Seeking Alpha
, Split Rock (533 clicks)
Oil & gas, small-cap, growth at reasonable price, hedge fund analyst
Profile| Send Message|
( followers)  

Halcon (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.

(click to enlarge)

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 (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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
22822983430391233009661338298258
22823941330410503021892263216215
22448973130400452896600243196
23120996730443832893049249233
22518930130421492958921314280
22054958530396302988331333312243
2254593363056351

3154761

276248219
Avg.959530432472989030288255234

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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
218701005325689492859275203158125
21672904424604912270387235190159
20953864925710642298639206157130
20989927326742472716713331221191
20990970725689262780238167140128
21703974028747002745574205243184
21207904427673852696290202179146
22506904425664502469094277199149
20992913825663892463358235167153
21719937430368333306335347269216
21940940330364643089634264243207
21939983030336183008746177169145
22226934030357082946879368304244
22128937430382223183957356303246
20707924026303052386847180192141
21550883824331682388562169183151
Avg.931827539322725658245207170

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.

(click to enlarge)

Marathon (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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
21575899230365442978760239210203
21613920530290622681865808877
21407885130254352513680463980
21335925430262212564300143151172
21361908130291532279150360192218
Avg.907630292832603551174136150

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.

(click to enlarge)

Triangle Petroleum (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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
22297818728690623569288231188
22296954331632344093148364244238
22558892631637533803450560415342
23160886531627393787154579391315
Avg.888030646973813260434310298

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 (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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
21641925030597402598954671473392
23054963830600822227201565403323
21639956530577102565343499270254
21027927230516743283208413292238
21778966530518863024843334230198
22329955030575892601909549392342
21966953330586382848750265255218
21971979130579912581450543365261
Avg.953330569142716457480335278

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.

(click to enlarge)

Oasis (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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
217211015336805704090462633424347
21314994736741974003952489388324
22607960436594833239158379255242
Avg.990136714173777857500356304

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.

(click to enlarge)

The most exciting wells in Tyrone Field are being purchased by Kodiak Oil and Gas (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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
2206710486352562974129812645493426
224959986352432504095724860613499
220689359352503274108310431419366
214819102352412344059653866656526
Avg.9733352477774098375701545454

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
WellLateral Ft.Stages Ft.Water Bbls.Proppant Lbs.30-Day IP Bo/d90-Day IP Bo/d180-Day IP Bo/d
199279656481125149905670712562
207668882371033339668031689598440
234219735491097539669220884555
20219507121556174862530283246
Avg.833639953048526363642490440

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/ StageWater/ FootProppant/ Foot180-Day Production/ Foot
HK3204.53124.4
Petro Hunt3455.82933.3
MRO3033.22873.0
TPLM2967.34296.0
CLR3186.02855.2
OAS2757.23825.5
KOG27825.54218.4
EOG21411.410239.5

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
WellCo.Total Oil Bbls.Oil RevenuesTotal Gas McfGas RevenuesDaysTotal Revenues
22822HK494444449960326461305842114580544
21361MRO492044428360378101512402484579600
22558TPLM667626008580472651890602056197640
21641CLR10914798232309161436645634310189686
21481KOG122023109820709387237548825611357558
20766EOG895738061570561852247402308286310
21721OAS10095190855901000454001803999485770

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.

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

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 shaleexperts.com. 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 shaleexperts.com.