Aethon Energy has amassed hundreds of thousands of core Haynesville acres that are making more than 2 Bcf/d with direct routes to demand centers, including Gulf Coast LNG. Here’s its portfolio, work in ESG and outlook.

Jennifer Pallanich, Senior Editor, Technology, Hart Energy

Gordon Huddleston, Co-President & Partner, Aethon Energy

Jennifer Pallanich (00:22): Aethon Energy has hundreds of thousands of acres in the Haynesville producing over 2 Bcf/d. Gordon Huddleston is here to tell us why the company is so keen in what the Haynesville has to offer. We'll also find out about the company's operations and its views on technology and ESG. Thank you for joining us.

Gordon Huddleston (00:48): Thank you very much.

JP: So for people who may not be familiar with Aethon Energy, tell us a little bit about the company.

GH (00:56): So Aethon was founded in 1990. Up until around 2007, when we divested of a large portion of our assets, we were focused on secondary recovery, primarily water floods as the majors were moving offshore and internationally. And we pivoted and really started focusing on unconventionals and honed in on the Haynesville in 2013 and began to acquire a number of assets as a number of companies were looking to other basins, in particular Appalachia, and felt like that we could apply different completion technology and different really improve well results that we're seeing in other basins, and that's been very successful.

JP: So what drew you guys to the Hayesville in the first place?

GH (1:56): So we knew, we're obviously more focused on oil. We wanted to be in gas long term. We have a very long-term view and felt like the Haynesville proximity to the Gulf Coast was good from a marketing perspective. There was a lot of empty pipe and felt like we wouldn't have transport constraints. And like I said a lot of the assets were understimulated and felt like we're able to acquire assets that we didn't have to pay a lot for upside and where we could meaningfully move the needle through application of better technology.

JP: So can you tell me a little bit about how the company has grown since its founding in 1990?

GH (2:57): So Aethon has a series of closed in funds. It's a private equity firm. It's more of an owner-operator, as many of y'all are familiar with other firms in a similar capacity. But it's really more focused on, rather than acquiring just PDP and managing declines, really focused on development. And so we were not constrained to one basin but felt like we had a lot of opportunity to grow in the Haynesville and today continue to look for opportunities both in the Haynesville and outside. So it's run with kind of like a smash co. You've got an operating company and then a private equity firm on top with your traditional investment committee structure.

JP: So I've got an audience question here and that is, okay, how do I open this? All right, We're having some technical difficulties here but there's a question about what the gas price is going to be in five years. What are the breakeven costs in the Hayesville at this point considering inflation?

GH (4:24): So I think it depends on, one thing about Aethon is that we made a strategic decision to be integrated. So across the bulk of our footprint, we control the midstream as well and to get a margin expansion there. And it results in us having some of the highest margins in North America. And so I think our breakevens are slightly different. Now, obviously when you have 40, 30 cent uplift, it doesn't make as big of a difference as prices are $6 to $9, $10. But I think everyone's seeing inflation, and certainly we're no exception. We've taken a number of steps to try to control that as best we can, as well as ensure availability of supply of things like casing and tubing, etc., with our partnership with U.S. Steel. And so some of that doesn't, not even necessarily about cost, it's about availability as many of people in the room can attest to. So I think I would say that we've seen between 30% and 40% inflation over the past year, which is not a small number.

JP: No, it is not. So we have another audience question, and that is Aethon concerned about capacity constraints out of the Haynesville with production forecast being so strong?

GH (6:08): So I think one thing we've been focused on over the last several years is our transport portfolio and making sure that we have, and our marketing team has, ability to move gas to the right end users in the right markets where we want to ultimately to realize pricing. And I think if you look out our forecast show that there are going to be constraints finally, but it certainly is easier to build pipe in Louisiana and Texas. I don't think we're going to have the same level of constraint that Appalachia has, and it remains to be seen some of the deals that's been struck at the federal level. We'll see how that plays out in terms of how easy it is to build pipe and what that ultimately will mean for interstate pipe.

JP: Well, on a related note, we've got an audience member who wants to know, given these constraints on materials, how much do you think the Hayesville grows next year?

GH (7:19): I can't really speak for the entire basin. I think there's a lot of people in the room. I guess we could all get together and put our numbers in a hat and can tell you. But I mean, I think we plan to continue to grow and our growth will be a little more moderated than our normal 15%, but we still expect to be in the double digit range. So I think we will have to see what some of the other speakers say because some of the firms have the ability to add a lot of rigs if they want.

(8:01): And I think the challenge is, as we all know, gas price is quite uncertain. We've got potential headwinds of a recession here, especially around maybe Q1 and with rates coming up and the LNG solution is pretty far off and it remains to be seen what happens with the Russia Ukraine situation. Obviously it seems to be worsening rather than improving, but there is a lot of, there's a motivation to get cheap gas to Europe and some would say you almost got addicted to that and Germany has a large industrial base. They want to see that solution if possible. But certainly it seems like normalizing relations with Russia would take effectively a change in at this point. And obviously, I don't know if some of y'all saw the recent news about Stream potentially being damaged could, So we all know salt water and pipelines not exactly a great thing and that could create a real problem even if things improved.

(9:16): So I think that's where we're kind of struggling is what does the LNG on the supply side look like? So we're the second largest private natural gas operator in the U.S., where the second largest supply to Cheniere, now behind Southwestern after their acquisitions. And so it does make is a large downstream user, but more importantly it represents a large component of demand. And so when we do our macro projections and forecasting, I think that sensitivity in particular about what utilization rate on the LNG side certainly can drive you to a lot of different outcomes from a gas price standpoint.

JP: We've got another audience question. Who wants to know, do you foresee more or less consolidation in the Haynesville at existing gas prices?

GH (10:20): I think the capital availability in the space in general has been constraint. And as we all know, consensus pricing doesn't necessarily reflect where the curve is today. And so until consensus is closer to market pricing from an equity analyst perspective, I think it makes it somewhat challenging for a number of the public firms to do something. I think a lot of people are looking at a creation from a free cash flow standpoint and then you have other reasons for acquisitions including dirty hedges for large downstream users. And there are a lot of different motivations, but I think there's a pretty big wide bit as spread at this point. And we're focused more on growing organically because a lot of the acquisitions we had, I think it's 13 or 15 acquisitions depending on how you want to, and a lot of other smaller ones, depending on when you put a cutoff on size. But a lot of that opportunity is gone. Certainly people recognize the value of that basin and where it's just more challenging to have it make sense versus what we see as there's a lot of opportunity from an organic standpoint.

JP: On a related note we have another audience member who wants to know people who today have been talking about the longevity and drilling inventory in the Haynesville. What is Aethon’s view on the basin longer term?

GH (12:13): So I think everyone can appreciate that there's not as much tier one inventory in all of these basins as people say. Right. And I think the challenge is also forecasting though, what is technology going to do? Because rock that today would say doesn't going to compete on a dispatch curve in five or 10 years. It's hard to predict what technology will unlock and what the opportunity is to develop those resources. So I think you got to be a little careful about condemning large swaths of acreage, especially that are hydrocarbon rich because there's a big prize to solve that problem. But in general the Haynesville was an early basin on the unconventional side, unfortunately was maybe today we would develop it differently. All the operators would if you had a blank slate. And so there's a lot of other things that are occurring, but ultimately a lot of that inventory has been drilled up.

(13:30): And so people are starting to explore the outed part of the play. And I think there's a lot of inventory, there's a lot of, more importantly, there's a lot of hydrocarbons in place and it's in the right place. So I think it really depends on what gas price is going to be because there are a lot of things that work. It just depends on what price. So we have about 20 years of inventory that we would be comfortable with developing today at more of a consensus pricing. I don't think we're not forecasting $10 gas 10 years out.

JP: You mentioned technology, and I'm really glad you did because I write a lot about technology. One of the things you've talked about with me before is the fact that you guys are working to digitize certain parts of your operations. Can you tell us more about that please?

GH (14:29): So we have our OCC and our operation support center. We've made a concerted effort to bring all of our completions and drilling in house, which a number of other firms are doing as well. But we think that there are a lot of efficiencies that everyone can get from being able to communicate on the ground in real time as well as obviously doing all the automation and everything else that most of us are doing at the actual well site.

JP: And would you like to talk a little bit more about how AETHON is investing in innovative solutions?

GH (15:09): Sure. So we're really focused, from an ESG perspective, we've been able to reduce our missions by about 80% over the last five years. We're last three years been working on carbon capture and sequestration and working with LDNR, the Louisiana Department of Natural Resources, to establish that framework. And now that's been set up and we really view that as another leg of our stool that that's something that is a line of business that we think is interesting. And given we have a long term view that's something we want to be a part of. And then also we have a hydrogen initiative that we're working with as well. And I think all these things ultimately are going to be opportunities that will ultimately be a core tenant of all of our businesses. And people want solutions that are clean. People want clean air, clean water. It's pretty simple when you understand why people want to go to Switzerland and all these wonderful places. And so how do we deliver that while still delivering affordable energy? And I think that's been one of the core things that we've been focused on at Aethon.