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A Haynesville Head-Scratcher

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On Friday, Canadian media reported that EnCana (NYSE: ECA  ) and its partner Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) were looking to farm out over 130,000 acres of their Haynesville shale position to a partner. I don't blame you if you're confused by the move.

Just the other week, EnCana decided to pour more dollars (freed up by sagging service costs) into the Haynesville play. On the conference call, management identified the play as "one of the most important pieces in the future of EnCana's gas production." So what's the company doing selling down its stake?

Here's how I view this situation. During 2008, there was a massive staking rush in East Texas and Northwest Louisiana, with companies like Chesapeake Energy (NYSE: CHK  ) and Petrohawk (NYSE: HK  ) swooping in on areas believed to be good prospects for Haynesville production. EnCana and Shell also participated in the frenzy.

There are now several factors working against operators here. Lower gas prices are of course constraining everyone's cash flows. Haynesville wells, which are deep and complex, cost even savvy drillers like XTO Energy (NYSE: XTO  ) upwards of $7.5 million a pop. At the same time, these companies need to push ahead with development drilling in order to maintain their leasehold.

Farming out acreage thus starts to make a lot of sense in that context, especially when considering that in this early stage of exploitation, no one quite knows for sure where the boundaries of the play will ultimately be drawn. This Louisiana acreage appears to lie south of what's currently seen as the "sweet spot" in the Haynesville, however, so EnCana and Shell are unlikely to later kick themselves for letting a third party in to help shoulder the drilling budget here.

Chesapeake Energy is an Inside Value recommendation. Swoop in on any of our subscriber newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (3)

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  • Report this Comment On May 11, 2009, at 4:22 PM, tankmanbob wrote:

    The Haynesville shale is not economic, nor will it be until prices are well north of $6.

    Why would this article be a surprise?

  • Report this Comment On May 11, 2009, at 6:49 PM, energygeek wrote:

    I have heard companies (like Chesapeake) say that Haynesville and other shale prospects are game-changers because they will bring the production cost per mcf down... and I have heard others say its too expensive. I guess it all depends on how much is there. Depending on your assumption of total produceable volume, I guess it will be cheap (with high produceable volume) or expensive (with low produceable volume).

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