Halcon Resources (NYSE: HK ) is off to a hot start in 2014. Just take a look at the chart of its stock performance since the start of the year.
Not only is the stock multiples ahead of the market this year, but it's beating rivals like Triangle Petroleum (NYSEMKT: TPLM ) and Northern Oil & Gas (NYSEMKT: NOG ) as well. While there are a number of reasons why its stock has performed so well, a real key to its success has been the improvements it's making in drilling wells in the Williston Basin thanks to the control it has over its operations there.
Take a look at the following slide from a recent investor presentation.
As the chart on the right side shows, the company is seeing improvements in four key metrics, which are fueling production growth. First, the company has cut its drilling days by as much as 42%. In a business where time is money, this efficiency is saving the company a lot of both. In addition to that it's pouring more proppants into each well, which is having a noticeable effect on both the initial production rate as well as the estimated ultimate recovery of oil and gas per well.
This is turning out to create an incredible amount of value for the company and its investors. In simplistic terms, the value of an oil and gas well is derived from the amount of oil and gas a well will deliver over its lifetime. It's called the Estimated Ultimate Recovery or EUR. Halcon Resources is seeing a remarkable uplift in its EUR by using more proppants. Further, it's realizing that value faster as its seeing higher initial production rates, which is pushing more of that oil and gas into sales sooner rather than later.
Control is key
One of the key reasons Halcon Resources is seeing such strong results is the simple fact that it controls a lot of the wells that it drills as it has a high operated interest in its wells. By operating its wells it can decide how the wells will be fracked, including trying new things like increasing proppant volumes or using a new slickwater frack method.
Meanwhile, peers like Northern Oil & Gas and Triangle Petroleum don't always have as much control, which does have an impact on results. Triangle Petroleum is actually focusing more of its efforts on drilling wells that it operates. In the first quarter of last year all of the wells it participated in were nonoperated, however, as of last quarter it boosted its operated wells to 80% of its volumes. In doing so it is able to control more of its costs, which is why we're seeing its drilling days and well costs fall as the following slide notes.
Northern Oil & Gas, on the other hand, doesn't have this same control over the wells it participates in. The company's business model is focused on nonoperated participation in wells. As of the end of the first quarter the company owned an interest in 1,847 wells, however, on a net basis its ownership interests were in 150.8 wells. With such a small ownership interest it's not the key decision maker in how wells are drilled so it really relies on other operators to keep its costs down.
Halcon Resources is using the control it has over the wells it drills to speed up the drilling process as well as test different fracking techniques to find the one that will create the most value per well. It's certainly paying off as its recent results literally speak volumes. Other producers like Triangle Petroleum are also finding that control is a key to improving its drilling speed, which is why it's focusing on drilling operated wells. Meanwhile, Northern Oil & Gas is leaving the control to others and in many ways its stock price this year reflects that decision.
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