Ausick