Halcon Resources is Ready to Take the Tuscaloosa Marine Shale to the Next Level

Photo credit: Copyright © Encana. All rights reserved.  

Halcon Resources (NYSE: HK  ) announced earlier this week that it will receive a $400 million cash injection from private equity firm Apollo Global Management (NYSE: APO  ) to fund the development of the oil-rich Tuscaloosa Marine shale. That deal, combined with the company's recent well success, has Halcon ready to move to the next level in that emerging shale play.

Solid results
Halcon Resources announced that its initial Horseshoe Hill 11-22H-1 well in Mississippi achieved an initial 24-hour peak production rate of 1,208 barrels of oil, along with 1.1 million cubic feet of high BTU natural gas. The company estimates that the well's initial production rate was a very strong 1,584 barrels of oil equivalent, or BOE, per day.

As the following map details, this well is located in the western portion of the core and in close proximity to Encana's (NYSE: ECA  ) own Horseshoe Hill well.

Source: Halcon Resources Investor Presentation (link opens a PDF).

Encana's Horseshoe Hill 10H-1 well only achieved an initial production rate of 830 BOE per day. While that well's lateral length was much shorter than Halcon Resources' well, Halcon still had much stronger initial production than Encana.

The Halcon Resources well also produced a slightly higher initial rate than Goodrich Petroleum's (NYSE: GDP  ) most recent well. The company's C.H. Lewis 30-19H-1 well to the east achieved a peak 24-hour production rate of 1,450 BOE. However, Goodrich Petroleum's well delivered 1,387 barrels of oil daily, or more than 95% oil. Halcon Resources' well, on the other hand, has a much higher natural-gas liquids content and only about 76% oil. Still, it's a solid first well, which is why the company is ready to take its development of the play to the next level.

Cash infusion
Apollo will invest up to $400 million in Halcon Resources' Tuscaloosa Marine shale subsidiary. Under the terms of the agreement, Apollo will acquire 150,000 preferred shares in the subsidiary for $150 million. It can acquire up to 250,000 additional shares on the same terms.

Halcon hinted at the deal during on its first-quarter conference call in May. Chief Financial Officer Mark Mize said the company's liquidity position was good through the next year to maintain its current growth plan. However, he noted that if the company brought in a financial partner to assist in financing the Tuscaloosa Marine shale, its liquidity picture would improve and growth could be accelerated.

That's exactly what's happening here as the cash will enable Halcon Resources to partially fund development of 75 wells in the shale play. If Apollo subscribes to its full allotment of preferred shares, Halcon would have the money to partially fund a maximum of 200 net wells. Needless to say, the cash infusion will go a lot way in helping Halcon Resources to develop its intriguing position in the Tuscaloosa Marine shale.

Photo credit: Copyright © Encana. All rights reserved.  

Investor takeaway
Halcon Resources is off to a solid start in the Tuscaloosa Marine shale. The company's first well is producing a significant amount of oil and liquids-rich natural gas. Halcon also is picking up a solid financial partner to help it increase its investments in the play. While the company is still very early in development of its asset, it's starting to look like Halcon made a very good decision to concentrate on making the Tuscaloosa Marine shale a new core play.

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