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In 2009, Petrohawk Energy (NYSE: HK ) spent about $450 million amassing leasehold in shale plays like the Haynesville and the Eagleford. This land grab was partially funded by the sale of new shares -- first in February, and then again in August. The company had more than 300 million shares outstanding by the time of its third-quarter filing, representing a 20% increase in one year. (The company's year-end financials won't be filed for another few weeks.)
Monday's operational update naturally focused on the sausage, rather than how that sausage was made. Petrohawk boosted its daily production by 76% over 2008, and proved reserves shot up by 122%, to 2.75 trillion cubic feet of gas equivalent. That's a fine-looking sausage.
While Petrohawk's reserves doubled, the firm's percentage of proved developed reserves dropped from 54% to 33%. This is the inverse of Chesapeake Energy (NYSE: CHK ) at the end of 2008, which had only 33% proved undeveloped reserves (PUDs). Petrohawk thus suddenly finds itself in what I've typically considered PUD problem territory.
How did the company end up here? The new SEC rules for reserve reporting play a big part. Operators were formerly only allowed to book direct offsets to a proved developed location. They now have more discretion. Petrohawk, for example, has booked a 3:1 ratio of undeveloped locations to developed Haynesville locations. In the Eagle Ford, the ratio is around 5:1.
Shale plays are highly predictable and repeatable, so these may well be conservative assumptions on Petrohawk's part (and on the part of its top-flight reserve evaluator Netherland, Sewell). Either way, it looks like PUD bookings are going to explode among shale players ranging from Atlas Energy (Nasdaq: ATLS ) to Quicksilver Resources (NYSE: KWK ) .
Another salutary effect of the new SEC rules is that Petrohawk's drill-bit finding and development costs have dropped like a stone. Under the old rules, F&Ds would have been reported at $1.32 per thousand cubic feet equivalent (mcfe). Under the new rules, they come in at $0.68/mcfe, which is what Range Resources (NYSE: RRC ) reported as well. I believe this is a direct result of higher PUD bookings, which do not reflect future development capital (Petrohawk's stand at $3.18 billion).
The new rules didn't entirely go in Petrohawk's favor. The pre-tax, discounted net present value of the firm's reserves (PV-10) was reported at just $1.5 billion, while it would have been $4.4 billion under the old rules. Low average natural gas prices this year hit the firm hard in this respect.
Basically, everything is now a little topsy-turvy in oil patch accounting land. I'll try to help you make sense of it all as we get further into reporting season.