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Halcon's Bakken Investments Pay off Big Time

Halcon Resources  (NYSE: HK  )  recently provided investors with an important operational update detailing its drilling progress. This is a big year for the company as its investing heavily to grow its production which is being fueled by $1.2 billion in planned capital spending. The biggest news from the update is what the company was saying about its investments in the Bakken. Let's take a closer look at how the company is doing so far this year in that key play.

Bakken's big well
The Bakken is a big part of Halcon's plans as it's spending nearly 40% of its capital on the play this year. It has eight rigs running right now while also working hard to implement drilling and completion modifications to improve its performance in the play. Recent results have been impressive to say the least.

The company's latest well produced an average initial production rate of 3,060 barrels of oil equivalent per day, or Boe/d. Overall, its three most recently drilled and completed wells produced an average initial production rate of 2,648 Boe/d which represented a 38% improvement over all its previous wells drilled in the first quarter using its previous completion method.

In addition to the wells targeting the Bakken formation, the company also saw solid production from its last four wells drilled that were targeting the Three Forks formation. Those wells had an average initial production rate of 2,094 Boe/d, which represented a 77% improvement over all the other Three Forks wells the company drilled last quarter. Halcon's investments in the Bakken, as well as its work on its well designs and completions, have clearly paid off for the company.

Keeping well costs down
Looking ahead, the company expects these new designs to increase production as well as increase the overall estimated economic recovery of its wells. What's really important to see is that Halcon is producing these exceptional results even as well costs are coming down as it focuses on cost. The company expects to see its well costs drop by 10% this year to about $9 million per well.

I've mentioned this before, but it bears mentioning again. Well costs are an important area to watch for Bakken operators. It costs Kodiak Oil & Gas  (UNKNOWN: KOG.DL  ) about $10 million per well while Continental Resources'  (NYSE: CLR  ) wells costs are about $8.3 million per well. That means Continental can drill 17% more wells than Kodiak for the same amount of money. Overall, the industry is really honing in on the right formula to get costs down and increase returns, though some companies are doing a much better job and therefore reaping higher returns.

Halcon's plan is to drop its Bakken well costs to the $9 million range by the end of the year. This will really help it improve its overall rate of return on the play. Further, it also means that the company can drill a couple extra wells per year with the same amount of capital, which will add up significantly over time. Halcon investors have to like what they are seeing in the company's ability to cut its well costs while simultaneously improving its operations. 

The proppant gets the props
One area that's really helping Halcon improve its Bakken well production is the company's decision to change to a ceramic proppant while increasing the proppant volume per lateral foot. If the ceramic proppants prove to be the best option for Bakken drillers it could prove to be a big boost for a company like CARBO Ceramics (NYSE: CRR  ) . The company's proppants cost more than raw frac sand but can increase both production rates and estimated ultimate recovery rates by more than 20%. This leads to high return on investments and faster payouts for producers.

Halcon's numbers really seem to confirm the value of ceramic proppants. Not only did the company see tremendous increases in average initial production rates, but Halcon also sees the estimated ultimate recovery from its wells increasing as well. Two wells in the Marmon area saw average initial production 91% higher than previously drilled wells and it's attributing this to the modified design change and use of ceramic proppants. Further, the company estimates that the ultimate recovery of these two wells will be 462,000 barrels of oil equivalent which is 40% higher than the wells drilled under its previous methods. Halcon sees its modifications as a "game changer" to that area of the Bakken.

Foolish bottom line
When you combine lower costs with higher production and higher ultimate recoveries you have a recipe for solid returns. That's exactly what Halcon is seeing from its Bakken wells, which speaks very well of its future in the play. The company's investments and hard work in modifying its well designs really seems to be paying off.

Halcon is an interesting story as its pursuing several emerging plays other than the Bakken. If you are looking for an interesting Bakken-focused driller then you might want to dig a little deeper into Kodiak Oil & Gas. While the company's well costs are higher than both Halcon and Continental, it's delivering unbelievable production growth. To find out more about Kodiak, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.

Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2013, at 1:10 PM, eyedoc2 wrote:

    Several Motley Fool writers (or one several times) refer to Kodiak's $10million per well cost. They too have plans to cut that to $9M by the end of 2013 and they already use 100% ceramic proppant (or nearly so) which is one of the reasons for the higher well cost (and higher yield). Time will tell if ceramic proppant increases total yield over the life of the well. So don't promote Kodiak's "poor management and discipline" when they are actually progressing along the same ways as you are so excited about Halcon doing.

  • Report this Comment On June 12, 2013, at 5:40 PM, TMFmd19 wrote:

    @eyedoc2 - I never said anything about Kodiak having poor management or discipline, just pointing out that the well costs are still high. I'm actually pretty excited about Kodiak and actually did say in my article that, "While the company's well costs are higher than both Halcon and Continental, it's delivering unbelievable production growth."

    Hope that clears up what I said. Thanks for reading.


  • Report this Comment On June 13, 2013, at 12:21 PM, Ostrowsr wrote:

    I know that before they bought GeoResources, GEOI was increasing the stock price very nicely. I know that big company money was behind them and they had a nearly perfect discovery percentage. Halcon bought this play and is capitalizing on it very nicely. The lagging of the stock price doesn't make sense.

  • Report this Comment On June 13, 2013, at 6:53 PM, TMFmd19 wrote:

    @Ostrowsr - The lagging stock price could just be the market taking a wait and see approach. By some metrics its richly valued only because most of its in a rapid growth phase. If you believe in the story and the management team then stick with it as what happens in the short-term is really just noise.


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9/28/2016 2:32 PM
HK $8.90 Up +0.55 +6.59%
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KOG.DL $0.00 Down +0.00 +0.00%
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