This Is One Ginormous Gas Play

Holy Haynesville, Batman!

If you're familiar with the initial production rates of onshore natural gas wells, in addition to Adam West's turn as the Caped Crusader, that's what you found yourself saying yesterday morning.

No? Just me? That's fine. You should still be excited about this news.

On Tuesday, two different companies released data on some well completions in the Haynesville Shale -- which was already red hot before we had much of any production data. Back in July, the biggest well I'd caught word of was a Petrohawk (NYSE: HK  ) gusher at nearly 17 million cubic feet equivalent (Mmcfe) per day. That's a big gas well, but today's completions really crank it up a notch.

Petrohawk has announced three completions ranging from 21 to 28 Mmcfe per day, for a total of 73 Mmcfe per day. The Houston-based shale hunter didn't divulge its cost to drill and complete these monsters, but if we assume $7 million, which is the higher end of the numbers I've seen, then these wells will pay for themselves quickly -- probably within two months.

EXCO Resources (NYSE: XCO  ) came out with its maiden horizontal well in the play. At nearly 23 Mmcfe per day, it's the most prolific well in the company's history. That says quite a lot, considering the 1955 incorporation date of this Dallas driller. The company plans to drill around 25 more Haynesville wells in 2009, so it's no wonder that the stock got bid sky-high yesterday. The potential reserve additions are elephantine.

There were some other noteworthy well results this week. Northern Oil & Gas (AMEX: NOG  ) reported some strong Bakken results, like an EOG Resources (NYSE: EOG  ) -operated well that came on at nearly 2,500 barrels of oil per day. Cabot Oil & Gas (NYSE: COG  ) also unveiled its first Marcellus Shale horizontal, which produced at a respectable rate.

Still, the Haynesville is the biggest story in onshore production today. In a low commodity price environment, these are going to be pretty much the last rigs to be laid down. If you're holding a Haynesville player with a strong balance sheet and a prudent spending plan for 2009, I would recommend hanging on tight. If you're on the outside looking in, Encore Acquisition (NYSE: EAC  ) recently stated that "no company has better acreage than we do in the Haynesville," so that might be a place to focus your further study.

Encore is being shown no love in Motley Fool CAPS, with a meager two-star rating. I think Fools are getting this one wrong, and I'm casting an outperform vote. You can join me right here, if you find its financial/leasehold position equally compelling.

Fool contributor Toby Shute is active in CAPS under the moniker TMFSmashy, but he doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

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  • Report this Comment On December 11, 2008, at 8:14 PM, XMFSmashy wrote:

    My well cost estimate is looking too low. EnCana talked about $8 to $10 million for its Haynesville completions today. Still a strong rate of return at that cost.

  • Report this Comment On December 12, 2008, at 11:57 AM, carbonates wrote:

    Initial production test rates are just that, initial production rates and are not truly in indicator of the wells production potential. If you really want to evaluate these wells, and the potential for these companies, wait till they have a few months of production so you can see the decline rate. Most gas shale wells lose production very rapidly, often losing 80% of the IP in a few months and then tend to level off at a slower decline. With the decline rate factored in this well may take over a year to pay back drilling costs, assuming they have somewhere to connect to a pipeline and sell the gas.

    I share your enthusiasm about these results and still consider most of these companies a good buy at today's prices, but I caution you to realize that this impressive IP is not a sure thing. In today's price market for gas and oil, many of these companies are working on very thin margins, and further oversupply of the gas market could force them to shut-in production. Sadly, success at finding elusive oil and gas no longer assures success in the market.

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