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Summary

  • Goodrich has prime acreage close to the Gulf Coast.
  • Recent well results from TMS provide a mixed picture.
  • The recent stock declines make the stock very intriguing now.

A growing theme in the markets is likely to develop surrounding the building demand for energy supplies around the Gulf Coast. Companies with production and infrastructure in and around the area should benefit greatly. In that manner, Goodrich Petroleum Corp (NYSE:GDP) is ideally situated following the recent developments in the Tuscaloosa Marine Shale, or TMS, and the holding of prime acres in the Haynesville Shale and Eagle Ford Shale. All of these shale plays have the major benefit of being located close to the refineries, chemical plants, and export facilities located or being built around the Texas and Louisiana coasts.

Other E&P firms like Comstock Resources (NYSE:CRK) offer some similar exposure to the Haynesville rebound and ramping up Eagle Ford growth, but it lacks the TMS upside. Halcon Resources (NYSE:HK) is set up to benefit from the potential growth of the TMS with over 300,000 net acres that offer proximity to the Gulf Coast.

High Costs And Production Issues

Most people have probably forgotten, but the Haynesville Shale in Louisiana was the original natural gas hot spot prior to the Marcellus Shale. Both Goodrich Petroleum and Comstock Resources had solid production in the area until the prices of natural gas plunged and the relatively higher costs of the area provided a huge disadvantage to the lower costs in the Marcellus. The two stocks continue to face growth issues due to production declines in the areas after reducing capital expenditures. In the case of Comstock, Haynesville production declined roughly 41% over the prior year during Q114 and another 33% in Q214.

The TMS faces similar issues with wells originally costing up to $13 million to drill placing the economics in question unless type curves in the 600 MMboe range are reached or hopefully surpassed. With oil prices only now dipping below $100 per barrel, the shale has the potential to develop where the Haynesville never got the opportunity. Halcon Resources expects to see roughly a $1 million annual reduction in well costs that would dramatically improve the returns on these wells.

A couple of well results by Goodrich of peak production rates of 1,270 and 1,450 boe/d with 95% oil are exceptional results. Followed by another solid well from Halcon Resources of 1,548 Boe/d, the TMS results were very encouraging. Though some of the recent results released by Goodrich have scaled back the high expectations and the stock price. The two wells placed on production recently only averaged peak 24-hour production close to 800 boe/d.

Considering the company highlights the TMS accounts for roughly 52% of resource potential, the ability to improve well results and reduce costs is essential to the stock. Back in a April invterview, a company executive suggested drilling costs were roughly $100,000 per day saving Goodrich significantly by reducing the drilling days for a TMS well from 45 days to 36 days. Further reduction in time and costs will quickly make the play very economical even at initial production rates of 800 boe/d per well.

Gulf Coast Situated

With massive infrastructure issues in most of the shale areas due to production outstripping pipeline growth, the proximity to the Gulf Coast should continue to play a huge factor in attractive realized prices and low costs to get product to market. In that manner, Goodrich has one of the most attractive portfolios in the industry. The TMS is virtually next door to the refineries, chemical plants, and export facilities located or being built along the Gulf Coast. And of course the Haynesville Shale and Eagle Ford Shale are only short distances especially compared to the Bakken up in North Dakota and the Marcellus in Pennsylvania.

The following slide demonstrates the core properties of Goodrich and the vast resource potential of the TMS.

(click to enlarge)

Bottom Line

With Goodrich Petroleum plunging in recent weeks due to mixed results in the TMS combined with lower oil prices, the stock is becoming very interesting at $17. Investors should closely listen to the upcoming Q214 earnings call on August 7. The company previously guided towards oil produciton of 4,200 to 4,500 Bbbls/d and hitting that target is important. The management team will need to ensure the market that the better well results from the TMS will prevail in the end. The topsy turvy stock action suggests buying on the dips when the market is too concerned over short-term well results.

With assets close to the Gulf Coast, the oil exploration and production firm is in a prime location to benefit from the growing demand. It only needs to get the TMS well results on a consistently strong production profile to provide rewards to shareholders.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in GDP over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Source: The Prime Location Of Goodrich Petroleum Acreage