Petrohawk Energy Corporation Announces Third Quarter 2010 Operational Update and Financial Results

Petrohawk reported average third quarter production of 685 million cubic feet equivalent per day (Mmcfe/d), a 10% increase over second quarter 2010 production, a 34% year over year increase, and above the Company's stated third quarter guidance range of 650-660 Mmcfe/d.

Total production for the quarter was 60.1 billion cubic feet (Bcf) of natural gas, 290 thousand barrels (MBbls) of oil, and 186 MBbls of natural gas liquids, or 63.0 billion cubic feet of natural gas equivalent (Bcfe) of which 95% was natural gas. Petrohawk's production was 3% crude oil and 2% natural gas liquids.

High production rates and price realizations produced revenues of $409 million during the third quarter, a 16% increase over second quarter 2010 and a 72% increase over third quarter 2009.  

Petrohawk's average realized natural gas price for the quarter was $5.19 per Mcf, which included a realized gain from natural gas derivatives of $0.99 per Mcf. The Company's average realized price for natural gas, before the impact of realized derivative gains, was $4.20 per Mcf, a 34% increase in the realized natural gas price compared to the third quarter of 2009 and 96% of the average NYMEX price for the quarter of $4.38 per Mcf. Petrohawk's average realized oil price for the quarter was $75.15 per Bbl, which included a $2.19 per Bbl of realized gain from oil derivatives. Before the impact of realized derivative gains, the average realized price for oil was $72.96 per Bbl, or 96% of the average NYMEX price for the quarter of $76.20 per Bbl and a 13% increase compared to the third quarter of 2009. Natural gas liquids were sold at an average of 46% of the per barrel NYMEX price of oil.

Cash flow from operations before changes in working capital (a non-GAAP financial measure; see Condensed Consolidated Statements of Cash Flows for a reconciliation to net cash provided by operating activities) was $188 million, or $0.62 per fully diluted common share, compared to $163 million, or $0.54 per fully diluted common share, reported for second quarter 2010 and $152 million, or $0.52 per fully diluted common share one year ago. The Company benefited from a strong and high volume of particularly natural gas hedges in effect during the quarter. Realized hedged receipts of $60.3 million were reported for the third quarter. Cash flow was negatively affected by $39 million in cash payments, reported as non-recurring interest expense, related to the early tender of long term debt that was refinanced at a lower interest rate during the quarter. After adjusting for selected items, primarily related to the non-cash impact of derivatives and the non-recurring interest expense, net income for the quarter was $39.9 million, or $0.13 per fully diluted common share, versus $31.2 million, or $0.11 per fully diluted common share one year ago (see Selected Item Review and Reconciliation table for additional information). Before excluding selected items, net income of $99 million was reported for the quarter, or $0.33 per fully diluted common share.

During the third quarter, Petrohawk achieved improvements in recurring expenses, enhanced the Company's liquidity through divestments,  refinanced its long-term debt maturing in 2013, and most recently increased the capacity of its revolving credit facility.

Lease operating costs were a reported at a record low of $0.25 per million cubic feet of natural gas equivalent (Mcfe), or $15.8 million, primarily driven by increased low-cost production from the Haynesville Shale. Taxes other than income were reported as a credit of $3 million, affected by the timing of certain severance tax refunds. Interest expense included certain non-recurring payments related to a major debt refinancing which closed during the quarter; approximately $775 million in senior notes due in 2013 with an interest rate of 9-1/8% were refinanced through the issuance of new senior notes issued at par with an interest rate of 7-1/4% and a maturity of 2018.

As of November 1, 2010, the borrowing base under the Company's revolving credit facility has been increased to $1.75 billion for oil and natural gas assets, a 75% increase over its previous borrowing base. At the end of the third quarter, Petrohawk's outstanding balance on its revolving credit facility was $129 million.

In addition, the Company has begun the marketing process for the potential sale of its natural gas and midstream assets in the Fayetteville Shale. Bank of America Merrill Lynch is acting as advisor on the sale process. During the third quarter, net production from the Fayetteville Shale averaged 95 Mmcfe/d.

Petrohawk's 2010 capital spending is largely driven by the Company's desire to conclude the leasehold capture phase in the Haynesville Shale. More than adequate liquidity has been achieved through cash flow, non-core asset sales and significant proved reserve bookings leading to substantially higher bank revolver capacity. Petrohawk is preparing for significant drilling flexibility by mid-2011 and beyond.

The Company is adjusting its 2010 capital budget to $2.55 billion, from the prior amount of $2.13 billion. This increase is largely driven by service cost inflation, specifically pressure pumping services both in the Haynesville Shale and the Eagle Ford Shale, and a much larger amount of non-operated drilling than was estimated in early 2010. Petrohawk estimates that 2010 and 2011 capital spending will be amply covered by a combination of cash flow, prior non-core asset sales and capacity under its $1.75 billion revolving credit facility. Additional non-core asset sales may add to this already substantial liquidity.

Full year 2010 production guidance is increased to between 665 and 675 Mmcfe/d, indicating 58% organic growth over 2009, with divestitures taken into account. Fourth quarter 2010 production guidance is increased to between 740 and 760 Mmcfe/d, indicating 9% quarter over quarter and 33% year over year growth, not accounting for approximately 15 Mmcfe/d which was sold at the end of third quarter. Management expects 2010 proved reserve percentage growth to be in line with expected full year production growth rates.

In keeping with the Company's strategy of less emphasis on dry gas development and more emphasis on condensate-rich property development, capital spending for 2011 is estimated at $2.3 billion, of which $1.9 billion will be allocated for drilling and completions, $200 million will be allocated for midstream businesses and $200 million will be allocated for potential acquisitions. Of the $1.9 billion budget for drilling and completions, approximately $900 million is planned for the Haynesville Shale, approximately $900 million is budgeted for the Eagle Ford Shale, and approximately $100 million is budgeted for the Fayetteville Shale. Petrohawk's 2011 spending plans contemplate an increase in drilling activity in the Eagle Ford Shale throughout the year and a significant decrease in the Haynesville Shale operated rig count in the second half of the year, down to approximately seven rigs. Production growth for 2011 is estimated to be 30% to 40% year over year before potential divestitures.

Petrohawk has successfully developed a new well design to help mitigate service cost inflation in the Haynesville Shale.

During the third quarter, Petrohawk completed its first well in the Haynesville Shale incorporating a revised well design which requires significantly less surface treating pressure during the completion phase than a traditional well. The Mendenhall 10H #1 was completed in early October with a frac cost that was approximately $1 million less than a traditionally drilled well. No problems were encountered during the drilling, completion and production phases of the well, which was put on production at a restricted initial production rate of 8.4 Mmcfe/d. Petrohawk expects to have between 15-20 wells utilizing the new well design drilled, and a portion of those completed, by the end of 2010.

Petrohawk expects continued high growth rates with a progressively higher proportion of revenue from condensate and natural gas liquids, and has outlined a 2011 capital program that takes advantage of the large condensate and high-BTU gas opportunity in the Eagle Ford Shale.

The Company's 2011 capital budget includes running an average of 15 operated rigs in the Eagle Ford Shale, approximately twice the number of rigs operated in 2010. Petrohawk estimates that there are approximately 1,900 net risked condensate-rich locations in both its Hawkville Field and Black Hawk that comprise over 50% of the Company's total acreage position in the Eagle Ford Shale.

Q3 2010 Operational Statistics

Haynesville Shale

Eagle Ford Shale

Fayetteville Shale

Hawkville Field

Blackhawk Field

Operated Wells Drilled

29

11

8

2

Non-operated Wells Drilled

73

2

0

147

Total Wells Drilled

102

13

8

149

Avg. Operated Rigs Running

14

3

5

1

Avg. Lateral Length

4700'

5500'

5500'

3000'

Avg. Forecast  2010 Operated Well Cost (Drill & Complete) ($MM)

$10.5

$7.1

$7.7

N/A

Avg. Forecast  2011 Operated Well Cost (Drill & Complete) ($MM)

$9.8

$7.5

$7.7

N/A

PETROHAWK ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

2010

2009

2010

2009

Operating revenues:

Oil and natural gas

$          280,328

$        166,683

$  820,753

$     492,214

Marketing

122,981

63,155

360,438

216,165

Midstream

5,873

8,100

21,810

20,314

    Total operating revenues

409,182

237,938

1,203,001

728,693

Operating expenses:

Marketing

139,053

66,586

392,984

211,722

Production:

Lease operating

15,794

20,788

49,573

55,903

Workover and other

2,758

865

6,707

1,793

Taxes other than income

(3,185)

15,204

14,849

39,921

Gathering, transportation and other:

Oil and natural gas

46,641

17,672

99,219

52,401

Midstream

3,405

5,071

15,077

13,469

General and administrative:

         General and administrative

33,784

20,405

98,936

57,419

         Stock-based compensation

6,641

4,145

17,038

10,762

Depletion, depreciation and amortization

107,812

91,692

315,061

290,383

Full cost ceiling impairment

-

-

-

1,732,486

        Total operating expenses

352,703

242,428

1,009,444

2,466,259

Amortization of deferred gain

59,472

-

123,839

-

Income (loss) from operations

115,951

(4,490)

317,396

(1,737,566)

Other income (expenses):

Net gain (loss) on derivative contracts

147,892

(1,568)

345,970

196,360

Interest expense and other

(110,714)

(58,981)

(235,093)

(170,929)

Equity investment income

8,572

-

10,619

-

        Total other income (expenses)

45,750

(60,549)

121,496

25,431

Income (loss) before income taxes

161,701

(65,039)

438,892

(1,712,135)

Income tax (provision) benefit

(63,020)

24,862

(170,581)

650,201

Net income (loss)

$            98,681

$         (40,177)

$  268,311

$ (1,061,934)

Net income (loss) per share:

Basic

$                0.33

$             (0.14)

$        0.89

$          (3.88)

Diluted

$                0.33

$             (0.14)

$        0.89

$          (3.88)

Weighted average shares outstanding:

Basic

300,543

287,913

300,377

273,477

Diluted

301,941

287,913

302,541

273,477

PETROHAWK ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)

September 30,

December 31,

2010

2009

Assets:

Current assets

$          646,465

$        385,650

Net oil and natural gas properties

5,127,420

4,167,733

Restricted cash

42,922

213,704

Equity investment

206,485

-

Other noncurrent assets

1,678,203

1,894,984

Total assets

$       7,701,495

$     6,662,071

Liabilities and stockholders' equity:

Current liabilities

$          862,582

$        698,832

Long-term debt

2,593,062

2,592,544

Other noncurrent liabilities

630,274

47,023

Stockholders' equity

3,615,577

3,323,672

Total liabilities and stockholders' equity

$       7,701,495

$     6,662,071

PETROHAWK ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

2010

2009

2010

2009

Cash flows from operating activities:

Net income (loss)

$     98,681

$ (40,177)

$   268,311

$ (1,061,934)

Adjustments to reconcile net income (loss) to net cash

provided by operating activities:

Depletion, depreciation and amortization

107,812

91,692

315,061

290,383

Full cost ceiling impairment

-

-

-

1,732,486

Income tax provision (benefit)

63,020

(24,862)

170,581

(650,201)

Stock-based compensation

6,641

4,145

17,038

10,762

Net unrealized (gain) loss on derivative contracts

(87,557)

115,171

(190,228)

96,752

Amortization of deferred gain

(59,472)

-

(123,839)

-

Equity investment income

(8,572)

-

(10,619)

-

Distributions from equity affiliate

8,954

-

13,190

-

Other operating

58,341

6,466

75,098

15,926

Cash flow from operations before changes in working capital

187,848

152,435

534,593

434,174

Changes in working capital

(144,961)

(3,801)

(172,180)

40,576

Net cash provided by operating activities

42,887

148,634

362,413

474,750

Cash flows from investing activities:

Oil and natural gas capital expenditures

(525,419)

(416,290)

(1,731,707)

(1,164,392)

Proceeds received from sale of oil and natural gas properties

122,223

724

613,317

724

Proceeds received from sale of Haynesville gas gathering systems

-

-

921,408

-

Marketable securities purchased

(112,999)

(519,509)

(1,091,005)

(1,282,601)

Marketable securities redeemed

394,005

386,501

1,091,005

1,255,582

Increase in restricted cash

(123,204)

-

(198,209)

-

Decrease in restricted cash

137,468

-

368,991

-

Other operating property and equipment capital expenditures

(38,297)

(79,971)

(212,137)

(225,322)

Other intangible assets acquired

-

(105,108)

-

(105,108)

Contributions to equity affiliate

(10,974)

-

(10,974)

-

Other

-

37,600

-

37,600

Net cash used in investing activities

(157,197)

(696,053)

(249,311)

(1,483,517)

Cash flows from financing activities:

Proceeds from exercise of stock options and warrants

545

711

1,821

2,667

Proceeds from issuance of common stock

-

571,500

-

956,500

Offering costs

-

(21,696)

-

(30,727)

Proceeds from borrowings

1,242,000

303,000

2,184,000

937,674

Repayment of borrowings

(1,109,108)

(307,354)

(2,274,888)

(849,513)

Debt issuance costs

(17,002)

212

(17,706)

(13,025)

Other

(115)

-

(3,688)

-

Net cash provided by (used in) financing activities

116,320

546,373

(110,461)

1,003,576

Net increase (decrease) in cash

2,010

(1,046)

2,641

(5,191)

Cash at beginning of period

2,142

2,738

1,511

6,883

Cash at end of period

$       4,152

$    1,692

$       4,152

$         1,692

PETROHAWK ENERGY CORPORATION

SELECTED OPERATING DATA (Unaudited)

(In thousands, except per unit, per share and per mcfe amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

2010

2009

2010

2009

Production:

Natural gas - Mmcf

60,128

44,376

169,397

119,376

Crude oil – MBbl

290

383

756

1,204

Natural gas liquids - MBbl

186

79

373

258

Natural gas equivalent – Mmcfe

62,984

47,148

176,171

128,150

Daily production - Mmcfe

685

512

645

469

Average price per unit:

Realized crude oil price - as reported

$      72.96

$     64.64

$      74.17

$       51.82

Realized impact of derivatives

2.19

1.57

0.76

3.38

Net realized crude oil price (Bbl)

$      75.15

$     66.21

$      74.93

$       55.20

Realized natural gas price - as reported

$        4.20

$       3.13

$        4.43

$         3.53

Realized impact of derivatives

0.99

2.43

0.92

2.37

Net realized natural gas price (Mcf)

$        5.19

$       5.56

$        5.35

$         5.90

Realized natural gas liquids price - as reported

$      34.97

$     30.98

$      35.66

$       27.04

Realized impact of derivatives

(0.22)

-

(0.11)

-

Net realized natural gas liquids price (Bbl)

$      34.75

$     30.98

$      35.55

$       27.04

Cash flow from operations (1)

187,848

152,435

534,593

434,174

Cash flow from operations  - per share (diluted)

0.62

0.52

1.77

1.57

Average cost per Mcfe:

Production:

  Lease operating

0.25

0.44

0.28

0.44

  Workover and other

0.04

0.02

0.04

0.01

Taxes other than income

(0.05)

0.32

0.08

0.31

Gathering, transportation and other:

   Oil and natural gas

0.74

0.37

0.56

0.41

   Midstream

0.05

0.11

0.09

0.10

General and administrative:

  General and administrative

0.54

0.43

0.56

0.45

  Stock-based compensation

0.11

0.09

0.10

0.08

Depletion

1.65

1.85

1.72

2.18

(1) Represents cash flow from operations before changes in working capital.  See the Condensed Consolidated Statements of Cash

    Flows for a reconciliation from this non-GAAP financial measure to the most comparable GAAP financial measure.

PETROHAWK ENERGY CORPORATION

SELECTED ITEM REVIEW AND RECONCILIATION (Unaudited)

(In thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

2010

2009

2010

2009

Unrealized (gain) loss on derivative contracts:(1)

    Natural gas

$ (102,281)

$ 112,861

$ (182,871)

$     88,177

    Crude oil

14,437

30

(7,644)

8,575

    Natural gas liquids

287

-

287

-

    Interest

-

2,280

-

-

        Total mark-to-market noncash charge

(87,557)

115,171

(190,228)

96,752

Full cost ceiling impairment

-

-

-

1,732,486

Amortization of deferred gain

(59,472)

-

(123,839)

-

Expense of deferred financing costs(2)

3,361

-

3,361

911

Loss on early extinguishment of debt(3)

47,084

-

47,084

-

Total selected items, before tax

(96,584)

115,171

(263,622)

1,830,149

Income tax effect of selected items

37,765

(43,788)

102,575

(695,823)

Selected items, net of tax

(58,819)

71,383

(161,047)

1,134,326

Net income (loss), as reported

98,681

(40,177)

268,311

(1,061,934)

Net income, excluding selected items

$    39,862

$   31,206

$  107,264

$     72,392

Basic net income (loss) per share, as reported

$        0.33

$     (0.14)

$        0.89

$        (3.88)

Impact of selected items

(0.20)

0.25

(0.54)

4.15

Basic net income per share, excluding selected items

$        0.13

$       0.11

$        0.35

$         0.27

Diluted net income (loss) per share, as reported

$        0.33

$     (0.14)

$        0.89

$        (3.88)

Impact of selected items

(0.20)

0.25

(0.54)

4.11

Diluted net income per share, excluding selected items

$        0.13

$       0.11

$        0.35

$         0.23

(1) Represents the unrealized (gain) loss associated with the mark-to-market valuation of outstanding derivative

      positions at September 30, 2010 and 2009.

(2) Represents charges related to the write-off of debt issuance costs in conjunction with a decrease in the Company's borrowing base under its

      senior revolving credit facility.  

(3) Represents charges related to the write-off of debt issuance costs, discounts and premiums in conjunction with the redemption of the Company's

      9.125% Senior Notes due July 15, 2013.  Also represents the premiums paid to noteholders for early redemption of the 9.125% Senior Notes.