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Hoedown or Slow Down in the Haynesville?

Excitement surrounding the Haynesville seems to be growing again thanks to some impressive reports of well performance by Comstock, Chesapeake, and Exco. So much so, that Comstock’s stock price tripled after its second quarter earnings call. So what’s the deal? Are we seeing a resurgence that will pick up the slack for lower associated gas production and serve south Texas demand? What does the data tell us about changing economics in the Haynesville?

On their second quarter earnings call, Comstock announced that their Haynesville production jumped 60%, from 48 MMcf/d in the first quarter to 77 MMcf/d in the second. This spike, Comstock said, was attributable to improvements in drilling and completion techniques, allowing longer laterals and higher fluid and proppant densities during completions. Comstock wasn’t the only one announcing new techniques in the Haynesville. Exco has gone the route of employing more proppant during completions, while Chesapeake has used more proppant and extended their lateral lengths. Not only are new techniques helping producers, but service costs have been falling across the board, which has allowed operators to experiment in their drilling and completions more economically.

How does all this translate to well breakevens? Let’s looks at how the economics have been evolving over the last couple of years. First, let’s set a benchmark for comparison by using 2014 producer reported well costs and historical decline curves coupled with well by well initial production rates to calculate breakevens for the region as a whole. Aggregating the results across the play, we calculate that the wells drilled in the Haynesville in 2014 had a median wellhead breakeven cost of $3.35/Mcf.  With a point of reference for 2014 activity, let’s separate wells by year spudded as well as by the operator, and perform the same type of analysis using some of the newest well results. The graph below shows results for the three companies in question.

Right off the bat, you probably noticed Comstock’s solitary bar in the graph. Unfortunately, not only is data limited for wells spudded in 2015, but Comstock has had limited activity, not spudding a single well in 2014 and only three, albeit successful wells, in 2015. It must also be noted that since these are average breakevens, they contain older vintage wells that are not being completed using new techniques.

Also noticeable in the graph is the conspicuous increase in Exco’s breakevens from 2014 to 2015. Why is this? A possible explanation of this is, not that Exco has lost their touch, but that Haynesville wells have a somewhat unique problem. Their pressure can be so high that operators need to use a ‘restricted choke’ to regulate the pressure at the wellhead. This in turn will cause Haynesville type curves to flatten as compared to typical horizontal wells which decline rapidly after the first month. The analysis in this commentary assumes an unrestricted choke type curve, so depending on the operator’s decision about how much to choke back wells, economics will be impacted, especially where we have limited data.

So what’s the verdict on the Haynesville? Will new drilling and completion techniques lead to a Haynesville Renaissance? Only time will tell, as production data is fleshed out. If you would like more analysis of the Haynesville, including wells mapped by operator and 2015 production to date, be sure to check out BTU’s Upstream Outlook.

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Matthew Hoza is a Manager of Energy Analysis for BTU Analytics. Currently he is leading the power team in the development of BTU Analytics’ Power View platform, which provides capacity, generation, and power price outlooks for ISOs and utility areas across the US. Previously, Matthew led the natural gas team that develops and maintains outlooks for natural gas production, demand, pricing, and infrastructure, as well as provided bespoke natural gas market analysis. He holds a M.S. in Finance from the Simon Graduate School of Business at the University of Rochester and B.S. in Physics from Florida State University.

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