Thursday, February 5, 2015

Halcón Resources and Comstock Pulled Out of Tuscaloosa Marine Shale While Goodrich Petroleum Keeps On Drilling $GP $HK

A tale of three oil companies:

  • "Goodrich Petroleum Corp. said Wednesday it will spend $150 million to $200 million on new oil and gas drilling next year, primarily in the Tuscaloosa Marine Shale along the Louisiana-Mississippi border. The Houston-based company is one of the largest leaseholders in that area." [link]
  • "As Halcón Resources Corp. dials back drilling plans in the wake of plunging oil prices, the Tuscaloosa Marine Shale will bear the brunt of the spending cuts, the company said Tuesday. CEO Floyd Wilson told investors in a call Tuesday morning that while he remains confident that the play in Louisiana and Mississippi has the potential to gush lots of oil, it’s too expensive to justify drilling while crude continues to fall. 'Right now, with oil prices where they are and service costs where they are, we’ve elected to slow down there,' he said. [...] The Tuscaloosa Marine Shale was the least economic of the basins studied by Tudor Pickering Holt, requiring a West Texas Intermediate price between $70 and $90 per barrel." [link]
  • "In response to low oil prices, the Company plans to suspend its oil directed drilling activity in its Eagle Ford shale properties in South and East Texas and in the Tuscaloosa Marine shale in Mississippi. Comstock has released its rig in the Tuscaloosa Marine shale and will postpone its drilling activity there until oil prices improve." [link]
In other words, Goodrich's main play is one where two other companies have just stopped drilling because the well economics are so bad at current prices. They just sold their position in a more economic play for $61 million in December.

That seems like amazingly bad capital allocation, reminiscent of GMX Resources. If the wells have poor IRRs and your bonds are yielding ~40 percent to maturity (the GDP 2019 bond), why keep drilling wells? Why not stop drilling and work on restructuring your balance sheet, while you still have cash to use as a carrot to bondholders?

There's a management thought process I've seen many times that goes like this: "We own this asset that was a mistake to buy. No one would be interested in buying it now, at the bottom of the cycle. We will never admit that it's a sunk cost. So, we'll sell the remaining good assets we have and continue to develop this bad one."


whydibuy said...

In poker terms, GDP is "pot committed".
They don't have enough remaining chips to bail out so its all in and hope they draw a winner on the river card.
With the wild calls for oil prices, who knows? Maybe oil will jump to 90.00 again by spring. At least GDP mgt can hope. Frankly I have no clue as to oil prices. Its so sensitive to supply and demand imbalances that just a touch either way makes pricing tidal waves.

CP said...

A lot of people would rather lose everything than have 5 cents on the dollar left.

Anonymous said...

If you take a look at the "Well Economics" slide (# 25) in the February 2015 TMS presentation, the title of the matrix clarifies management's goal: to break even.

According to the "Hedging Summary" in the February 2015 management deck: GDP will swap 3,500 BOPD at $96.11 in 2015 and they plan to pump 2,200 to 2,800 BOPD -- or really as much as it takes in order -- to break even.

It seems like 2015 will be a "go big or go home" CAPEX year.

GDP may sell more of the non-TMS assets for cash to carry on.

When do you think covenants on the senior credit facility will get triggered?