Friday, August 8, 2014

Halcon Resources Is Betting on the Last American Shale Oil Play

This article was originally published by TheStreet on August 4, 2014. 

By Sarfaraz A. Khan. Research Asst. Daniel L. 

Halcon Resources (HK_) has been getting most of its output from Bakken formation, but this could start changing from next year when the company will begin pumping oil from Tuscaloosa Marine Shale, or TMS, the last remaining major American unconventional oil play.


Halcon Resources is a small, independent energy company valued at $2.3 billion with significant operations at two shale formations: Bakken - Three Forks in North Dakota and El Halcon in Eagle Ford East Texas. Furthermore, Halcon Resources is one of the few oil producers that are betting big on the rise of TMS as a major shale oil play which stretches from South Louisiana to Southwest Mississippi.
Halcon Resources' shares ar up 38.2% this year, currently hovering around $5.50.

Halcon Resources has nearly 120 million barrels of oil-weighted proved reserves, of which more than 75% are located at Bakken while most of the remaining are at El Halcon. In an email toTheStreet, the company's Vice President for investor relations Scott Zuehlke said that Halcon Resources' growth has been driven by its assets at the Bakken and Eagle Ford formations and this trend will likely continue in the coming years.
In its previous quarterly results which came out last week, the company's production, which consist of mainly oil and natural gas liquids, increased by 44.2% from last year to more than 42,000 barrels of oil equivalents per day. This growth was driven by 87% and 453% increases in production from Williston Basin at the Bakken formation and El Halcon respectively. Around 67% of the company's output came from the former and 22% from the latter.
The company swung to a loss of $73.3 million from a profit of $36.3 million a year earlier but this was on the back of $106 million non-cash loss on oil derivatives. Excluding the impact of one-off items, the company reported net income of 7 cents a share, up from 4 cents a share a year earlier.
Halcon Resources is currently evaluating its acreage at TMS. This asset has not made any notable contribution to the company's daily production or total reserve base. This, however, might change in the near future. Earlier in June, Halcon Resources signed a $400 million agreement with Apollo Global Management (APO_) to fund its growth in TMS.
So far, the results from the initial TMS test wells have been encouraging. Further positive results can give a significant boost to the company's proven reserves base, considering the size and quality of its acreage.
Halcon Resources has leased around 315,000 net acres at TMS, which is bigger than its combined acreage at Bakken and El Halcon, making it one of the biggest players in this shale play. Furthermore, Zuehlke has said that most of its acreage at TMS lies in the "sweet spot", or the most promising area, of the shale oil play.
Although TMS is as old as Eagle Ford in terms of geological age, it is a tougher place to drill for oil and gas. Several operators, such as Devon Energy (DVN_), have been unsuccessful at exploiting this area which could be home to 7 billion barrels of oil. However, Zuehlke has said that drilling and completion challenges are expected in any early stage play. With improvements in understanding about the region, the industry as a whole "has a much better handle on where to land the laterals and how to effectively complete these TMS wells compared to a year or two ago when other operators were trying less effective methods."
This is one of the reasons why other companies, such as Encana (ECA_) and Goodrich Petroleum (GDP_), are also positive about the future of TMS. Encana and Goodrich Petroleum own about 200,000 and 300,000 net acres at TMS respectively. Like Halcon Resources, Encana and Goodrich Petroleum are currently evaluating their TMS assets. Halcon Resources plans to drill more than a dozen operated and non-operated wells at TMS in the second half of this year. With ongoing development, Scott has predicted that TMS will start making a "meaningful contribution" to the company's production "towards the second half of 2015."
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.