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Haynesville:

Dead Man Walking or Comeback Kid?

March 1, 2017 | By Annalisa Kraft

The hottest drilling and production activity is in the Permian, Marcellus and Utica basins. But what about the Haynesville? In this Get the Point, we look at whether this struggling production area is ripe for rebound.

Even its biggest fan, Chesapeake Energy, has said the Haynesville was left for dead. But the question is can this dead man walking return to life?

Is the Haynesville coming into its own in what may be the quietest of comeback kid stories by adding rigs and attracting deals?

PointLogic Vice President Charles Nevle said if the Haynesville wasn't dead, it was "close to comatose" having dropped from 162 rigs in February 2011 to a low of 12 in April 2016. 

But several companies are betting big on the Bayou basin (much of the Haynesville is located in Northern Louisiana and eastern Texas), including Chesapeake, Range Resources (through its acquisition of Memorial Resource Development), EXCO Resources and Comstock Resources. These companies believe they can shock the basin, like a defribillator, back to life with new drilling technologies.

The Feb. 17 Baker Hughes rig count showed the surprising fact that the basin had added the largest number of rigs over the last year, 19, second only to the Permian’s outsized add of more than 138. (For the most recent week ended Feb. 24, the Haynesville added one rig and the Marcellus and Utica none.)

“Haynesville is one of today’s premier U.S. gas plays. Chesapeake remains the top operator and using Gen 4 completions (10,000’ laterals, high proppant loads) is reporting some monster IP30’s [30 day initial production rate] reaching over 30 MMcf/d and in one case (ROTC 1H) of 40 MMcf/d," said Houston-based oil and gas research firm PLS Inc. Senior Analyst Andrew Dittmar in an email to PointLogic.

“Currently, Comstock is among the companies that has been active in the Haynesville, recently adding 3,300 net acres through a JV with USG Properties. It reports EURs have climbed to 18.6 Bcf for Haynesville wells with 7,500 ft. laterals by using 50 stages at 150 ft apart versus 30 stages at 250 feet for prior Haynesville well designs,” Dittmar added.

On the Feb. 24 Comstock Resources earnings call, CEO Jay Allison said that the company expects from its 700 Haynesville operating locations a “rate of returns from anywhere from 50% to 70% with $2.50 gas and 70% to 100% with $3.00, depending upon the lateral length of the wells.” The company plans for three rigs drilling 22 Haynesville/Bossier wells in 2017.

And although the Permian has been the deal monster of the year, Dittmar said the Haynesville has triple-headed attractions: petrochemicals, Gulf Coast power generation and LNG. “Providing credence is the fact that deal activity in the Haynesville totaled nearly $3.0 billion in 2016, more than doubling from $900 million of transacted deals in 2015, and only second to the Marcellus," he said. "The 2016 list of large Haynesville buyers may represent the smart money and include Covey Park Energy (2 deals, $885 million), Indigo Resources (2 deals, $825 million) and Castleton Commodities ($1.0 billion).”

However, some geologists question whether the play really can be competitive, especially at today's low prices. in late 2015, petroleum geologist Art Berman wrote in Forbes he thought the Haynesville breakeven price was $6.50/MMBtu natural gas, though that was based on lower EURs of 4.3 Bcf/d at the time.

Berman said the region faces “…insurmountable geological problems. First, the shale is not brittle and, therefore, does not respond well to hydraulic fracturing. Second, the reservoir is over-pressured and compacts when gas is produced.”

Understanding Haynesville

The Dallas Federal Reserve Bank of Dallas 11th District says that DeSoto parish in Louisiana leads the region in natural gas production, with nearly 1.7 Bcf/d of gas production in first quarter 2016, or over 27% of the Haynesville's output. In the second quarter of 2016, total Haynesville production was 6.1 Bcf/d.

While the Utica and Marcellus, along with the Permian (and its associated gas), draw most of the headlines on gas production, according to the Dallas Federal Reserve the Louisiana portion of the Haynesville deserves some ink. “Louisiana [Haynesville] has recorded the strongest natural gas production gains since the shale boom. Even with the recent declines in production, the Louisiana Haynesville parishes produced around 2.2 billion cubic feet [per day] more natural gas in first quarter 2016 than in first quarter 2008. DeSoto parish alone accounted for almost 67 percent of this increase,” it said.

“Production across the Haynesville has declined in recent years, but the formation still produces 6.8 percent of all U.S. natural gas," it added.

Louisiana Onshore Wellhead Gas Production

During its boom years, the Haynesville accounted for more than 12% of the U.S. gas supply. 

Haynesville Producing Areas Wellhead Gas Production

The Texas portion of the Haynesville is relatively small and, according to the Railroad Commission of Texas, in 2016 accounted for only 887 MMcf/d, down considerably from the 1,220 and 1,298 MMcf/d of production in its 2011-2012 heyday, respectively.

Texas Onshore Wellhead Gas Production

Producvity Gains

While production has declined along with the rig count, productivity is up, as it is in other producing basins.

The Feb. 17 EIA Drilling Productivity Report expects to see an overall 109 MMcf/d improvement in March from February levels. And new well gas production per rig is expected to grow by 101 Mcf/d month over month as seen in the chart below.

Haynesville Region Changes

In the 9,000-square-mile Haynesville, Chesapeake has been lauding its virtues as it goes on a frac attack, “We expect our gas volumes [in 2017] will be primarily driven by the Haynesville and Marcellus," said Chesapeake CEO Doug Lawler on the firm's most recent earnings call on Feb. 23.

He answered analysts' questions about the breakeven economics of the Haynesville, with a general comment, “We haven't set an exact price. As we've shared in the past, we have excellent breakeven economics in the Haynesville and they continue to get better with the improved capital efficiencies that we have recognized.”

“I think basically in the $2.50 to $3.50 range is where we anticipate gas to move with the seasonality," he continued. "If you saw it dip below $2.50 for an extended period of time, we would probably start making adjustments, but we are -- we haven't really said at a specific price we would move or adjust at.”

BHP Billiton announced in late January on its half-year operational report it would add another rig there, too.

While producers say they are planning to increase their activity, PointLogic's Senior Energy Analyst Mike Pittle has seen only modest production increases lately. “The Haynesville producing area in Northern Louisiana so far for the month of February 2017 is up almost 0.1 Bcf/d to 3.4 Bcf/d from January 2017. Compared to February 2016 the LA Haynesville has increased by the same amount, 0.1 Bcf/d. When compared to the past 4 years, production in the area has declined over 0.3 Bcf/d,” he said.

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In Texas, the TX Haynesville producing area is down over 0.2 Bcf/d from February 2016 to February 2017, he said. Compared to a four-year average, production has declined nearly 0.4 Bcf/d, Pittle said.

Yet, others see a brighter future, including some of the pipeline operators serving the area.

Seventeen major pipelines serve the Haynesville, including eight intrastates and  the following 11 interstates: Enable Gas Transmission, Enable Mississippi River Gas Transmission, ETC Tiger Pipeline, Southern Natural Gas, Tennessee Gas Pipeline, Texas Eastern (TETCO), Texas Gas Transmission, Gulf South Pipeline, Gulf States Transmission, Sabine Pipeline and NGPL.

On the last Kinder Morgan Investor Conference on Jan. 25, CEO Steve Kean said things are improving -- "recovering" is the term he used -- as producers are taking the playbook of larger players and increasing production through enhanced production techniques. He spoke anecdotally about one customer who didn’t drill at all in 2016, and Kinder Morgan had only expected the producer to run one rig this year but it’s putting on two. 

Williams CEO Alan Armstrong, in an earnings call on Feb. 16, observed, “Just to note about the Haynesville now, that's an area which is further advantaged if the Northeast takeaway capacity is unable to supply most of the coming demand in the Southeast U.S. So, we view our position here as very strategic."

Chesapeake renegotiated Haynesville contracts with Williams in 2016. Chesapeake CFO Nick Dell’Osso said on the October Analyst Day he expects the Haynesville shortfall on transportation costs to keep dropping over the next few years. 

Prop-A-Geddon

To the extent Haynesville enjoys a comeback, PointLogic’s Pittle said that it will be driven by technology as well as price recovery.

“I believe that the increase we are seeing in production is tied to just general production increases and rises in drilling activity because of the better price environment," he said. "Over the years, operators have continued to improve on the technologies used in horizontal drilling and in hydraulic fracturing and is allowing operators to drill longer laterals with more frack stages per section that can be turned on all at once or in stages (choke back) to allow production a steady ramp up to the well’s maximum performance level and in turn also extends the overall life of the well.”

As Chesapeake is one of the largest, if not the largest Haynesville player, it’s not surprising executives spent most of Chesapeake’s Oct. 20 Analyst Day detailing its boldest drilling experiments, determined to exact “Prop-A-Geddon, unleashing Hell on every gas molecule in the hole," as Senior VP Jason Pigott said.

CEO Lawler said that "10 is the new 35," meaning 10 rigs are doing the work of what 35 rigs did just a few years ago. But in the Haynesville Pigott said 3 is the new 35. The company’s rate of return in the Haynesville has grown from 3% to 47% largely as a result of much longer laterals, more frac stages and significantly more proppant, he said.

Productivity has grown 250%, based on 90-day cumulative data year over year, and adding sand will take that up another notch, Pigott said. (For comparison, company-wide, Pigott said Chesapeake has increased lateral lengths by 45%.) In fact, 19 of Chesapeake’s 20 longest laterals are in the Haynesville.

Right now, the company is averaging 70 stages per well, with 110 stages per well as a goal in 2017, Pigott added. “We expect to add 170 MMcf/d in 2017 per rig line,” he said. 

Not only is production up, but costs are down. “We take our P&L sheets [profit and loss] to every operator and we’ve gotten $2,067 per lateral foot costs down to $1,250 per lateral foot,” he said.

Finding and development costs will come down from $2.17/mcf to $0.67/mcf in 2017, Pigott  predicted.

Delivering monster IPs
Source:Chesapeake Energy earnings presentation

The Big Boom Theory

As of just six years ago, it was said the Louisiana section of the Haynesville alone could hold reserves of 230 Tcf. A land rush started in 2009, creating millionaires with bonus monies running up to $25,000 an acre. There was even a short-lived CMT reality show in 2012 called “Bayou Billionaires” based on a couple who sold gas rights to their land overlaying the Haynesville. The couple called the Haynesville royalty checks “mailbox money”. Billionaires they weren’t, but they were certainly at least multi-millionaires.

In 2011 gushed one local Louisiana newscaster, “It could be this century’s gold rush.” But what happened since then?

Encana documented in a 2011 video that it was one of the first to see the Haynesville potential, with a position encompassing 350,000 acres despite what was then considered an uneconomic basin to develop because of its low permeability. But with horizontal drilling Encana was able to better access the 150-million-years old deposits. And the shale also boasts a layer 500 feet above that called the Mid-Bossier. Encana also touted the access to growing markets and pipelines to move the gas.

Purely Dry

In 2015, Louisiana Oil and Gas Association President Don Briggs spoke of the boom and the bust. “When we think back to the steep incline in production from the Haynesville Shale that occurred from 2008-2012, jobs were easy to come by in the natural gas fields of North Louisiana. Along about midway through 2012, due to the price of natural gas dropping significantly, drilling in the Haynesville dipped," he said.

Briggs said then although the cost to drill a Haynesville well had dropped from an average $12 million to $7.5 million through cost saving measures, it wasn’t making drilling more attractive.

But then, as LOGA Acting President Gifford Briggs told PointLogic, the decline in gas prices dried up production but fast, as liquids-rich plays attracted drillers. “I would love to see $9 gas again [but] the reality now is we need to see long term, reliable pricing to make investments possible,” he said.

A Sept. 7 note from Citi pointed up what Briggs said. “Painfully low gas prices earlier in the year may have encouraged producers to focus more concertedly on wetter gas areas, thereby keeping associated liquids production supported even as natural gas production has fallen, though reportedly producers are not switching to any great extent in the Marcellus/Utica,” Citi's analysts wrote.

This could be occurring at a play-level, not a producer level, Citi added.

However, Gifford Briggs said this last week that what the Haynesville does have going for it is that “breakeven is lower now than seven years ago. Costs of drilling are down—drilling efficiencies are up.”

Add in the easy access to pipeline infrastructure and the manufacturing-industrial and LNG renaissance, and the Haynesville has significant attractions, he said.He pegged investments through 2020 at $100 billion for petchems and LNG.

Dry gas production, obviously, is highly sensitive to gas prices. “With $4-5 Henry Hub (HH) in 2009-2011 production was growing a ton in the Haynesville. However in 2012 when HH dropped close to $2, dry gas plays like the Haynesville went out of favor," said Nils Jenson, energy and materials analyst at Crescat Capital, in an email to PointLogic.

"From 2011-2012, NGL prices generally fell with a lag behind natural gas itself (and oil was also much higher, of course), so wet gas plays were preferred thanks to the extra boost from NGLs. That meant the Eagle Ford and other wet areas were getting all the attention at the time," Jenson continued. "Now HH is firming up, but so are NGLs, and both have a bright future, so I wouldn’t suggest that dry plays would be preferred over wet plays going forward.”

“Looking forward longer term, Haynesville has good infrastructure and is close to the Gulf Coast," Jenson said. "U.S. natural gas in storage recently came down to the 5-year average even with a very mild winter. Thanks to longer-term tailwinds from LNG/pipeline exports, coal plant retirements, and new petrochemical plant capacity, the longer-term demand picture is still looking good."

As the industry continues to get back on its feet, Jenson predicted that rig counts will grow "at a similar or slightly slower rate than the U.S. as a whole. I don’t see the type of production growth seen in the play’s earlier days, given the lack of liquids and limited budgets in the industry, but the outlook for natural gas is positive and it’s still a good resource close to all the Gulf Coast infrastructure.

“I think the most important point is that it fell out of favor since it’s a dry gas play, but now both natural gas and NGLs are in good fundamental shape,” he concluded.

Also, said LOGA's Gifford Briggs, the theme from Chesapeake that the Haynesville had been left for dead isn't quite accurate. “The companies didn’t leave after the boom, they reduced production and continued working off their leased obligations," he said.

Chesapeake and several others are banking big on the bayou. “We wanted you to hear what a 40 million a day [cubic feet of gas] sounds like,” Jason Piggott said in an audio clip, explaining the company had placed a microphone next to one of its Haynesville wells. At first there’s just an ear-bleeding whoosh, then comes the overlay of a familiar bass riff and then “Money…It’s a gas” sung by Pink Floyd.

And one last advantage of the Haynesville over the Marcellus/Utica is the Southern hospitality shown to the gas industry, said LOGA’s Briggs. “We don’t have any real local challenges," like they do up North, he said.

Enticing Opportunities -- Under the Right Conditions

PointLogic’s Vice President Charles Nevle offered his own insights on the Haynesville.

“The Haynesville remains a very enticing shale gas play. It is one of the most explored of the shale plays, has ample pipeline capacity, and is very near the large growing LNG export market," he said. "Producers such as Chesapeake continue to be extremely innovative in finding ways to extract more gas from the play at lower and lower prices. The challenge for the Haynesville continues to be the competition from oil-directed associated gas from plays like the Permian, which is fairly insensitive to natural gas prices, and the relentless focus on the Utica and Marcellus plays.”

But in mid-February, several analysts (Bloomberg Intelligence, Williams Capital Partners LP and Infill Thinking) came out with comments speculating that Permian prices of up to $60,000 per acre could drive explorers to the Haynesville, as well as the SCOOP and STACK, Bakken and the Eagle Ford.

While Nevle believes in a possible Haynesville resuscitation, it might not be right around the corner, he warned. “2017 looked to be the year of a resurgence in Haynesville production, but a warm weather driven lackluster winter demand looks to set storage balances well above the 5-year average as we exit winter, placing less of a need on Haynesville production to balance the market," he said. "Nonetheless, rigs have been increasing in the play and a potential resulting production increase this summer could be looming whether the market needs it or not.”

In other words, while there are some green shoots for the Haynesville, the biggest issue looming for the play is where the storage balance will be at the end of October 2017. 

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