In 2012, the once-hot Haynesville Shale peaked. Producers were deciding that the play in Louisiana and east Texas, which had seen a steep ramp-up in production in the early shale era, was too expensive to drill relative to other plays and were leaving in droves.
Through a combination of lower costs from drilling technology advances, an influx of private equity investment and shifts in energy markets, the Haynesville is on the upswing again, with the September gas production average the highest in the play since 2013.
"We have been active again in the Haynesville since early 2015. The returns on the wells are phenomenal," said Gary Guyton, director of investor relations for Frisco, Texas-based Comstock Resources Inc. Comstock was active in the Haynesville in the early days of the shale boom, then shifted focus in 2012 to the cheaper, liquids-heavy Eagle Ford Shale.
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"At $2.50 [per MMBtu] gas, we make a 50% return. At $3 gas, the returns are 75%-plus," Guyton told S&P Global Market Intelligence. With the spot price at the nearby Henry Hub close to $3/MMBtu, that leaves plenty of room for companies like Comstock to thrive in the play.
Comstock, like a number of other active players in the Haynesville, has its operations backed by private equity and other funding sources. According to a September report by Bernstein Research, private investment was paying for 25 of the approximately 40 active rigs in August, and private equity had been responsible for every M&A transaction in the play since the third quarter of 2013.
Drilling technology: 'We've had this renaissance'
One of the first unconventional plays to draw attention, the Haynesville began to feel the pinch of low prices before others did. A steep rig count slide was already well underway in 2012 when production peaked in the shale, which was deemed tougher to drill — and therefore having higher break-even prices — than plays like the Marcellus Shale in the Northeast and the Barnett Shale in north Texas.
Northern Louisiana accounted for 11% of the nation's rig count at the beginning of 2010 and just 3% two years later, after producers chased cheaper gas zones and more oil-heavy plays, Scott Angelle, then Louisiana's natural resources secretary, told SNL Energy in 2012.
"I see economics ruling the day, as they always do ... there's a reason the rig counts are down in the Haynesville," said Angelle, now the director of the U.S. Bureau of Safety and Environmental Enforcement. "Until prices go up, and until we find wider uses for natural gas, I'm not bullish [on the Haynesville]."
The recovery began after a second skid in 2015-2016 that sent the rig count in the Haynesville to as low as 12, but it was not because gas prices changed markedly. The number required to turn a profit did.
"We've had this renaissance of completion design," Chesapeake Energy Corp. Executive Vice President of Exploration and Production Frank Patterson said in September. "And quite frankly, the Haynesville is where it began."
That combined total was 50 cents per Mcf less than just a year before and was well below recent break-even prices in the Fayetteville, more than $3.50/Mcf, and Barnett, more than $4.50/Mcf, shales. It was within 50 cents per Mcf of the southwest Marcellus and Utica shales, where Bernstein estimated drilling and midstream break-even costs at $2.50/Mcf. But prices at hubs in Appalachia lag behind the Henry Hub, making the Haynesville's cost reductions all the more attractive. Patterson said Chesapeake, like other major players in the Haynesville, improved its returns by extending its laterals on new wells and refracking, or hydraulically fracturing again, ones that were as much as a decade old.
"The longer laterals are allowing us to reduce the number of wells that we have to drill. We have tested the re-frack potential. Honestly, it's going to work," Patterson said. The laterals Chesapeake is working with are massive: In 2016, the company drilled at least six wells with 10,000-foot laterals that required more than 30 million tons of sand, or proppant, pumped into the well. "We call this new era in completion technology proppant-geddon," in the words of Chesapeake CEO Doug Lawler.
Cheapeake has not been alone in seeing better technology leading to positive returns in the Haynesville. QEP Resources Inc. said it spent $44 million on refrack activity in the play during the second quarter as part of a program that has increased production by nearly 150 MMcf/d since the middle of 2016.
"One obvious benefit of driving production growth in the Haynesville is the returns and, therefore, the payout on these wells are extremely attractive at $3 gas," QEP Resources CEO Charles Stanley said.
As of Oct. 13, there were 44 active rigs in the Haynesville — a far cry from the 161 that were drilling in early 2011 but just one behind the rig count of the prolific Marcellus.
Private equity backing
While Chesapeake and QEP stayed the course in the Haynesville, other former major players sold out. Southwestern Energy Co. bailed out in 2015. BHP Billiton Group, which bought Petrohawk Energy Corp. in large part due to its Haynesville holdings, is trying vigorously to unload its acreage as it attempts to get out of the shale game entirely.
Meanwhile, smaller commpanies, frequently backed by private equity, have their made their way in.
Supported by Denham Capital, Dallas-based Covey Park Energy LLC has gobbled up large swaths of Haynesville acreage since its inception in 2013. It purchased more than 34,000 net acres from EP Energy Corp. for approximately $420 million in the first quarter of 2016, then spent $465 million in spring 2017 to acquire some of Chesapeake's noncore acreage. Geosouthern Haynesville, another company backed by private equity, paid $850 million for Encana Corp.'s Haynesville acreage in 2015.
Overseas demand
The gas from Comstock's production goes to multiple locations, but Guyton said the company hopes to add more. One location is a key draw for many producers in the Haynesville: Sabine Pass, home of Cheniere Energy Inc.'s pioneering and expanding LNG export facility.
"Most of our gas eventually makes its way into the Southeast markets. We sell into the Perryville, Louisiana, hub currently," he said. "We are currently studying ways to sell into the Texas market, both the Houston Ship Channel and Sabine Pass."
Rice University professor Ken Medlock said cheap production rates and the siren song of LNG exports will likely continue to spur the Haynesville's rebirth.
"Cost reductions as well as growth potential owing to expanded market access via LNG [have fueled the resurgence]," Medlock told S&P Global Market Intelligence. Cheniere, the pioneering U.S. LNG exporter, reported sending 322 trillion Btu overseas during the first half of 2017, up from 52 trillion Btu in the first half of 2016.
With Cheniere also building an LNG export facility in Corpus Christi, Texas, and with other export facilities underway, it appears the Haynesville is well-placed to serve as a primary gas source for exports. "Investment prospects look more promising now, particularly for export capacity interests, because the opening of Gulf Coast LNG export infrastructure allows the Haynesville resource access to an expanding market," Medlock said.