How to Proceed After the Goodrich Surge

 | Apr 16, 2014 | 9:35 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

gdp

,

dvn

If you've been a shareholder of Goodrich Petroleum (GDP), Monday was your day. In a press release, management announced the completion of its Blades 33H-1 well in Tangipahoa Parish, La. Initial production has achieved a peak rate of more than 1,200 barrels of oil per day.

Those are just numbers. Here is the significance: Blades has thus far yielded production comparable to Goodrich's top-performing "core" well, Crosby 12-1h. Blades, however, is considerably east of the "core" Tuscaloosa Marine Shale (TMS) acreage. This means the TMS could be broader than originally thought. Couple this good news with Halcon Resources' (HK) entry into the TMS, and it's not hard to see why Goodrich's stock was up a whopping 30% on Monday alone.

The Next Bakken?

Initial results from the Blades well were no doubt encouraging. While I do believe the TMS will be commercially viable, I also believe we should put this well -- and recent stock price action -- into proper perspective. All we have, at this point, are initial production numbers. It will take a few months of observations before we'll get a better feel for the Blades 33H-1's production curve. Also, Goodrich shares only rose so sharply because of the large short interest in the stock, much of which got squeezed out.

Well costs are still very high: near $13 million for Goodrich, and even higher for others. Also, much of the TMS, especially areas further west, have been only minimally explored. There are still plenty of question marks regarding the TMS.

I don't say this because I believe the TMS won't ultimately be commercially viable; again, I believe it will be. I say this because Goodrich stock has been volatile over the last 12 months -- and investor sentiment, as we have seen, can change very quickly.

Now, let us look at the good news. Goodrich seems to be successfully working around its coiling issues. Also, the Blades well was drilled on acreage that was sold by Devon Energy (DVN). Devon's previous well design and strategy failed, but where Devon failed, Goodrich succeeded. Finally, the completion cost for the Blades well was $800,000 below budget due to consistent improvements in completion time. Goodrich expects this trend to continue as the company refines its process.

Conclusion

The above items all constitute signs that Goodrich is the best operator in the TMS, sort of akin to what EOG (EOG) has been in the Eagle Ford. If that analogy plays out, Goodrich's market capitalization should grow to become much greater than the $1 billion that it is today. In fact, if TMS acreage could ever be valued at anything near that of Eagle Ford, Goodrich's 30% Monday jump will seem like just a bump in the road.

Of course, in the here and now, Goodrich stock will continue to be volatile. Especially after such a huge jump in price, a little caution is warranted in the near term. But, if you see a pullback, you know what to do.

Columnist Conversations

Following last quarter's earnings, I highlighted MELI as a well-priced growth candidate with a great business ...
OK, this story is doing the rounds and cheering everyone up in Europe (and I suspect in the U.S. too up to a p...
With overnight inventory being long, the Es currently trading above its low volume area of rejection (on the d...
This is a quick review of where this bounce has taken the major indices.

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.