Halcon Resources (NYSE:HK), an upstart oil and gas producer, was founded by Floyd Wilson, a highly successful entrepreneur with over four decades of experience in the oil and gas industry, after he sold his previous company, Petrohawk Energy, to BHP Billiton (NYSE: BHP) for $12.1 billion back in 2011.
While Halcon has done a commendable job in accelerating production from its two core plays -- the Bakken/Three Forks in North Dakota and the El Halcon in Texas -- the company's future success and share price performance will depend largely on two factors: its performance in the emerging Tuscaloosa Marine Shale (TMS) play and its ability to improve returns from the Bakken and El Halcon.
Success in the TMS
The single biggest near-term driver of Halcon's share price will be its performance in the TMS, an emerging oil play in southwestern Mississippi and southern Louisiana where Halcon is one of the largest leaseholders, commanding roughly 316,000 net acres.
Though production data for the TMS is quite limited, initial well results from Halcon and other operators have been quite encouraging. Halcon's inaugural TMS well was one of the most productive wells drilled to date, achieving 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.
Goodrich Petroleum (OTC:GDPM) and Encana (NYSE:ECA), two other major leaseholders in the TMS, have also reported positive results. Goodrich's C.H. Lewis 30-19H-1 well delivered a peak 24-hour average production rate of 1,450 barrels of oil equivalent per day (boe/d), of which 96% was oil, while one of Encana's wells on its Anderson well pad achieved a peak 24-hour production rate of 1,540 boe/d.
In addition to encouraging initial results, Halcon has a number of advantages that position it well for success in the TMS, including operating experience in shale plays with similar geologies and data-sharing arrangements with other TMS operators. The company reckons it can boost its returns by drilling longer laterals, using more proppant, and by using multiwell pad drilling and spacing wells closer together.
Eventually, Halcon believes it can reduce its TMS cost per well from more than $13 million currently to less than $11 million as it transitions into full multi-well pad development mode. If it can achieve this targeted cost reduction, IRRs across its two TMS type curves could increase from around 60% to nearly 90% and from around 40% to 55%, respectively.
Improving drilling economics in other core plays
While success in the TMS will be the biggest near-term driver of Halcon's share price, strong improvements in the Bakken/Three Forks and El Halcon could also be a catalyst to boost the company's overall returns and share price.
Currently, Halcon's Fort Berthold acreage in the Bakken represents the strongest drilling economics across its portfolio, earning a 100% internal rate of return (IRR) at a well cost of $11 million and a WTI price of $100 per barrel. Going forward, Halcon expects to improve its overall Bakken returns through further frac design optimization, including downspacing tests in the Fort Berthold area. By year-end, it expects to reduce completed well costs in the Bakken by 5%-10%.
In the Eagle Ford's El Halcon play, returns aren't as strong as the Bakken's Fort Berthold area, but have improved meaningfully in recent quarters. Halcon is making good progress in further optimizing its well design through testing longer stage lengths, tighter perforation cluster spacing, and making other incremental adjustments.
If the company's efforts are successful and it is able to reduce its average well cost at El Halcon from $9 million per well currently to around $8 million per well, its IRR should improve markedly from around 45% currently to nearly 60%. Coupled with the recent strength in WTI prices, these improvements could provide a material boost to the company's returns and PV-10 value.
For Halcon Resources, future success will depend primarily on its performance in the TMS and, to a lesser extent, its ability to improve returns at its other two core plays. Given the company's currently strong momentum and aforementioned advantages in the TMS, I think there's a decent chance Halcon could surprise to the upside. With that said, however, Halcon remains a fairly risky stock that's not for the faint of heart.