HK Reports 4Q08; Top Line Beat, Bottom Line Miss; Raising Production Guidance, Costs Remain Low.

• The 4Q Numbers:
  • Production: 361 MMcfepd was previously announced, up 15% sequentially and 52% YoY, 92% natural gas
  • Revenues of $270.7 vs $226 mm expected. Much of this beat was due to higher than expected marketing revenues (lower margin than oil and gas revenues)
  • Lease Operating Expense (LOE): $0.45 (very low)
  • EPS of ($0.04) vs $0.03 expected (quarter was clouded by the previously announced ceiling test writedown)
  • CFPS of $0.48 vs $0.54 expected
• Guidance:
  • 1Q09: 400 to 410 MMcfepd (HK had previously stated a 2008 exit rate of 400 MMcfepd).
  • 2009: 422 to 432 MMcfepd, up 40% from 2008’s average production of 305 MMcfepd. The last target range given for production was 25 to 35% growth so this is an increase to guidance.
  • LOE seen falling further in 2009; targetting a range of $0.36 to $0.44.
  • Average EUR for a Haynesville shale horizontal now seen at 7.5 Bcfe, up from a prior 6.5 Bcfe.
• Balance Sheet: 41% debt to cap
• Hedges: About 60% hedged with floors in the mid $7s.

Conference Call Notes:

Borrowing base was reconfirmed at same level under same terms.

Haynesville development will allow them to guide to the lower LOE range referred to above.

Target goes from mid point 30% to 40% growth, they are doing this with the same capital budget.

Says the EURs are remarkably consistent which is what gave them the confidence to go to 7.5 Bcfe.

Comment on the high yield deal:

• Used $535mm to pay off all of the borrowings on the revolver.
• They have $950 mm available.
• Net debt to total cap was 38% at YE08

Q&A

On The Upward Revision of the Recoverable Reserves from 6.5 to 7.5 Bcfe per well:

• There is of course variability,
• this is the answer so far,
• it comes from the small set of publicly released wells they’ve drilled
• stretched over a broad area over many miles both in the Elm Grove area and outside of it.