Petrohawk Energy's (NYSE: HK) share price performance relative to its oil patch peers has been pretty poor over the past year. Prior to today's bounce, "The Hawk" had lost around one-third of its market value, while Whiting Petroleum (NYSE: WLL) and Rosetta Resources (Nasdaq: ROSE) had roughly doubled.
Despite the fact that everyone hates natural gas, the answer cannot be simply that Petrohawk is more gas-levered than its peers. That is unquestionably part of the story, though. Range Resources (NYSE: RRC) and Southwestern Energy (NYSE: SWN) have been beaten up as well, though not to the same extent. (And I still believe that those are two of the best values in oil and gas today). When it comes to Petrohawk, there must be other factors at work.
One difficulty that Petrohawk created for itself was the issuance of a slug of new shares last year. This makes year-over-year gains in per-share metrics pretty modest. In the second quarter, for example, production was up 29% over the prior year, but per-share cash flows only lifted 8%, from $0.50 to $0.54.
I think another element that's caught investors by surprise is that well completion costs have risen so significantly in the Haynesville shale. I had at least one reader chide me for underestimating the ability of operators like Encana (NYSE: ECA) to drive down costs over time, as a result of the learning factor. At the time, I countered that service costs would rise as the industry got back on its feet. That's exactly what we're seeing now, and the increase has been even stronger than I anticipated.
Petrohawk noted in its second-quarter release that pressure pumping (i.e., hydraulic fracturing) costs in the Haynesville are up 30% since the beginning of the year. I think the reality of the economics of this shale play have finally sunk in.
The good news is that Petrohawk has a strong position in the Eagle Ford shale, in addition to its Haynesville stronghold. Months ago, I'd heard anecdotally that the firm was shifting resources away from the Haynesville in favor of this play. That's proven to be the case, and it's not hard to understand why. Petrohawk says its Black Hawk drilling area within the greater Eagle Ford trend is the most economic play in its entire portfolio.
I'm going to tentatively suggest that today's upturn in Petrohawk shares marks a new chapter for the company. It's not my favorite name in the space, but shareholders should fare significantly better in the year ahead than they have over the past 12 months.
