PXP Buys Into Haynesville Shale, Could Be a 'Great Deal'

The Haynesville Shale appears to be the next platform for stock growth. With so few options in this market for growth, without agricultural plays such as (POT) and (IPI), the energy market looks primed for growth through the end of the year. Also, if you think that OPEC will help us, you are sadly mistaken. Since they have had low prices for so long OPEC will keep them up for as long as the US market doesn't belly flop. This is an interesting time for our economy but luckily we are resilient. By next year we will start flooding the market with high fuel economy and hybrids cars with smaller, cheaper batteries that will run a vehicle alone up to 40 miles per gallon. I know I'll here about that statement but Dodge already has a plan for such a model. We will wait and see. Until then, exploration and production of natural gas looks good. With nothing new to push down the price and an inability to hike rates unless Europe does, we will still see high prices. Don't blame the speculators, as they wouldn't be speculating if there was a high inventory.

The Haynesville Shale appears to have a plethora of resources with respect to natural gas. Chesapeake Energy (CHK) made a great move getting in there and that is why their stock is up so much since I made the call on theupdown.com. Even more important was the news of an agreement with Plains Exploration & Production (PXP). This could be a great move for CHK, but PXP could end up making out like a bandit. For PXP this is an instant move into shale that could hold up to 23 to 44 trillion in unrisked, unproven reserve potential.

CHK probably didn't want to do the deal, but they needed a partner with a lot of cash so they can expand quicker. This means CHK doesn't have to dig a hole through credit and also means they do not have to sell more stock which could punish the company. They also don't have to worry about their credit rating. Tthe quicker they get they gas out of the ground the less chance of natural gas prices plummeting. PXP basically buys 110,000 acres of the current 550,000. PXP has the right to participate in any other venture at 20%. CHK also stated that they plan to drill 600 new wells in the next three years. That is another possible 120 wells for PXP. It's a match made in heaven and could make PXP a huge player if the reserves are anything like they expect. Not only do they get to put their cash to work now, but also as a growth opportunity going forward.

PXP is also selling at a discount to its peers. Companies like (HK), (EOG), and CHK are all much more expensive when compared to enterprise value per BOE proven reserves. When placed against its peers, only one company is less expensive and HK is more than double. This valuation has flaws, as they have to be able to get production up and going, but PXP just found out how to with adding to its reserve base.

Over the past year or so PXP has seen its production and cash flow increase, while they have seen production costs decrease. Production in the first quarter of 2007 was 51.9 thousand BOEPD, while in the first quarter of 2008 it was 95.7. Every quarter saw an increase. Operating cash flow in the first quarter of 2007 was $94.6 million which increased to $350.2 million in the first quarter of 2008. Production costs for the first quarter of 2007 were $13.25 per BOE which reduced to $17.57 in the first quarter of 2008. Since 2006 they have repurchased 13.44 million shares of stock. Production growth from 2002 is 24% CAGR. Proved reserves have increased 19% CAGR.

All of this appears to be a good company making a great deal. Since they have so much cash, it was the best way to get into shale since they are already in the Gulf of Mexico. PXP could see an amazing run and their shares are a buy.

Disclosure: Author is long PXP, CHK, IPI, and POT.

Comments

[Trader Tim]

Seems that everything relating to the Haynesville Shale has been put on hold.....this winter the shale plays will again heat up!

oilshalegas.com/haynes...