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Tickers in this Article: HK, XOP, CHK, SWN, DVN, XTO
The entire energy sector has been hit hard since the stocks peaked in July, but some have been hurt more than others. The S&P Oil & Gas Exploration & Production SPDR (NYSE:XOP) is down 58% from the peak over the summer, with several large independent oil and gas companies down much more. Petrohawk Energy (NYSE:HK) is one of the unlucky ones, down more than 69% from July's 52-week high of $54.49 as of Monday's close. (For background reading, see the Oil And Gas Industry Primer.)

The Hawk
Petrohawk Energy is an exploration and production company with operations in five states in several high-profile unconventional shale plays including the Haynesville Shale, the Fayetteville Shale and a new shale area called the Eagle Ford Shale, announced in October. The company has 1.33 trillion cubic feet of natural gas equivalent (Tcfe) of proven reserves, of which 91% are natural gas. Production growth for 2009 is estimated by the company at 25%-35%. During the third-quarter conference call, CEO Floyd Wilson put a 30% number on production growth, even after recent cuts in capital expenditures. (See why reserves are important to growth in Unearth Profits In Oil Exploration And Production.)

Details on Petrohawk properties
Shale plays
Net Acreage
Well Cost
EUR Per Well
Eagle Ford Shale
100,000
$5-7 million
Unknown
Haynesville Shale
300,000
$7.5 million
5 Bcfe
Fayetteville Shale
157,000
$1.75-$2.75 million
1-4 Bcfe
EUR: Estimated Ultimate Recovery; Bcfe: Billion cubic feet equivalent
The Eagle Ford Shale is located in La Salle County, Texas, and the company has already leased more than 100,000 acres. Two wells have been drilled to date and the company has budgeted $82 million in capital spending in the area in 2009. It's hard to tell how good this play will be this early, but clearly Petrohawk has staked out this area as having potential. One advantage for an early mover in an emerging play is that lease costs are very low, at only $350 per acre.

The Haynesville Shale is located in East Texas and North Louisiana, and is a tight gas shale formation located at depths of 10,500-13,000 feet. Other companies active in the Haynesville Shale include Chesapeake Energy (NYSE:CHK) and Devon Energy (NYSE:DVN).

The Fayetteville Shale is located in Arkansas and is also a tight gas shale play. Industrywide, more than 2.5 million acres have been leased here, and wells range from 1,500 to 6,500 feet deep. Two other large operators in the Fayetteville Shale are Southwestern Energy (NYSE:SWN) and XTO Energy (NYSE:XTO).

Any Problems?
Petrohawk seems to have some good prospects, and double-digit production growth, so why has its stock sold off more than the group? There are macro issues involved, with too much natural gas being produced relative to storage capacity, but that affects all companies in the sector.

The company has fairly aggressive production growth numbers, and the market may be concerned that further weakness in natural gas and oil prices might cause Petrohawk to cut capital expenditures further, which would mean a cut in growth.

Bottom Line
Petrohawk has good upside for investors in anticipation of an economic recovery, and who are still bullish on natural gas in the long term.

To learn how exploration companies arrange their production costs, read Accounting For Differences In Oil And Gas Accounting.


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