Tuscaloosa Marine Shale: Looking Up

 | Apr 02, 2014 | 12:00 PM EDT  | Comments
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Things in the Tuscaloosa Marine Shale, or TMS for short, have been steadily looking up. But you wouldn't notice from the price action in Goodrich Petroleum (GDP), the shale play's biggest operator.

Shares of Goodrich have dropped by over 40% from their high six months ago. This was due to a technical issues regarding a few of the company's newly-drilled wells in this nascent shale play.

In 2013 Goodrich encountered some difficulties while drilling out the plugs in three of its wells. The Smith, Ash, and most recently the Foster Creek 20-7 wells, all reported this similar problem.  Foster Creek, a well that was intended to have a lateral of over 6,000 feet, had to be truncated to only 2,100 feet of usable, unobstructed lateral. Engineers currently believe that this complication was a result of coiled tubing, and that use of coiled tubing may not be the best approach in the TMS.

Since then Goodrich has successfully spudded three more wells with lateral lengths ranging from between 4,500 feet and 6,200 feet. Perhaps the most encouraging point of data is that the rock at Foster Creek has been about as good as the Crosby 12H-1 well, the latter of which has outperformed even the average Bakken well. Although drilling experience in the TMS is rather limited, so there is no guarantee, it looks as if Goodrich's engineering team has resolved the drilling issue. This problem should be a thing of the past.

Halcon Joins the Fray

Another big upstream name is moving into the Tuscaloosa. Halcon Resources (HK) recently announced that it would be committing two rigs to this play. At the latest Howard Weil energy conference, Floyd Wilson, the CEO of Halcon, said he believed that the TMS would be one of the last big shale oil plays to be discovered and developed. Wilson ought to know. He was also the CEO of Petrohawk, the company which spudded the first Eagle Ford shale well. Many credit Wilson as the one who 'discovered' the Eagle Ford.

Halcon's entrance to the Tuscaloosa will make the company the second largest operator in the play by rig count. I believe that this company's entrance to the play will entice oil servicers to do the same, thereby increasing service competition and driving down well costs.

Conclusion

Goodrich has the greatest exposure of all companies to the TMS. Initial production results on wells are positive and improving. Well costs are coming down as best practices are implemented. Management believes that service costs will continue to decline. Oil from the TMS is priced at Louisiana prices. With the entrance of Halcon and Floyd Wilson, the TMS is looking more and more viable.

At just below 2x book value, Goodrich's valuation is pretty reasonable, or at least much more so than it was six months ago. The company's market cap is only $700 million, but with over 300,000 net acres in the Tuscaloosa, Goodrich will be worth very much more if this play 'works out.'

Sources:

http://www.goodrichpetroleum.com/presentations/MgmtTMS.pdf

http://tuscaloosatrend.blogspot.com/2013/10/goodrich-announces-result-for-cmr.html

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