The boiler-plate text in Petrohawk Energy Corp.’s earnings reports that cited its assets changed often. The company, which was sold in August to Australian conglomerate BHP Billiton Ltd., had been in plays ranging from the conventional, vertical Hunton in Oklahoma to coalbed methane in western Arkansas to the Gulf of Mexico.

Floyd Wilson, founder, chairman and chief executive officer, was a strict guardian who didn’t fall too much in love with any of the company’s assets. “I used the 80/20 rule always,” he says. That is, 20% of assets make 80% of the money. And, thus, the chameleon property set. He adds, “The shales have changed this old rule of thumb.”

At times, Petrohawk entered basins—such as the Permian and South Texas—as a result of an acquisition of a larger package of properties, sold these and later bought back in.

Finally, it settled into three core areas: the Haynesville shale-gas play in northwestern Louisiana and northeastern Texas; the Eagle Ford gas and liquids play in South Texas; and the emerging Bone Spring and Wolfcamp liquids-rich plays in the Permian Basin.

And, the team did fall in love with these—so much that all of the company’s currency was being put into them by year-end 2010 and that another key asset, its large Fayetteville shale property set, was let go to feed its monster drilling obligations on more than 1 million other net acres.

BHP was equally attracted in taking operatorship of three world-class unconventional-resource plays and in gaining Petrohawk’s hundreds of employees who knew how to drill, complete, operate and monetize them. New to the U.S. unconventional-resource scene, BHP had just entered in March with the $4.75-billion purchase of Chesapeake Energy Corp.’s Fayetteville shale properties, and the deal included one year of operating support.

Petrohawk Energy Corp. founder Floyd Wilson used the 80/20 rule at all times in building the company, divesting nonstrategic properties as new-growth opportunities emerged.

In July, it offered $15 billion in cash, consisting of $12.1 billion for outstanding shares and $3 billion in debt assumption, for Petrohawk, paying $38.75 a share or 69% more than the pre-announcement trading price. Proved reserves included were 3.4 trillion cubic feet equivalent (Tcfe); with probables and possible, total risked reserves were 35 Tcfe at year-end 2010.

Tudor, Pickering, Holt & Co. Securities Inc. equity analysts bid adieu to Petrohawk and its founders on August 25 with this: “The great ride finally comes to an end with an excellent return for shareholders, plus excellent assets and people for BHP. We wish Floyd…and the rest of the crew at Petrohawk the best.”

To demonstrate their confidence in Wilson and the team, they added, “We’re getting a jump start on the ‘next Petrohawk’ and considering initiating coverage with a ‘Buy.’”

Wilson says “team” is spot on. “I was fortunate to be able to co-found Petrohawk with several of our industry’s leaders. And they continue to build our staff into the technical and operational powerhouse that we became.”

From the beginning

The story started in 1970 when Wilson began his oil and gas career as a completions engineer in Houston. In 1976, he packed up for Wichita, Kansas, and the Midcontinent’s huge gas fields, starting several private oil and gas companies that, with Prudential Capital backing, culminated with founding Hugoton Energy Corp. in 1987 during what was eventually determined to be the bottom of the 1980s oil-price bust.

He took Hugoton public in 1994 and sold it and its 246 billion cubic feet equivalent (Bcfe) of proved reserves for $326 million in stock and debt assumption in 1998 to Chesapeake, a mid-cap E&P at the time, taking it to its first Tcfe of proved reserves.

Days later, he founded W/E Energy Co. LLC in Dallas with $20 million of equity backing by EnCap Investments LP and management, and accessed public capital again, rolling W/E into tiny, publicly held Middle Bay Oil Co. which emerged as 3Tec Energy Corp. in 1999.

“I built Hugoton bit by bit with bank financing and sweat equity,” Wilson said at the time. “This time, I arranged for the equity with EnCap first. Partners with cash are the best.”

The W/E partnership had been 12-year-old EnCap’s first investment in a start-up E&P; its focus had previously been on project finance. David Miller, EnCap managing director and cofounder, said at the time, “Floyd built a $350-million company before selling it, so we felt he had the skills to grow a half-billion-dollar company.”

And, he did. Wilson soon moved 3Tec to Houston, built it to 49 million barrels of oil equivalent of proved reserves and sold it to Plains Exploration & Production Co., which was in its formative year, for $450 million in June 2003, doubling Plains’ mass.

Again days later, Wilson formed Petrohawk Energy LLC with $54 million of equity commitments by EnCap and mutual fund Liberty Energy Holdings LLC and another $6 million from himself and fellow members of management, including Dick Stoneburner, who came from the Hugoton days, and Steve Herod, who joined Wilson and Stoneburner at 3Tec.

Wilson rolled the $60 million into a controlling interest in publicly held micro-cap Beta Oil & Gas Inc., again gaining access to public-capital markets. The deal was closed in May 2004. The newly named Petrohawk Energy Corp. held 33 Bcfe of proved reserves in conventional oil and gas fields in Oklahoma, Kansas and South Louisiana.

Beta’s second-half 2003 drilling budget was a mere $4 million for 7.3 net wells. Its production averaged 7 million cubic feet equivalent a day. It was a platform for grander plans.

Soon after—for $425 million or nearly as much as he had just sold 3Tec—Wilson bought 200 Bcfe of onshore U.S. proved reserves from privately held Wynn-Crosby Energy Inc., with whose founder, Ron Crosby, he had initiated a conversation months earlier.

Crosby had already put hedges on the production to support Petrohawk’s financing at closing. Wilson said, as the acquisition was named Oil and Gas Investor’s M&A Deal of the Year for 2004, “These were hedges Ron would have to live with if the deal didn’t work out. Something like that isn’t done without a great deal of mutual trust.”

Crosby said, presciently, at the time, “If I were starting a company, our property base would be a great one to start with.”

2005-07: Proton, Mission, KCS

From there, a meaningfully sized independent E&P with 233 Bcfe of proved reserves and 57 million cubic feet equivalent of daily production emerged, gaining a position on E&P equity analysts’ coverage lists. For Wilson at the time, the typical private-equity-backed, start-up E&P exit was on the horizon: three to five years.

“We were in the consolidation business,” Wilson says of Petrohawk’s initial acquire-and-exploit strategy. “These were multiple, conventional fields with proved reserves that were generally mature and we built a drilling program around that.”

From Wynn-Crosby, it gained producing properties in South Texas, East Texas, the Permian Basin and elsewhere onshore the U.S. It also picked up 75,000 net undeveloped acres in the Arkoma Basin in Arkansas. The transaction included more than 100 Bcfe of probable and possible reserves. “You don’t find too many deals like this.” Wilson said.

Within the next month, Wilson acquired Proton Oil & Gas Corp. for $53 million, gaining 28 Bcfe proved and a small amount of shallow-depth production in South Texas and South Louisiana from underdeveloped properties.

A month later, he had another deal in hand—for publicly held, small-cap Mission Resources Corp. Its reserves doubled to 446 Bcfe, now in- cluding assets in East Texas and the Gulf of Mexico as well.

Unknown to Petrohawk in late 2005, its next big deal would change the company’s course, putting it smack in the middle of the Haynes - ville shale play that was still more than two years away.

In early 2006, Wilson picked up Winwell Resources Inc., gaining 106 Bcfe proved in the giant Elm Grove and adjoining Caspiana gas fields in northwestern Louisiana for $262 million. His target was the Cotton Valley formation and commingling production from it with new Hosston production.

In keeping with his mantra of growth “without trashing the balance sheet,” Wilson put to auction some 7 Bcfe proved that was making a small amount of production from some 1,500 nonoperated wells in various basins. He also sold virtually all of Petrohawk’s Gulf of Mexico properties.

The proceeds went to reduce bank debt. And, Wilson had another deal under way. A few months later, Wilson merged Petrohawk with KCS Energy Inc., taking it to 1 Tcfe of proved reserves, an enterprise value of $3.7 billion and a major position in Elm Grove Field. “The Haynesville play had not been developed yet,” Wilson says. “This was in 2006. No one knew of a Haynesville play yet.”

Much had changed on Petrohawk’s way to the exit. When entering 2007, Wilson says, “It became obvious we would outpace any company our own size and our own style and that, would there be an exit transaction, we would certainly be involved with a larger company.

Wilson was a strict guardian who didn’t fall too much in love with any of the company’s assets.

“It wasn’t the thought when we started out, but, of course, things changed.”

With proceeds from selling the company’s Gulf Coast division, Wilson bought more exposure to the Fayetteville shale play and to Elm Grove Field’s conventional gas, bringing Petrohawk to 150,000 net acres over the former and interests in more than 150 square miles in the latter. The Haynesville shale, which lay beneath, was just a few months away from hitting the Street.

2008-09, Part I: Haynesville

In early 2008, Petrohawk was well within its three- to five-year exit window. Proved reserves were 1.062 Tcfe. Assets were primarily in North Louisiana, Arkansas and the Permian Basin. Production was more than 319 million equivalent a day. Its drilling budget was $800 million. Drilling locations in its inventory now totaled 10,500.

Wilson went to the Street, selling an oversubscribed 20.7 million shares for $15 each.

Soon, talk of the Haynesville play began to surface. Cabot Oil & Gas Corp. had mentioned it in late 2007 and early 2008. Goodrich Petroleum Inc. named it in an earnings call in early March. An equity-analyst report in late March showed early indications of the economics of horizontal Haynesville wells.

Now four years old and well within its three-to five-year exit window, Petrohawk dropped its Haynesville bomb on April 8, announcing it had 70,000 net acres prospective for the shale’s gas, including approximately 30,000 in Elm Grove Field within the heart of the play. “Our location was fortunate,” Wilson says of its preexisting position.

Its break-out visit with research analysts at the IPAA’s annual OGIS meeting in New York that month was standing room only. Gas prices had pushed past $10 on Nymex. The gassy play was on, and so was Petrohawk stock, shooting past $26 from $15. Further leasing soon brought its exposure to Haynesville to 275,000 net acres.

“We weren’t the first to drill a Haynesville well. We were the first to drill a headline, economic, horizontal, multi-stage-fractured Haynes ville well and release the information,” Wilson says. “We knew from our research that the footprint of the Haynesville was extensive. We spent about $1.5 billion during 2008 buying more land. We had spent $1 billion before we even produced an Mcf of Haynesville gas.”

Sell Petrohawk now or further develop the Haynesville position? Proved reserves fetch more on the market than undeveloped acreage and Petrohawk had 50 years of drilling locations left to exploit. It also already had technical staff with shale-drilling experience in the house.

He said at the time, when named Oil and Gas Investor’s Executive of the Year for 2008, “We got into a couple of such awesome plays that we wanted to exploit them.” The company pushed further away from its conventional-resource beginnings. “We became a different sort of company, both internally and externally.”

Petrohawk would continue on. Wilson made another trip to the capital market, selling 25 million shares at $26.53 each. Lehman Brothers and Merrill Lynch & Co. were joint book-running managers of the offering. A month later, on September 15, 2008, neither would exist.

2008-09, Part II: Capital Markets

In the midst of the capital-markets disarray that began that day, E&Ps and other enterprises across the U.S. and elsewhere were trapped between capital demands and withdrawn sources. The Petrohawk board put in a shareholder-rights plan to protect the company from a takeover on the cheap.

Wilson cut Petrohawk’s 2008 capex budget from $1.5 billion to $1 billion, dedicating the balance to its highest rate-of-return and reserve-growth projects: Haynesville and Fayetteville. Its $1.1-billion credit facility had been put in place on September 10 and, having just raised $1.8 billion in stock and senior-notes offerings, Petrohawk was flush with cash.

Meanwhile, gas prices, which had begun to soften a few months earlier, fell to some $5.60 and less-economic shale wells depended on a $6-or-better gas price. Oil, which had peaked at nearly $150 in July, had fallen to $44.

Petrohawk had a third to two-thirds of its production hedged for 12 to 36 months at pre-collapse prices, though. Wilson said, “The good news is that we’re not in a…bind.” He added, about the state of financial markets, “It’s hard to be worried about a fact.”

Petrohawk exited 2008 at 1.4 Tcfe of proved reserves—80% of this in North Louisiana and Arkansas—and 400 million equivalent of daily production. It had invested $1.5 billion in Haynesville leases that would expire in the coming three years unless drilled. Wilson went to the high-yield debt market that reopened for select candidates and sold $600 million of five-year, 10.5% senior notes at 91.279% of the face value to yield 12.75% to maturity.

With the proceeds, Wilson zeroed Petrohawk’s bank debt. The company was in good fiscal shape. Its debt to book capitalization was approximately 41%. Estimated ultimate recovery (EUR) for its Haynesville wells had grown to 7.5 Bcfe each based on its first 14 completed. Its total resource potential in the shale was now 13.7 Tcfe.

Wilson said of the late-2008 double hit of collapsing oil and gas prices and closed capital markets, “It was my job to cut the budget and maintain some discipline around cash flow, but it was also my job to make sure that we kept those great fields on track and didn’t let them languish.

“Some of the best times to create opportunity are when people are pessimistic. I believed this may be one of those times.”

2008-09, Part III: Eagle Ford

It was easy to think during 2008 that all of Petrohawk’s $1-billion capex budget was being spent on leasing and drilling in the Haynesville and Fayetteville. But, in October 2008, investors—and the oil and gas industry worldwide—discovered a story even bigger than the Haynesville: Petrohawk had discovered the Eagle Ford gas and liquids play in South Texas and had been amassing leasehold. Its position now totaled more than 100,000 acres.

Wilson says that, in early 2008, he tasked the Petrohawk team with finding another Haynes - ville. The Eagle Ford emerged. “It had the reservoir attributes we were looking for and we were able to go in there quietly. The first 150,000 acres we bought were at about $200 an acre.” Today, leasehold trades for more than $10,000 an acre.

Petrohawk had held South Texas acreage from some of its early acquisitions but had sold it. Like any other operator, it hadn’t looked at the deeper Eagle Ford formation yet that sits between the Edwards and Sligo reef trends. It had had zero acreage there anymore.

“It was totally a grassroots effort,” Wilson says of developing the new play. The team found three old wellbores 70 miles apart that had penetrated Eagle Ford. “That was it.” With study, the results suggested the shale had varying amounts of dry gas, condensate and oil deposits and that it was highly faulted.

“It was a great exploration feat by our group to discern, identify and then convince ourselves, based on our research, that we should put together a large acreage position there.”

In La Salle County, Texas, in the field Petrohawk named Hawkville, a discovery well, STS #241-1H, was drilled 11,300 feet vertically and 3,200 feet laterally. It went on production at 9.1 million equivalent, including 250 barrels of condensate, a day.

The response from the Street? “Just what we need: More oil and shale gas.” What would become a Top 3 liquids play in North America met with “ho hum.”

Petrohawk put one rig at work in Eagle Ford continuously and continued leasing.

Meanwhile, the capital storm—at least for oil and gas companies—subsided; instead, the industry came to emerge as one of the few that investors would put money in as hard assets became gold again. By August 2009, Petrohawk sold another 25 million common shares at $22.86 each—roughly the year-earlier stock price. And, Wilson divested the company’s Permian Basin portfolio. Eventually, Petrohawk would be there again.

2010-11: HBP’ing acreage

Petrohawk entered 2010 with 360,000 net acres over Eagle Ford where the average initial-production (IP) rate became 9.7 million equivalent a day and EUR per well was looking like 5.5 Bcfe.

In the Haynesville, it now held 360,000 net acres as well and the average IP grew to 17.2 million equivalent per day. The company was within one year of holding most of its Haynes - ville leasehold by production (HBP). A majority of capex would now be focused on Eagle Ford.

To fund this, Wilson evoked the 80/20 rule and began to sell. First, he let go of the old money-maker oil field, the West Edmond Hunton Lime Unit (Wehlu) in Oklahoma, that was the last of interests it still held from Beta.

He let go of interests in Terryville Field in North Louisiana. Except for Elm Grove, Terryville was the last property it still held from KCS; it wasn’t prospective for Haynesville. After divesting interests in Haynesville and Fayetteville midstream assets, Wilson let go of Petrohawk’s massive Fayetteville program that had grown to 299 Bcfe of proved reserves.

By now, among all of the properties Petrohawk had purchased in the prior six years, it only retained interests in Elm Grove Field. “We were always divesting and we were happy to let things go. If we left a dollar or two on the table, it was justified by the velocity Steve (Herod, Petrohawk’s M&A go-to director) was able to accomplish with all of this activity.”

By 2011, proved reserves were 3.4 Tcfe (92% gas; 1.2 Tcfe proved developed producing). Its oil and gas-liquids production was growing. The new capex budget was $1.8 billion. Wilson paid off some old notes and issued new ones at 6.25%, down from the double-digit deal of early 2009.

Wilson says, “In second-half 2008 and early 2009, although we did equity deals at ever-lower prices and debt deals at ever-higher interest rates, we were comfortable that the use of these funds would be far more durable than the recession. As it turned out, we were, fortunately, right.”

In June 2011, production was 943 million equivalent per day, 89% gas. Leasing was under way in the Permian Basin, where it had four rigs targeting horizontal Bone Spring shale-oil and commingled Bone Spring and Wolfcamp vertical production.

Oil and gas producers began citing the Eagle Ford among the Top 3 plays they’re in—or would like to be in. Wilson says, “It turned into something even much larger than we envisioned. We knew it was going to be good, but we didn’t realize how good it was going to be and how much areal extent it would have.”

On July 14, Wilson had 35-Tcfe-risked-resource-rich, seven-year-old Petrohawk sold.

“We didn’t market the company per se,” he says of the deal with BHP. Throughout the Wynn-Crosby, Mission and KCS deals, Wilson emphasized initiating transactions privately.

“I certainly kept my conversations current with the larger companies around the world during the past few years.” Wilson’s past startups were sold to what would become large-cap E&Ps; this start-up, instead, became a large-cap E&P. “We had become large enough that only the largest companies could get their hands around the size Petrohawk had become.”

Of his future, Wilson says, “At the appropriate time, I plan to continue to try to be a company builder in the oil and gas business.”

Beyond 2011

The extension on the exit strategy paid off. As of this spring, Wilson, 64, held 4.08 million or 1.34% of outstanding Petrohawk shares. All executive officers and directors held 4.22% or 12.81 million shares. Exit packages for five members of management, including Wilson, totaled more than $24 million.

What are Wilson’s plans now? “I have some service yet with BHP. At the appropriate time, I plan to continue to try to be a company builder in the oil and gas business. Who knows how I’ll do, but I’m not ready to play golf every day.”

Where will his next start-up focus? Certainly on the U.S., he says. “This is the best place in the world to work, the place with the least political risk. I won’t say we have none, but it’s far less than any place else in the world.”

Within the U.S., he would build again on assets in energy-friendly regions, such as Texas, “areas that know we strive to be clean and responsible operators, making jobs and economies for people who support the oil and gas business. I wouldn’t put together acreage in New York State, for example.”

The Eagle Ford remains intriguing, he adds. “You could probably still put a large leasehold together there, but it would cost more than $10,000 an acre.” And, Kansas has been a good friend to Wilson as well, but he won’t say in which plays he’ll land next: “I hope to not be the last guy in the door in a new play.”

Founded on conventional resources, Petrohawk became a leader in the horizontal drilling and multi-stage fracing revolution. Wilson is impressed by how technology is creating new plays as well as making old plays new again.

“The boom has been well identified over the past five years in natural gas and that’s going to continue to grow for a while. It’s just the beginning now of a new boom in oil. My prediction is that, going forward, we are going to produce a huge amount of the oil we consume in the U.S. out of these North American shale plays.

“That’s going to have a real impact on our economy and on the world price of oil. I was reading just the other day that the U.S. will become the largest producer of crude in the world again in 10 or so years and this is all due to these shales and redevelopment of even some conventional reservoirs with horizontal wells.

“They won’t all be prospective for this new activity, but many of them will.”

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