SHREVEPORT, La.—When calling plays for the natural gas game, the Haynesville Shale is often overlooked. But no one’s rooting for the underdog more than the basin’s own operators, citing favorable economics and scalability as the play’s hidden gems.

While typically in the shadows of the Marcellus’ and Utica’s big muscles and the always popular Permian basin, Haynesville players are adamant the shale basin is just as promising.

Speakers were sure to address their great success in the play at Hart Energy’s recent DUG Haynesville conference and exhibition at the Shreveport Convention Center. But, the operators emphasized that a strategic game plan is necessary to take on the Haynesville.

“We’ve got to educate the market, educate investors and get investors back to the space,” Rob Turnham, Goodrich Petroleum’s president and COO, said.

A lot of the resistance to setting up in the play, Turnham said, is due to “a bunch of guys that don’t want to do the work and they assume that the Haynesville and other basins have a high-cost structure.

“When you look at low cost basins the reputation use to be that the Haynesville was a high cost basin, but not anymore it’s a low-finding cost.”

Currently, Goodrich Petroleum holds 20,000 net acres in North Louisiana that is 100% HBP. In its leasehold position the E&P company has drilled over 102 wells that are both online and producing. Goodrich also holds an additional 3,000 acres in the Shelby Trough and Angelina River Trend.

“We don’t have a huge footprint [but] it happens to be in the best rock in north Louisiana and what we call the Angelina River Trend,” he said. “We’ll spend about $100 million dollars this year drilling in north Louisiana and that’ll get us 10 net wells with an average lateral length of about 7,500 feet.”

Turnham said that his company’s continued interest in the play is mostly driven by its favorable economics.

This includes low lease operating expense, severance tax abatement from the State of Louisiana and ample service company capacity. And—his most emphasized factor—a high price realization because it’s “a big strategic advantage when comparing against the Marcellus.”

“We know that the Haynesville is the basin of choice do to the close proximity to the Gulf Coast petrochemical plants in addition to LNG exports in Mexico,” he said.

Additionally, on service company capacity he said Haynesville operators benefit from enough service capacity in the basin that it keeps a reasonable cost structure for them, so the service companies can generate sufficient returns.

“It’s all about the economics and that is what we think is missing in the market. The assumption that its gas and therefore you can’t generate competitive rates of return is actually wrong,” Turnham said. “If you take that 2.5 Bcf [gas production] curve, you bake in low-operating expenses, no severance tax…and you honor our early time outperformance of the curves—even the short laterals—you really start to see the benefit of the longer laterals to your rates of return.”

“This competes with a lot of the Permian,” he added.

Keeping this in mind, Turnham said that Goodrich hadn’t drilled in the Haynesville for about three years prior to 2017. Despite coming in slow, Goodrich is projected to average 140 million cubic feet of natural gas equivalent a day (Mcfe/d) with the possibility of hitting 200 Mcfe/d of production exiting 2019. “The ability to grow is pretty obvious,” he said.

“The completions recipe is working and the acreage is in the right zip code,” Turnham added.

He also shined the spotlight on technology in the area for driving the basins value up. According to Turnham, evolving completions that maximize near wellbore stimulations have been the game changer in the play.

“I would say we’re in a great neighborhood of a lot of really good operators in the Haynesville. We’re all sharing data so the results are all going to get more and more uniform if you’re in the same area and there’s quite a bit of scalability to grow volumes,” he said.“For us, we’re clearly taking advantage of that geographic advantage with leading edge technology which is really driving growth in cash flow and growth in the enterprise.”

Importance of Scaling

Expanding on strategy, Castleton Resources LLC president and CEO Craig Jarchow honed in on the growing importance of scaling particularly in the Haynesville.

Predicting that most of the basin will soon transact, Jarchow said that this warrants one specific approach.

“The entire East Texas portion of the basin is for sale or will be for sale. Same thing is true in north Louisiana. Obviously this cries out for consolidation and that is the right thing to do…that’s the strategic imperative because, as we all know, scale matters in this business,” he said.

Starting from tier 1, Jarchow’s scale breakdown starts at G&A costs coupled with LOE, capex and midstream in the middle and finally at tier 3 is capital. Each tier is based on the company’s value (in order):  $250 million, $1 billion and $2.5 billion.

“The easiest level to achieve when it comes to scale is G&A and LOE. We think if you’re a $250 million dollar company you’re pretty well there and you can get your costs down to an acceptable level because we have a high component of fixed costs in our business,” he said.

Above G&A and LOE, Jarchow added, is the scale required to drive midstream outcomes and to resist the rent-seeking behavior by midstream companies.

“To keep rigs and pressure pumping equipment busy for long periods of time and speak for a lot of proppant unless you’re our size—a billion dollar company or larger—it’s hard to do that and get true economies,” he said.

At the top of the pyramid for companies valued at $2.5 billion or higher is the cost of capital. “It is almost never talked about, but it’s the Holy Grail,” he said.

“If you look at the cost of capital and the effect on our businesses versus if you just lower the discount rate that you run…you increase the value of our company by as much as $100 million. This is really the Holy Grail when it comes to scale and really none of us in the basin on the upstream side are quite there yet, but we need to get there.

“That’s the strategic imperative to consolidate [and] achieve scale and history teaches us this,” he added.

Now the name of the game is back to creating cash flows, away from creating inventory and asset value, according to Jarchow.

“[During] the unconventional revolution the imperative was to go and find the next shale play and inventory,” he said. “Well that game is over. We don’t need any more inventory and its back to the future so to speak.”

In regards to natural gas, he said the business is back to the 90s where prices are low and expectations are flat, and, consolidating is necessary.

But, M&A activity in the Haynesville has been hindered by different approaches to the business: creating cash flow of creating investment opportunities.

While he said both are economically rational, they birth two different price expectations and “unfortunately the cash flow generators are the buyers and the inventory creators are the sellers”.

“We would say that that’s even more of an issue in getting deals done in the Haynesville than its price volatility for where we are currently with price.”

Still, Jarchow was optimistic about consolidation in Haynesville adding that companies that scale trade at higher multiples.

“Ultimately, that trumps the bid-ask spread that we’re seeing in the Haynesville,” he said.

In all, both Turnham and Jarchow agree that they are in good company in the Haynesville. Urging interested players to overlook its stereotype instead of the basin.