Though Halcon Resources (HK) has done a solid job in growing production from its core plays -- the El Halcon in Texas and the Bakken in North Dakota -- its near-term share price performance depends heavily on its results in a relatively unknown liquids-rich play called the Tuscaloosa Marine Shale (TMS).

But given the company's numerous advantages in the play, including a large, concentrated position, favorable lease terms, operational experience in similar shale plays, and encouraging results from its inaugural TMS well, Halcon has a good chance of potentially game-changing success.

Photo credit: Copyright © Encana Corporation. All rights reserved.

Halcon's huge opportunity in the TMS
The Tuscaloosa Marine Shale is an emerging oil play underlying approximately 2.5 million acres in southwestern Mississippi and southern Louisiana. Halcon is one of the largest leaseholders in the TMS, with 314,000 net acres under its belt. This year, the company expects to spud 10 to 12 operated wells in the TMS using a two-rig drilling program and also plans to participate in 15 to 20 nonoperated wells.

To fund its growth plans, Halcon recently announced that it has struck a definitive agreement with affiliates of private-equity firm Apollo Global Management (APO), which will provide a cash injection of up to $400 million. Though very little production data exists for the TMS, Halcon's inaugural TMS well posted highly encouraging results that bode well for the company's future.

Promising initial results
This well -- the Horseshoe Hill 11-22H-1 (92% WI) well -- in Wilkinson County, Mississippi, achieved a 24-hour average initial production rate of 1,208 barrels of oil per day and 1.1 million cubic feet per day of 1,551 BTU natural gas on a 19/64 inch choke. This level of production puts it among the most productive TMS wells drilled to date.

By comparison, a well drilled by Goodrich Petroleum (NYSE: GDP) earlier this month -- the C.H. Lewis 30-19H-1 well -- achieved  a peak 24-hour average production rate of 1,450 barrels of oil equivalent per day (boe/d) with an extremely high 96% oil cut. This is good news because the company has a lot riding on the TMS, with plans to allocate roughly 80% of its 2014 capital budget toward the play.

Encana (OVV 0.25%) has also seen encouraging initial results, with a well in its Anderson well pad delivering a peak 24-hour production rate of 1,540 boe/d -- the highest 24-hour production rate of any TMS well drilled to date. The company views the TMS as one of five core liquids-rich plays that will help boost its oil and liquids production over the next few years as it transitions away from natural gas.

Why Halcon has an edge
Halcon believes that it can deliver industry-leading well performance in the TMS through drilling longer laterals, using more proppant, and by using tighter cluster spacing between wells. The company plans to drill laterals in excess of 7,200 feet, use more than 1,600 pounds of proppant per foot, and utilize 50-foot cluster spacing between wells, as compared to the current industry practice of 6,000-foot plus laterals, 1,400 pounds of proppant per foot, and 66-foot or less cluster spacing.

For Halcon to meaningfully improve its returns in the play, reducing well costs and boosting drilling efficiencies will be key. In its current delineation phase, the company expects the average well to cost a little over $13 million and take 48 days to complete from spud to rig release. But as it transitions toward multi-well pad drilling, drilling days should fall to 35 days and well costs to $12 million per well.

Eventually, as the company moves into full multi-well pad development mode, drilling days are expected to fall to an average of 30 days, while well costs are expected to fall below $11 million. If the company can achieve these targeted improvements, the economics of its drilling program should become highly compelling and rates of return could exceed those the company is seeing in El Halcon and the Bakken.

Given Halcon's operational experience in similar shale plays and access to data across the entire play thanks to data sharing arrangements with other TMS operations, I think these operating cost reductions should be achievable.

Investor takeaway
For Halcon, success in the TMS is sure to be a crucial driver of its share price in coming quarters. Given the company's numerous advantages in the play, it should have a good shot at achieving the operating cost reductions and production growth it is targeting. Any positive surprises along these lines are sure to lift the company's shares.