Haynesville: True Staying Power

Five years ago, the Haynesville shale emerged as the largest producing shale gas play in the US, with an estimated 250 trillion cubic feet of natural gas, with the first discovery announced by Chesapeake Energy. Depressed natural gas prices have somewhat dulled the development pace at Haynesville, but we still like this play. Now that the shale orgy has let go some of its decadence we can examine the potential without all the fanfare. Here's why we like it:

•    As the natural gas market levels off, Haynesville will be on the top of everyone's list
•    We've only tapped into one-quarter of the Haynesville Shale's potential
•    Not only is it the US' largest shale gas field, it could be the world's 8th largest
•    It is this play that balances natural gas supply and demand
•    We think this is play has mileage and long-term stability
•    Long-lived reserves, high drilling success rates and wells with relatively high initial production rates
•    Largest inventory that can easily be delivered to market
•    It's got the infrastructure advantage, close enough to the St. James terminal and access to Gulf Coast transport and logistics-unrivaled pipeline infrastructure

The Geological Snapshot

Spanning Louisiana, Texas and Arkansas, the Haynesville Shale (also known as the Haynesville/Bossier Shale) is the largest shale gas field by production in the US, followed by Barnett (Texas), Fayettville (Arkansas) and Marcellus (Pennsylvania and West Virginia), covering an area of approximately 9,000 square miles. The Upper Jurassic Haynesville play has high IPs, steep decline rates and EURs estimated at 3-7 Bcf per well. Shale thicknesses range from 200-350 feet at producing depths of 10,000-14,000+ feet.

Activity is up and down, but don't write this one off …

Louisiana has been the sweet spot in Haynesville, with more than 1 million acres leased so far. The drilling frenzy began in 2008, following on Chesapeake's discovery. In early 2011, the Energy Information Administration (EIA) came out saying that Haynesville was the highest-producing shale gas play in the US, putting out 5.5 billion cubic feet of natural gas per day, surpassing the Barnett Shale. Then 2012 saw a disappointing drop in activity as natural gas prices bottomed out and supply hit new ceilings from other producing shales.

But 2013 has already seen a bit of a revival.

The rig count has declined thanks to low natural gas prices, but since January, there's been an uptick. At its peak in 2010, there were 186 rigs in the Haynesville Shale (most of them in Louisiana). By late 2012, there were only a dozen rigs left, but this month there are more than 40. So things are getting back to "normal". 

A whopping 2,400 wells have been drilled since 2008, and still we've only tapped into 25% of the potential.

Production reached its peak in late 2011, at about 7.34 Bcf/d and at the end of the first quarter of this year was hovering at around 5.59 Bcf/d. So it's hanging in there, just waiting for natural gas prices to rise a bit more.  We're patient, and you should be, too.

The Infrastructure Bonanza

There's a lot to choose from, and this is the KEY advantage here, and also what makes Louisiana's Haynesville territory a bit more attractive that Texas'.

Here's what we've go so far (and this is only the short list):

•    Louisiana has about 125,000 miles (87,764 onshore and 37,000 offshore) of pipes that transport oil, gas and chemicals
•    The Gulf Coast has over 500,000 miles of pipeline stretching from the tip of Texas to Alabama
•    Henry Hub, in Vermillion Parish, is the largest centralized point for natural gas spot and futures trading in the US. It interconnects nine interstate and four intrastate pipelines. Keep in mind that Henry Hub's natural gas prices have continued to rise lately. This year, natural gas has outperformed oil, gold and copper by a wide margin.

And here's what's in the works: 

•    Cheniere Energy has won approval from the government to go ahead with the $11 billion Sabine Pass natural gas export facility in southwestern Louisiana, and construction has already begun. On 29 May, Cheniere announced it had secured $5.9 billion in debt financing from a syndicate of banks to start construction on trains 3 and 4 immediately with an expected completion in late 2015. Work on trains 1 and 2 began in August 2012 and are 30% complete.
•    Lockheed Martin plans to build liquefied natural gas (LNG) tanks in nearby New Orleans

Back in Business …

We're mostly looking at Chesapeake, the big spender, and Encana Corporation in Haynesville, and considering Exco Resources Inc.

Chesapeake is the largest Haynesville player, and the shale's pioneer, with the most acreage and the most ambitious drilling. It's got 921 producing wells in Louisiana and they put out over 600 billion cubic feet equivalent in 2011 alone. 

Encana Corporation, down to only 2 rigs right now, says it's ready to return 3 more rigs to Haynesville by the end of this year. In February, Encana surprised analysts with its confidence over Haynesville, stating: "Encana is resuming activity in the Haynesville play. Because of the low supply costs in this play, Encana expects that the Haynesville will be able to produce solid returns at current natural gas prices. The company currently has two rigs running in the play with plans to increase to five rigs through 2013." The company says its costs have come down enough to make its Haynesville operations profitable. Encana initially had big designs for Haynesville, jumping in and drilling six wells.

Exco Resources Inc is back in the saddle now, with 3 new rigs this year and plans to drill 7 new wells.

Overall, we agree with Encana's sentiment: This is a long play, worth keeping. It may outlast the others and that's what makes it a safer bet. Chesapeake has known this from the start, though it too got caught up in all the decadence.