Haynesville Shale Activity Continues To Decline

By Eric Fox | August 17, 2011 AAA

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.)

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