Up 30% This Week, Is This Stock's Rally Set to Continue?

If you're a shareholder of Goodrich Petroleum (NYSE: GDP  ) , then you already know that on Monday shares shot up by a whopping 30%. In a press release, management announced the completion of its Blades 33H-1 well in Tangipahoa Parish, Louisiana. Initial production was over 1,200 barrels of oil per day.

Here is what it all really means: Blades has thus far yielded production comparable to Goodrich's top-performing "core" well, Crosby 12-1h. Blades, however, is considerably east of the "core" Tuscaloosa Marine Shale (or TMS) acreage. This means that the TMS could be broader than originally thought. Couple this good news with Halcon Resources' (NYSE: HK  ) entry into the TMS, and it is not hard to see why investors are suddenly optimistic about the this play. 

Source: Goodrich Petroleum Investor Relations

This chart represents all of Goodrich's operational TMS wells. It also displays the type curve for the average Eagle Ford and Bakken well. These are some encouraging lines: Goodrich has a quite a few wells which outperform not only the Eagle Ford but also the Bakken. That red line? That's Goodrich's superstar well: Crosby 12H-1. And Goodrich's newest well, Blades 33H-1 (not shown here), yielded initial production results almost as good as Crosby 12H-1. While it may be difficult to extrapolate a type curve from just initial production, engineers and investors are very optimistic about initial data. Blades should clock in somewhere between the red and purple lines. And best of all? With Goodrich's experience and refined practices, many believe that the Blades well will be a repeatable feat.  

Putting it into perspective
Before anyone gets euphoric about the TMS, look first at the big picture. First of all, shares of Goodrich were up so much primarily because of the deep short interest in the stock. What we saw on Monday was the result of a very big short squeeze. Price action going forward may not be as steep. Second, and more importantly, well costs are still very high in the TMS: near $13 million for Goodrich and even higher for others. Finally, much of the TMS, especially areas further west, have been only minimally explored. There are still plenty of question marks regarding this shale play.

While I do ultimately believe that the TMS will be commercially viable, perhaps even another Eagle Ford, it is worth noting that shares of Goodrich have been very volatile over the last six months. Investor sentiment could change very quickly.

The Blades well was drilled on acreage that was sold by Devon Energy (NYSE: DVN  ) . Devon's previous well design and strategy failed in the TMS, but where Devon failed, Goodrich succeeded. Also, completion costs for the Blades well were $800,000 below budget thanks to a quicker drilling time. Management expects this trend to continue.

Bottom line
Those are all signs that Goodrich is the best operator in the TMS, akin to what EOG was and is in the Eagle Ford. If that analogy plays out, Goodrich's market cap will be much greater than the $1 billion that it is today, and Monday's 30% jump will seem like just a speed bump. However, in the here and now, Goodrich stock will continue to be volatile. A little caution is warranted, but if you see a steep pullback, go ahead and use that pullback to get in on this one.

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