El Paso Corporation (NYSE:EP) has a significant program underway to develop natural gas assets in the Haynesville Shale in 201. Despite the company and industry tilt towards oil and liquid plays, El Paso believes that today's natural gas prices allow for decent returns from the project.

TUTORIAL: Stock Basics

El Paso first entered the Haynesville Shale through the acquisition of Peoples Energy in 2007 and has built up a 43,000 net acre position across the play.

El Paso has Haynesville Shale acreage in the Holly, Bethany Longstreet and Logansport fields, and it believes that its Holly acreage in Louisiana is the most attractive in the current environment of low natural gas prices.

El Paso estimates that wells in the Holly Field will cost between $8.7 million and $9.3 million to drill and complete, and yield an estimated ultimate recovery (EUR) between six and seven Bcfe. The company will earn an internal rate of return (IRR) between 20 and 30% at $4.00 natural gas prices. Haynesville Shale wells drilled and completed in the company's other two fields will only have an IRR between 5 and 15%.

This cost is in line with operators in the Haynesville Shale. QEP Resources (NYSE:QEP) reported that the company's average cost to drill and complete a well in the play during the first quarter of 2011 was $9.1 million.

El Paso has increased production rapidly from the Haynesville Shale and reported production of 258 million cubic feet of natural gas equivalents per day from 74 operated wells as of March 31, 2011. This was 31% of the company's total quarterly production of 821 million cubic feet of natural gas equivalents per day.

El Paso plans to operate four rigs in the Haynesville Shale going forward and concentrate on improved drilling efficiencies in an effort to reduce costs. The company estimates that it has 415 future drilling locations here and resource potential of 800 Bcfe.

One operator that is reducing its activity in the Haynesville Shale is Petrohawk Energy (NYSE:HK), which operated an average of 16 rigs in the play during the first quarter of 2011. The company plans to cut this to only six rigs by the end of 2011, as most if its acreage will be held by production by that time. Plains Exploration and Production (NYSE:PXP) is involved in a joint venture in the Haynesville Shale and anticipates that the number of rigs operating will drop from the 33 that existed as of May 2011, to 25 by the end of the year.

The Bottom Line
El Paso is still putting capital into the Haynesville Shale in 2011, in spite of the industry focus on oil and liquids assets, as the company believes that wells here still earn an adequate return at current natural gas prices. (These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet. Refer to Using Porter's 5 Forces To Analyze Stocks.)

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