Should Halcon Resources’ Investors Be Excited About its New Core Play?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Photo credit: Copyright © Encana Corporation. All rights reserved 

Halcon Resources (NYSE: HK  ) recently reported a fairly good quarter. While its earnings estimates fell short, the company's cash flow and production surged. In addition providing investors with a financial and operational update, the company also announced that it was adding a third core play to its portfolio of opportunities. What was surprising, at least to me, was that the company chose the Tuscaloosa Marine Shale as the new core development instead of the Utica Shale.

Drilling down into the TMS
The Tuscaloosa Marine Shale, which is located in Louisiana and Mississippi, is believed to contain upwards of 7 billion barrels of recoverable oil. It's a deep formation with an approximate depth range between 11,000-15,000 feet or nearly three miles deep in some parts. In addition to the depth of the rock, one of the issues some drillers have encountered is clay, which can swell with water.

That said, drillers like Goodrich Petroleum (NYSE: GDP  ) and Encana (NYSE: ECA  ) both have found success in the play. Goodrich Petroleum in particular is very focused on this play. The company has more than 300,000 net acres in the play and plans to spend about 80% of its 2014 capital budget on that play. The reason Goodrich Petroleum is spending so much on the play is because it sees its resource potential at 736 million barrels of oil equivalent, with more than 90% of that potential being oil.


Photo credit: Copyright © Encana Corporation. All rights reserved  

Encana, meanwhile, sees the Tuscaloosa Marine Shale as one of its five core plays as the company refocuses its attention from natural gas to higher returns liquids. Like Goodrich Petroleum it has amassed a 300,000 net acres position in the play. That said, Encana isn't investing as great a percentage of its capital program into the play yet as its 2014 plan calls for a two rig program as it works to complete its appraisal program of the play. However, its initial results are encouraging that this could be massive oil resources for the company.

A closer look at Halcon Resources TMS position
Like both of those peers, Halcon Resources also amassed a more than 300,000 net acre position in the Tuscaloosa Marine Shale. As the following slide shows, the company's position is spread across the play.

Sources: Halcon Resources Investor Presentation (link opens a PDF)

One of the reasons Halcon Resources is confident in the play is because of a data sharing agreement with both Encana and Goodrich Petroleum that provides it with visibility to the technical and operating data across the entire play. Because of what its seeing, Halcon Resources is confident that it will develop the significant upside potential of this shale play.

In 2014 the plan is to operate just a couple of drilling rigs. That should enable the company to drill 10-12 operated wells this year. That represents just 10% of the company's 2014 drilling program. However, its drilling program should grow over time as the company sees this play as one of the most attractive emerging crude oil resource plays in North America.

So, what happened to the Utica Shale?
For the time being Halcon Resources is putting its pursuit of the Utica Shale on hold. When asked on the company's last conference call about the Utica Shale, CEO Floyd Wilson said that the company isn't planning on moving any rigs there at this time. He said that the company is waiting to see the results on the wells that it already drilled.

While the company has about 140,000 net acres in the play, about half of that land is currently held by shallower production. Because of that it's not facing many lease expirations, which enables it to be patient. Right now it appears that the company is going to let others do the exploration in the Utica Shale before it spends any more money on its acreage.

Investor takeaway
Halcon Resources was an early mover in locking up acreage in the Tuscaloosa Marine Shale. That bet could pay off if the play turns out to be as good as early wells from Goodrich Petroleum and Encana suggest. That said, investors do need to keep a close eye on early well results because this is no sure bet just yet.

This is the best way to invest in oil and gas

Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Read/Post Comments (1) | Recommend This Article (6)

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 March 04, 2014, at 8:38 AM, Ostrowsr wrote:

    I have invested in GeoResources before HK bought them. The stock went straight up due to their 100% success rate on wells drilled. Production was significant at all their sites. Now, the company is combined with HK and the above article shows the potential gains ahead (significant production increases). Great management team and the possibilities are endless, starting with this company being significantly undervalued. A buyout in the double digits is possible but I see greater value if this company goes it alone.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2861415, ~/Articles/ArticleHandler.aspx, 9/1/2015 8:36:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated Moments ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:01 PM
HK $0.99 Down -0.16 -13.68%
Halcon Resources C… CAPS Rating: **
ECA $6.82 Down -0.62 -8.33%
EnCana Corp (USA) CAPS Rating: ***
GDP $0.84 Down -0.08 -8.56%
Goodrich Petroleum… CAPS Rating: **