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."

WSJ: "An Oil Man's New Groove" ($HK)

Worth reading WSJ article about Floyd Wilson:

Petrohawk mounted a multibillion-dollar drilling campaign to lock up that land with producing wells, many of which cost more than $10 million apiece. Mr. Wilson went to Wall Street repeatedly to raise the money through debt and stock offerings.

"It was painful to be in the marketplace five times in a year during the recession," Mr. Wilson said. "People would say, 'We're going to participate, but my God, what are you doing?' "

In the end, Petrohawk's investors were rewarded when it was bought by BHP Billiton Ltd.
[...]
"However painful it is, we'll come to New York to get the money, be it debt or equity," he said. "Even though it's not always popular, it's always worked out."

Reminds us of anyone?