Haynesville Shale: hope or hype?

HOUSTON (Reuters) - A company news release with the words "Haynesville Shale" these days is enough to send an exploration and production stock soaring, but with little known about the Louisiana natural gas discovery, some question whether the talk justifies the gains.

In March, Chesapeake Energy Corp (CHK.N) CEO Aubrey McClendon said Haynesville may hold an eye-popping 20 trillion cubic feet equivalent of potential reserves -- nearly equal to the amount of gas consumed in the United States last year.

Since then shares of smaller companies that hold acreage in the shale have "gone through the roof," said Jeff Hayden, senior analyst at Pritchard Capital Partners LLC.

"I've never seen stuff go this crazy on this few hard data points, but that's kind of the market we're in," Hayden said. "Everybody is looking for the next play and nobody wants to miss it."

Yet there is little public data about the Haynesville Shale, a formation in northern Louisiana near Shreveport where natural gas is trapped underground in sedimentary rock. Exploration and production require sophisticated technology, an investment made more enticing by the year's soaring energy prices.

"The more capital I see put in Haynesville, the better I feel about the play, but that doesn't mean there's too much froth," Phil Weiss, energy analyst at Argus Research, said. Drilling there is becoming more active, a sign that exploration is beginning in earnest, Weiss said.

Chesapeake Energy has already locked up the rights to drill on 500,000 acres in the Haynesville Shale and was the first large company to publicly discuss the discovery's potential.

REVERBERATIONS

The reverberations, however, are still being felt.

GMX Resources GMXR.O, for example, said on Tuesday it had purchased more property in the Haynesville, bringing its total acreage to 27,500 acres in the Haynesville and Bossier shales in east Texas and northern Louisiana.

The news pushed its shares to an intraday lifetime high of $71.99 on Thursday. Since the start of the year, the stock is up nearly 118 percent.

Shares of Goodrich Petroleum Corp (GDP.N) have risen 135 percent since the first Chesapeake announcement, while Chesapeake's shares have climbed 42 percent in that period.

Comstock Resources Inc (CRK.N) is up 102 percent, and Petrohawk Energy Corp (HK.N) has soared 108 percent. And most stocks are trading at or near all-time highs.

Those gains compare with a 25 percent rise in the Dow Jones U.S. Exploration and Production Index .DJUSOS during the same time period.

Other companies with exposure in the Haynesville include EnCana Corp (ECA.TO), Forest Oil Corp (FST.N) and EXCO Resources Inc (XCO.N).

Some analysts question whether investors have gotten ahead of themselves. In years past, investors wanted to see more hard data on a field's potential before aggressively buying stocks that have exposure in a developing area, Hayden said.

Valuations are also rich, another sign that might signal these stocks may be topping out, analysts said.

Shares of Chesapeake are trading at about 16 times 2009 earnings, above the Standard & Poor's index of natural gas producers .XNG, which is trading at 15 times 2009 earnings.

Goodrich Petroleum is trading at about 89 times 2009 earnings, according to data from Reuters Estimates.

"HIGH SIDE"

"Chesapeake's valuation is on the high side right now," said Argus Research's Weiss. "I know Chesapeake is getting close to where it has topped out, in my view, for now."

But Pritchard Capital's Hayden and other analysts said there is plenty more upside in the stocks if the Haynesville discoveries pan out.

"This really comes down to how good you think the play is," Hayden said. "There aren't a whole lot of data points, but there is plenty of chatter about the type of production rates people are seeing and they sound pretty good to us."

And Argus Research's Weiss said Chesapeake's public comments about the Haynesville Shale's potential help confirm that there is value in the play.

The frenzy to own Haynesville Shale stocks can be traced to investors' desire to capitalize on the booming energy sector, which is outperforming the broader market, said John Olson, hedge fund manager at Houston Energy Partners.

"The market has actually jumped way ahead of the drilling activity, Olson said. "What this play has is tremendous novelty value, but sooner or later it is going to cool off, and these stocks will obey the laws of gravity."

(Editing by Brian Moss)