Tuscaloosa Marine Shale Is an Opportunity

What would your portfolio look like if you bought one of today's big Eagle Ford producers back in 2010? Or how about a Bakken producer back in 2008? For example, Continental Resources (NYSE: CLR  ) is up almost six times since the end of 2008. 

Last month, Halcon Resources (NYSE: HK  )  CEO Floyd Wilson said that his company was entering the Tuscaloosa Marine Shale, or the TMS for short. Wilson also said he believed that the Tuscaloosa Marine Shale would be one of the last big shale oil discoveries that America will see.

So what? Well, Floyd Wilson knows a thing or two about shale exploration. Wilson is the person most credited with discovering the Eagle Ford Shale last decade. The company he founded, Petrohawk, was the first player in the Eagle Ford. Petrohawk would later be bought by BHP Billiton for a cool $12 billion. 

Wilson looks to repeat this success in the TMS. While he is not the first player in the TMS, Halcon's entrance into this nascent shale play gives it added legitimacy. The addition of Halcon's name to the list of TMS producers will provide a catalyst for oil service companies to enter this play. This should, in turn, help drive down completion costs and make the TMS economically viable. 

The two big players
Halcon's move into the TMS is a big one. Halcon now has a 300,000 acre position in the TMS and will move two rigs into this play. Buying shares of Halcon would be one solid way to participate in the TMS: Floyd Wilson and company certainly are capable managers, and I believe management will make its Tuscaloosa acreage very profitable.

The more Tuscaloosa-focused play here, however, is Goodrich Petroleum (NYSE: GDP  ) . Goodrich has 400,000+ acres in the Tuscaloosa, and most of that acreage is in the "core" of this play, where well returns should be the highest. Goodrich is to the TMS what Continental Resources is to the Bakken: The first and biggest player with a large core position. 

Economics
The most important aspect of developing the Tuscaloosa right now is reducing well costs. The TMS, so far, is entirely an oil play. This is favorable to today's situation because oil fetches a much higher margin than does natural gas. 

Unfortunately, the Tuscaloosa's oil is way down in the ground. Most oil in the TMS is between 10,000 ft. and 14,000 ft. deep, compared with 8000 ft. to 11,000 ft. in the Eagle Ford. This, along with little servicing competition, drives up well costs. For example, wells in the TMS, on average, cost about $13 million versus a functionally comparable well cost of $7.5 million in the Eagle Ford. On the upside, TMS wells have been more prolific than Eagle Ford ones, and so well economics in the Tuscaloosa will rival that of the Eagle Ford if costs can come down by just $3 million or $4 million.

Bottom line
According to Floyd Wilson, the Tuscaloosa will be one of America's last shale discoveries, at least with this generation of technology. I believe that the TMS is an important 'frontier' of America's "shale revolution," and that the two best ways to participate are now Goodrich and Halcon. 

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Read/Post Comments (3) | Recommend This Article (3)

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 April 14, 2014, at 6:51 PM, divedogg wrote:

    Nice call, considering the stock is up 37% since this article was published just last week. This stock closed at 28.04 on 10/7/13, plummeted to 12.28 on 2/20/14, and closed back up at 23.96 today after jumping 30% in one day. Now that is a volatile stock. The excitement today is that this well was on the Sinopec JV land, so it could go a long way to help build that relationship which is the real bull case for this stock (>30) if Sinopec buys into the rest of their acreage.

  • Report this Comment On April 16, 2014, at 9:41 PM, HoerthCM wrote:

    Thank you divedogg. In fact, I've been singing the praises of GDP for awhile on another website, too. Been through those downs, and am now enjoying the ups.

  • Report this Comment On June 19, 2014, at 5:51 PM, fdmckenzie wrote:

    Hi! I live in the heart of the TMS and would like to know which funds to look for in my 401K that would get me into Goodrich and Halcon heavily?

    Thanks!

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