Petrohawk Energy (NYSE:HK) felt the sting of rapid increases in oil service costs during the third quarter of 2010, and was forced to adjust the company's capital budget up by more than $400 million for 2010.
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Q3 2010 Summary
Petrohawk Energy reported average daily production of 685 million cubic feet equivalent per day during the third quarter of 2010. This was approximately 10% growth sequentially from the second quarter of 2010, and 34% growth on a year over basis. Although the company has started an effort to add oil and liquids production to its base, it is still primarily a natural gas company. During the third quarter of 2010, 95% of its production was natural gas, with the balance a mix of oil and natural gas liquids.

Petrohawk Energy also increased its capital budget for 2010 from $2.13 billion up to $2.55 billion. The company attributed the increase to rapid inflation in the cost of oil services in the Haynesville Shale and the Eagle Ford Shale, where it conducts most of its development activities. Other exploration and production companies have also been impacted by rapid increases in oil service costs. EOG Resources (NYSE:EOG) cited higher costs for hydraulic fracturing services as one of the reasons that the company reduced production growth in 2011 and 2012. EnCana (NYSE:ECA) also faced delays and higher costs for completion services, and decided to defer $200 million in capital expenditures until 2011.

2011 Capital Budget
Petrohawk Energy announced a preliminary capital budget for 2011 of $2.3 billion, including $1.9 billion for exploration and development. Petrohawk Energy has allocated $900 million each for the Haynesville Shale and Eagle Ford Shale, and $100 million for the Fayetteville Shale, where its operations are conducted mostly on a non-operated basis.

Haynesville Shale
Petrohawk Energy reported average production from the Haynesville Shale of 434 million cubic feet equivalent per day during the third quarter of 2010. The company drilled 102 wells here on both an operated and non-operated basis, but has been slowly reducing its rig count here over the last three months, which is expected to continue going forward. The company started the quarter at 16 rigs and is now at 12, and expects to reduce the rig count to approximately seven by the second half of 2011.

Petrohawk Energy has also been experimenting with new well completion techniques on Haynesville shake wells and believes that the new design will save the company as much as $1 million per well going forward.

Other companies have also tried to reduce costs through efficiencies in drilling and completion operations. EXCO Resources (NYSE:XCO) has reduced its well costs in the Haynesville Shale by $1 million per well over the last 12 months. The company is targeting a further reduction of $500,000 per well in 2011.

Eagle Ford Shale
Petrohawk Energy reported average production of 67 million cubic feet equivalent per day from the Eagle Ford Shale during the third quarter of 2010. The company drilled 21 wells here on both an operated and non-operated basis. Petrohawk Energy plans a major ramp in activity here in 2011, as the company reduces its activity in the Haynesville Shale.

The Bottom Line
Petrohawk Energy had to put even more capital into the ground during the third quarter of 2010, as the company was hurt by the rapid rise in oil service costs. (For related reading, take a look at How Does Crude Oil Affect Gas Prices?)

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Tickers in this Article: HK, XCO, ECA, EOG

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