That's Pathetic, Petrohawk

Petrohawk (NYSE: HK  ) investors just got punk'd.

Upon the release of its year-end results earlier this week, the oil and gas company raised both its production guidance and its estimated per-well recoveries in the company's Haynesville shale play to 7.5 billion cubic feet equivalent (Bcfe) of gas. The latter revision bumped up the company's estimated Haynesville resource potential by 15%, to 13.7 trillion cubic feet equivalent. Chesapeake Energy (NYSE: CHK  ) and XTO Energy (NYSE: XTO  ) use a 6.5 Bcfe-per-well model and Comstock Resources (NYSE: CRK  ) goes by 5 Bcfe per well.

The following day, Petrohawk announced a placement of 22 million shares, which would dilute equity owners by roughly 9% in one fell swoop.

So much for October's declaration of "no current plans or need to access the equity capital markets." "The Hawk" just hocked a loogey in your eye, Fool.

No wonder management struck a defensive tone on its conference call. Regarding 2009 spending, CEO/Chairman Floyd Wilson said, "We're not going to back off from a good business."

I agree that drilling Haynesville wells is a good (but not great) business today. Even though the darn things cost around $10 million each, they're still a good economic bet, thanks to huge initial production rates. But that leads to one of the things that irks me here: Chesapeake recently spoke about modeling 82% first-year decline rates on these monster wells. You would think this extremely front-weighted production would encourage Petrohawk to follow folks such as EOG Resources (NYSE: EOG  ) and St. Mary Land & Exploration (NYSE: SM  ) in deferring spending so as to maximize value creation.

Petrohawk's production is hedged to the tune of 60% this year, so the folks at the company aren't completely off their rockers. But the clear choice of growth over per-share value maximization is enough to turn me off -- for good.

Chesapeake Energy is an Inside Value recommendation. Drill deep into any of our premium newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 17, 2009, at 1:18 PM, 45goldenhinde wrote:

    This commentary is rather foolish - as in ignorant. Dilution is not terribly relevant for a growth company who in this environment CAN still raise working capital (more than most companies can say) and who, so long as they use the capital and create a greater than 9% ROR on the capital will compensate existing sharedholders for the dilution.

    With 60% of production hedged the risk is foreseeable (hopefully they have an eagle eye on that). More importantly, demonstrating results in a downturn is hugely important to institutional investors whose dollars are required to stimulate buying demand for the stock.

    HK is better positioned that other producers and has the reputation needed to thrive if and when they a stable economic environment occurs. If indeed, that happens by the end of Q4 2009, HK shareholders will benefit from the positioning.

    It is a risk of course. But a risk worth taking and that is what HK management is known for - taking risks and winning at them.

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