Merger press releases commonly speak of synergies and accretion to earnings. They're usually right, especially at ever-growing oil and gas prices, and because of sound geoscience no matter the oil or gas price. So what's extraordinary about the merger of Petrohawk Energy Corp. and KCS Energy Inc., and the combined company's advantage in northwestern Louisiana's Elm Grove Field? Clearly, it gives the somewhat nascent acquire-and-exploit Petrohawk-it was formed only two years ago yet already posts 1 trillion cubic feet of proved reserves post-merger with KCS in July-a core operating area where it is the dominant player. But growth potential comes with this: With KCS, Petrohawk has acquired geoscience and engineering competencies that have cracked the gas-filled Hosston code. The Hosston rock sits on top of the gas-productive Cotton Valley zones in Elm Grove Field, but the water the Hosston produces, when commingled with the Cotton Valley, lessens production from that deeper, reliable zone. "The Hosston is in almost every well in varying degrees of quality," says Floyd Wilson, Petrohawk chairman and chief executive. KCS had already reworked about 50 of its Elm Grove wells, bringing Hosston production online along with production from the Cotton Valley. "It's very critical what they've done. The KCS staff worked with various service companies, and came up with a more efficient way to frac the Hosston zone." Covering Bossier, Caddo and Webster parishes, Elm Grove is an old field that has been quite prolific. Discovered in 1912, it produced 352 billion cubic feet of gas, 4.7 million barrels of condensate and 28 million barrels of water from multiple Cretaceous and Jurassic zones through 2005, according to IHS Energy data. The field had seen little recent drilling and production when KCS started development of nine sections in 2002. Most wells tapped the more permeable, lowest Cotton Valley interval. "The massive Cotton Valley Davis sandstones immediately above were largely ignored because of the poorer permeability in the thick rock section," says Bill Hahne, Petrohawk chief operating officer who was president and COO of KCS. "Drilling success and production prior to 2002 had been mediocre and inconsistent." KCS' engineers went after the Cotton Valley Davis in early 2003, using fracs on the Davis interval with higher pump-in rates and larger volumes of proppant. "These initial tests on older wellbores illustrated the potential of the Davis sand to produce at economical rates," Hahne says. Production improved as gel types, gel-loading, proppant types and fracture-stimulation rates were varied and tested. Sales grew from 5 million cubic feet per day to 29 million. In 2004, the team also began to look at the shallower, Upper Cotton Valley sands. "These zones had previously been identified, but none were understood well enough to be viable targets of completion," Hahne says. Magnetic resonance imaging (MRI) logging was used on these, and significant additional reserves have been added to the books. In 2005 after two years of study, the team went after the untapped Hosston sands-this potential was behind pipe-using coiled-tubing fracture stimulation. "This innovation proved to be a superior completion technique that allowed accurate placement of fracture treatments and efficient stimulation of multiple Hosston zones," Hahne says. By November 2005, production had grown to 68 million cubic feet per day from the field-14-fold since KCS started drilling in 2002. Coiled-tubing fracs The Hosston is hundreds of feet thick. Wilson says, "Individual water sands in the Hosston interval, when intermixed in the wellbore, damage the Cotton Valley zone and reduces ultimate recovery. The chemical make-up of the water from the Lower Cotton Valley and Hosston is not compatible. You can drill a twin well. It's shallow, and it doesn't cost very much. But that's still not the most efficient method to tap the Hosston." To improve production rates from the Hosston, the KCS team, working with Halliburton and BJ Services, came up with a coiled-tubing frac technique that is more precise and can bypass the water-bearing Hosston lenses. Individual, thin Hosston intervals are perforated and then fraced. The coiled-tubing technique is faster than a conventional frac job. "With iron pipe, it would be hours and hours and hours at 10,000 feet," Wilson says. Once the bottom Hosston zone is fraced, a sand plug is placed with the coiled-tubing, and the next up-hole zone is perforated and fraced. This process is repeated (set the sand plug, perforate and frac with coiled-tubing), until all the Hosston pay zones are stimulated. "In two days, they can do eight of these small frac jobs and stay away from the water," Wilson says. "And they're getting initial production rates in the range of 500,000 to 5 million cubic feet a day, the average being close to 1 million. And this is in addition to the Cotton Valley production." These coiled-tubing jobs have been found to be effective in the Hosston; they can get the velocity and volumes needed for the small frac jobs. "In the big frac jobs, in the Cotton Valley where there isn't much water, you're pumping millions of pounds of sand down there, through casing most of the time," Wilson says. "In these small fracs, you're doing 20,000 or 30,000 pounds in zones as thin as three or five feet-and four to six of them at a time." On new Elm Grove Field wells, the Cotton Valley is fraced, a plug is set, the Hosston is fraced in several places, all the plugs are removed and the well is brought on. Petrohawk had no Hosston reserves booked at the time of the merger; KCS had booked these reserves for roughly half of its wells. "It looks like we can find new production and new reserves in most wellbores," Wilson says. "And it's affordable: this whole procedure costs $350,000 to $500,000 per well. Instead of drilling 20 wells and waiting 15 years until the Cotton Valley is depleted, we can add Hosston production today." Combined with KCS' assets, Petrohawk has just under 400 wells in Elm Grove Field. KCS had added Hosston gas to approximately 50 wells so far. Petrohawk has two coiled-tubing units in the field right now, working on Hosston recompletions, and hopes to perform 75 of these jobs this year. Over time, at 40-acre spacing, there are more than 1,000 Cotton Valley wells to be drilled and most wellbores have an attractive Hosston zone. "This is a huge upside. And it's an example of what KCS pioneered and fine-tuned that was tailored specifically for this field." Petrohawk will produce from the Hosston in future wells, and rework the couple hundred old wells to add in that production. "In the new wells, we can add it at initial completion." Petrohawk entered Elm Grove Field and the adjoining Caspiana Field earlier this year with its acquisition of properties from Winwell Resources Inc. and one other seller for $262 million. The company's assets in the area now include 300 billion cubic feet equivalent of proved reserves, 90 million cubic feet equivalent of daily production and 106 square miles of acreage in Caddo and Bossier parishes. Today, Elm Grove/Caspiana represents some 40% of the company's reserves and production. On the acreage, fewer than 400 wells have been drilled. "On 40-acre spacing there is room for more than 1,000 wells." If the area goes to 20-acre spacing, which is highly likely, the potential is for 2,500 wells. "When we made the Winwell et al. acquisition in January, I was thinking about KCS," Wilson says. "We closed the Winwell deal January 26, and I was speaking with Jim Christmas (chairman and chief executive of KCS) on February 3." Gas netbacks KCS' netbacks on its gas prices have been higher than that of other operators in the area due to relationships with takeaway-capacity providers developed over several years and firm transportation on easterly pipelines. "KCS was getting 60 cents more per thousand cubic feet of gas than Petrohawk was," Wilson says. Combined, the company has 80 million cubic feet of firm daily transportation. Crosstex Energy Services and Regency Gas Services are building a new pipeline in the southern part of the Elm Grove acreage, pushing into the Caspiana Field part of the play. The two fields are the same geologically. "KCS had historically beat Nymex prices, if you add in the gas quality, which is over 1 million Btu (per thousand cubic feet). They had their compression needs figured out, their flowlines looped. They had their saltwater wells drilled and lines laid, so they had fewer trucks running around, which runs up the cost of water disposal. They had relationships with Regency and Crosstex in the area; most of the other operators there don't have that scale." Petrohawk has gained an improved cost structure, and KCS is now part of a larger enterprise value, plus the KCS team on the Elm Grove property gains the Petrohawk acreage, which contains low-hanging fruit with potential for future drilling, workover and cost improvement. "Our cost structure was pretty good; theirs was better. Our lifting cost in Elm Grove has been 75 cents per thousand cubic feet equivalent, which is good for the industry; theirs was 45 cents, which is the best," Wilson says. KCS was drilling wells three or four days faster than others in the field and getting them online two or three days faster. "These are nuts-and-bolts improvements in growing production. They have been honing their practices over time. Think about taking those cost advantages and those best practices, and apply them to that kind of drilling inventory. You are talking about value creation in the billions of dollars." Wilson expects Elm Grove is big enough to grow the combined company for years, if it didn't do anything anywhere else. "We have 100% drilling success there, and KCS' finding cost creates robust economics. It's a great package to have." Post-merger, the combined company lost fewer than 10 employees and now has a total of more than 300 employees. It has 10 rigs running in North Louisiana, six working on Elm Grove, and two coiled-tubing units. "We also have opportunities in Terryville, which is an Elm Grove look-like in Lincoln Parish. KCS had about 100 square miles leased there and was just starting that development program," Wilson says. "They're on their 20th well. It's early, but it looks to have many similar properties as Elm Grove." For Petrohawk, Elm Grove Field is safe harbor. "Break-even costs there are less than $4 all-in, including finding, development and lifting costs. It's a place we can drill for years and years and, even at low gas prices, grow the company. And, it's a springboard for growth in high prices." Petrohawk is retaining KCS' Tulsa office from which the Elm Grove team has worked. "This is a talented pool of very successful people, and we've turned the property we had over to this group," Wilson says. "Their practices have been fine-tuned over the past four or five years. They're the best in the area."