Haynesville E&Ps' Conundrum: Curtail or Not Curtail?

Copyright © 2023 Energy Intelligence Group Published: Fri, Mar 31, 2023

Authors Everett Wheeler, Shreveport, Louisiana

The volatile gas and oil-field services markets have Haynesville Shale gas producers balancing their short-term and long-term plans, with some dropping rigs, leaving wells uncompleted and even curtailing production in response to diminishing margins.

But with an eye toward meeting growing domestic demand and feeding nearby LNG export markets in the long term, not all producers in the basin straddling the Texas-Louisiana border are taking immediate steps to curb growth, despite broad agreement that the gas market is oversupplied. And they credit strategic hedging for the ability to navigate the volatility.

'Calming the Waters'

“Volatility is part of our business, and that’s something that you just have to expect,” Aethon Energy President Gordon Huddleston told attendees of Hart Energy’s DUG Haynesville conference in Shreveport, Louisiana, this week. “It’s really important that we’re able, when we look at our long-range plans, to be able to execute on that. Because we have debt like everybody else, it’s really important that you’re able to continue recycling that capital into high-return projects. And you don’t want to get caught in a situation where you might not be able to.”

Ahead of the conference, Huddleston told Energy Intelligence that “a rising tide of prices that raised many ships in 2022, but it will be difficult for smaller producers to weather more volatility and inflation without increased scale and discipline to sustain more consistent production — or in Aethon’s case, measured growth.”

As the region’s largest private gas producer with midstream assets to get its gas to market, Aethon “is in a relatively unique position,” Huddleston said. “We have a longer-term view where we’ve hedged much of our production for 2023. That calms the waters in managing a more active drilling and completions program than our peers.”

He told the conference that Aethon is running a 14-rig program, and many of the wells it is drilling now will be turned to sales in 2024.

“We’ve got about 1,100 miles of pipe and move a large portion of our volumes and some other volumes on that pipe. And so as we’re expanding, in particular, our East Texas facilities. We want to really make sure that we’re filling that capacity and keeping it full for a long period of time in order to maximize that revenue,” Huddleston said.

However, Aethon’s plan has always been to dial back activity over time. “We’re in the low double digits of growth right now, and we expect to be in the single digits over time as that pacing moderates more.”

Rockcliff Pulling Back

Rockcliff Energy CEO Alan Smith said his company is running five rigs in the Haynesville and plans to drop two by midsummer following changes to its risk management strategy.

“We’ll likely be running two frac spreads through the balance of the year, and you’ll see us alter that a bit in 2024, but our goal is to be just-in-time with that rather than trying to build an inventory" of drilled but uncompleted wells, he explained.

Smith said Rockcliff “felt the pain” when prices jumped to $9 per million Btu last year. “Now that we’ve turned out some of our debt and public bonds, we’re hedging less,” he added — and that hedging strategy is what allowed the company to maintain its activity cadence through the last downturn.

“The reason we’ve been able to consistently stay at four rigs when gas dipped into the $1s in 2020 is when we underwrite an asset, we hedge it. … We drilled right through Covid. And we got a lot of questions: ‘How come you didn’t lay anybody off? You didn’t lay a rig down or a frac spread down?’ Well, it was because we were hedged at roughly $2.50.”

'Hamster on a Wheel'

Sabine Oil & Gas CEO Doug Krenek said his company has about 76% of its production hedged at close to $3.40/MMBtu. The other 24%, about 90 to 100 million cubic feet per day, is being curtailed. “Next year we’re exposed, so we’re hoping a turnaround comes,” Krenek said.

But even if that does happen, re-ramping production could pose a challenge, others observed.

“I’ve been warned … that you can’t shut this production in too much or you’ll never work your way out. It’s like a hamster on a wheel,” GeoSouthern Energy President Meg Molleston said. “We’re going to try to keep our production flat, maybe go a little less than we’ve got. We’re going down to a rig and a half or two rigs and are reluctantly hedging a little bit.”

Rob Turnham, director at E&P New ASEAN Energy and former president of Haynesville stalwart Goodrich Petroleum, said operators are more likely to slow their drilling and completion activity than to curtail production. “You might choke them back … where you minimize the pressure drawdown and flatten out the curves. But as far as outright shutting them in, I don’t think you’ll see much of that.”

Rising Service Costs

The Haynesville has become an early test case for just how sticky US oil-field services costs have become in the wake of last year’s hefty increases, and operators at the conference voiced their concerns about rising costs and plunging gas prices.

“Our play has always been a margin play,” Turnham said. “Everybody focuses on gas prices, but they don’t focus on capex and service cost and that combination of what I spent for what I get."

Molleston said that in the past year "we’ve seen probably a 25%-35% increase in our cost to drill and complete just due to inflation.”

RockCliff's Smith told the conference that his firm was in a similar situation as GeoSouthern, but it has had some success in pushing back on services costs.

“In January we were seeing the equivalent of $5 gas equivalent capital cost, and all of a sudden we’re seeing $2/MMBtu gas. That’s just not sustainable,” Smith said. “We’ve approached [our service providers] and said this is the conundrum: If you want us to continue at anywhere close to the pace we’re at today, we’re going to need some help here.”

He said that some of the services firms working with Rockcliff were receptive, although not all. “We’ve already seen [pricing] change. We’re seeing it in some other places, too. Depending on what service we are talking about, it’s 15%-20% reductions."

But representatives for some services firms at the conference said there was only so much they could do to ratchet down last year’s price hikes. “Most of our price increases have gone into giving our guys raises,” a Haynesville services company official told Energy Intelligence. “You can’t take that away."

He said demand for services in oilier basins was also propping up prices, and that providers capable of moving their equipment and crews elsewhere were often doing so.

Bernadette Johnson, Enverus power and renewables general manager, said concerns about service costs comes as geopolitical tensions, and the possibility of disruptions to trade flows, make their direction hard to predict. “I do think there’s room for downward pressure on pricing, but I also think there’s a ton of risk out there,” she said. “We’ll see certain pockets of very high pricing, because there are certain things that we won’t be able to get, depending on what happens.”