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Floyd Wilson

Petrohawk Energy Corp. had an outstanding 2008. It showed organic reserve and production growth, the ability to raise more than $1.5 billion in the capital markets before these ground to a halt, and most intriguing, headline-making successes in the hot-button Haynes­ville shale in Louisiana and Texas. What’s more, Petrohawk unveiled its presence in the emerging Eagle Ford shale play in South Texas in October.

Under the vision of chairman, president and chief executive Floyd C. Wilson:, the Houston-based company has repositioned itself to grow by focusing on higher-return, shale-gas plays and selling its more-conventional assets in the Gulf Coast and West Texas during the past two years. In 2007, organic reserve replacement was 281% and production rose 21%. Final results for 2008 were not yet released at press time.

The future looks bright. Petrohawk has feathered its nest with some 300,000 net acres in the Haynesville shale, to become one of its leading players. Its key legacy in the region, Elm Grove Field, came through its acquisition of KCS Energy. While Elm Grove represents most of the company’s current focus and infrastructure, that will be enhanced with some 12 operated rigs working the Haynesville zones in the region in 2009.

Petrohawk completed its first operated horizontal Haynesville well last June. It recently announced three more such wells, with a combined initial flow of 73 million cubic feet equivalent per day.

And, the company is investing another $250 million in midstream assets in the area during the next few years to allow for more production growth.

Wilson: has built and successfully sold E&P companies several times before. He frankly says he expected Petrohawk would have been sold or merged by now, “but we got into a couple of such awesome plays that we wanted to exploit them. We are so fortunate.”

Indeed, this time around, he may want to run a little longer, since Petrohawk is sitting on trillions of cubic feet of gas potential in several shale plays. In the Haynesville alone, the company has enough to do to keep on its current drilling pace for the next 50 years, which Wilson: admits is “crazy.”

As for the Eagle Ford, he says the company had previously sold its position in the region, but new research brought the area back to his hawk-like attention. Petrohawk worked for more than a year, building a large enough land position in a specific area in South Texas to better exploit the new field.

The first Eagle Ford well, announced in October, yielded initial production of 9.1 million cubic feet of gas equivalent per day, drawing other companies to the play.

This good news came just as commodity prices swooned and the credit crisis deepened, however, throwing the industry into a whirl. Many E&Ps, including Petrohawk, reduced their exploration and development programs. The stock price also was buffeted.

Wilson:, however, thinks the company remains sufficiently hedged to weather the situation and has the assets and capital to stay afloat, regardless of what the markets do.

Wilson: has been named Oil and Gas Investor:’s Executive of the Year for 2008 in its sixth annual Excellence Awards program. He spoke with Oil and Gas Investor: about Petrohawk’s success in the Haynesville and his outlook on the Eagle Ford shale.

Investor: How did you come to discover the Eagle Ford shale?

Wilson: It’s very exciting for us. We set out to find another shale play that had the attributes and characteristics of the Haynesville shale, in which we have become a significant participant. We came up with a number of ideas over several months and zeroed in on this particular idea of the Eagle Ford shale in this particular location. We had some old data points that allowed us to feel confident that the shale had sufficient thickness. We had a good understanding of the land position, so we leased up, essentially, what we considered the localized productive area of the Eagle Ford shale. This took about nine months.

Investor: What do you think the long-term potential is for this emerging shale?

Wilson: The exploitation will depend on the commerciality of the early tests. So far, that’s looking interesting. The potential would be much like other shale plays. Maybe not as attractive as the Haynesville at the moment, but it would be very exciting. Our leasehold has the potential of 15,000 wells, which would be a huge piece of business for us, if all this comes to fruition. I’m very high on it. We intend to use one rig there in 2009.

Investor: How has Petrohawk been funding its exploitation of the Haynesville play?

Wilson: It comes from a combination of cash flow and available capital. We’re significantly hedged in the derivatives market, so we realize a comfortable gas price. We’ll have spent a little more than $200 million in the Haynesville in 2008, and plan to spend $600 million in 2009. The 2008 operations were funded with cash flow, and 2009 will be funded with a combination of cash flow and available capital. The good news is we’ve funded it concurrently with acquiring our large position in the Haynesville. We reloaded our capital structure several times in 2008. At this time, we see no need for external funding. We have plenty on our plate, and we have decades of drilling to be done at our current pace.

Investor: What about the fact that you cut your budget by about a third for 2009?

Wilson: It was my job to cut the budget and maintain some discipline around cash flow, but it is also my job to make sure we keep those great fields on track and don’t let them languish. Some of the best times to create opportunity are when people are pessimistic. This may be one of those times. I don’t know about acquisitions, but I do feel these great assets deserve more capital.

Investor: What has made Petrohawk so successful in this play?

Wilson: A combination of good fortune, experience and the ability to seize an opportunity quickly. The play blossomed around our existing position at Elm Grove Field in northwestern Louisiana. We have a long history of drilling tight gas using horizontal techniques, both from shale and tight sands. So our location was fortunate and our skillset was conducive to quick execution. We didn’t have a learning curve that we had to go through before we could effect efficient operations. This Haynesville is not easy. You are drilling into high pressures of 14,000 to 15,000 psi and 350-degree downhole temperatures. It really tests the capacity of the equipment. These wells come at you pretty strong. We’ve never seen a shale like the Haynesville.

Investor: What is your percentage weighting to the Haynesville in terms of enterprise value and capex? Is this purposeful? Will it be more or less going forward?

Wilson: The market has been so volatile lately. Companies likes ours really don’t have a good measure of the components of enterprise value. If I separate the drilling capex from infrastructure capex, we’re going to spend more than 70% of our capital drilling on Haynesville wells. That’s $600 million out of $830 million for drilling that we project to spend on wells in 2009.

Investor: As Haynesville production grows, are you worried about having enough take-away capacity? Do you foresee bottlenecks?

Wilson: We feel like we’ve planned and secured sufficient capacity through 2009 and the better part of 2010. We are hoping for, and counting on, some new-build projects or improvements in existing projects, meaning some line-looping or compression to add capacity in 2010. The field will certainly need that by then. This is where the credit-market issue really has impact, since many of the pipeline projects require significant debt to provide the equity Investor:s the rate of return they expect. In time, the existing takeaway capacity of the field is going to be fully utilized, and there’s going to be a need for new capacity.

Investor: Are you open to entering any joint ventures in the Haynesville?

Wilson: We’re not looking for a joint-venture partner at this time. We’re well capitalized, and we have a largely hedged production profile that provides plenty of cash flow for the next several years. We’re open to discussion, as we are with any property deal, but there’s nothing specific at this moment.

Investor: What are your plans for your other assets?

Wilson: We have some great assets in the Permian Basin, and a few Midcontinent assets, such as Wehlu Field in Oklahoma, that are money-makers, even at current commodity prices. However, at some point in time, we intend to divest some of those properties to reinvest funds in the shale plays. Right now, the resale market is not very robust. The good news is that we’re not in a hurry or in a bind, so we’ll pick an appropriate future time to market some of these properties.

Investor: Are you worried about a gas glut depressing gas prices? Will you be a net asset buyer in this distressed A&D market in 2009?

Wilson: Obviously, gas prices are affected by the supply-demand balance. We’ve had very nice supply growth during the past few years, totally driven by success in these new shales. When we tie that in with the timing of a recession and a little demand contraction, we certainly have a supply situation that contributes to this downward pressure on gas prices. It’s hard to be worried about a fact.

Investor: Will E&Ps that have had recent success in unconventional plays continue to operate at the same pace in this financial environment?

Wilson: There’s a lot of news about companies curtailing drilling and reducing capital programs, to the extent that many analysts are projecting significantly fewer rigs operating in 2009 than were operating in 2008. Since many of these rigs are drilling these highly productive shale wells, you would expect to see lessening supply. We’re going to assume that things will remain challenging.

Investor: With many E&Ps struggling to survive, how will Petrohawk thrive in this uncertain environment?

Wilson: We have a strategy and a philosophy that we’re going to hedge our production significantly for a few years out. We are in a commodity-based business, and commodities generally are volatile, especially in challenging times. We think we are well positioned in terms of capital availability, and the ability to drill wells that are very efficient in terms of finding and development costs, and operating costs, to produce. We’re projecting we’re going to come through these challenging times just fine.

Investor: What does Wall Street misunderstand about Petrohawk’s potential?

Wilson: I don’t like to complain about what Investor:s don’t understand, especially to complain in a challenging time like this when many businesses’ valuations have been dramatically affected by conditions outside of their control. So it’s hard to say that someone misunderstands something. However, it’s pretty clear that for a company our size—1.3 trillion cubic feet of gas equivalent at midyear 2008 and that has reported it has the potential of up to 22 trillion cubic feet on top of that, all within its current acreage blocks and expertise in terms of exploitation—there’s certainly not that much value being attributed to potential. But in these challenging times, it’s hard to single out Wall Street and say it doesn’t get it.

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