Here is a classic story of an oil & gas producer who sunk most of its cash into natural gas, and then got burned as prices plummeted. Now Goodrich Petroleum (NYSE: GDP), which used to have 96% of its production weighted toward natural gas, has been able to increase oil output to 30% of production over the past five years.
Part of the shift came from Goodrich's intensive investments in the Eagle Ford, which totaled roughly 40% of Goodrich Petroleum's capital expenditures in 2013. This year will see a change however, as growth shifts from the Eagle Ford to the Tuscaloosa Marine Shale. The TMS will receive $300 million of the $375 million Goodrich Petroleum is going to spend this year.
Back in 2012, Goodrich's Eagle Ford assets were home to 9 million barrels of proven oil equivalent compared to the Tuscaloosa's tiny 200,000 boe in proven reserves. This would make you believe that the Eagle Ford is where Goodrich Petroleum was going to plant its flag, but you would be mistaken.
There could be as much as 778 million barrels of potentially recoverable oil equivalent in the Tuscaloosa on Goodrich's acreage, compared to just 62 million barrels in the Eagle Ford. If the Tuscaloosa Marine Shale could be effectively tapped into by Goodrich Petroleum, the possibilities are nearly endless. Most of the resources in the TMS are thought to be oil (92%-96%) and high BTU gas, which makes the 778 million barrels of oil equivalent all the more valuable.
Goodrich Petroleum has 300,000 net acres in the play located in central Louisiana, right next to the major oil refining hub in the world's biggest economy. For only $185 an acre, Goodrich was able to acquire acreage in the region at a great price. The big question is, can Goodrich Petroleum access the true value of the Tuscaloosa?
Cloak and dagger
Helping Goodrich Petroleum along the way will be results from Halcon Resources' (HK) development of its 75,000 acre leasehold. With plans to drill its first well in the Tuscaloosa Marine Shale this year, Halcon Resources is going to decide where to drill based on data from a 330-mile, 3-D seismic survey expected to be completed soon.
As Louisiana's oilfield is developed, if there is oil and gas to be found, acreage in the best counties will skyrocket in price. This is why Halcon Resources is hush-hush on the current state of its operations, but in the long run, this data will be made public one way or the other. Appraisal wells are the best way Halcon Resources and Goodrich can prove the value of TMS acreage, which is why 2014 is such an important year for both players.
Why should Goodrich shareholders care
Goodrich Petroleum has benefited immensely from oil production coming out of the Eagle Ford, so why purchase acreage in an unproven play that could be a major waste? The root of the purchase lays in the risk-reward being heavily situated in Goodrich Petroleum's favor.
For $59 million, Goodrich Petroleum was able to acquire a sizable chunk in the play. Add in $370 million in development costs that Goodrich Petroleum is going to spend by the end of 2014 (since the beginning of 2013), and you get a $429 million bet on what could be $70 billion worth of resources (778 million barrels at $90 per barrel, assuming a high oil content). Halcon Resources has a smaller bet on Louisiana but could still see similar upside if its management can find liquid rich deposits.
This year, Goodrich Petroleum is pulling back the curtain so its investors can see just what the future holds. If 80% of its capex can't find anything meaningful, then the acreage would be a bust and Goodrich Petroleum could lose a ton of value. But if Goodrich can find valuable hydrocarbons in the Tuscaloosa, the upside remains enormous. 2014 will see higher levels of drilling activity bringing more wells online, deciding once and for all if the Tuscaloosa Marine Shale is the treasure trove it's cracked up to be.
By not investing, you could be missing out on opportunities like this