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Peter Maa

HK AT A GLANCE

P/E ► -4.50   EV/EBITDA ► -5.80   ROA ► -21.1% AVG ROE ► -52.8% AVG Debt to Equity ► 1.12 AVG Current Ratio ► 1.18 AVG Interest Coverage Ratio ► -10.4 AVG

 

 

 

 

 

 

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Petrohawk Energy Corporation is a US independent oil and natural gas company aiming to acquire and develop a group of long-lived, low-risk properties in the southern United States. The company looks to eventually sell itself to a larger company at a premium. Instead of attempting to compete with larger oil and gas companies, Petrohawk has announced a strategy of shedding its outlying properties and developing a principal set of low-cost properties. Accordingly, the company sold its Gulf Coast properties in December 2007, resulting in the loss of 104 million cubic feet equivalents of natural gas production per day. ^[1][2]

Because oil and gas prices are unpredictable, Petrohawk uses derivatives contracts to lower its overall risk profile and protect against a sudden drop in commodities prices. In 2007, Petrohawk lost money on its derivatives contracts due to an unexpected increase in market prices for natural gas and crude oil. However, higher prices drove Petrohawk’s revenue to increase 50% in 2007 over the previous year.^[3] The company’s stock more than tripled in the first 6 months of 2008, from $15/share in January to $48/share in July. ^[4] A decrease in oil and gas prices would adversely affect Petrohawk's revenue stream.

Petrohawk’s investments in the Haynesville Shale have proved quite profitable, with its initial well producing a record-setting 16.8 million cubic feet per day of natural gas. ^[5] In the long term, the movement towards renewable energy technology and global climate change regulation add to the uncertainty surrounding Petrohawk’s operating outlook.

[edit] Business Overview

Petrohawk Energy Corporation drills for oil and natural gas while developing its properties to increase their value. Petrohawk's properties are located in the Mid-Continent and Western regions of the United States.

Petrohawk Energy areas of operation ^[8]

[edit] Main properties in Mid-Continent Region

• Terryville, North Louisiana
• Elm Grove, North Louisiana
• Haynesville Shale, North Lousiana
• Fayetteville Shale, Arkansas

Over 90% of Petrohawk’s drilling locations are located within these four main resource areas. Production from these areas increased by 50% in 2007. ^[9] The company has increased its 2008 capital budget from $800 million to $1.3 billion, reflecting $384 million new investment into its newly acquired properties in the Haynesville Shale in Elm Grove. On July 15, 2008, Petrohawk entered into an agreement with Mainland Resources Inc. to develop Mainland’s properties in the Haynesville Shale. ^[10]

[edit] Outlying properties in Western Region

Petrohawk also has 8 smaller operating locations throughout the Permian Basin, Oklahoma, Texas ,and Southeastern New Mexico. ^[11] In June 2007, the company announced it would form HK Energy Partners LP, which would acquire most of its properties located in West Texas, New Mexico, and Oklahoma. Petrohawk Energy Corporation would become a general partner and majority owner of the LP. In January 2008, Petrohawk announced that it would delay the initial public offering of the LP due to market conditions. ^[12]

Petrohawk has 262 full-time employees and hires independent contractors on an as-needed basis. The company has no collective bargaining agreement with any of its employees. ^[13]

[edit] Sale of Gulf Coast Properties and Long Term Strategy

In June 2007, Petrohawk Energy announced a strategic repositioning plan to sell its Gulf Coast properties and concentrate on developing its properties in North Louisiana and the Fayetteville Shale. Four months later, the company sold its Gulf Coast properties for $825 million. ^[14] The sale resulted in the loss of 100 million cubit feet equivalents of production per day and over 200 billion cubic feet equivalents of proved reserves that the company aims to replace through future strategic acquisitions. ^[15] Over the following months, Petrohawk invested over $800 million in proceeds from the sale in a tax-efficient manner to develop the Fayetteville Shale in Arkansas, Elm Grove field, the Haynesville Shale in North Louisiana and Terryville field. ^[16] The sale was consistent with the company's long-term goals of maintaining a group of low-cost, long-term properties with significant potential for development. Also consistent with its long-term strategy, the company has reduced its per unit operating costs from $1.16 K/Mcfe in 2004 to $0.63 K/Mcfe in 2007. ^[17]

[edit] Buy-and-sell strategy

The company’s founder, Floyd C. Wilson, has demonstrated a penchant for forming a company, taking it public, and then selling it to another oil and gas company. Wilson founded Hugoton Energy Corporation in 1987 and sold it in 1998 for $450 million. Afterwards, he founded 3TEC Energy Corporation in 1999 and sold it in 2003 for $350 million.^[18] Petrohawk Energy is Wilson’s third major startup, which according to its 10-K filing intends to sell “at an appropriate time with the goal of providing superior returns to stockholders.” ^[19]

[edit] Trends and Forces

[edit] Hedging against price volatility

Because oil and gas prices are unpredictable, Petrohawk uses derivatives contracts in the oil and gas speculation market to lower its overall risk profile. This practice guarantees the company a specified amount of revenue even if oil and gas prices fall. However, if oil and gas prices rise higher than expected, the company loses potential revenue.

• Price collars: These agreements put a floor and ceiling on the price of a particular commodity for a fixed volume of production during a certain time period. The counterparty is paid if the market price exceeds the ceiling and Petrohawk is paid if the market price is under the floor.
• Swap agreements: These agreements provide for payments to, or receipts from, a counterparty based on whether the market price is above or below a predetermined price.
• Put options: Petrohawk pays a fixed premium to lock in a floor price. If the market price falls below the floor, the counterparty pays Petrohawk. ^[25]

In 2007, Petrohawk reported a net derivative loss of $35.0 million, compared to a net derivative gain of $124.4 million for 2006. This decrease resulted primarily from an increase the price of crude oil from $65.40 per barrel to $91.77 per barrel during 2007. ^[26]

In 2008, Petrohawk is looking for an average natural gas price range of $7.06 to $10.86 per MMbtu in its collar contracts. The company is looking for an average crude oil price of between $64.96 and $80.26 per barrel. ^[27] If crude oil prices remain elevated for the remainder of 2008, the company stands to lose money through derivatives contracts since collars provide for payments to counterparties if the market price exceeds the ceiling.

Year to year changes net income over the past two years were almost entirely dependent on gains or losses from Petrohawk’s derivatives contracts. ^[28] Net income fell from $116.6 million in 2006 to $52.9 million in 2007 as a result of the company’s $35.0 million net derivative loss. In 2006, net income rose to $116.6 million from a loss of $16.6 million in 2005, primarily due to a $124.4 million net derivative gain. ^[29]

Petrohawk gain/loss on derivatives contracts ^{[30] [31]}

[edit] High Oil and Natural Gas Prices

Petrohawk is able to extract crude oil and natural gas at a relatively constant per-unit cost, but with rising commodities prices can sell the oil and gas for more margin. Crude oil futures reached nearly $146/barrel in July 2008 ^[32], up from an average of $72/barrel in 2007. ^[33] Amid higher oil and natural gas prices, Petrohawk’s stock more than tripled in the first 6 months of 2008, from $15/share in January to $48/share in July. Although US demand for oil has declined as a result of the economic downturn, demand from fast-growing developing nations remains strong and continues to pull overall demand higher.^[34] However, the outlook for oil demand is uncertain. OPEC released a downbeat outlook for world oil demand in mid-July 2008,^[35] and crude oil fell $16 in the 3 days afterward. ^[36] In the short term, Petrohawk will be able to absorb falls in oil prices through its derivatives hedging contracts. However, because shales are expensive to develop, in the long term Petrohawk stands to lose more income from a drop in oil prices than other companies with less expensive reserves.

[edit] Haynesville Shale Proves to be Valuable Investment

Petrohawk has leases or commitments for 275,000 acres in the Haynesville Shale, which are estimated to contain a total of 20 trillion cubic feet equivalents of reserves—almost equal to the annual consumption of natural gas in the US. ^[37]. Its acquisitions in the Haynesville Shale exceed other larger companies such as Goodrich Petroleum, GMX Resources, and Chesapeake Energy. ^[38] Petrohawk’s stock hit a new high on June 30, 2008, after it reported its initial well in Haynesville had an initial natural gas production rate of 16.8 million cubic feet per day, the highest initial rate out of any energy company in the Haynesville Shale.

[edit] Global Climate Change Regulation and Hybrid and Alternative Energy Technology

The growing momentum for government action against global warming will have a direct effect on Petrohawk Energy. The 2007 United Nations Intergovernmental Panel on Climate Change report and Al Gore’s “An Inconvenient Truth” have propelled the issue of climate change to the top of the national agenda. In February 2008, JP Morgan Chase, Citigroup, and Morgan Stanley stated that they would institute a set of "Carbon Principles" in which they would give investment priority to clean energy groups. A series of international meetings are currently taking place, culminating in the Copenhagen conference to be held in late 2009 with the goal of establishing a global climate change agreement to reduce greenhouse gas emissions.^[39]

Rising oil and gas prices are leading consumers and businesses to pursue alternative energy sources and to invest in renewable energy technology, including nuclear, solar, wind, biofuels, and ethanol. In addition, a growing sentiment for action on global warming has resulted in the popularization of “green” technologies, especially hybrid cars. ^[40] Senator Barack Obama, the presumed 2008 Democratic nominee for President, has pledged to reduce carbon emissions by 80% below 1990 levels by 2050. ^[41] Senator John McCain, the presumed Republican candidate, supports a cap-and-trade carbon system. If carbon emissions caps are adopted at the Copenhagen conference and domestic legislation makes it more expensive to produce fossil fuels, Petrohawk’s business prospects will suffer.

[edit] Competition

The oil and natural gas industry is highly competitive in all aspects, from the identification of attractive properties for drilling, securing financing for these activities, and obtaining the necessary equipment and personnel to conduct these operations. ^[42] As a smaller domestic oil and gas company, Petrohawk must compete for personnel and properties with larger international energy companies that have significantly more capital and resources. ^[43]

[edit] References

1. ↑ Reuters “Milagro Exploration Announces Completion of Petrohawk Gulf Coast Acquisition”
2. ↑ HK 2007 10-K Item 1 "Business," page 4, 6
3. ↑ HK 2007 10-K Item 6 "Selected Financial Data," page 25
4. ↑ Google Finance: HK
5. ↑ Reuters “Petrohawk shares up on Haynesville shale well results
6. ↑ HK 2007 10-K Item 6 "Selected Financial Data," page 25
7. ↑ HK 2007 10-K Item 6 "Selected Financial Data," page 25
8. ↑ HK 2007 Annual Report, page 3
9. ↑ HK 2007 Annual Report, page 3
10. ↑ Sun Herald, “Mainland Resources, Inc. and Petrohawk Energy Enter Into Agreement for Joint Development of Haynesville Shale Property”
11. ↑ HK 2007 Annual Report, page 3
12. ↑ HK 2007 10-K Item 1 "Business," page 4
13. ↑ HK 2007 10-K Item 1 "Business," page 14
14. ↑ HK 2007 10-K, Item 1 "Business," page 5
15. ↑ HK 2007 Annual Report, page 2
16. ↑ HK 2007 Annual Report, page 2
17. ↑ Petrohawk 2007 Annual Report, page 2
18. ↑ Answers.com “Hoover’s Profile: Petrohawk Energy Corporation”
19. ↑ HK 2007 10-K Item 1 "Business," page 6
20. ↑ HK 2007 10-K Item 1 "Business," page 12
21. ↑ HK 2006 10-K Item 1 “Business,” page 13
22. ↑ HK 2005 10-K Item 1 “Business,” page 11
23. ↑ “Petrohawk Energy Corporation’s Proved Reserves More Than Double to 1.076 Tcfe”
24. ↑ [18http://ccbn.10kwizard.com/download.php?repo=tenk&ipage=4028279&format=PDF&cik=0001059324 HK 2005 10-K, Item 1 “Business,” page 5]
25. ↑ HK 2007 10-K, Item 1 "Business," page 9
26. ↑ HK 2007 10-K, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," page 38
27. ↑ HK 2007 10-K, Item 8 "Consolidated Financial Statement," page 67
28. ↑ HK 2007 10-K Item 7 "Management’s Discussion," page 36 and 39
29. ↑ HK 2007 10-K, Item 7 “Management Discussion,” page 39.
30. ↑ HK 2007 10-K, Item 8 “Consolidated Financial Statement,” page 42
31. ↑ HK 2005 10-K, Item 8 “Consolidated Financial Statement,” page 46
32. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
33. ↑ EIA: "Short-Term Energy Outlook"
34. ↑ OPEC “World Oil Demand – June 08”
35. ↑ Wall Street Journal, “OPEC Hints at Less Need For More Oil In Months Ahead”
36. ↑ FOX News, “Have Oil Prices Peaked? Crude Plunges $16 in 3 days
37. ↑ Reuters “Petrohawk shares up on Haynesville shale well results
38. ↑ “The Haynesville is Hot” July 1, 2008
39. ↑ Copenhagen 2009, “The Government’s Goals for COP15”
40. ↑ Sunday Herald, “Green motorists face 20-week wait for eco-cars”
41. ↑ CNN Election Center: Issues: Environment
42. ↑ HK 2007 10-K, Item 1A "Risk Factors," page 17
43. ↑ HK 2007 10-K, Item 1 “Business,” page 12
44. ↑ MMcfe/day, or millions of natural gas cubic feet equivalent, is a measure of the level of production per day that converts oil into the energy-yielding natural gas equivalent using a ratio of 6 to 1 (natural gas to oil)
45. ↑ HK 2007 10-K, Item 8 “Consolidated Financial Statement,” page 46.
46. ↑ Google Finance: HK
47. ↑ HK 2007 10-K, Item 1 “Business,” page 11.
48. ↑ HK 2007 10-K, Item 8 “Consolidated Financial Statement,” page 80.
49. ↑ HK 2007 10-K, Item 8 “Consolidated Financial Statement,” page 80.
50. ↑ HK 2007 10-K, Item 1 “Business,” page 10.
51. ↑ HK 2007 10-K, Item 1 “Business,” page 10.
52. ↑ HK 2007 10-K, Item 1 “Business,” page 10.