Too Much of a Good(rich) Thing?

 | Aug 27, 2014 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

gdp

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hk

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dvn

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eog

If you're 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, Louisiana. Initial production was over 1,200 barrels of oil per day.

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 (or TMS) acreage. This means that 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.

Initial results from the Blades well were no doubt encouraging. While I do believe that the TMS will be commercially viable, I also believe that 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 to get a better feel for the Blades 33H-1's production curve. Also, shares of Goodrich only increased so sharply because of the large short interest in the stock. Much of that short interest got squeezed out on Monday.

Well costs are still very high: nearly $13 million for Goodrich and even higher for others. Finally, 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 do believe that it will.) I say this because Goodrich stock has been volatile over the last twelve 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.

Those are all signs that Goodrich is the best operator in the TMS, sort of akin to what EOG Resources (EOG) was and is in the Eagle Ford. If that analogy plays out, Goodrich's market cap will be 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 acreage, Friday's 30% jump will seem like just a bump in the road. However, in the here and now, Goodrich stock will continue to be volatile. In the short future, especially after such a huge jump in price, a little caution is warranted. However, if you see a pullback, you know what to do. 

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