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Outlook dims for Haynesville as prices slump

Weakening commodity values means operators are scaling back rig numbers

The outlook for the gassy Haynesville shale of Texas and Louisiana has dimmed in recent months as commodity prices have weakened.

Operators Chesapeake Energy and Comstock Resources both announced plans earlier this month to scale back the number of rigs in the play to offset the impact from expected sub-$2.50 natural gas prices going into next year.

In Chesapeake's case, its efforts will cut its rig programme in one of its flagship basins from one to zero.

More recently, financial services firm Tudor Pickering Holt lowered production forecasts for the Haynesville and the Appalachian basin.

"We expect both frack and drilling activity declines in gassy basins (in the second half of 2019) and if our gas macro forecast proves more right than wrong, capex could fall as much as 30% versus 2019, leading to further softness in 2020-21," TPH said in a research note earlier this month.

Yet activity appears to have steadied on the Texas side of the basin. According to Baker Hughes rig data, the Texas Haynesville rig count has stayed relatively flat since the start of the year, fluctuating between 19 and 23.

The Louisiana side of the play has been prone to larger swings, between 29 and 38 since the start of 2019.

"I think it's still pretty definitive that the Louisiana side is still the core of the play," said RS Energy vice president Nick Volkmer.

"There are a lot of operators, though, on the Texas side that only have exposure to the Texas side, so I think that's playing a part in why we're seeing the rig count hold a little bit steadier."

In addition, while there are a number of small private companies with Louisiana assets, larger players like Chesapeake have the option to deploy capital to other plays while they wait for prices to improve.

Because Haynesville wells are productive, it will only take a handful of rigs to drive production back up in a short amount of time.

Yet at least one player has plans to potentially ramp up on the Texas side of the play. Aethon Energy is currently running around nine or 10 rigs, and may take that number up to 12, Gordon Huddleston, the company's co-president, said.

"Our plan is to continue developing at the same pace prior to pricing dropping," Huddleston told Upstream.

"I think that we want to have a lot of production on line as the market recovers over the next couple of years."

To help it weather the low commodity price environment, Huddleston said the company has a strong hedging programme in place.

"I think we're pretty aggressive on our strategy and hedging, and also our focus has always been on finding access that would have very, very low cost," he said.

Low cost for market access is one factor that may make Texas more attractive to players in the low-price environment. For Louisiana producers, who may be subject to legacy transportation agreements that were signed when prices were much higher, that can be elusive.

"They were done when gas was at $4.50," Huddleston said. "It wasn't that material when prices were at those levels but as pricing has come down it just really destroys the economics. That's something that we're focused on and that's part of the reason why we make a big point about trying to control as much of our midstream as possible."

In addition, since the Texas side of the Haynesville hasn't been as developed as the Louisiana side, it could be easier for new entrants to drill multi-section long laterals, Huddleston said.

For its part, Aethon is looking at drilling 7500- to 10,000-foot laterals on its acreage and develop large multiwell pads, "akin to what they're doing in the Permian," Huddleston said.

There have been a few deals in the Haynesville this year, notably Comstock's merger with Covey Park.

The acquisition made Comstock the biggest Haynesville operator and allowed it to step out into the growing East Texas portion of the play.

More recently, Japan's Osaka Gas acquired full control of Sabine Oil & Gas, a Texas Haynesville and Cotton Valley producer, for $146 million. Huddleston said Aethon has seen some interest from international buyers looking to hedge liquefied natural gas cargoes from the US Gulf Coast.

"These are guys that have large tolling agreements or some kind of LNG commitment and they're just looking at ways to lock in their price for natural gas over the next 20 years," he said.

He also expects to see more consolidation happen in the basin as low prices take their toll on already overleveraged players.

"I think if prices stay down, if we have a warm winter I think people are going to have to.... be in workout with their bank groups, which would either be restructuring or forced divestitures. It's just not sustainable."

Volkmer also said the M&A market continues to be a focus in the play, where a large swathe of assets is held by private players.

"We know it's going to continue, we know there will be some consolidation," he said. "We know it's going to happen in the future, we're just kind of waiting on when."

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