Development activity in the Haynesville Shale is continuing to decline in 2011 as operators shift capital to areas with a higher return and approach the conclusion of drilling programs designed to convert leases from "term" to "held by production." This trend has been ongoing and accelerated during the second quarter of 2011.
TUTORIAL: The Industry Handbook: The Oil Services Industry

Haynesville Shale Players
Plains Exploration and Production
(NYSE:PXP) is involved with Chesapeake Energy (NYSE:CHK) in a joint venture to develop the Haynesville Shale. Chesapeake Energy was operating 33 rigs as of late July 2011, and will reduce its rig count further during the balance of 2011. The company will drop nine rigs during August 2011 and end the year with only 15 rigs working this play.

Despite this reduction, Plains Exploration and Production reported a 12% sequential increase in production from the Haynesville Shale in the second quarter of 2011. The company does expect this growth rate to slow during the final six months of 2011. (For related reading, see What Determines Oil Prices?)

GMX Resources (NYSE:GMXR) recently suspended all development of the Haynesville Shale citing poor economics relative to oil development. The company is shifting capital to develop new properties in the Bakken and Niobrara formations. These plays generate a higher return due to the stronger price of crude oil relative to natural gas.

EOG Resources (NYSE:EOG) has also suspended natural gas development in areas that produce dry gas, except for those plays where it has to drill to hold by production. These areas include the Haynesville and Marcellus Shale.

One company that has been slowly exiting the Haynesville Shale over the last year is Southwestern Energy (NYSE:SWN). The company sold portions of its Haynesville Shale acreage in East Texas in two transactions over the last nine months. Southwestern Energy is allocating only $20 million in capital in 2011 for East Texas and will use the funds to develop the James Lime formation.

QEP Resources (NYSE:QEP) is nearly finished with converting the company's Haynesville Shale acreage to held by production and reported that it has only one operated section left to drill. QEP Resources is still maintaining its drilling efforts and will keep six operated rigs working through the end of 2011. QEP Resources raised its capital budget for 2011 by $123 million and will use part of the funds to drill additional Haynesville Shale wells. The company reports that Haynesville Shale wells still have "strong economics at current commodity prices."

Petrohawk Energy (NYSE:HK) has also cut its rig count sharply and is currently operating six rigs in the Haynesville Shale, compared to an average of 11 rigs during the second quarter of 2011.

The Bottom Line
Most investors might assume that a drop in the natural gas rig count in the Haynesville Shale and elsewhere will lead to a quick drop in production of this commodity, as this has been the pattern in previous drilling cycles. However, there are more than 3,500 wells in the United States that are either waiting on completion, or for pipeline or other infrastructure to come on line. Many of these wells produce natural gas, and this stealth inventory may keep production higher for longer than in prior cycles. (For related reading, see A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Fundamental Analysis

    4 Predictions for Oil in 2016

    Learn four predictions for oil markets in 2016 including where prices are heading and the key fundamental factors driving the market.
  4. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  9. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  10. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center