Bakken Update: Halcon Well Results Improve While Kodiak Buys The Best In West Williams County

Jun.24.13 | About: Halcon Resources (HK)

Halcon (NYSE:HK) recently released an operational update. This was met with optimism on the Street, as Halcon seems to have placed emphasis on its Bakken acreage. There are a few reasons for this, which may have more to do with the quality of its other plays. Those who follow Halcon know the Woodbine, Utica and El Halcon are its focus. Halcon is a very interesting story and one that doesn't come around every day. What interests me is the start from scratch small cap with talented and experienced management. This group is motivated to grab acreage for the purpose of selling the company at a later date.

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Halcon has acquired a very large acreage in areas that are considered economic, but on the fringe of being a very good play. This acreage is purchased cheap and developed aggressively, de-risking acreage and increasing its value. It has made a couple of bigger acquisitions, which are now considered its core leasehold. Halcon's flagship leasehold is in northeast McKenzie and Dunn counties. Its Utica acreage carried a large price tag close to $6000/acre in Trumbull County. Halcon has been disappointed with the results here, as the Utica has been more prolific in condensate production than crude. There are rumors the oily acreage is not economic, but I have seen little reason to believe this assertion. As with many plays, it takes a while for the operators to get comfortable. Keep in mind, Utica oil production could prove very lucrative. It is positioned close enough to provide feedstocks to northeast refineries.

Halcon has done a great job of acquiring acreage in the Bakken. The Street was excited about its purchase of Petro-Hunt's acreage, but an earlier acquisition could prove to be the most important. The purchase of GeoResources provided a foothold in North Dakota and Montana. Its non-operated acreage in Mountrail County is top notch. It also garnered acreage in north McKenzie County. This was not far from Kodiak's acquisition of Liberty. It paid between $5000 and $6000 per undeveloped acre. The western Williams County acreage was a steal, as this acreage is shallow and well costs are low. This does not produce the large IP rates of leaseholds to the east, but is still economic. EOG Resources (NYSE:EOG) recently started acquiring acreage, and has had some excellent results. Its new completion design has produced some fantastic results in this area.

Halcon acquired GeoResources cheap as the market undervalued its acreage in the Bakken and Eagle Ford. Petro-Hunt was shopping its acreage due to high costs on the reservation and below average production in Williams County. Halcon believes it can significantly improve production in these areas. For the purpose of valuation, I have compiled data on wells in western Williams County. By analyzing results of several operators, we hope to understand the upside to this area.

Well design varies from one operator and area to the next. What works in Mountrail County may be ineffective in Divide. These variations take time to hammer out, and most operators have a good idea of how they want to work the formation by the time pad development begins. There are several variables manipulated by operators to maximize production at the lowest cost. The lateral length is how long the horizontal leg of the well is. Basically, this is the total feet coming in contact with the source rock. The longer the lateral, the better the production (or at least that is how it is suppose to work). The lateral is made of stages. These stages allow completions work to be done one section at a time. The tighter the stage, the better the pump trucks can stimulate the source rock. Water and proppant are pushed into the fractures, keeping it open so the crude and natural gas can continue to travel into the well. Well design must have balance. Too little water and proppant, and the fractures close off, decreasing well economics. Too much and there is added cost with no benefit of additional revenues. This is why operators use a wide range of design, as it is the only way to optimize well economics.

Halcon has drilled and completed a large number of wells in western Williams County. This is the same general area I recently covered. EOG Resources recently completed a well in this area that had a 6 month pay back. These results are not typical, but could be a sign of things to come.

The table below provides Halcon's well design and production data in several fields of western Williams County. Keep in mind, it is relatively new to the Bakken and still getting comfortable with the play.

Halcon's Western Williams County Well Design
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
22822 9834 30 39123 3009661 338 298 258
22823 9413 30 41050 3021892 263 216 215
22448 9731 30 40045 2896600 243 196
23120 9967 30 44383 2893049 249 233
22518 9301 30 42149 2958921 314 280
22054 9585 30 39630 2988331 333 312 243
22545 9336 30 56351


276 248 219
Avg. 9595 30 43247 2989030 288 255 234
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Halcon's goal is to improve on Petro-Hunt's and GeoResources' well design. The above wells use average stage and lateral length. It could feasibly increase water usage by 50% and proppant by 25%. This would depend on how well it is stimulating the source rock, but this design tells me Halcon is still figuring that out. Its IP rates are below average, with EURs of 300 MBo. Comparing to Petro-Hunt, Halcon's well are better. Petro-Hunt's well design had very poor production. It used more water, but the average stage was longer. It used less proppant. Petro-Hunt's EURs were approximately 200 MBo, which is not economic even with better Bakken differentials.

Petro-Hunt's Western Williams Well Design
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
21870 10053 25 68949 2859275 203 158 125
21672 9044 24 60491 2270387 235 190 159
20953 8649 25 71064 2298639 206 157 130
20989 9273 26 74247 2716713 331 221 191
20990 9707 25 68926 2780238 167 140 128
21703 9740 28 74700 2745574 205 243 184
21207 9044 27 67385 2696290 202 179 146
22506 9044 25 66450 2469094 277 199 149
20992 9138 25 66389 2463358 235 167 153
21719 9374 30 36833 3306335 347 269 216
21940 9403 30 36464 3089634 264 243 207
21939 9830 30 33618 3008746 177 169 145
22226 9340 30 35708 2946879 368 304 244
22128 9374 30 38222 3183957 356 303 246
20707 9240 26 30305 2386847 180 192 141
21550 8838 24 33168 2388562 169 183 151
Avg. 9318 27 53932 2725658 245 207 170
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Halcon has made significant improvements in a short period of time. Its results are not great, but refining a well design takes time and testing. There is no doubt it will continue to improve. Below I have added other operator results in the area. This provides an estimate to where Halcon and other operators could end up in the short term.

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Marathon (NYSE:MRO) is active in Strandahl Field. Activity has ramped up and pad development is increasing. Marathon is not as active in this area, with the majority of cap ex being spent in Dunn County and in Fort Berthold. Marathon is an excellent operator, but there is no doubt its Bakken focus is elsewhere.

Marathon's 2012 Strandahl Field Well Design
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
21575 8992 30 36544 2978760 239 210 203
21613 9205 30 29062 2681865 80 88 77
21407 8851 30 25435 2513680 46 39 80
21335 9254 30 26221 2564300 143 151 172
21361 9081 30 29153 2279150 360 192 218
Avg. 9076 30 29283 2603551 174 136 150
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Marathon has lagged other operators in western Williams County. Its wells are light with respect to proppant, but the big issue seems to be water. Marathon's wells in Strandahl Field have had production issues as well. Four of the five wells had initial production disruption. This is why there isn't a constant depletion, and production isn't declining from the 30-Day to 180-Day IP rates.

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Triangle Petroleum (NYSEMKT:TPLM) is also active in western Williams County. I have collected data on four of its wells spread out over Otter and Rosebud fields. Given its exposure to the area, Triangle's results and well design are very good. Triangle seems to be headed in the right direction. It has added benefit of its own pressure pumping and midstream business. This has brought down costs considerably, and should continue to benefit the bottom line.

Triangle Petroleum's Otter And Rosebud Field Well Design
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
22297 8187 28 69062 3569288 231 188
22296 9543 31 63234 4093148 364 244 238
22558 8926 31 63753 3803450 560 415 342
23160 8865 31 62739 3787154 579 391 315
Avg. 8880 30 64697 3813260 434 310 298
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Triangle's above well design is very good. This aided in it blowing by analyst estimates in the last quarter. About 25% of its proppant is ceramic sand. This lower pressure environment does not require ceramic proppant as the cheaper ceramic coated sand should be adequate. Triangle is considering using a cheaper ceramic proppant in these wells as pressures do not require the strongest ceramics. It believes this change will decrease costs without sacrificing production. Triangle is one of my top Bakken Stock picks for 2013.

Continental Resources (NYSE:CLR) has a large leasehold in western Williams. It is just beginning pad development in this area. The data below is from its 2012 completions in Lone Tree Lake and Oliver Fields. Given the scale of development, Continental seems very optimistic.

Continental's 2012 Oliver and Lone Tree Lake Field Well Design
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
21641 9250 30 59740 2598954 671 473 392
23054 9638 30 60082 2227201 565 403 323
21639 9565 30 57710 2565343 499 270 254
21027 9272 30 51674 3283208 413 292 238
21778 9665 30 51886 3024843 334 230 198
22329 9550 30 57589 2601909 549 392 342
21966 9533 30 58638 2848750 265 255 218
21971 9791 30 57991 2581450 543 365 261
Avg. 9533 30 56914 2716457 480 335 278
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Continental has made big strides in well design from 2010. It has switched from a low cost/low production operator to a better than average well design. In this part of North Dakota, it is outperforming. It had used all sand fracs initially, but is switching to ceramics. This improved initial production, but more importantly, slowed depletion. Over the past two years, well costs have decreased significantly. Continental has taken lower costs and invested in a more expensive well design. Well costs have remained low while increasing production. Continental's completions consist of ample volumes of water and three million pounds of proppant. Of this number, it uses approximately one million pounds of ceramic coated sand. While not recommended below 8000 feet, ceramic coated sand is a good option in western Williams.

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Oasis (NYSE:OAS) is one of the better operators in the Tyrone Field area. It has made very good well design changes over the past year. Like Triangle, Oasis has its own midstream and completion businesses. This has lowered well costs, and Oasis continues to better its wells without increasing costs. This is part of the reason for its stock outperformance. The table below has Oasis' 2012 well results and design.

Oasis' 2012 Tyrone Field Well Design
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
21721 10153 36 80570 4090462 633 424 347
21314 9947 36 74197 4003952 489 388 324
22607 9604 36 59483 3239158 379 255 242
Avg. 9901 36 71417 3777857 500 356 304
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The table above provides some very interesting data. These completions are quite good, as it uses a large amount of proppant with 25% to 30% ceramic. This flattens the depletion curve. Its stage lengths are better than average, allowing for better source rock stimulation. Better stimulation allows for increased use of water and proppant. The more fractures there are, the more water and proppant are needed. The increased water transports the proppant and chemicals into the formation. The proppant "props" open the fractures, allowing the resource to continue to flow.

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The most exciting wells in Tyrone Field are being purchased by Kodiak Oil and Gas (NYSE:KOG). This purchase was received in both a positive and negative light. The bears believe Kodiak will have to go back to the shareholders this year. This is an issue, as Kodiak seemed to have the cash to operate 2013. The Liberty purchase makes for a cloudy situation, which could pull the stock price back this year. Kodiak believes it can pay for this acquisition through cash flow, and this could be possible. If it can accomplish this, then the deal was a good one.

I initially did not like the purchase. It seemed Kodiak was in for a big year if it hit company estimates. It was seeing costs decrease, with tight differentials. Going over the purchase, it seemed Kodiak didn't get the acreage cheap, but didn't pay too much either. The question is about motivation. The acreage isn't top notch, and does not produce great IP rates. Going over Liberty's well results, I found out why. Liberty's west Williams County results are the best in the area. The table below provides Kodiak's new wells.

Kodiak's Wells From Liberty Purchase
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
22067 10486 35 256297 4129812 645 493 426
22495 9986 35 243250 4095724 860 613 499
22068 9359 35 250327 4108310 431 419 366
21481 9102 35 241234 4059653 866 656 526
Avg. 9733 35 247777 4098375 701 545 454
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Kodiak may have made a great deal. Liberty is not well known, as it's a private company. It has two monster wells in Tyrone Field. The average of its four wells has EURs of 600 to 700 MBo. Liberty has an interesting well design. It uses very large volumes of water. Its water usage is five times the average well. It uses a large amount of proppant. These results are good enough to rival EOG's recent completions. Below is the table of EOG's new completion design from my last article.

EOG's Top Wells In West Williams County
Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
19927 9656 48 112514 9905670 712 562
20766 8882 37 103333 9668031 689 598 440
23421 9735 49 109753 9669220 884 555
20219 5071 21 55617 4862530 283 246
Avg. 8336 39 95304 8526363 642 490 440
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This comparison is very interesting, as Liberty's wells are producing much better than EOG's. It has done this with less than half the proppant and more than twice the water. EOG's wells were completed this year, as compared to Liberty's in 2012. As a result, we have longer-term production and will have to wait a few months to know how EOG's wells deplete. It is obvious Kodiak is interested in Liberty's well design. This could be used on future wells in western Williams, but more importantly, its acreage in Koala, Polar and Smokey prospects.

In order to make a proper comparison of the above operators, this data needs to be broken down. This removes differences in lateral length, and shows which wells outperform on a per foot basis. The table below breaks down these results by operator.

Well Results By Operator Per Foot
Co. Feet/ Stage Water/ Foot Proppant/ Foot 180-Day Production/ Foot
HK 320 4.5 312 4.4
Petro Hunt 345 5.8 293 3.3
MRO 303 3.2 287 3.0
TPLM 296 7.3 429 6.0
CLR 318 6.0 285 5.2
OAS 275 7.2 382 5.5
KOG 278 25.5 421 8.4
EOG 214 11.4 1023 9.5
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Halcon is on the lower end of this group with respect to production per foot over the first 6 months of well life. It has quickly improved Petro-Hunt's well design, which has resulted in an additional 25% of crude production. It is still early, and looks like Halcon has significant upside in well design. Marathon has had the greatest difficulty, but as I said earlier, it is not a focus area. It uses the least volume of water, and only one other operator uses less proppant. It has the lowest production of the group. Triangle is the biggest surprise. Not only is it near the top in production, but it is the youngest operator of the group. It is already out producing some of the better E&Ps in the Bakken. Continental continues to have consistent success at low well costs. Liberty could be the most exciting operator in the group. and Kodiak now has access to those wells. It has figured out how to increase production significantly. Since it is a pure Bakken player, this could be utilized throughout its entire acreage. Although EOG had better production per foot by taking the average of all its wells, Liberty had two wells that were better than any of EOG's. Liberty's production average was pulled down by one under performing completion.

The economics of wells from this article are quite different. When figuring production rates per foot, it can be deceiving how they will affect well revenues. The table below breaks down the best well of each operator.

Well Economics For Operators In Western Williams
Well Co. Total Oil Bbls. Oil Revenues Total Gas Mcf Gas Revenues Days Total Revenues
22822 HK 49444 4449960 32646 130584 211 4580544
21361 MRO 49204 4428360 37810 151240 248 4579600
22558 TPLM 66762 6008580 47265 189060 205 6197640
21641 CLR 109147 9823230 91614 366456 343 10189686
21481 KOG 122023 10982070 93872 375488 256 11357558
20766 EOG 89573 8061570 56185 224740 230 8286310
21721 OAS 100951 9085590 100045 400180 399 9485770
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All of the above wells are economic. I used a $90/Bbl. of Bakken crude price and $4 natural gas. Keep in mind most companies get closer to $8/Mcf when figuring NGL production. Marathon's result was the worst of the group. It had still produced revenues over $4.5 million in a little over 8 months. It will be a while until this well achieves payback. Halcon's well produced revenues close to that of Marathon's. It achieved this 37 days earlier. Triangle produced revenues of over $6 million in under seven months. Payback should be achieved before one year. This is a very good well. All of the other wells have already reached payback. Continental's well has produced over $10 million in revenues. It has well costs of $7 million. It has a net of over $3 million in under a year. Oasis' well has been producing the longest. Its $8 million average well cost was surpassed in under a year as well. The EOG well was covered in my last article. This well achieved payback in under 6 months. Kodiak purchased well 21481. This is the best well listed here. Liberty's well costs are probably higher than EOG's. I would guess the difference is about $1.5 to $2 million. The increased production should make up for this difference.

In summary, Halcon has acquired some very good acreage. Wells in this area continue to improve, This acreage is not as good as Fort Berthold, but it has significant upside to its current development. We will be getting a large amount of data in these fields as pad development is a focus. By analyzing data from other operators, we have an idea of how much better Halcon's completions can get. Companies like EOG Resources and Liberty have made changes to their completion design. This not only is increasing initial production, but is creating slower depletion. This could change the way we model well EURs. More importantly, new techniques could be used in other parts of the play. Kodiak realized this and acquired Liberty. By doing this, it has access to information it can use in its other prospects. We continue to see well design improve. It is difficult to know how much higher EURs can go, but this data shows large increases in initial production are possible. If operators can alter the depletion curve, it will revolutionize the business of oil and gas.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. For more articles like this check out my website at Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to